As filed with the Securities and Exchange Commission on
July 21, 2005
Registration No. 333-125506
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 2
to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Kona Grill, Inc.
(Exact Name of Registrant as Specified in Its Charter)
|
|
|
|
|
|
Delaware
(State
or Other Jurisdiction of
Incorporation or Organization)
|
|
5812
(Primary
Standard Industrial
Classification Code Number)
|
|
20-0216690
(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
|
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.
|
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 JULY 21,
2005.
2,500,000 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 $9.00 and $11.00. We
have applied to have our common stock quoted on the NASDAQ
National Market under the symbol “KONA.”
See “Risk Factors” beginning on page 6 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 375,000 shares of common stock from us at
the initial public offering price less the underwriting
discount, solely to cover over-allotments.
The underwriters expect to deliver the shares against payment in
New York, New York
on ,
2005.
|
|
|
|
Oppenheimer & Co.
|
Feltl and Company
|
Prospectus
dated ,
2005.
TABLE OF CONTENTS
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.
i
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 freshly prepared food, personalized
service, and a contemporary ambiance that create a satisfying
yet affordable dining experience that we believe exceeds 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
appetizers and entrees with an international influence,
including an extensive selection of sushi items. Our menu items
also incorporate over 40 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 quality meals. We believe that our offerings and
generous portions, combined with an average check during the
three months ended June 30, 2005 of $14.25 per guest,
excluding alcoholic beverages, offers our guests an attractive
price-value proposition.
Our restaurants accommodate approximately 275 guests and are
comprised of multiple dining areas that incorporate modern
design elements to create an 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. We generated net income of
$0.3 million during 2004 and a net loss of
$(0.7) million during 2003. During the six months ended
June 30, 2005, we generated $16.9 million of sales, an
increase of $6.0 million, or 55.9%, from the
$10.9 million of sales generated during the comparable
prior year period. During the six months ended June 30,
2005, we recorded net income of $22,000.
Our Competitive Strengths
We believe that the key strengths of our business include the
following:
|
|
|
|
|
|
•
|
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
presentations that adhere to standards that we believe are much
closer to fine dining than typical casual dining.
|
1
|
|
|
|
|
|
|
|
•
|
Our 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.
|
|
|
|
|
|
|
•
|
Our commitment to provide prompt, friendly, and efficient
service enhances our food, reinforces our upscale ambiance, and
helps distinguish us from other traditional casual dining
restaurants.
|
|
|
|
|
•
|
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.
|
|
|
|
|
•
|
We believe our high average unit volume helps us attract
high-quality employees, leverages our fixed costs, makes us a
desirable tenant for landlords, and provides the potential for
strong financial returns.
|
|
|
|
|
|
|
•
|
Our 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, our concept, and our brand throughout the United States.
Key elements of our growth strategy include the following:
|
|
|
|
|
|
•
|
Pursue disciplined restaurant growth.
During 2004, we
opened three new restaurants, all of which were located in new
markets, and we plan to open two new restaurants in new markets
during the second half of 2005, and four or five restaurants
during 2006.
|
|
|
|
|
•
|
Grow existing restaurant sales.
We will continue to
pursue targeted local marketing efforts and evaluate operational
initiatives designed to increase unit volumes including
enclosing certain patios and promoting our formal take-out
program.
|
|
|
|
|
•
|
Leverage depth of existing corporate infrastructure.
As
we grow, our goal is to leverage our investments in our
corporate infrastructure and realize efficiencies that an
increasing restaurant base and associated sales growth can
generate.
|
Risk Factors
An investment in our common stock involves a high degree of
risk. You should carefully consider the risks discussed in
“Risk Factors” before investing in our common stock,
which include the following:
|
|
|
|
|
|
|
|
•
|
the limited history for evaluating our company;
|
|
|
|
|
|
|
|
|
•
|
our history of losses and expectation of further losses;
|
|
|
|
|
|
|
|
|
•
|
our limited number of existing restaurants;
|
|
|
|
|
|
|
|
|
•
|
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; and
|
|
|
|
|
|
|
|
|
•
|
negative publicity surrounding our restaurants or the
consumption of food in general.
|
|
|
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.
2
The Offering
|
|
|
|
|
Common stock offered
|
|
2,500,000 shares
|
|
|
|
Common stock to be outstanding after this offering
|
|
5,296,530 shares
|
|
|
|
Use of proceeds
|
|
We estimate that our net proceeds from this offering will be
approximately $22.2 million, assuming an initial public
offering price of $10.00 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.
|
The number of shares of common stock to be outstanding after
this offering is based upon our outstanding shares as of
June 30, 2005 and excludes the following:
|
|
|
|
|
|
|
|
•
|
494,079 shares of common stock issuable upon the exercise
of stock options outstanding with a weighted average exercise
price of $5.62 per share;
|
|
|
|
|
|
|
|
|
•
|
405,721 shares of common stock reserved for issuance under
our stock option plans;
|
|
|
|
|
|
|
|
|
•
|
258,900 shares of common stock reserved for issuance upon
exercise of outstanding warrants with a weighted average
exercise price of $5.31 per share; and
|
|
|
|
|
|
|
|
|
•
|
125,000 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 833,331 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
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 375,000 additional shares of stock from
us; and
|
|
|
|
|
|
|
|
|
•
|
reflects the 1-for-5 reverse stock split of our common stock
effected by our company during July 2005.
|
|
|
3
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
Year Ended December 31,
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Consolidated Statement of Operations Data
(in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant sales
|
|
$
|
9,453
|
|
|
$
|
16,608
|
|
|
$
|
25,050
|
|
|
$
|
10,862
|
|
|
$
|
16,930
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
2,852
|
|
|
|
4,952
|
|
|
|
7,371
|
|
|
|
3,187
|
|
|
|
4,889
|
|
|
|
Labor
|
|
|
3,097
|
|
|
|
5,105
|
|
|
|
7,502
|
|
|
|
3,185
|
|
|
|
5,067
|
|
|
|
Occupancy
|
|
|
691
|
|
|
|
1,212
|
|
|
|
1,748
|
|
|
|
774
|
|
|
|
1,173
|
|
|
|
Restaurant operating expenses
|
|
|
1,383
|
|
|
|
2,304
|
|
|
|
3,372
|
|
|
|
1,410
|
|
|
|
2,007
|
|
|
|
General and administrative
|
|
|
1,639
|
|
|
|
2,058
|
|
|
|
2,217
|
|
|
|
750
|
|
|
|
2,240
|
|
|
|
Preopening expense
|
|
|
438
|
|
|
|
241
|
|
|
|
880
|
|
|
|
127
|
|
|
|
107
|
|
|
|
Depreciation and amortization
|
|
|
503
|
|
|
|
823
|
|
|
|
1,269
|
|
|
|
536
|
|
|
|
1,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
10,603
|
|
|
|
16,695
|
|
|
|
24,359
|
|
|
|
9,969
|
|
|
|
16,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(1,150
|
)
|
|
|
(87
|
)
|
|
|
691
|
|
|
|
893
|
|
|
|
398
|
|
|
Nonoperating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
103
|
|
|
|
260
|
|
|
|
360
|
|
|
|
94
|
|
|
|
358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before provision for
income taxes
|
|
|
(1,253
|
)
|
|
|
(347
|
)
|
|
|
331
|
|
|
|
799
|
|
|
|
40
|
|
|
Provision for income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
55
|
|
|
|
20
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(1,253
|
)
|
|
|
(347
|
)
|
|
|
276
|
|
|
|
779
|
|
|
|
22
|
|
|
Income (loss) from discontinued operations
|
|
|
394
|
(1)
|
|
|
(319
|
)(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(859
|
)
|
|
$
|
(666
|
)
|
|
$
|
276
|
|
|
$
|
779
|
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share — Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.90
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
0.19
|
|
|
$
|
0.53
|
|
|
$
|
0.02
|
|
|
|
Discontinued operations
|
|
|
0.28
|
|
|
|
(0.22
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(0.62
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
0.19
|
|
|
$
|
0.53
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share — Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.90
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
0.17
|
|
|
$
|
0.28
|
|
|
$
|
0.01
|
|
|
|
Discontinued operations
|
|
|
0.28
|
|
|
|
(0.22
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(0.62
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
0.17
|
|
|
$
|
0.28
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,391
|
|
|
|
1,437
|
|
|
|
1,460
|
|
|
|
1,460
|
|
|
|
1,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
1,391
|
|
|
|
1,437
|
|
|
|
2,815
|
|
|
|
2,801
|
|
|
|
2,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) per share (unaudited)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
$
|
0.17
|
|
|
|
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
$
|
0.17
|
|
|
|
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computation of pro forma net
income (loss) per share (unaudited)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
2,794
|
|
|
|
|
|
|
|
2,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
2,815
|
|
|
|
|
|
|
|
2,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents results of operations and gain (loss) on sale of
restaurant concepts other than Kona Grill.
|
4
|
|
|
|
(2)
|
The unaudited pro forma information reflects the conversion of
all outstanding preferred stock and convertible notes into
common stock as if such conversion had occurred at June 30,
2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2005
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
Pro Forma(1)
|
|
|
As Adjusted(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Balance Sheet Data (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
475
|
|
|
$
|
475
|
|
|
$
|
22,625
|
|
|
Working capital (deficit)
|
|
|
(2,305
|
)
|
|
|
(2,305
|
)
|
|
|
19,845
|
|
|
Total assets
|
|
|
23,174
|
|
|
|
23,174
|
|
|
|
45,324
|
|
|
Long-term debt, including current maturities
|
|
|
7,126
|
|
|
|
4,402
|
|
|
|
4,402
|
|
|
Total stockholders’ equity
|
|
|
6,199
|
|
|
|
8,923
|
|
|
|
31,073
|
|
|
|
|
|
|
|
(1)
|
The Pro Forma column of the balance sheet data assumes
(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
1,333,331 shares of common stock upon conversion of our
Series A and Series B preferred stock upon the closing
of this offering.
|
|
|
|
|
|
|
|
(2)
|
The As Adjusted column of the balance sheet data reflects the
sale of 2,500,000 shares of common stock offered by us,
after deducting the underwriting discounts and commissions and
estimated offering expenses payable by us.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
Year Ended December 31,
|
|
|
Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurants open at end of period
|
|
|
3
|
|
|
|
4
|
|
|
|
7
|
|
|
|
4
|
|
|
|
7
|
|
|
Average restaurant sales (in thousands)(1)
|
|
$
|
4,398
|
|
|
$
|
4,966
|
|
|
$
|
5,479
|
|
|
$
|
2,603
|
|
|
$
|
2,815
|
|
|
Sales per square foot(1)
|
|
$
|
659
|
|
|
$
|
716
|
|
|
$
|
777
|
|
|
$
|
375
|
|
|
$
|
399
|
|
|
Same store sales growth(2)
|
|
|
(0.3
|
)%
|
|
|
7.1
|
%
|
|
|
7.3
|
%
|
|
|
10.4
|
%
|
|
|
5.3
|
%
|
|
|
|
|
(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.
|
5
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, we expect to experience
continuing losses for at least the next two years, and we may
never achieve profitability.
We 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 future operating results may fluctuate significantly due
to our limited number of existing restaurants and the expenses
required to open new restaurants.
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 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
6
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 growth and results of operations could be harmed
significantly.
A critical factor in our future success is our ability to expand
successfully our restaurant operations. We currently plan to
open two restaurants during 2005 and four or five restaurants
during 2006, and we continue to actively seek additional
locations to open new restaurants. If we do not successfully
open and operate new restaurants, our growth and results of
operations could be harmed significantly. Our ability to open
new restaurants in a timely manner and operate them profitably
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 and our ability to compete successfully for those
locations;
|
|
|
|
|
•
|
the timing of delivery of leased premises from our landlords so
we can commence our build-out construction activities;
|
|
|
|
|
•
|
construction and development costs;
|
|
|
|
|
•
|
labor shortages or disputes experienced by our landlords or
outside contractors;
|
|
|
|
|
•
|
unforeseen engineering or environmental problems with the leased
premises;
|
|
|
|
|
•
|
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 results of operations.
Unexpected expenses and low market acceptance of our
restaurant concept could adversely affect the profitability of
restaurants that we open in new markets.
As part of our expansion strategy, we plan to open 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 longer to achieve average unit volumes compared with our
existing restaurants, if at all, which would adversely affect
the profitability of those new restaurants.
7
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.
Our failure to protect our trademarks, service marks, or
trade secrets could negatively affect our competitive position
and the value of the Kona Grill brand.
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.
We may require additional capital in the future as a result
of changes in our restaurant operations or growth plans, and our
inability to raise such capital could harm our operations and
restrict our growth.
Changes in our restaurant operations, acceleration of our
restaurant expansion plans, lower than anticipated restaurant
sales, increased food or labor costs, increased property
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 to us on acceptable terms, or at all, and our failure
to raise capital when needed could negatively impact our
restaurant growth 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,
including investors that purchase our common stock in this
offering. Debt financing may involve significant cash payment
obligations, covenants, and financial ratios that restrict our
ability to operate and grow our business.
The successful management of our restaurant operations and
growth may suffer because our senior management team has a
limited history of working together.
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
8
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 negatively impact 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. If our
restaurants are unable to compete successfully with other
restaurants in new and existing markets, our results of
operations will be harmed and we will not achieve profitability.
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.
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
9
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 35% during the
six months ended June 30, 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.
Litigation concerning our food quality, our employment
practices, liquor liability, and other issues could result in
significant expenses to us and could divert resources from our
operations.
Like other restaurants, we may receive complaints or litigation
from, and potential liability to, our guests involving
food-borne illness or injury or other operational issues. We may
also be subject to complaints or allegations from, and potential
liability to, our former, existing, or prospective employees
involving our restaurant employment practices and procedures. 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, our sales may be adversely
affected by publicity resulting from such claims. Such claims
may also be expensive to defend and may divert time and money
away from our operations and adversely affect our financial
condition and results of operations.
Labor shortages or increases in labor costs could slow our
growth or adversely affect our results of operations.
Our success depends in part on our ability to attract, motivate,
and retain a sufficient number of qualified restaurant
employees, including restaurant general managers and kitchen
managers, necessary to continue our operations and keep pace
with our growth. This ability is especially critical to our
company because of our relatively small number of existing
restaurants and our current development plans. If we are unable
to identify and attract a sufficient number of qualified
employees, we will be unable to open and operate the new
locations called for by our development plans.
Competition for qualified restaurant employees in our current or
prospective markets 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
10
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 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.
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
$ per
share initial public offering price or at all.
There has been no public market for our common stock prior to
this offering, and an active and liquid public market for our
common stock may not develop or be sustained after this
offering. This risk is particularly applicable to our common
stock because we are only selling 2,500,000 shares in this
offering and we will have only 5,296,530 shares of common
stock outstanding immediately after this offering. If you
purchase shares of our 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
Oppenheimer & Co. The price of our common stock in any
public market may be higher or lower than the
$ per
share that you pay in this offering. Many factors could cause
the market price of our common stock to rise and fall after this
offering, including the following:
|
|
|
|
|
|
|
|
•
|
variations in our or our competitors’ actual or anticipated
restaurant operating results;
|
|
|
|
|
|
|
|
|
•
|
our or our competitors’ growth rates in the casual dining
segment of the restaurant industry;
|
|
|
|
|
|
|
|
|
•
|
our or our competitors’ introduction of new restaurant
locations, menu items, concepts, or pricing policies;
|
|
|
|
|
|
|
|
|
•
|
recruitment or departure of key restaurant operations or
management personnel;
|
|
|
|
|
|
|
|
|
•
|
changes in the estimates of our operating performance or changes
in recommendations by any securities analysts that may choose to
follow our stock;
|
|
|
|
|
|
|
|
|
•
|
announcements of investigations or regulatory scrutiny of our
restaurant operations or lawsuits filed against us; and
|
|
|
|
|
|
|
|
|
•
|
changes in our accounting principles.
|
|
|
Due to the potential volatility of our stock price, we also may
become the target of securities litigation in the future.
Securities litigation could result in substantial costs and
divert our management’s attention and resources from our
business as well as depress the price of our common stock.
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 $10.00 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 $4.13 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.
11
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 34.6% of our outstanding common stock, or 32.5% 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 June 30, 2005, we will have outstanding
5,296,530 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 2,796,530 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 833,331 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 1,225,000 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 and for working capital
and general corporate purposes, we will have broad discretion to
adjust the application and allocation of the net proceeds. Our
expectations regarding future sales, cash flow, and business
needs may prove to be inaccurate. Accordingly, we will retain
broad discretion in the allocation of the net proceeds from this
offering, and we reserve the right to change the use of these
proceeds as a result of contingencies such as the timing and
expenses for the construction of restaurants currently under
development and our ability to identify appropriate sites for
future restaurants. 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.
12
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 ability to produce
accurate financial statements and on our 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 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
13
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.
Since we do not expect to pay any dividends for the
foreseeable future, investors in this offering may be forced to
sell their stock in order to obtain a return on their
investment.
We do not anticipate that we will pay any dividends to holders
of our common stock in the foreseeable future. Instead, we plan
to retain any earnings to finance our restaurant operations and
growth plans discussed elsewhere in this prospectus.
Accordingly, investors must rely on sales of their common stock
after price appreciation, which may never occur, as the only way
to realize any return on their investment. As a result,
investors seeking cash dividends should not purchase our common
stock.
14
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;
|
|
|
|
|
•
|
our limited number of existing restaurants;
|
|
|
|
|
•
|
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 our trademarks and other proprietary
information;
|
|
|
|
|
•
|
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;
|
|
|
|
|
•
|
the impact of litigation;
|
|
|
|
|
|
|
•
|
labor shortages or increases in labor costs; and
|
|
|
|
|
|
|
|
|
•
|
economic and political conditions generally.
|
|
|
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.
15
USE OF PROCEEDS
Assuming an initial public offering price of $10.00 per
share, which is the midpoint of the range on the cover page of
this prospectus, we estimate that the net proceeds from this
offering will be $22.2 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 $21.0 million for new restaurant
development; and
|
|
|
|
|
|
|
|
|
•
|
approximately $1.2 million for working capital and general
corporate purposes.
|
|
|
The amounts set forth above are estimates, and the exact amounts
that we will spend for any of these uses cannot yet be
determined. The amounts and purposes for which we allocate the
net proceeds from this offering may vary significantly depending
upon a number of factors, including our future sales and the
amount of cash generated by our operations. Accordingly, we will
retain broad discretion in the allocation of the net proceeds
from this offering, and we reserve the right to change the use
of these proceeds as a result of contingencies such as the
timing and expenses for the construction of restaurants
currently under development and our ability to identify
appropriate sites for future restaurants. Depending upon the
outcome of these contingencies, we may allocate substantially
greater or lesser amounts to new restaurant development and to
working capital and general corporate purposes. 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.
16
CAPITALIZATION
The following table sets forth our unaudited capitalization as
of June 30, 2005
|
|
|
|
|
|
|
|
•
|
on an actual basis, which reflects our actual capitalization as
of June 30, 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
June 30, 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 1,333,331 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 June 30, 2005 as adjusted to reflect
the sale of the 2,500,000 shares of common stock offered by
us in this offering at an assumed public offering price of
$10.00 per share, after deducting estimated underwriting
discounts and offering expenses and giving effect to our receipt
of the estimated net proceeds.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
As Adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except share data)
|
|
|
Cash and cash equivalents
|
|
$
|
475
|
|
|
$
|
475
|
|
|
$
|
22,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of notes payable
|
|
$
|
735
|
|
|
$
|
735
|
|
|
$
|
735
|
|
|
Long-term notes payable, less current portion
|
|
|
6,391
|
|
|
|
3,667
|
|
|
|
3,667
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 or outstanding, pro forma; no shares authorized,
issued, or outstanding, pro forma as adjusted
|
|
|
42
|
|
|
|
—
|
|
|
|
|
|
|
|
Series B convertible preferred stock, $0.01 par value,
15,000,000 shares authorized, no shares issued or
outstanding, actual and pro forma; no shares authorized, issued,
or outstanding, pro forma as adjusted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 40,000,000 shares
authorized, 1,463,199 shares issued and outstanding,
actual; 40,000,000 shares authorized, 2,796,530 shares
issued and outstanding, pro forma; 40,000,000 shares
authorized, 5,296,530 shares issued and outstanding, pro
forma as adjusted(1)
|
|
|
15
|
|
|
|
28
|
|
|
|
53
|
|
|
|
Additional paid-in capital
|
|
|
8,950
|
|
|
|
11,979
|
|
|
|
34,104
|
|
|
|
Accumulated deficit(2)
|
|
|
(2,808
|
)
|
|
|
(3,084
|
)
|
|
|
(3,084
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
6,199
|
|
|
|
8,923
|
|
|
|
31,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
13,325
|
|
|
$
|
13,325
|
|
|
$
|
35,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Excludes the following as of June 30, 2005:
|
|
|
|
|
|
|
|
|
•
|
494,079 shares issuable upon exercise of stock options
outstanding with a weighted average exercise price of
$5.62 per share;
|
|
|
|
|
|
|
|
|
•
|
405,721 shares reserved for issuance under our stock option
plans;
|
|
|
17
|
|
|
|
|
|
|
|
•
|
258,900 shares issuable upon exercise of outstanding
warrants with a weighted average exercise price of
$5.31 per share; and
|
|
|
|
|
|
|
|
|
•
|
125,000 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.
|
|
|
|
(2)
|
The difference between the actual and pro forma amounts
represents the $0.3 million write-off of the unamortized
debt discount associated with the outstanding $3.0 million
convertible subordinated promissory note and associated warrants.
|
18
DILUTION
Our pro forma net tangible book value as of June 30, 2005
was $8.9 million, or $3.19 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 2,500,000 shares at an assumed
initial public offering price of $10.00 per share and after
deducting estimated underwriting discounts and commissions and
our estimated offering expenses, our adjusted pro forma net
tangible book value at June 30, 2005 would have been
$31.1 million, or $5.87 per share of common stock. This
represents an immediate increase in net tangible book value of
$2.68 per share to existing stockholders and an immediate
dilution in net tangible book value of $4.13 per share to
purchasers of shares in this offering. The following table
illustrates this per share dilution:
|
|
|
|
|
|
|
|
|
|
|
Assumed initial public offering price per share
|
|
|
|
|
|
$
|
10.00
|
|
|
Pro forma net tangible book value per share as of June 30,
2005
|
|
$
|
3.19
|
|
|
|
|
|
|
Increase per share attributable to new investors
|
|
|
2.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted pro forma net tangible book value per share after the
offering
|
|
|
|
|
|
|
5.87
|
|
|
|
|
|
|
|
|
|
|
Dilution per share to new investors
|
|
|
|
|
|
$
|
4.13
|
|
|
|
|
|
|
|
|
|
The following table summarizes on a pro forma basis as of
June 30, 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
$10.00 per share before deducting the estimated
underwriting discounts and commissions and estimated expenses of
this offering.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Price
|
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Existing stockholders
|
|
|
2,796,500
|
|
|
|
52.8
|
%
|
|
$
|
11,773,368
|
|
|
|
32.0
|
%
|
|
$
|
4.21
|
|
|
New investors
|
|
|
2,500,000
|
|
|
|
47.2
|
|
|
|
25,000,000
|
|
|
|
68.0
|
|
|
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,296,530
|
|
|
|
100.0
|
%
|
|
$
|
36,773,368
|
|
|
|
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 494,079 were subject to options
outstanding on June 30, 2005, at a weighted average
exercise price of $5.62 per share and 530,721 shares
available for future grant. As of June 30, 2005, there were
also 258,900 shares of common stock issuable upon exercise
of warrants with weighted average exercise price of
$5.31 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.
19
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 six months
ended June 30, 2004 and 2005 have been derived from our
consolidated financial statements that have not been audited.
The financial data for the six months ended June 30, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
Year Ended December 31,
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Consolidated Statement of Operations Data (in thousands,
except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant sales
|
|
$
|
4,534
|
|
|
$
|
5,890
|
|
|
$
|
9,453
|
|
|
$
|
16,608
|
|
|
$
|
25,050
|
|
|
$
|
10,862
|
|
|
$
|
16,930
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
1,402
|
|
|
|
1,819
|
|
|
|
2,852
|
|
|
|
4,952
|
|
|
|
7,371
|
|
|
|
3,187
|
|
|
|
4,889
|
|
|
|
Labor
|
|
|
1,425
|
|
|
|
1,950
|
|
|
|
3,097
|
|
|
|
5,105
|
|
|
|
7,502
|
|
|
|
3,185
|
|
|
|
5,067
|
|
|
|
Occupancy
|
|
|
349
|
|
|
|
455
|
|
|
|
691
|
|
|
|
1,212
|
|
|
|
1,748
|
|
|
|
774
|
|
|
|
1,173
|
|
|
|
Restaurant operating expenses
|
|
|
567
|
|
|
|
746
|
|
|
|
1,383
|
|
|
|
2,304
|
|
|
|
3,372
|
|
|
|
1,410
|
|
|
|
2,007
|
|
|
|
General and administrative
|
|
|
637
|
|
|
|
696
|
|
|
|
1,639
|
|
|
|
2,058
|
|
|
|
2,217
|
|
|
|
750
|
|
|
|
2,240
|
|
|
|
Preopening expenses
|
|
|
19
|
|
|
|
172
|
|
|
|
438
|
|
|
|
241
|
|
|
|
880
|
|
|
|
127
|
|
|
|
107
|
|
|
|
Depreciation and amortization
|
|
|
288
|
|
|
|
324
|
|
|
|
503
|
|
|
|
823
|
|
|
|
1,269
|
|
|
|
536
|
|
|
|
1,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
4,687
|
|
|
|
6,162
|
|
|
|
10,603
|
|
|
|
16,695
|
|
|
|
24,359
|
|
|
|
9,969
|
|
|
|
16,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(153
|
)
|
|
|
(272
|
)
|
|
|
(1,150
|
)
|
|
|
(87
|
)
|
|
|
691
|
|
|
|
893
|
|
|
|
398
|
|
|
Nonoperating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(11
|
)
|
|
|
11
|
|
|
|
103
|
|
|
|
260
|
|
|
|
360
|
|
|
|
94
|
|
|
|
358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before provision for
income taxes
|
|
|
(142
|
)
|
|
|
(283
|
)
|
|
|
(1,253
|
)
|
|
|
(347
|
)
|
|
|
331
|
|
|
|
799
|
|
|
|
40
|
|
|
Provision for income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
55
|
|
|
|
20
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(142
|
)
|
|
|
(283
|
)
|
|
|
(1,253
|
)
|
|
|
(347
|
)
|
|
|
276
|
|
|
|
779
|
|
|
|
22
|
|
|
Income (loss) from discontinued operations
|
|
|
225
|
(1)
|
|
|
7
|
(1)
|
|
|
394
|
(1)
|
|
|
(319
|
)(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
83
|
|
|
$
|
(276
|
)
|
|
$
|
(859
|
)
|
|
$
|
(666
|
)
|
|
$
|
276
|
|
|
$
|
779
|
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
Year Ended December 31,
|
|
|
Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Net income (loss) per share — Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.09
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.90
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
0.19
|
|
|
$
|
0.53
|
|
|
$
|
0.02
|
|
|
|
Discontinued operations
|
|
|
0.15
|
|
|
|
0.00
|
|
|
|
0.28
|
|
|
|
(0.22
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.06
|
|
|
$
|
(0.19
|
)
|
|
$
|
(0.62
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
0.19
|
|
|
$
|
0.53
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share — Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.09
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.90
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
0.17
|
|
|
$
|
0.28
|
|
|
$
|
0.01
|
|
|
|
Discontinued operations
|
|
|
0.15
|
|
|
|
0.00
|
|
|
|
0.28
|
|
|
|
(0.22
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.06
|
|
|
$
|
(0.19
|
)
|
|
$
|
(0.62
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
0.17
|
|
|
$
|
0.28
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,509
|
|
|
|
1,513
|
|
|
|
1,391
|
|
|
|
1,437
|
|
|
|
1,460
|
|
|
|
1,460
|
|
|
|
1,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
1,526
|
|
|
|
1,513
|
|
|
|
1,391
|
|
|
|
1,437
|
|
|
|
2,815
|
|
|
|
2,801
|
|
|
|
2,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) per share (unaudited)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.17
|
|
|
|
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.17
|
|
|
|
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computation of pro forma net
income (loss) per share (unaudited)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,794
|
|
|
|
|
|
|
|
2,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,815
|
|
|
|
|
|
|
|
2,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents results of operations and gain (loss) on sale of
restaurant concepts other than Kona Grill.
|
|
|
|
|
|
(2)
|
The unaudited pro forma diluted information reflects the
conversion of all outstanding preferred stock and convertible
notes into common stock as if such conversion had occurred at
June 30, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
2005(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Balance Sheet Data
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,281
|
|
|
$
|
562
|
|
|
$
|
178
|
|
|
$
|
3,107
|
|
|
$
|
3,098
|
|
|
$
|
1,676
|
|
|
$
|
475
|
|
|
$
|
475
|
|
|
Working capital (deficit)
|
|
|
1,502
|
|
|
|
(96
|
)
|
|
|
(2,539
|
)
|
|
|
(218
|
)
|
|
|
(261
|
)
|
|
|
(326
|
)
|
|
|
(2,305
|
)
|
|
|
(2,305
|
)
|
|
Total assets
|
|
|
4,936
|
|
|
|
4,885
|
|
|
|
6,816
|
|
|
|
12,697
|
|
|
|
22,413
|
|
|
|
15,171
|
|
|
|
23,174
|
|
|
|
23,174
|
|
|
Long-term notes payable, including current maturities
|
|
|
1,274
|
|
|
|
819
|
|
|
|
2,372
|
|
|
|
2,652
|
|
|
|
6,236
|
|
|
|
2,297
|
|
|
|
7,126
|
|
|
|
4,402
|
|
|
Total stockholders’ equity
|
|
|
2,802
|
|
|
|
2,226
|
|
|
|
686
|
|
|
|
5,425
|
|
|
|
6,131
|
|
|
|
6,203
|
|
|
|
6,199
|
|
|
|
8,923
|
|
|
|
|
|
(1)
|
The pro forma balance sheet data as of June 30, 2005
assumes (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
1,333,331 shares of common stock upon conversion of our
Series A and Series B preferred stock upon the closing
of this offering.
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
Year Ended December 31,
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurants open at end of period
|
|
|
3
|
|
|
|
4
|
|
|
|
7
|
|
|
|
4
|
|
|
|
7
|
|
|
Average restaurant sales (in thousands)(1)
|
|
$
|
4,398
|
|
|
$
|
4,966
|
|
|
$
|
5,479
|
|
|
$
|
2,603
|
|
|
$
|
2,815
|
|
|
Sales per square foot(1)
|
|
$
|
659
|
|
|
$
|
716
|
|
|
$
|
777
|
|
|
$
|
375
|
|
|
$
|
399
|
|
|
Same store sales growth(2)
|
|
|
(0.3
|
)%
|
|
|
7.1
|
%
|
|
|
7.3
|
%
|
|
|
10.4
|
%
|
|
|
5.3
|
%
|
|
|
|
|
(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
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 freshly prepared food, personalized service,
and a contemporary ambiance that create a satisfying yet
affordable dining experience that we believe exceeds 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 appetizers and entrees with an
international influence, including an extensive selection of
sushi items. Our menu items are freshly prepared and incorporate
over 40 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
quality meals. We believe that our offerings and generous
portions, combined with an average check during the three months
ended June 30, 2005 of approximately $14.25 per guest,
excluding alcoholic beverages, offers our guests an attractive
price-value proposition.
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
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.
Restaurant Operating Expenses
. Restaurant 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
Financial Performance Overview
The following table sets forth certain information regarding our
financial performance for 2002, 2003, 2004, and the six months
ended June 30, 2004 and 2005 (unaudited).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
Year Ended December 31,
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant sales growth
|
|
|
60.5
|
%
|
|
|
75.7
|
%
|
|
|
50.8
|
%
|
|
|
47.8
|
%
|
|
|
55.9
|
%
|
|
Same store sales growth(1)
|
|
|
(0.3
|
)%
|
|
|
7.1
|
%
|
|
|
7.3
|
%
|
|
|
10.4
|
%
|
|
|
5.3
|
%
|
|
Average restaurant sales (in thousands)(2)
|
|
$
|
4,398
|
|
|
$
|
4,966
|
|
|
$
|
5,479
|
|
|
$
|
2,603
|
|
|
$
|
2,815
|
|
|
|
|
|
(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
|
|
|
2
|
|
|
|
3
|
|
|
|
4
|
|
|
|
7
|
|
|
|
9
|
|
|
Openings
|
|
|
1
|
|
|
|
1
|
|
|
|
3
|
|
|
|
2
|
(2)
|
|
|
4
|
|
|
Closings
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3
|
|
|
|
4
|
|
|
|
7
|
|
|
|
9
|
|
|
|
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.
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 date, we expect that the operation of a
multi-unit restaurant company will involve such determinations as
25
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.
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.
We record contingent rent expense based on a percentage of
restaurant sales, which exceeds minimum base rent, over the
periods the liability is incurred. The contingent rent expense
is recorded prior to achievement of specified sales levels if
achievement of such amounts is considered probable and estimable.
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
|
|
|
|
|
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.
For purposes of determining the fair value of our common stock
during 2004, the value was determined by us based on a valuation
of our company performed by an independent valuation specialist.
The valuation was dated as of March 31, 2004. As a result,
we valued the exercise price of grants of options for the period
March 31, 2004 to December 31, 2004 consistent with or
above the results of the March 31, 2004 valuation. For
purposes of determining the fair value of our common stock
during the six-month period ended June 30, 2005, we
considered various factors, including our historical and
projected performance and discussions with investment bankers
regarding an initial public offering at a future date. In the
absence of recent arms’ length transactions in our common
stock during the first quarter of 2005, we considered these
discussions and valuation methodologies presented to us by those
firms. We did not obtain contemporaneous valuations of our
company by an unrelated valuation specialist during the six
months ended June 30, 2005 because we believed the costs
required for such a valuation outweighed the incremental
benefits of such a valuation to our company or investors. As a
result of initiating this initial public offering, we have
revised our estimate of the fair value of our common stock for
financial reporting purposes relating to the grants of options
during March 2005 and the acceleration of vesting of outstanding
options during March 2005. Accordingly, we modified our
valuation and calculated the value of our common stock
retrospectively.
Determining the fair value of our common stock requires making
complex and subjective judgments. We used our projected sales
growth rate and applied multipliers to our historical restaurant
level cash flow to estimate the value of our company during
March 2005, during which time we granted options to purchase
shares of our common stock and accelerated the vesting of
outstanding options. We believe our projected sales growth rate
and cash flow multiplier selected are consistent with valuation
methodologies to other similar public companies in our industry.
Given the uncertainty of the timing and likelihood of an initial
public offering, we concluded that the prospects for liquidity
through an initial public offering were such that it would be
appropriate to reduce our estimated total valuation by a
liquidity discount factor assessed at 10%. There is inherent
uncertainty in these estimates. The assumptions underlying the
estimates and multiples are consistent with our industry and we
believe them to be reasonable in the circumstances.
27
The following table summarizes certain information regarding
option grants since July 1, 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
|
|
|
|
|
Subject to
|
|
|
Exercise
|
|
|
Fair
|
|
|
Intrinsic
|
|
|
Option Grant Date
|
|
Options
|
|
|
Price
|
|
|
Value
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 2004
|
|
|
8,700
|
|
|
$
|
5.00
|
|
|
$
|
5.00
|
|
|
$
|
—
|
|
|
October 2004
|
|
|
71,089
|
|
|
|
5.00
|
|
|
|
5.00
|
|
|
|
—
|
|
|
November 2004
|
|
|
4,000
|
|
|
|
6.00
|
|
|
|
6.00
|
|
|
|
—
|
|
|
December 2004
|
|
|
14,568
|
|
|
|
6.00
|
|
|
|
6.00
|
|
|
|
—
|
|
|
January 2005
|
|
|
92,000
|
|
|
|
6.00
|
|
|
|
6.00
|
|
|
|
—
|
|
|
March 2005
|
|
|
9,000
|
|
|
|
6.00
|
|
|
|
6.90
|
|
|
|
.90
|
|
|
April 2005
|
|
|
4,800
|
|
|
|
7.50
|
|
|
|
7.50
|
|
|
|
—
|
|
As a result of our retrospective analysis, we determined that
our operating results during January 2005 did not support an
increase in the fair value of our common stock for financial
reporting purposes. Accordingly the increase in fair value was
determined to take place during March 2005. With respect to the
options granted for 9,000 shares during March 2005, we
consider the related compensation expense to be immaterial.
As of June 30, 2005, we had outstanding stock options to
purchase an aggregate of 494,079 shares of common stock and
those stock options had an intrinsic value of $2.1 million.
The “intrinsic value” of these stock options
represents the difference between the assumed initial public
offering price of $10.00 per share (the midpoint of the initial
public offering proposed price range) and the option exercise
price, multiplied by the number of shares subject to the
options. All of these options were vested at June 30, 2005.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
Year Ended December 31,
|
|
|
Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Restaurant sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
30.2
|
|
|
|
29.8
|
|
|
|
29.4
|
|
|
|
29.3
|
|
|
|
28.9
|
|
|
|
Labor
|
|
|
32.8
|
|
|
|
30.7
|
|
|
|
29.9
|
|
|
|
29.3
|
|
|
|
29.9
|
|
|
|
Occupancy
|
|
|
7.3
|
|
|
|
7.3
|
|
|
|
7.0
|
|
|
|
7.1
|
|
|
|
6.9
|
|
|
|
Restaurant operating expenses
|
|
|
14.6
|
|
|
|
13.9
|
|
|
|
13.5
|
|
|
|
13.0
|
|
|
|
11.9
|
|
|
|
General and administrative
|
|
|
17.4
|
|
|
|
12.4
|
|
|
|
8.8
|
|
|
|
7.0
|
|
|
|
13.2
|
|
|
|
Preopening expense
|
|
|
4.6
|
|
|
|
1.4
|
|
|
|
3.5
|
|
|
|
1.2
|
|
|
|
0.6
|
|
|
|
Depreciation and amortization
|
|
|
5.3
|
|
|
|
5.0
|
|
|
|
5.1
|
|
|
|
4.9
|
|
|
|
6.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
112.2
|
|
|
|
100.5
|
|
|
|
97.2
|
|
|
|
91.8
|
|
|
|
97.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(12.2
|
)
|
|
|
(0.5
|
)
|
|
|
2.8
|
|
|
|
8.2
|
|
|
|
2.4
|
|
|
Nonoperating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
1.1
|
|
|
|
1.6
|
|
|
|
1.5
|
|
|
|
0.8
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before provision for
income taxes
|
|
|
(13.3
|
)
|
|
|
(2.1
|
)
|
|
|
1.3
|
|
|
|
7.4
|
|
|
|
0.2
|
|
|
Provision for income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(13.3
|
)
|
|
|
(2.1
|
)
|
|
|
1.1
|
|
|
|
7.2
|
|
|
|
0.1
|
|
|
Income (loss) from discontinued operations
|
|
|
4.2
|
|
|
|
(1.9
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(9.1
|
)%
|
|
|
(4.0
|
)%
|
|
|
1.1
|
%
|
|
|
7.2
|
%
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
Six Months Ended June 30, 2005 Compared with Six
Months Ended June 30, 2004
Restaurant Sales
. Restaurant sales increased by
$6.0 million, or 55.9%, to $16.9 million during the
first six months of 2005 from $10.9 million during the
first six months of 2004 primarily as a result of a
$5.6 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 in the first
quarter of 2005, and a $0.5 million increase related to a
5.3% increase in same store sales. The decline in the rate of
same store sales growth during the first half of 2005 was
primarily attributable to the addition to the same store sales
base of one restaurant that experienced strong unit sales upon
opening, and then experienced a slight decrease in sales due to
competitive pressure in its market during the first half of 2005.
Cost of Sales
. Cost of sales as a percentage of
restaurant sales decreased slightly to 28.9% during the first
half of 2005 from 29.3% during the first half of 2004. This
reduction in cost of sales as a percentage of restaurant sales
was primarily the result of more favorable pricing negotiated
for the purchase of beverage products.
Labor
. Labor expenses as a percentage of restaurant sales
increased to 29.9% during the first half of 2005 from 29.3%
during the first half 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 decreased 0.2% to 6.9% during the first half of
2005 from 7.1% during the first half of 2004. The slight
decrease as a percentage of restaurant sales was primarily due
to increased same store sales which leveraged the fixed portion
of occupancy expenses.
Restaurant Operating Expenses
. Restaurant operating
expenses as a percentage of restaurant sales decreased 1.1% to
11.9% during the first half of 2005 from 13.0% during the first
half of 2004, primarily as a result of lower expenditures for
advertising and marketing initiatives, partially offset by
higher costs for utilities.
General and Administrative
. General and administrative
expenses increased by $1.4 million to $2.2 million
during the first half of 2005 from $0.8 million during the
first half of 2004. General and administrative expenses as a
percentage of restaurant sales increased from 6.9% of sales
during the first half of 2004 to 13.2% of sales during the first
half of 2005. This $1.5 million increase was primarily
attributable to approximately $0.8 million as a result of
the addition of executive management and corporate personnel and
director compensation, and approximately $0.7 million as a
result of the addition of infrastructure to support our growth
strategy and preparation to meet the reporting and compliance
requirements of a public company.
Preopening Expense
. Preopening expense remained constant
at $0.1 million during the first half of 2005 and 2004.
Preopening expense in both periods was in anticipation of
restaurant openings in the second half of each year.
Depreciation and Amortization
. Depreciation and
amortization increased $0.5 million to $1.0 million
during the first half of 2005 from $0.5 million during the
first half 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 6.2% during the
first half of 2005 from 4.9% during the first half 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 $0.4 million during the first half of
2005 from $0.1 million during the first half 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.
29
Provision for Income Taxes
. During the first half of
2004, we utilized net operating loss carryforwards available to
offset our income tax obligation. During the first half of 2005,
we did not record a federal income tax liability due to the
utilization of federal net operating loss carryforwards. During
the first half of 2005 we recorded an expense of $18,000 related
to state income taxes payable.
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.
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.
Restaurant Operating Expenses.
Restaurant 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
restaurant 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
30
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.
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.
Restaurant Operating Expenses.
Restaurant 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. The increase was primarily the result of a
$0.4 million one-time compensation charge recorded during
2003 relating to a former senior officer. General and
administrative expenses as a percentage of restaurant sales
decreased to 12.4% during 2003 from 17.4% during 2002. This
decrease as a percentage of sales was primarily the result of
increasing the number of our restaurants without proportionately
increasing general and administrative costs or administrative
personnel.
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
31
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;
|
|
|
|
|
•
|
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 our investors. In that event, the
price of our common stock would likely decrease.
32
Quarterly Results of Operations
The following table presents unaudited consolidated statements
of operations data for each of the ten quarters in the period
ended June 30, 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
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
|
June 30
|
|
|
Sept. 30
|
|
|
Dec. 31
|
|
|
March 31
|
|
|
June 30
|
|
|
Sept. 30
|
|
|
Dec. 31
|
|
|
March 31
|
|
|
June 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Operations Data (in thousands,
except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant sales
|
|
$
|
3,601
|
|
|
$
|
3,747
|
|
|
$
|
3,949
|
|
|
$
|
5,311
|
|
|
$
|
5,272
|
|
|
$
|
5,590
|
|
|
$
|
6,566
|
|
|
$
|
7,622
|
|
|
$
|
8,011
|
|
|
$
|
8,919
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
1,096
|
|
|
|
1,109
|
|
|
|
1,176
|
|
|
|
1,571
|
|
|
|
1,541
|
|
|
|
1,646
|
|
|
|
1,949
|
|
|
|
2,235
|
|
|
|
2,335
|
|
|
|
2,554
|
|
|
|
Labor
|
|
|
1,117
|
|
|
|
1,115
|
|
|
|
1,226
|
|
|
|
1,647
|
|
|
|
1,549
|
|
|
|
1,636
|
|
|
|
2,009
|
|
|
|
2,308
|
|
|
|
2,509
|
|
|
|
2,558
|
|
|
|
Occupancy
|
|
|
259
|
|
|
|
277
|
|
|
|
300
|
|
|
|
376
|
|
|
|
381
|
|
|
|
393
|
|
|
|
464
|
|
|
|
510
|
|
|
|
582
|
|
|
|
591
|
|
|
|
Restaurant operating expenses
|
|
|
492
|
|
|
|
518
|
|
|
|
521
|
|
|
|
773
|
|
|
|
706
|
|
|
|
704
|
|
|
|
873
|
|
|
|
1,089
|
|
|
|
975
|
|
|
|
1,032
|
|
|
|
General and administrative
|
|
|
475
|
|
|
|
442
|
|
|
|
351
|
|
|
|
790
|
|
|
|
366
|
|
|
|
384
|
|
|
|
530
|
|
|
|
937
|
|
|
|
1,063
|
|
|
|
1,177
|
|
|
|
Preopening expense
|
|
|
—
|
|
|
|
11
|
|
|
|
230
|
|
|
|
—
|
|
|
|
—
|
|
|
|
127
|
|
|
|
79
|
|
|
|
674
|
|
|
|
7
|
|
|
|
100
|
|
|
|
Depreciation and amortization
|
|
|
180
|
|
|
|
180
|
|
|
|
198
|
|
|
|
265
|
|
|
|
268
|
|
|
|
268
|
|
|
|
332
|
|
|
|
401
|
|
|
|
511
|
|
|
|
538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
3,619
|
|
|
|
3,652
|
|
|
|
4,002
|
|
|
|
5,422
|
|
|
|
4,811
|
|
|
|
5,158
|
|
|
|
6,236
|
|
|
|
8,154
|
|
|
|
7,982
|
|
|
|
8,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(18
|
)
|
|
|
95
|
|
|
|
(53
|
)
|
|
|
(111
|
)
|
|
|
461
|
|
|
|
432
|
|
|
|
330
|
|
|
|
(532
|
)
|
|
|
29
|
|
|
|
369
|
|
|
Nonoperating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
56
|
|
|
|
64
|
|
|
|
70
|
|
|
|
70
|
|
|
|
47
|
|
|
|
47
|
|
|
|
119
|
|
|
|
147
|
|
|
|
182
|
|
|
|
176
|
|
|
Income (loss) from continuing operations before provision for
income taxes
|
|
|
(74
|
)
|
|
|
31
|
|
|
|
(123
|
)
|
|
|
(181
|
)
|
|
|
414
|
|
|
|
385
|
|
|
|
211
|
|
|
|
(679
|
)
|
|
|
(153
|
)
|
|
|
193
|
|
|
Provision for income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20
|
|
|
|
20
|
|
|
|
15
|
|
|
|
—
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(74
|
)
|
|
|
31
|
|
|
|
(123
|
)
|
|
|
(181
|
)
|
|
|
414
|
|
|
|
365
|
|
|
|
191
|
|
|
|
(694
|
)
|
|
|
(153
|
)
|
|
|
175
|
|
|
Income (loss) from discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
(331
|
)
|
|
|
12
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(74
|
)
|
|
$
|
31
|
|
|
$
|
(454
|
)
|
|
$
|
(169
|
)
|
|
$
|
414
|
|
|
$
|
365
|
|
|
$
|
191
|
|
|
$
|
(694
|
)
|
|
$
|
(153
|
)
|
|
$
|
175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share — Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.05
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.08
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
0.28
|
|
|
$
|
0.25
|
|
|
$
|
0.13
|
|
|
$
|
(0.48
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
0.12
|
|
|
|
Discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.23
|
)
|
|
|
0.00
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(0.05
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.31
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
0.28
|
|
|
$
|
0.25
|
|
|
$
|
0.13
|
|
|
$
|
(0.48
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share — Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.05
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.08
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
0.18
|
|
|
$
|
0.16
|
|
|
$
|
0.10
|
|
|
$
|
(0.48
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
0.10
|
|
|
|
Discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.23
|
)
|
|
|
0.00
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(0.05
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.31
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
0.18
|
|
|
$
|
0.16
|
|
|
$
|
0.10
|
|
|
$
|
(0.48
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,382
|
|
|
|
1,452
|
|
|
|
1,452
|
|
|
|
1,460
|
|
|
|
1,460
|
|
|
|
1,460
|
|
|
|
1,460
|
|
|
|
1,460
|
|
|
|
1,463
|
|
|
|
1,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
1,382
|
|
|
|
1,456
|
|
|
|
1,452
|
|
|
|
1,460
|
|
|
|
2,295
|
|
|
|
2,294
|
|
|
|
2,794
|
|
|
|
1,460
|
|
|
|
1,463
|
|
|
|
2,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
33
|
|
|
|
|
Equipment Loans and Subordinated Notes
|
As of June 30, 2005, we had six equipment term loans with
lenders, each collateralized by restaurant equipment. The
outstanding principal balance under these loans aggregated
$4.4 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 June 30, 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.
The following table summarizes our primary sources of cash
during the periods presented (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
Year Ended December 31,
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
982
|
|
|
$
|
545
|
|
|
$
|
5,288
|
|
|
$
|
1,887
|
|
|
$
|
1,280
|
|
|
|
Investing activities
|
|
|
(2,919
|
)
|
|
|
(2,832
|
)
|
|
|
(9,254
|
)
|
|
|
(2,962
|
)
|
|
|
(4,727
|
)
|
|
|
Financing activities
|
|
|
1,553
|
|
|
|
5,216
|
|
|
|
3,957
|
|
|
|
(355
|
)
|
|
|
824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
(384
|
)
|
|
$
|
2,929
|
|
|
$
|
(9
|
)
|
|
$
|
(1,430
|
)
|
|
$
|
(2,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 half of 2005, net
cash provided by operating activities was $1.3 million
consisting primarily of income from continuing operations,
depreciation and amortization, amortization of deferred rent,
and collections of tenant improvement allowances, partially
offset by payments of accounts payable and accruals and
expenditures advanced for our initial public offering. During
the first half of 2004, net cash provided by operating
activities was $1.9 million consisting primarily of income
from operations, depreciation and amortization, amortization of
deferred rent, 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
34
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 $4.7 million and $3.0 million for the
first half 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 $0.8 million during the first half of 2005
as a result of proceeds from equipment loans less related
principal payments. Net cash used for financing activities was
$0.4 million during the first half of 2004 primarily as a
result of payment of a $1.2 million promissory note payable
and principal payments on equipment financing partially offset
by proceeds from new equipment financing. 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.
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
|
|
$
|
595
|
|
|
$
|
605
|
|
|
$
|
3,137
|
(1)
|
|
$
|
517
|
|
|
$
|
557
|
|
|
$
|
825
|
|
|
$
|
6,236
|
|
|
Operating leases
|
|
|
1,954
|
|
|
|
2,005
|
|
|
|
2,011
|
|
|
|
2,072
|
|
|
|
2,142
|
|
|
|
13,316
|
|
|
|
23,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,549
|
|
|
$
|
2,610
|
|
|
$
|
5,148
|
(1)
|
|
$
|
2,589
|
|
|
$
|
2,699
|
|
|
$
|
14,141
|
|
|
$
|
29,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
(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 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 June 2005, the EITF issued EITF No. 05-6,
“Determining the Amortization Period for Leasehold
Improvements,” which states that leasehold improvements
acquired in a business combination or purchased subsequent to
the inception of the lease should be amortized over the lesser
of the useful life of the asset or the lease term that includes
reasonably assured lease renewals
as determined on the date
of the acquisition
of the leasehold improvement. The
guidance in this consensus should be applied prospectively. For
calendar-quarter companies, reasonably assured lease renewals
should be considered in determining the amortization period of
leasehold improvements acquired (either directly or in business
combinations) in periods beginning after July 1, 2005
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
36
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 June 30, 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.
37
BUSINESS
Overview
Kona Grill restaurants offer freshly prepared food, personalized
service, and a contemporary ambiance that create a satisfying
and affordable dining experience that we believe exceeds 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 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 quality
meals.
Our restaurants accommodate approximately 275 guests and are
comprised of multiple dining areas that incorporate modern
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 offerings and generous portions combined
with an average check during the three months ended
June 30, 2005 of $14.25 per guest, excluding alcoholic
beverages, offers our guests an attractive price-value
proposition. This value proposition, coupled with our flexible
daypart model and exceptional service, have created an
attractive 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 six months ended June 30, 2005, we generated
$16.9 million of sales, an increase of $6.0 million,
or 55.9%, from the $10.9 million of sales generated during
the comparable prior year period. Our same store sales growth
was 5.3% during the first half of 2005 compared with the first
half 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 mark the 14th consecutive year of sales
growth for the industry and a 4.9% increase over 2004 sales. The
38
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 the three months ended June 30, 2005
of $14.25 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.
|
39
|
|
|
|
|
|
•
|
Personalized Guest Service.
Our commitment to provide
prompt, friendly, and efficient service enhances our 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 is 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. Our Chief Executive
Officer and Chief Financial Officer were actively involved in
the expansion of a number of national and international
restaurant 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, our concept, and our brand throughout 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 selection criteria for
new restaurants includes locating our restaurants near high
activity areas such as retail
40
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 six months of 2005, our
comparable restaurants produced same store sales increases of
5.3% compared with the first six months 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
for the construction of the building. The average cash
investment cost for all of our restaurants opened
41
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30, 2005
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except
|
|
|
|
|
percents)
|
|
|
Lunch
|
|
$
|
3,760
|
|
|
|
22
|
%
|
|
|
Open to 3:00 p.m.
|
|
|
|
|
|
|
|
|
|
Dinner
|
|
|
9,152
|
|
|
|
54
|
%
|
|
|
5:00 to 9:00 p.m.
|
|
|
|
|
|
|
|
|
|
Non-Peak
|
|
|
4,018
|
|
|
|
24
|
%
|
|
|
3:00 p.m. to 5:00 p.m. and
9:00 p.m. to Close
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total All Day
|
|
$
|
16,930
|
|
|
|
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.
42
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 35% during the first six
months 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
43
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.
44
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 June 30,
2005 and anticipated openings for 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
Square
|
|
|
Number of
|
|
|
State
|
|
City
|
|
Opened
|
|
|
Footage
|
|
|
Seats(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arizona
|
|
Scottsdale
|
|
|
1998
|
|
|
|
5,964
|
|
|
|
249
|
|
|
Arizona
|
|
Chandler
|
|
|
2001
|
|
|
|
7,389
|
|
|
|
326
|
|
|
Missouri
|
|
Kansas City
|
|
|
2002
|
|
|
|
7,455
|
|
|
|
222
|
|
|
Nevada
|
|
Las Vegas
|
|
|
2003
|
|
|
|
7,380
|
|
|
|
275
|
|
|
Colorado
|
|
Denver
|
|
|
2004
|
|
|
|
5,920
|
|
|
|
243
|
|
|
Nebraska
|
|
Omaha
|
|
|
2004
|
|
|
|
7,415
|
|
|
|
304
|
|
|
Indiana
|
|
Carmel
|
|
|
2004
|
|
|
|
7,433
|
|
|
|
295
|
|
|
Texas
|
|
Sugarland (Houston)
|
|
|
2005
|
(2)
|
|
|
6,914
|
|
|
|
285
|
|
|
Texas
|
|
San Antonio
|
|
|
2005
|
(2)
|
|
|
7,200
|
|
|
|
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.
We thoroughly analyze each prospective site before presenting
the site to our Board of Directors 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.
45
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.
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.
46
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.
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.
47
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.
We believe we compete favorably with respect to each of these
factors, as follows:
|
|
|
|
|
|
•
|
We offer a diverse selection of freshly prepared 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;
|
|
|
|
|
•
|
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;
|
|
|
|
|
•
|
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.
|
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, such as our unique
menu offerings and proprietary sauce recipes, 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
48
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.
Employees
As of June 30, 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
June 30, 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.
49
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information regarding our
directors, executive officers, and key employees:
|
|
|
|
|
|
|
|
|
Name
|
|
Age
|
|
|
Position
|
|
|
|
|
|
|
|
|
Marcus E. Jundt
|
|
|
40
|
|
|
Chairman of the Board
|
|
C. Donald Dempsey
|
|
|
58
|
|
|
President, Chief Executive Officer, and Director
|
|
Jason J. Merritt
|
|
|
41
|
|
|
Executive Vice President and Chief Operating Officer
|
|
Mark S. Robinow
|
|
|
49
|
|
|
Executive Vice President, Chief Financial Officer, and Secretary
|
|
Frank B. Bennett
|
|
|
48
|
|
|
Director
|
|
Richard J. Hauser
|
|
|
43
|
|
|
Director
|
|
Douglas G. Hipskind
|
|
|
37
|
|
|
Director
|
|
W. Kirk Patterson
|
|
|
47
|
|
|
Director
|
|
Anthony L. Winczewski
|
|
|
49
|
|
|
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, a private company.
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, Mr. Dempsey was
retired from January 2003 until May 2004. 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 Vice
President of Corporate Finance of Piper Jaffray &
Hopwood and a Vice President of Piper Jaffray
50
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. Mr. Marcus Jundt serves as our
Class I director, with the term of office of the
Class I director expiring at the annual meeting of
stockholders in 2006. The Class II directors consist of
Messrs. Dempsey, Winczewski, and Douglas G. Hipskind, with
the term of office of the Class II directors expiring at
the annual meeting of stockholders in 2007. Class III
directors consist of Richard J. Hauser, W. Kirk Patterson, and
Frank B. Bennett, with the term of office of Class III
directors expiring at the annual meeting of stockholders in
2008. Officers serve at the pleasure of the Board of Directors.
51
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 4,800 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
4,800 shares of common stock to the Chairman of the Audit
Committee, and options to purchase an additional
1,600 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 20,000 shares of common stock at an
exercise price of $6.00 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.
52
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)
|
|
|
Restricted
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Underlying
|
|
|
All Other
|
|
|
Name and Principal Position
|
|
Year
|
|
|
Salary
|
|
|
Bonus
|
|
|
Awards
|
|
|
Options
|
|
|
Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C. Donald Dempsey
|
|
|
2004
|
|
|
$
|
175,549
|
|
|
$
|
89,600
|
|
|
|
—
|
|
|
|
177,722
|
|
|
$
|
—
|
|
|
|
President and Chief Executive Officer(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chandler
|
|
|
2004
|
|
|
$
|
—
|
(3)
|
|
$
|
—
|
(3)
|
|
|
—
|
|
|
|
9,712
|
(3)
|
|
$
|
—
|
|
|
|
Former President and
|
|
|
2003
|
|
|
|
—
|
(3)
|
|
|
—
|
(3)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
Chief Executive Officer(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jason J. Merritt
|
|
|
2004
|
|
|
$
|
193,131
|
|
|
$
|
135,000
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
9,033
|
(5)
|
|
|
Executive Vice President
|
|
|
2003
|
|
|
$
|
101,717
|
|
|
|
—
|
|
|
$
|
48,000
|
(4)
|
|
|
60,000
|
|
|
$
|
11,192
|
(5)
|
|
|
and Chief Operating Officer
|
|
|
2002
|
|
|
$
|
81,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,000
|
|
|
$
|
11,844
|
(5)
|
|
|
|
Mark S. Robinow
|
|
|
2004
|
|
|
$
|
43,269
|
|
|
$
|
22,500
|
|
|
|
—
|
|
|
|
71,089
|
|
|
$
|
—
|
|
|
|
Executive Vice President, Chief Financial Officer, and
Secretary(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 9,712 shares of our
common stock at an exercise price of $6.00 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.
|
53
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
|
|
|
|
|
Individual Grants
|
|
|
at Assumed
|
|
|
|
|
|
|
|
Annual Rates
|
|
|
|
|
Number of
|
|
|
Percent of
|
|
|
|
|
of Stock Price Appreciation
|
|
|
|
|
Securities
|
|
|
Total Options
|
|
|
|
|
for
|
|
|
|
|
Underlying
|
|
|
Granted to
|
|
|
Exercise
|
|
|
|
|
Option Term(3)
|
|
|
|
|
Options
|
|
|
Employees in
|
|
|
Price per
|
|
|
Expiration
|
|
|
|
|
|
Name
|
|
Granted
|
|
|
Fiscal Year
|
|
|
Share(1)
|
|
|
Date(2)
|
|
|
5%
|
|
|
10%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C. Donald Dempsey
|
|
|
177,722
|
|
|
|
65.5
|
%
|
|
$
|
5.00
|
|
|
|
5/01/14
|
|
|
$
|
670,610
|
|
|
$
|
1,699,459
|
|
|
Chandler
|
|
|
9,712
|
(4)
|
|
|
3.6
|
%
|
|
$
|
6.00
|
|
|
|
12/01/07
|
(4)
|
|
$
|
9,185
|
|
|
$
|
19,288
|
|
|
Jason J. Merritt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Mark S. Robinow
|
|
|
71,089
|
|
|
|
26.2
|
%
|
|
$
|
5.00
|
|
|
|
10/18/14
|
|
|
$
|
223,537
|
|
|
$
|
566,488
|
|
|
|
|
|
(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 midpoint of the proposed range of the initial public
offering price of $10.00 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
midpoint of the proposed range of the initial public offering
price of $10.00 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
|
|
|
|
Number of Unexercised
|
|
|
In-the-Money Options
|
|
|
|
Options at Fiscal Year-End
|
|
|
at Fiscal Year-End
|
|
|
|
|
|
|
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C. Donald Dempsey
|
|
|
177,722
|
|
|
|
—
|
|
|
$
|
888,610
|
|
|
$
|
—
|
|
|
Chandler
|
|
|
9,712
|
|
|
|
—
|
|
|
$
|
38,848
|
|
|
$
|
—
|
|
|
Jason J. Merritt
|
|
|
95,000
|
|
|
|
—
|
|
|
$
|
337,500
|
|
|
$
|
—
|
|
|
Mark S. Robinow
|
|
|
71,089
|
|
|
|
—
|
|
|
$
|
355,445
|
|
|
$
|
—
|
|
54
Employment and Separation Agreements
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 177,722 shares of our common stock at an exercise
price per share of $5.00. In addition, beginning during fiscal
2005, we agreed to grant to Mr. Dempsey additional options
to purchase 5,000 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.
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
8,000 shares of our common stock and options to purchase an
additional 60,000 shares of our common stock at an exercise
price per share of $6.00.
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
55
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.”
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 71,089 shares of our common stock at an exercise
price per share of $5.00. 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.
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
9,712 shares of our common stock at an exercise price of
$6.00 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.
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 approval by our stockholders 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
650,000 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
June 30, 2005, options to purchase
56
approximately 489,279 shares of common stock were
outstanding, and 155,721 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 June 2005, our Board of Directors adopted our 2005 Stock
Award Plan, or 2005 Plan, and the 2005 Plan was approved by our
stockholders during July 2005.
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
57
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 total number of shares of
our common stock that may be subject to awards under the 2005
Plan is equal to 250,000 shares, plus (i) the number
of shares with respect to which awards previously granted under
the 2002 Plan that terminate without the issuance of the shares
or where the shares are forfeited or repurchased; (ii) any
shares available for grant in the share reserve of the 2002 Plan
as of the date this proposal is approved by the stockholders;
(iii) with respect to awards granted under the plans, the
number of shares which are not issued as a result of the award
being settled for cash or otherwise not issued in connection
with the exercise or payment of the award; and (iv) the
number of shares that are surrendered or withheld in payment of
the exercise price of any award or any tax withholding
requirements in connection with any award granted under the
existing plans. 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.
In the event that a dividend or other distribution (whether in
cash, shares of our common stock, or other property),
recapitalization, forward or reverse split, reorganization,
merger, consolidation, spin-off, combination, repurchase, share
exchange, or other similar corporate transaction or event
affects our common stock so that an adjustment is appropriate in
order to prevent dilution or enlargement of the rights of
participants, the plan administrator is authorized to
substitute, exchange, or adjust any of all of (1) the
number and kind of shares that may be delivered under the plan,
(2) the per person limitations described in the preceding
paragraph, and (3) all outstanding awards, including
adjustments to exercise prices of options and other affected
terms of awards. The plan administrator is authorized to adjust
performance conditions and other terms of awards in response to
these kinds of events or in response to changes in applicable
laws, regulations, or accounting principles.
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.
58
Our Board of Directors administers the plan, unless the Board
delegates administration to a Committee, which we expect to be
the Compensation Committee. 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 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 100% 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.
59
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 our obligations to pay cash under the plan or
other plans or compensatory arrangements, subject to such terms
as the plan administrator may specify.
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.
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
60
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) cash flow from
operations; 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 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.
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
61
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.
|
|
|
|
|
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.
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,
62
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 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.
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.
63
|
|
|
|
|
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.
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.
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(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
64
“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.
2005 Employee Stock Purchase Plan
We adopted our 2005 Employee Stock Purchase Plan, or ESPP,
during June 2005 to become effective upon the closing of this
offering. Our stockholders approved the ESPP during July 2005.
|
|
|
|
|
Principal Reasons for the Plan; General Terms
|
The purpose of the ESPP is to provide a means by which our
employees may be given an opportunity to purchase shares of
common stock through payroll deductions, to assist us in
retaining the services of our employees, to secure and retain
the services of new employees, and to provide incentives for
such persons to exert maximum efforts for our success.
The rights to purchase common stock granted under the ESPP are
intended to qualify as options issued under an “employee
stock purchase plan” as that term is defined in
Section 423(b) of the Internal Revenue Code of 1986, as
amended, or the Code.
We have reserved for issuance 125,000 shares of common
stock under the ESPP. Many of our approximately 800 employees
are eligible to participate in the ESPP, as described below.
Our Board of Directors administers the ESPP and has the final
power to construe and interpret both the ESPP and the rights
granted under it. Our Board of Directors has the power, subject
to the provisions of the ESPP, to determine when and how rights
to purchase common stock will be granted, the provisions of each
offering of such rights (which need not be identical), whether
employees of our company will be eligible to participate in the
ESPP.
The Board has the power to delegate administration of the ESPP
to a committee composed of not fewer than one member of the
Board of Directors, which we expect to be the Compensation
Committee. As used herein with respect to the ESPP, the
“Board” refers to any committee the Board of Directors
appoints or to the Board of Directors.
An aggregate of 125,000 shares of common stock is reserved
for issuance under the ESPP, subject to annual increases equal
to the lesser of (a) 1.5% of the shares of our common stock
outstanding on the first day of the fiscal year, or
(b) 100,000 shares of common stock. If rights granted
under the ESPP expire, lapse, or otherwise terminate without
being exercised, the shares of common stock not purchased under
such rights again become available for issuance under the ESPP.
The ESPP is implemented by offerings of rights to all eligible
employees from time to time by the Board. The maximum length for
an offering under the plan is 27 months. A participant with
more than one purchase right outstanding will be deemed to fully
exercise the purchase right with a lower exercise price (or an
earlier-granted date if the rights have the same exercise
price), unless otherwise indicated by the participant.
65
Any person who is customarily employed by us at least
20 hours per week and five months per calendar year on the
first day of an offering is eligible to participate in that
offering, provided such person has been employed by us for a
period determined by the Board, such period not to exceed two
years. Officers of our company may be eligible to participate in
the ESPP, however, the Board may provide that “highly
compensated” employees are not eligible to participate in
the ESPP.
However, no employee is eligible to participate in the ESPP if,
immediately after the grant of purchase rights, the employee
would own, directly or indirectly, stock representing 5% or more
of the total combined voting power or value of all classes of
stock of our company (including any stock which such employee
may purchase under all outstanding rights and options). In
addition, no employee may purchase shares of our common stock
worth more than $25,000 (determined at the fair market value of
the shares at the time such rights are granted) under all of our
employee stock purchase plans in any calendar year. The ESPP is
the only employee stock purchase plan adopted by the Board.
|
|
|
|
|
Participation in the Plan
|
Eligible employees enroll in the ESPP by delivering to us, prior
to the date selected by the Board as the offering date for the
offering, an agreement authorizing payroll deductions during the
offering, not to exceed fifteen percent (15%) of such
employees’ eligible earnings during the offering period.
Commencing on the effective date of the ESPP through
December 31, 2005, the purchase price per share at which
shares of common stock are sold in an offering under the ESPP
will not be less than the lesser of (i) 85% of the fair
market value of one share of common stock on first day of the
offering, or (ii) 85% of the fair market value of one share
of common stock on the last day of the offering. Following
December 31, 2005, the purchase price per share at which
shares of common stock are sold in an offering under the ESPP
will not be less than 95% of the fair market value of one share
of common stock on the last day of the applicable offering
period.
|
|
|
|
|
Payment of Purchase Price; Payroll Deductions
|
The purchase price of the shares is accumulated by payroll
deductions during the offering period. At any time during the
offering, a participant may reduce, increase, or terminate his
or her payroll deductions as the Board provides in the offering.
All payroll deductions made for a participant are credited to
his or her account under the ESPP and deposited with the general
funds of our company. To the extent specifically provided in the
offering, a participant may make additional payments into such
account.
By executing an agreement to participate in the ESPP, the
employee is entitled to purchase shares under the ESPP. In
connection with offerings made under the ESPP, the Board
specifies a maximum number of shares of common stock an employee
may be granted the right to purchase and the maximum aggregate
number of shares of common stock that may be purchased pursuant
to such offering by all participants. If the aggregate number of
shares to be purchased upon exercise of rights granted in the
offering would exceed the maximum aggregate number of shares of
common stock available, the Board would make a pro rata
allocation of available shares in a uniform and equitable
manner. Unless the employee’s participation is
discontinued, his or her right to purchase shares is exercised
automatically on each purchase date during an offering at the
applicable price.
66
While each participant in the ESPP is required to sign an
agreement authorizing payroll deductions, the participant may
withdraw from a given offering by terminating his or her payroll
deductions and by delivering to us a notice of withdrawal from
the ESPP.
Upon any withdrawal from an offering by the employee, we will
distribute to the employee his or her accumulated payroll
deductions without interest, less any accumulated deductions
previously applied to the purchase of shares of common stock on
the employee’s behalf during such offering, and such
employee’s interest in the offering will be automatically
terminated. The employee is not entitled to again participate in
that offering. However, an employee’s withdrawal from an
offering will not have any effect upon such employee’s
eligibility to participate in subsequent offerings under the
ESPP.
|
|
|
|
|
Termination of Employment or other Lack of
Eligibility
|
Rights granted pursuant to any offering under the ESPP terminate
immediately upon cessation of an employee’s employment for
any reason or no reason (subject to any post-employment
participation period required by law) or other lack of
eligibility for any reason, and we will distribute to such
employee all of his or her accumulated payroll deductions,
without interest, less any accumulated deductions previously
applied to the purchase of shares of common stock on the
employee’s behalf during such offering.
Rights granted under the ESPP are not transferable and may be
exercised only by the person to whom such rights are granted.
Transactions not involving receipt of consideration by us, such
as a merger, consolidation, reorganization, stock dividend, or
stock split, may change the type, class, and number of shares of
common stock subject to the ESPP and to outstanding purchase
rights. In that event, the ESPP will be appropriately adjusted
in the type, class, and maximum number of shares subject to the
ESPP and the outstanding purchase rights granted under the ESPP
will be appropriately adjusted in the type, class, number of
shares, and purchase limits of such purchase rights.
|
|
|
|
|
Effect of Certain Corporate Transactions
|
In the event of (i) the sale, lease, license, or other
disposition of all or substantially all of our consolidated
assets, (ii) the sale or other disposition of at least
ninety percent (90%) of our outstanding securities, or
(iii) certain specified types of merger, consolidation, or
similar transactions (collectively, “corporate
transaction”), any surviving or acquiring corporation may
continue or assume rights outstanding under the ESPP or may
substitute similar rights. If any surviving or acquiring
corporation does not assume such rights or substitute similar
rights, then the participants’ accumulated payroll
deductions will be used to purchase shares of common stock
within twenty (20) business days prior to the corporate
transaction under the ongoing offering and the
participants’ rights under the ongoing offering will
terminate immediately after such purchase.
|
|
|
|
|
Duration, Amendment, and Termination
|
The Board may suspend or terminate the ESPP at any time. Unless
terminated earlier, the ESPP will terminate at that time that
all of the shares of common stock reserved for issuance under
the ESPP, as increased or adjusted from time to time, have been
issued under the terms of the ESPP.
The Board may amend the ESPP at any time. Any amendment of the
ESPP, except amendments relating solely to (i) benefit the
administration of the ESPP, (ii) take account of a change
in legislation, or (iii) exchange control or regulatory
treatment for participants or us, must be approved by the
67
stockholders after its adoption by the Board if the amendment is
necessary for the ESPP to satisfy Sections 423 of the Code
or other applicable laws and regulations.
Rights granted before amendment or termination of the ESPP will
not be altered or impaired by any amendment or termination of
the ESPP, except (i) with consent of the employee to whom
such rights were granted; or (ii) as necessary to comply
with any laws or governmental regulations (including, without
limitation the provisions of the Code and the regulations
thereunder relating to employee stock purchase plans).
|
|
|
|
|
Federal Income Tax Information
|
Rights granted under the ESPP are intended to qualify for
favorable federal income tax treatment associated with rights
granted under an employee stock purchase plan which qualifies
under provisions of Section 423 of the Code.
A participant will be taxed on amounts withheld for the purchase
of shares of common stock as if such amounts were actually
received. Other than this, no income will be taxable to a
participant until disposition of the acquired shares, and the
method of taxation will depend upon the holding period of the
acquired shares.
If the stock is disposed of more than two years after the
beginning of the offering period and more than one year after
the stock is transferred to the participant, then the lesser of
(i) the excess of the fair market value of the stock at the
time of such disposition over the exercise price, or
(ii) the excess of the fair market value of the stock as of
the beginning of the offering period over the exercise price
(determined as of the beginning of the offering period) will be
treated as ordinary income. Any further gain or any loss will be
taxed as a long-term capital gain or loss. At present, such
capital gains generally are subject to lower tax rates than
ordinary income.
If the stock is sold or disposed of before the expiration of
either of the holding periods described above, then the excess
of the fair market value of the stock on the exercise date over
the exercise price will be treated as ordinary income at the
time of such disposition. The balance of any gain will be
treated as capital gain. Even if the stock is later disposed of
for less than its fair market value on the exercise date, the
same amount of ordinary income is attributed to the participant,
and a capital loss is recognized equal to the difference between
the sales price and the fair market value of the stock on such
exercise date. Any capital gain or loss will be short-term or
long-term, depending on how long the stock has been held.
There are no federal income tax consequences to us by reason of
the grant or exercise of rights under the ESPP. We are entitled
to a deduction to the extent amounts are taxed as ordinary
income to a participant (subject to the requirement of
reasonableness and the satisfaction of tax reporting
obligations).
68
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 50,000 shares of our common stock at an
exercise price of $6.00 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 $6.00.
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.
69
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 Kona MN, LLC,
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
200,000 shares of our common stock at an exercise price of
$5.00 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 $35.00. 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 40,000 shares of our
common stock at an exercise price of $6.00 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 20,000 shares of our common stock at an
exercise price of $6.00 per share.
70
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of our common stock on June 30, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent Beneficially
|
|
|
|
|
Number of
|
|
|
Owned(2)
|
|
|
|
|
Shares
|
|
|
|
|
|
|
|
Beneficially
|
|
|
Before
|
|
|
After
|
|
|
Name of Beneficial Owner
|
|
Owned(1)
|
|
|
Offering
|
|
|
Offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors and Executive Officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marcus E. Jundt
|
|
|
905,934
|
(3)
|
|
|
29.6
|
%
|
|
|
16.3
|
%
|
|
C. Donald Dempsey
|
|
|
177,722
|
(4)
|
|
|
6.0
|
%
|
|
|
3.3
|
%
|
|
Jason J. Merritt
|
|
|
103,600
|
(5)
|
|
|
3.6
|
%
|
|
|
1.9
|
%
|
|
Mark S. Robinow
|
|
|
71,089
|
(6)
|
|
|
2.5
|
%
|
|
|
1.3
|
%
|
|
Chandler
|
|
|
34,712
|
(7)
|
|
|
1.2
|
%
|
|
|
*
|
|
|
Frank B. Bennett
|
|
|
9,600
|
(8)
|
|
|
*
|
|
|
|
*
|
|
|
Richard J. Hauser
|
|
|
871,466
|
(9)
|
|
|
29.0
|
%
|
|
|
15.8
|
%
|
|
Douglas G. Hipskind
|
|
|
8,000
|
(10)
|
|
|
*
|
|
|
|
*
|
|
|
W. Kirk Patterson
|
|
|
6,400
|
(11)
|
|
|
*
|
|
|
|
*
|
|
|
Anthony L. Winczewski
|
|
|
4,800
|
|
|
|
*
|
|
|
|
*
|
|
|
All directors and executive officers as a group (10 persons)
|
|
|
1,493,323
|
|
|
|
43.4
|
%
|
|
|
25.1
|
%
|
|
5% Stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kona MN, LLC
|
|
|
700,000
|
(12)
|
|
|
23.4
|
%
|
|
|
12.7
|
%
|
|
Mary Joann Jundt Irrevocable Trust
|
|
|
540,732
|
(13)
|
|
|
19.3
|
%
|
|
|
10.2
|
%
|
|
James R. Jundt
|
|
|
303,333
|
(14)
|
|
|
10.9
|
%
|
|
|
5.7
|
%
|
|
Kona KC Investment LLC
|
|
|
216,666
|
(15)
|
|
|
7.6
|
%
|
|
|
4.1
|
%
|
|
Mary Jane Hauser
|
|
|
166,666
|
(9)
|
|
|
6.0
|
%
|
|
|
3.2
|
%
|
|
EFO/Kona G.P.
|
|
|
150,000
|
(16)
|
|
|
5.4
|
%
|
|
|
2.8
|
%
|
|
|
|
|
|
|
(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
2,796,530 shares of common stock outstanding on
June 30, 2005, and 5,296,530 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 June 30, 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
June 30, 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
|
71
|
|
|
|
|
|
|
|
|
Mr. Jundt includes (a) 10,800 shares held in
trust by his children, of which Mr. Marcus Jundt is not a
trustee; (b) 500,000 shares of common stock
beneficially owned by Kona MN, LLC, of which Mr. Marcus
Jundt is a control person; (c) 200,000 shares of
common stock issuable upon exercise of outstanding warrants held
by Kona MN, LLC; and (d) 60,000 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) 540,732 shares beneficially owned by
the Mary Joann Jundt Irrevocable Trust; or
(ii) 303,333 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 177,722 shares of common stock issuable upon
exercise of vested stock options.
|
|
|
|
|
|
|
|
|
(5)
|
Includes 95,000 shares of common stock issuable upon
exercise of vested stock options.
|
|
|
|
|
|
|
|
|
(6)
|
Includes 71,089 shares of common stock issuable upon
exercise of vested stock options.
|
|
|
|
|
|
|
|
|
(7)
|
Includes 9,712 shares of common stock issuable upon
exercise of vested stock options.
|
|
|
|
|
|
|
|
|
(8)
|
Includes 9,600 shares of common stock issuable upon
exercise of vested stock options.
|
|
|
|
|
|
|
|
|
(9)
|
Richard J. Hauser and Mary Jane Hauser are husband and wife, and
Mr. Hauser is a control person of Kona MN, LLC. The number
of shares of common stock beneficially owned by Mr. Hauser
includes (a) 166,666 shares of common stock held by
Ms. Hauser; (b) 500,000 shares of common stock
held by Kona MN, LLC; (c) 200,000 shares of common
stock issuable upon exercise of outstanding warrants held by
Kona MN, LLC; and (d) 4,800 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 8,000 shares of common stock issuable upon
exercise of vested stock options.
|
|
|
|
|
|
|
|
(11)
|
Includes 6,400 shares of common stock issuable upon
exercise of vested stock options.
|
|
|
|
|
|
|
|
(12)
|
Includes 500,000 shares of common stock and
200,000 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 50,000 shares of common stock issuable upon
exercise of outstanding warrants. Kona KC Investment LLC is
controlled by RJN II, LLC, its manager. Robert J. Novak controls
both Kona KC Investment, LLC and RJN II, LLC. The address for
Kona KC Investment LLC, RJN II LLC, and Mr. Novak is
5219 North Casa Blanca Drive, Paradise Valley, Arizona
85253.
|
|
|
|
|
|
|
|
(16)
|
Represents 150,000 shares of common stock. EFO/Kona G.P. is
an entity controlled by William Esping. The address for EFO/Kona
G.P. and Mr. Esping is 2828 Routh, Suite 500,
Dallas, Texas, 75201.
|
|
|
72
DESCRIPTION OF CAPITAL STOCK
Following the completion of this offering, we will be authorized
to issue 40,000,000 shares of common stock, $.01 par
value, and 20,000,000 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. Immediately prior to the closing of this
offering and following the conversion of all shares of preferred
stock to common stock, we will not have any shares of preferred
stock outstanding. We have no present intention to issue any
additional 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 $35.00.
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.
73
Anti-Takeover Effects
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 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.
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.
74
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 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.
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
2
/
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.
|
|
|
|
|
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
75
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 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
1
/
3
%
of all voting power;
|
|
|
|
|
•
|
at least
33
1
/
3
%
but less than a majority of all voting power; or
|
|
|
|
|
•
|
a majority or more of all voting power.
|
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 Continental Stock
Transfer & Trust Company. The transfer agent’s
address is 17 Battery Place, New York, New York 10004 and
its telephone number is (212)509-4000.
76
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
5,296,530 shares of common stock outstanding, based on
2,796,530 shares of common stock outstanding as of
June 30, 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 75,600 shares will be eligible for
sale pursuant to Rule 144(k), none of which are held by
affiliates; 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 2,190,265 additional
shares held by affiliates will be eligible for sale subject to
volume, manner of sale, and other limitations under
Rule 144; 200 additional shares held by nonaffiliates will
be eligible for sale pursuant to Rule 701; and 530,435
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 request to release shares
covered by a lock-up agreement, the representatives would
consider circumstances of emergency and hardship. 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.
77
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 2002 Stock Plan, 2005 Stock Award Plan, 2005 Employee
Stock Purchase 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 833,331 restricted shares and warrants to purchase
200,000 shares of common stock 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.
78
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
79
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.
|
80
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.
81
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 375,000 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 375,000
additional shares from us.
|
|
|
|
|
|
|
|
|
|
|
|
|
No Exercise
|
|
|
Full Exercise
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
$
|
|
|
|
$
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
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.
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, or
enter into any swap, hedge, or other arrangement that transfers,
in whole or in part, any of the
82
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, suppliers, and business associates that we
invite to participate in this 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 125,000 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.
We have applied 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.
83
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 $1.0 million. In addition, we have
also agreed to pay to the representative an expense allowance of
$100,000, which is payable at, and only in the event of, the
closing of the offering.
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.
84
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 1580, 100 F Street, N.E.,
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.
85
KONA GRILL, INC.
INDEX TO FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
Page
|
|
|
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
|
F-3
|
|
|
|
|
|
F-4
|
|
|
|
|
|
F-5
|
|
|
|
|
|
F-6
|
|
|
|
|
|
F-7
|
|
F-1
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.
Phoenix, Arizona
May 20, 2005
F-2
KONA GRILL, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
Notes Payable and
|
|
|
|
|
December 31,
|
|
|
|
|
Stockholders’
|
|
|
|
|
|
|
|
June 30,
|
|
|
Equity at June 30,
|
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005 (Note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
(In thousands)
|
|
|
|
|
ASSETS
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,107
|
|
|
$
|
3,098
|
|
|
$
|
475
|
|
|
|
|
|
|
|
Receivables, primarily due from landlords
|
|
|
440
|
|
|
|
1,344
|
|
|
|
920
|
|
|
|
|
|
|
|
Inventories
|
|
|
184
|
|
|
|
336
|
|
|
|
298
|
|
|
|
|
|
|
|
Prepaids and other
|
|
|
36
|
|
|
|
109
|
|
|
|
146
|
|
|
|
|
|
|
|
Deferred offering costs
|
|
|
—
|
|
|
|
—
|
|
|
|
378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
3,767
|
|
|
|
4,887
|
|
|
|
2,217
|
|
|
|
|
|
|
Other assets
|
|
|
106
|
|
|
|
344
|
|
|
|
363
|
|
|
|
|
|
|
Notes receivable
|
|
|
190
|
|
|
|
141
|
|
|
|
120
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
8,634
|
|
|
|
17,041
|
|
|
|
20,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
12,697
|
|
|
$
|
22,413
|
|
|
$
|
23,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,303
|
|
|
$
|
2,786
|
|
|
$
|
2,167
|
|
|
|
|
|
|
|
Accrued expenses
|
|
|
1,193
|
|
|
|
1,767
|
|
|
|
1,620
|
|
|
|
|
|
|
|
Current portion of notes payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related party
|
|
|
1,200
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
Other
|
|
|
289
|
|
|
|
595
|
|
|
|
735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
3,985
|
|
|
|
5,148
|
|
|
|
4,522
|
|
|
|
|
|
|
Long-term notes payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related party, net
|
|
|
—
|
|
|
|
2,657
|
|
|
|
2,724
|
|
|
|
—
|
|
|
|
Other
|
|
|
1,163
|
|
|
|
2,984
|
|
|
|
3,667
|
|
|
|
|
|
|
Deferred rent
|
|
|
2,124
|
|
|
|
5,493
|
|
|
|
6,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
7,272
|
|
|
|
16,282
|
|
|
|
16,975
|
|
|
|
14,251
|
|
|
|
|
Commitments and contingencies (Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock, $0.01 par value,
aggregate liquidation preference of $10,000,000,
4,166,666 shares authorized, issued and outstanding at
December 31, 2003 and 2004, and June 30, 2005
|
|
|
42
|
|
|
|
42
|
|
|
|
42
|
|
|
|
—
|
|
|
|
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
June 30, 2005
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 40,000,000 shares
authorized, 1,460,200, 1,463,199, and 1,463,199 shares
issued and outstanding at December 31, 2003 and 2004, and
June 30, 2005, respectively, 2,796,530 shares issued
and outstanding as of June 30, 2005 on a pro forma basis
|
|
|
15
|
|
|
|
15
|
|
|
|
15
|
|
|
|
28
|
|
|
Additional paid-in capital
|
|
|
8,474
|
|
|
|
8,904
|
|
|
|
8,950
|
|
|
|
11,979
|
|
|
Accumulated deficit
|
|
|
(3,106
|
)
|
|
|
(2,830
|
)
|
|
|
(2,808
|
)
|
|
|
(3,084
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
5,425
|
|
|
|
6,131
|
|
|
|
6,199
|
|
|
$
|
8,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
12,697
|
|
|
$
|
22,413
|
|
|
$
|
23,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-3
KONA GRILL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
Years Ended December 31,
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
(In thousands, except per share data)
|
|
|
Restaurant sales
|
|
$
|
9,453
|
|
|
$
|
16,608
|
|
|
$
|
25,050
|
|
|
$
|
10,862
|
|
|
$
|
16,930
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
2,852
|
|
|
|
4,952
|
|
|
|
7,371
|
|
|
|
3,187
|
|
|
|
4,889
|
|
|
|
Labor
|
|
|
3,097
|
|
|
|
5,105
|
|
|
|
7,502
|
|
|
|
3,185
|
|
|
|
5,067
|
|
|
|
Occupancy
|
|
|
691
|
|
|
|
1,212
|
|
|
|
1,748
|
|
|
|
774
|
|
|
|
1,173
|
|
|
|
Restaurant operating expenses
|
|
|
1,383
|
|
|
|
2,304
|
|
|
|
3,372
|
|
|
|
1,410
|
|
|
|
2,007
|
|
|
|
General and administrative
|
|
|
1,639
|
|
|
|
2,058
|
|
|
|
2,217
|
|
|
|
750
|
|
|
|
2,240
|
|
|
|
Preopening expense
|
|
|
438
|
|
|
|
241
|
|
|
|
880
|
|
|
|
127
|
|
|
|
107
|
|
|
|
Depreciation and amortization
|
|
|
503
|
|
|
|
823
|
|
|
|
1,269
|
|
|
|
536
|
|
|
|
1,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
10,603
|
|
|
|
16,695
|
|
|
|
24,359
|
|
|
|
9,969
|
|
|
|
16,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(1,150
|
)
|
|
|
(87
|
)
|
|
|
691
|
|
|
|
893
|
|
|
|
398
|
|
|
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 six months ended June 30, 2004 and 2005,
respectively
|
|
|
103
|
|
|
|
260
|
|
|
|
360
|
|
|
|
94
|
|
|
|
358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before provision for
income taxes
|
|
|
(1,253
|
)
|
|
|
(347
|
)
|
|
|
331
|
|
|
|
799
|
|
|
|
40
|
|
|
Provision for income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
55
|
|
|
|
20
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(1,253
|
)
|
|
|
(347
|
)
|
|
|
276
|
|
|
|
779
|
|
|
|
22
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations of discontinued locations
|
|
|
27
|
|
|
|
(57
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
Gain (loss) from sale of restaurant assets
|
|
|
367
|
|
|
|
(262
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
|
394
|
|
|
|
(319
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(859
|
)
|
|
$
|
(666
|
)
|
|
$
|
276
|
|
|
$
|
779
|
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share — Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.90
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
0.19
|
|
|
$
|
0.53
|
|
|
$
|
0.02
|
|
|
|
Discontinued operations
|
|
|
0.28
|
|
|
|
(0.22
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(0.62
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
0.19
|
|
|
$
|
0.53
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share — Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.90
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
0.17
|
|
|
$
|
0.28
|
|
|
$
|
0.01
|
|
|
|
Discontinued operations
|
|
|
0.28
|
|
|
|
(0.22
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(0.62
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
0.17
|
|
|
$
|
0.28
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,391
|
|
|
|
1,437
|
|
|
|
1,460
|
|
|
|
1,460
|
|
|
|
1,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
1,391
|
|
|
|
1,437
|
|
|
|
2,815
|
|
|
|
2,801
|
|
|
|
2,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) per share (unaudited)(Note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
$
|
0.17
|
|
|
|
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
$
|
0.17
|
|
|
|
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computation of pro forma net
income (loss) per share (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
2,794
|
|
|
|
|
|
|
|
2,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
2,815
|
|
|
|
|
|
|
|
2,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-4
KONA GRILL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Balances at December 31, 2001
|
|
|
—
|
|
|
$
|
—
|
|
|
|
1,473
|
|
|
$
|
15
|
|
|
$
|
3,792
|
|
|
$
|
(1,581
|
)
|
|
$
|
2,226
|
|
|
|
Common stock repurchased in sale of restaurant assets
|
|
|
—
|
|
|
|
—
|
|
|
|
(91
|
)
|
|
|
(1
|
)
|
|
|
(680
|
)
|
|
|
—
|
|
|
|
(681
|
)
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(859
|
)
|
|
|
(859
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2002
|
|
|
—
|
|
|
|
—
|
|
|
|
1,382
|
|
|
|
14
|
|
|
|
3,112
|
|
|
|
(2,440
|
)
|
|
|
686
|
|
|
|
Common stock issued in connection with purchase of restaurant
assets
|
|
|
—
|
|
|
|
—
|
|
|
|
70
|
|
|
|
1
|
|
|
|
419
|
|
|
|
—
|
|
|
|
420
|
|
|
|
Issuance of common stock as compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
8
|
|
|
|
—
|
|
|
|
48
|
|
|
|
—
|
|
|
|
48
|
|
|
|
Issuance of Series A convertible preferred stock, net of
$63,000 in issuance costs
|
|
|
3,334
|
|
|
|
34
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,903
|
|
|
|
—
|
|
|
|
3,937
|
|
|
|
Conversion of convertible promissory note to preferred stock
|
|
|
833
|
|
|
|
8
|
|
|
|
—
|
|
|
|
—
|
|
|
|
992
|
|
|
|
—
|
|
|
|
1,000
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(666
|
)
|
|
|
(666
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2003
|
|
|
4,167
|
|
|
|
42
|
|
|
|
1,460
|
|
|
|
15
|
|
|
|
8,474
|
|
|
|
(3,106
|
)
|
|
|
5,425
|
|
|
|
Issuance of common stock from exercise of stock options and
warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
|
—
|
|
|
|
30
|
|
|
|
—
|
|
|
|
30
|
|
|
|
Beneficial conversion feature and detachable warrants on
convertible subordinated promissory note
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
400
|
|
|
|
—
|
|
|
|
400
|
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
276
|
|
|
|
276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2004
|
|
|
4,167
|
|
|
|
42
|
|
|
|
1,463
|
|
|
|
15
|
|
|
|
8,904
|
|
|
|
(2,830
|
)
|
|
|
6,131
|
|
|
Issuance of stock options as compensation (unaudited)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
46
|
|
|
|
—
|
|
|
|
46
|
|
|
|
Net loss (unaudited)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
22
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2005 (unaudited)
|
|
|
4,167
|
|
|
$
|
42
|
|
|
|
1,463
|
|
|
$
|
15
|
|
|
$
|
8,950
|
|
|
$
|
(2,808
|
)
|
|
$
|
6,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-5
KONA GRILL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
Years Ended December 31,
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
(In thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(859
|
)
|
|
$
|
(666
|
)
|
|
$
|
276
|
|
|
$
|
779
|
|
|
$
|
22
|
|
|
Discontinued operations
|
|
|
(394
|
)
|
|
|
319
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(1,253
|
)
|
|
|
(347
|
)
|
|
|
276
|
|
|
|
779
|
|
|
|
22
|
|
|
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
503
|
|
|
|
823
|
|
|
|
1,269
|
|
|
|
536
|
|
|
|
1,049
|
|
|
|
Compensation expense for issuance of common stock and stock
options
|
|
|
—
|
|
|
|
48
|
|
|
|
—
|
|
|
|
—
|
|
|
|
46
|
|
|
|
Amortization of debt discount
|
|
|
—
|
|
|
|
—
|
|
|
|
57
|
|
|
|
—
|
|
|
|
67
|
|
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
81
|
|
|
|
(422
|
)
|
|
|
(904
|
)
|
|
|
342
|
|
|
|
424
|
|
|
|
|
Inventories
|
|
|
(54
|
)
|
|
|
(52
|
)
|
|
|
(152
|
)
|
|
|
(27
|
)
|
|
|
37
|
|
|
|
|
Prepaids and other current assets
|
|
|
(37
|
)
|
|
|
19
|
|
|
|
(73
|
)
|
|
|
(112
|
)
|
|
|
(37
|
)
|
|
|
|
Deferred offering costs
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(378
|
)
|
|
|
|
Accounts payable
|
|
|
830
|
|
|
|
(449
|
)
|
|
|
872
|
|
|
|
99
|
|
|
|
(374
|
)
|
|
|
|
Accrued expenses
|
|
|
336
|
|
|
|
482
|
|
|
|
574
|
|
|
|
(136
|
)
|
|
|
(145
|
)
|
|
|
|
Deferred rent
|
|
|
549
|
|
|
|
441
|
|
|
|
3,369
|
|
|
|
406
|
|
|
|
569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing operations
|
|
|
955
|
|
|
|
543
|
|
|
|
5,288
|
|
|
|
1,887
|
|
|
|
1,280
|
|
|
Net cash provided by discontinued operations
|
|
|
27
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
982
|
|
|
|
545
|
|
|
|
5,288
|
|
|
|
1,887
|
|
|
|
1,280
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(2,982
|
)
|
|
|
(2,852
|
)
|
|
|
(9,065
|
)
|
|
|
(3,021
|
)
|
|
|
(4,730
|
)
|
|
Repayment (issuance) of notes receivable
|
|
|
12
|
|
|
|
(2
|
)
|
|
|
49
|
|
|
|
85
|
|
|
|
21
|
|
|
Decrease (increase) in other assets
|
|
|
51
|
|
|
|
(78
|
)
|
|
|
(238
|
)
|
|
|
(26
|
)
|
|
|
(18
|
)
|
|
Proceeds from sale of restaurant
|
|
|
—
|
|
|
|
100
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(2,919
|
)
|
|
|
(2,832
|
)
|
|
|
(9,254
|
)
|
|
|
(2,962
|
)
|
|
|
(4,727
|
)
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of notes payable
|
|
|
1,700
|
|
|
|
2,194
|
|
|
|
5,495
|
|
|
|
1,000
|
|
|
|
1,095
|
|
|
Repayments of notes payable
|
|
|
(147
|
)
|
|
|
(915
|
)
|
|
|
(1,568
|
)
|
|
|
(1,355
|
)
|
|
|
(271
|
)
|
|
Proceeds from the exercise of stock options and warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
30
|
|
|
|
—
|
|
|
|
|
|
|
Proceeds from issuance of Series A convertible preferred
stock, net of issuance costs
|
|
|
—
|
|
|
|
3,937
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
1,553
|
|
|
|
5,216
|
|
|
|
3,957
|
|
|
|
(355
|
)
|
|
|
824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(384
|
)
|
|
|
2,929
|
|
|
|
(9
|
)
|
|
|
(1,430
|
)
|
|
|
(2,623
|
)
|
|
Cash and cash equivalents at the beginning of the period
|
|
|
562
|
|
|
|
178
|
|
|
|
3,107
|
|
|
|
3,107
|
|
|
|
3,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the period
|
|
$
|
178
|
|
|
$
|
3,107
|
|
|
$
|
3,098
|
|
|
$
|
1,677
|
|
|
$
|
475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
107
|
|
|
$
|
258
|
|
|
$
|
343
|
|
|
$
|
87
|
|
|
$
|
296
|
|
|
Noncash investing and financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in accounts payable related to property and
equipment additions
|
|
$
|
204
|
|
|
$
|
388
|
|
|
$
|
611
|
|
|
$
|
(462
|
)
|
|
$
|
(249
|
)
|
|
Beneficial conversion feature and detachable warrants on
convertible note
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
400
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Issuance of common stock for purchase of restaurant assets
|
|
$
|
—
|
|
|
$
|
420
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Conversion of convertible promissory note to preferred stock
|
|
$
|
—
|
|
|
$
|
1,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Sale of restaurant assets for redemption of common stock
|
|
$
|
681
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
See accompanying notes to the consolidated financial statements.
F-6
KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
Information as of June 30, 2005 and for the Six Months
Ended
June 30, 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
|
During July 2005, the stockholders of the Company approved a
1-for-5 reverse stock split of its common stock. The
accompanying financial statements give retroactive effect to the
reverse stock split for all periods presented.
|
|
|
|
|
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 June 30, 2005
and for the six months ended June 30, 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 six months ended June 30, 2005, are not
necessarily indicative of the results to be expected for the
year ending December 31, 2005, or for any other interim
period.
|
|
|
|
|
Unaudited Pro Forma Convertible Notes Payable,
Stockholders’ Equity, and Net Income (Loss)
Per Share
|
The Company’s Board of Directors has authorized the filing
of a registration statement with the Securities and Exchange
Commission to register shares of its common stock in an initial
public offering. If the initial public offering closed as
presently anticipated at June 30, 2005, all of the shares
of convertible preferred stock then outstanding would have
converted into 833,331 shares of common stock and the
convertible notes payable to related parties would have
converted to 2,500,000 shares of Series B preferred
stock, which would have converted into 500,000 shares of
common stock. The unaudited pro forma long-term notes payable to
related party and stockholders’ equity at June 30,
2005 reflects the conversion of all outstanding preferred stock
and convertible notes into common stock as if such conversion
had occurred at June 30, 2005. The pro forma accumulated
deficit reflects the write off of the unamortized debt discount
associated with the convertible promissory notes.
F-7
KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Information as of June 30, 2005 and for the Six Months
Ended
June 30, 2004 and 2005 is Unaudited.
The unaudited pro forma net income per share for the year ended
December 31, 2004 is the same as net income per share due
to inclusion of all convertible preferred stock and convertible
promissory notes in diluted income per share. The unaudited pro
forma net income per share for the six months ended
June 30, 2005 reflects the conversion of all preferred
stock and convertible notes in the unaudited pro forma
stockholder’s equity at June 30, 2005.
The following table sets forth the computation of pro forma net
income per share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Six Months Ended
|
|
|
|
|
December 31, 2004
|
|
|
June 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
Diluted
|
|
|
Basic
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
276
|
|
|
$
|
276
|
|
|
$
|
22
|
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense and debt discount amortization of convertible
notes payable to related parties, net of income taxes
|
|
|
189
|
|
|
|
189
|
|
|
|
217
|
|
|
|
217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
465
|
|
|
$
|
465
|
|
|
$
|
239
|
|
|
$
|
239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
|
|
|
1,460
|
|
|
|
2,815
|
|
|
|
1,463
|
|
|
|
2,433
|
|
|
|
Conversion of Series A convertible preferred stock
|
|
|
834
|
|
|
|
—
|
|
|
|
834
|
|
|
|
—
|
|
|
|
Conversion of convertible notes payable
|
|
|
500
|
|
|
|
—
|
|
|
|
500
|
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computation of pro forma net
income per share
|
|
|
2,794
|
|
|
|
2,815
|
|
|
|
2,797
|
|
|
|
2,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per share
|
|
$
|
0.17
|
|
|
$
|
0.17
|
|
|
$
|
0.09
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, which are typically
deposited the following business day.
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 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-8
KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Information as of June 30, 2005 and for the Six Months
Ended
June 30, 2004 and 2005 is Unaudited.
The Company evaluates property and equipment for impairment
whenever events or changes in restaurant operating results
indicate that the carrying value of those assets may not be
recoverable. The assessment of impairment is performed on a
restaurant-by-restaurant basis. If indicators of impairment are
present and if the Company determines the carrying value of the
restaurant assets exceeds the projected future undiscounted cash
flows, an impairment charge would be recorded to reduce the
carrying value of the restaurant assets to their fair value. The
Company does not believe there are any indicators of impairment
with respect to its property and equipment.
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. Rent expense associated with these
contingent payments is recorded prior to the achievement of
specified sales levels if exceeding such amount is considered
probable and is estimable. 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.
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, 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.
The Company expenses advertising as incurred. Advertising
expense for the years ended December 31, 2002, 2003, and
2004 and for the six months ended June 30, 2004 and 2005,
was approximately $290,000, $476,000, $637,000, $279,000, and
$192,000, respectively, and is included in other restaurant
operating costs in the accompanying consolidated statements of
operations.
F-9
KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Information as of June 30, 2005 and for the Six Months
Ended
June 30, 2004 and 2005 is Unaudited.
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.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Net income (loss), as reported
|
|
$
|
(859
|
)
|
|
$
|
(666
|
)
|
|
$
|
276
|
|
|
$
|
779
|
|
|
$
|
22
|
|
|
Stock-based compensation expense, net of tax effect
|
|
|
(21
|
)
|
|
|
—
|
|
|
|
(108
|
)
|
|
|
(57
|
)
|
|
|
(344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss)
|
|
$
|
(880
|
)
|
|
$
|
(666
|
)
|
|
$
|
168
|
|
|
$
|
722
|
|
|
$
|
(322
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic, as reported
|
|
$
|
(0.62
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
0.19
|
|
|
$
|
0.53
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic, pro forma
|
|
$
|
(0.63
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
0.12
|
|
|
$
|
0.50
|
|
|
$
|
(0.22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted, as reported
|
|
$
|
(0.62
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
0.17
|
|
|
$
|
0.28
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted, pro forma
|
|
$
|
(0.63
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
0.06
|
|
|
$
|
0.26
|
|
|
$
|
(0.22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2003, the Company did not report stock-based compensation
expense, net of tax effect, primarily because the amount of
options forfeited during 2003 exceeded the amount of options
granted during 2003. The per share weighted average fair value
for options awarded during the years ended 2002, 2003, and 2004
and the six months ended June 30, 2005 was $1.50, $1.30,
$1.00, and $1.16, 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.
F-10
KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Information as of June 30, 2005 and for the Six Months
Ended
June 30, 2004 and 2005 is Unaudited.
|
|
|
|
|
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
subordinated promissory note using the if-converted method, and
potential warrant and stock option exercises calculated using
the treasury stock method.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
(In thousands, except per share data)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders
|
|
$
|
(859
|
)
|
|
$
|
(666
|
)
|
|
$
|
276
|
|
|
$
|
779
|
|
|
$
|
22
|
|
|
|
Interest and amortization expense related to convertible
subordinated promissory note, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
189
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(859
|
)
|
|
$
|
(666
|
)
|
|
$
|
465
|
|
|
$
|
779
|
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares — basic
|
|
|
1,391
|
|
|
|
1,437
|
|
|
|
1,460
|
|
|
|
1,460
|
|
|
|
1,463
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
22
|
|
|
|
8
|
|
|
|
137
|
|
|
|
|
Series A preferred shares
|
|
|
—
|
|
|
|
—
|
|
|
|
833
|
|
|
|
833
|
|
|
|
833
|
|
|
|
|
Convertible shares
|
|
|
—
|
|
|
|
—
|
|
|
|
500
|
|
|
|
500
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,391
|
|
|
|
1,437
|
|
|
|
2,815
|
|
|
|
2,801
|
|
|
|
2,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.62
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
0.19
|
|
|
$
|
0.53
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.62
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
0.17
|
|
|
$
|
0.28
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2002, 2003, and 2004, there were
approximately 142,854, 108,700, and 122,068 stock options
outstanding and 62,100, 62,100, and 58,900 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. At
December 31, 2003, 833,331 shares of common stock
issuable upon conversion of the Series A Convertible
Preferred Stock and at June 30, 2005, 500,000 shares
of common stock issuable upon conversion of the convertible
promissory note 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.
F-11
KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Information as of June 30, 2005 and for the Six Months
Ended
June 30, 2004 and 2005 is Unaudited.
|
|
|
|
|
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. No allowance for doubtful accounts has
been recorded as collection of tenant improvement allowances is
considered probable.
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.
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
F-12
KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Information as of June 30, 2005 and for the Six Months
Ended
June 30, 2004 and 2005 is Unaudited.
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 40,000 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 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 70,000 shares of the
Company’s common stock. At the time of the transaction, the
fair value of the Company’s common stock was estimated by
the Company’s Board of Directors to be $6.00 per
share. In determining the fair value of the Company’s
common stock, the Board of Directors considered various factors,
including the Company’s historical operational performance,
the Company’s prospects, and the most recent arms’
length transaction in the Company’s common stock. 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
90,800 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. During the year ended December 31,
2002, revenue for the restaurant during the two-month period of
operations was approximately $189,000 and the net income was
approximately $27,000.
The fair value of the shares surrendered to the Company at
February 25, 2002 was estimated by the Company’s Board
of Directors to be $681,000, or $7.50 per share. In
determining the fair value of the Company’s common stock,
the Board of Directors considered various factors, including the
Company’s historical operational performance, the
Company’s prospects, and the most recent arms’ length
transaction
F-13
KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Information as of June 30, 2005 and for the Six Months
Ended
June 30, 2004 and 2005 is Unaudited.
in the Company’s common stock. 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.
Receivables consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Landlord tenant improvement allowances
|
|
$
|
370
|
|
|
$
|
1,323
|
|
|
$
|
920
|
|
|
Other
|
|
|
70
|
|
|
|
21
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
440
|
|
|
$
|
1,344
|
|
|
$
|
920
|
|
|
|
|
|
|
|
|
|
|
|
|
No allowance for doubtful accounts has been recorded as
collection of tenant improvement allowances is considered
probable.
|
|
|
|
5.
|
Property and Equipment
|
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Leasehold improvements
|
|
$
|
7,701
|
|
|
$
|
14,788
|
|
|
$
|
15,213
|
|
|
Equipment
|
|
|
2,393
|
|
|
|
4,401
|
|
|
|
4,493
|
|
|
Furniture and fixtures
|
|
|
650
|
|
|
|
1,087
|
|
|
|
1,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,744
|
|
|
|
20,276
|
|
|
|
20,817
|
|
|
Less accumulated depreciation and amortization
|
|
|
(2,155
|
)
|
|
|
(3,424
|
)
|
|
|
(4,473
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,589
|
|
|
|
16,852
|
|
|
|
16,344
|
|
|
Construction in progress
|
|
|
45
|
|
|
|
189
|
|
|
|
4,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,634
|
|
|
$
|
17,041
|
|
|
$
|
20,474
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Accrued payroll
|
|
$
|
156
|
|
|
$
|
537
|
|
|
$
|
480
|
|
|
Gift cards
|
|
|
150
|
|
|
|
304
|
|
|
|
241
|
|
|
Sales tax
|
|
|
170
|
|
|
|
234
|
|
|
|
234
|
|
|
Accrued rent
|
|
|
56
|
|
|
|
183
|
|
|
|
120
|
|
|
Other
|
|
|
661
|
|
|
|
509
|
|
|
|
545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,193
|
|
|
$
|
1,767
|
|
|
$
|
1,620
|
|
|
|
|
|
|
|
|
|
|
|
|
F-14
KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Information as of June 30, 2005 and for the Six Months
Ended
June 30, 2004 and 2005 is Unaudited.
Notes payable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
(In thousands)
|
|
|
$3,000,000 convertible subordinated promissory note, net of
unamortized beneficial conversion and warrant discounts of
$343,000 and $276,000 at December 31, 2004 and June 30,
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
|
|
|
$
|
2,724
|
|
|
$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
|
|
|
|
927
|
|
|
$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
|
|
|
|
879
|
|
|
$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
|
|
|
|
757
|
|
|
$600,000 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
|
|
|
|
589
|
|
|
$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 (Note 14)
|
|
|
—
|
|
|
|
—
|
|
|
|
995
|
|
|
$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
|
|
|
514
|
|
|
|
345
|
|
|
|
255
|
|
|
$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
|
|
|
1,200
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,652
|
|
|
|
6,236
|
|
|
|
7,126
|
|
|
Less current portion
|
|
|
(1,489
|
)
|
|
|
(595
|
)
|
|
|
(735
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,163
|
|
|
$
|
5,641
|
|
|
$
|
6,391
|
|
|
|
|
|
|
|
|
|
|
|
|
F-15
KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Information as of June 30, 2005 and for the Six Months
Ended
June 30, 2004 and 2005 is Unaudited.
Future maturities of notes payable at December 31, 2004 are
as follows (in thousands):
|
|
|
|
|
|
|
2005
|
|
$
|
595
|
|
|
2006
|
|
|
605
|
|
|
2007
|
|
|
3,137
|
|
|
2008
|
|
|
517
|
|
|
2009
|
|
|
557
|
|
|
Thereafter
|
|
|
825
|
|
|
|
|
|
|
|
|
|
$
|
6,236
|
|
|
|
|
|
|
Total interest expense incurred during the years ended
December 31, 2002, 2003, and 2004 and the six months ended
June 30, 2004 and 2005 was approximately $127,000,
$263,000, $375,000, $94,000, and $357,000, respectively. No
interest was capitalized during the three years in the period
ended December 31, 2004 or the six months ended
June 30, 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 200,000 shares of the Company’s common stock
for $5.00 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, of which $200,000 was
allocated to the beneficial conversion feature of the
convertible promissory note and $200,000 to the warrant. The
value of the warrant and beneficial conversion feature were
derived through application of the Black-Scholes option pricing
model. 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-16
KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Information as of June 30, 2005 and for the Six Months
Ended
June 30, 2004 and 2005 is Unaudited.
Income tax expense from continuing operations consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Six Months
|
|
|
|
|
December 31,
|
|
|
Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
2003
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
State
|
|
|
—
|
|
|
|
—
|
|
|
|
55
|
|
|
|
20
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
55
|
|
|
|
20
|
|
|
|
18
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
State
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
55
|
|
|
$
|
20
|
|
|
$
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
Year Ended December 31,
|
|
|
Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Income tax expense at federal statutory rate
|
|
$
|
(426
|
)
|
|
$
|
(118
|
)
|
|
$
|
113
|
|
|
$
|
272
|
|
|
$
|
14
|
|
|
State income taxes, net of federal benefit
|
|
|
—
|
|
|
|
—
|
|
|
|
36
|
|
|
|
14
|
|
|
|
12
|
|
|
Nondeductible expenses
|
|
|
29
|
|
|
|
177
|
|
|
|
105
|
|
|
|
36
|
|
|
|
86
|
|
|
Business tax credit
|
|
|
(77
|
)
|
|
|
(142
|
)
|
|
|
(250
|
)
|
|
|
(92
|
)
|
|
|
(204
|
)
|
|
Other
|
|
|
98
|
|
|
|
(63
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Change in valuation reserve
|
|
|
376
|
|
|
|
146
|
|
|
|
51
|
|
|
|
(210
|
)
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
55
|
|
|
$
|
20
|
|
|
$
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-17
KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Information as of June 30, 2005 and for the Six Months
Ended
June 30, 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,
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
719
|
|
|
$
|
700
|
|
|
$
|
598
|
|
|
$
|
503
|
|
|
|
Deferred rent
|
|
|
629
|
|
|
|
776
|
|
|
|
2,105
|
|
|
|
2,105
|
|
|
|
Business tax credits
|
|
|
130
|
|
|
|
272
|
|
|
|
522
|
|
|
|
725
|
|
|
|
Organizational and preopening costs
|
|
|
176
|
|
|
|
218
|
|
|
|
484
|
|
|
|
484
|
|
|
|
Accrued expenses
|
|
|
39
|
|
|
|
124
|
|
|
|
20
|
|
|
|
20
|
|
|
|
Property and equipment
|
|
|
(599
|
)
|
|
|
(721
|
)
|
|
|
(2,009
|
)
|
|
|
(2,009
|
)
|
|
|
Accelerated tax depreciation
|
|
|
(75
|
)
|
|
|
(203
|
)
|
|
|
(520
|
)
|
|
|
(520
|
)
|
|
|
Other
|
|
|
(11
|
)
|
|
|
(12
|
)
|
|
|
5
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
1,008
|
|
|
|
1,154
|
|
|
|
1,205
|
|
|
|
1,313
|
|
|
Valuation allowance
|
|
|
(1,008
|
)
|
|
|
(1,154
|
)
|
|
|
(1,205
|
)
|
|
|
(1,313
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $108,000 at
June 30, 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.
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-18
KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Information as of June 30, 2005 and for the Six Months
Ended
June 30, 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.
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.
The Company issued warrants to purchase 8,900 shares
of common stock at an exercise price of $5.50 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 3,200 shares of common stock at
an exercise price of $7.50 per share to placement agents in
connection with the private placement of common stock in 1999.
During 2004, warrants with respect to 2,800 shares were
exercised. The remainder of the warrants expired in December
2004.
The Company issued warrants to purchase 50,000 shares
of common stock at an exercise price of $6.00 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
200,000 shares of the Company’s common stock for
$5.00 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-19
KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Information as of June 30, 2005 and for the Six Months
Ended
June 30, 2004 and 2005 is Unaudited.
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 six months ended
June 30, 2005 under the Company’s stock option plans
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
|
|
|
|
|
|
|
|
|
Shares Available
|
|
|
|
|
Weighted Average
|
|
|
|
|
for Options
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at December 31, 2001
|
|
|
64,000
|
|
|
|
56,000
|
|
|
$
|
5.00 - 7.50
|
|
|
|
Granted
|
|
|
(100,854
|
)
|
|
|
100,854
|
|
|
|
7.50
|
|
|
|
Forfeited
|
|
|
14,000
|
|
|
|
(14,000
|
)
|
|
|
5.00 - 7.50
|
|
|
|
Authorized
|
|
|
230,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at December 31, 2002
|
|
|
207,146
|
|
|
|
142,854
|
|
|
|
5.00 - 7.50
|
|
|
|
Granted
|
|
|
(63,900
|
)
|
|
|
63,900
|
|
|
|
6.00 - 7.50
|
|
|
|
Forfeited
|
|
|
98,054
|
|
|
|
(98,054
|
)
|
|
|
7.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at December 31, 2003
|
|
|
241,300
|
|
|
|
108,700
|
|
|
|
5.00 - 7.50
|
|
|
|
Granted
|
|
|
(276,079
|
)
|
|
|
276,079
|
|
|
|
5.00 - 6.00
|
|
|
|
Forfeited
|
|
|
1,100
|
|
|
|
(1,100
|
)
|
|
|
7.50
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
(200
|
)
|
|
|
7.50
|
|
|
|
Authorized
|
|
|
300,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at December 31, 2004
|
|
|
266,321
|
|
|
|
383,479
|
|
|
|
5.00 - 7.50
|
|
|
|
Granted (unaudited)
|
|
|
(110,600
|
)
|
|
|
110,600
|
|
|
|
6.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at June 30, 2005 (unaudited)
|
|
|
155,721
|
|
|
|
494,079
|
|
|
$
|
5.00 - 7.50
|
|
|
|
|
|
|
|
|
|
|
|
|
Information regarding options outstanding and exercisable at
December 31, 2004 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of
|
|
|
|
|
|
Weighted
|
|
|
|
|
Exercise Prices
|
|
Number Outstanding
|
|
|
Weighted Average Life
|
|
Average Price
|
|
|
Number
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$5.00 - $7.50
|
|
|
383,579
|
|
|
8.4 years
|
|
$
|
5.50
|
|
|
|
131,729
|
|
|
$
|
5.90
|
|
At December 31, 2002, 2003, 2004, and June 30, 2005
the total shares exercisable were 32,534, 32,117, 131,729, and
494,079, respectively, at a weighted-average price of $7.45,
$6.60, $5.90, and $5.60, respectively.
|
|
|
|
11.
|
Commitments and Contingencies
|
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
F-20
KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Information as of June 30, 2005 and for the Six Months
Ended
June 30, 2004 and 2005 is Unaudited.
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 defined. Rent expense for the years ended
December 31, 2002, 2003, and 2004 and for the six months
ended June 30, 2004 and 2005 was approximately $821,000,
$1,176,000, $1,748,000, $774,000, and $1,173,000, respectively.
Contingent rent included in rent expense for the years ended
December 31, 2002, 2003, and 2004 and for the six months
ended June 30, 2004 and 2005 was approximately $27,000,
$145,000, $190,000, $87,000, and $120,000, respectively.
Future minimum lease payments under operating leases at
December 31, 2004, were as follows (in thousands):
|
|
|
|
|
|
|
2005
|
|
$
|
1,954
|
|
|
2006
|
|
|
2,005
|
|
|
2007
|
|
|
2,011
|
|
|
2008
|
|
|
2,072
|
|
|
2009
|
|
|
2,142
|
|
|
Thereafter
|
|
|
13,316
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
23,500
|
|
|
|
|
|
|
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
F-21
KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Information as of June 30, 2005 and for the Six Months
Ended
June 30, 2004 and 2005 is Unaudited.
per annum and matured in January 2003, at which time the note
was repaid. For the years ended 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 six months ended
June 30, 2005, the Company recorded interest expense of
approximately $187,000 and $217,000, respectively, associated
with the note and warrant. The convertible subordinated
promissory note is subordinated to existing and future senior
indebtedness.
The Company’s Chairman and investors affiliated with the
Chairman own a significant number of shares of the
Company’s capital stock, and may have significant influence
over the Company.
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
$505,000. The compensation amount was measured based on the
difference between the intrinsic value at the date of
acceleration and the original intrinsic value. Since the Company
is not able to estimate compensation expense related to the
amount by which an employee is expected to benefit from the
acceleration of vesting, no compensation is recorded until the
employee receives a benefit.
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-22
2,500,000 Shares
Common Stock
PROSPECTUS
Oppenheimer & Co.
Feltl and Company
,
2005
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.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
|
|
|
|
Item 13.
|
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
|
|
|
NASDAQ National Market filing fee
|
|
|
100,000
|
|
|
Transfer agent and registrar fees
|
|
|
7,880
|
|
|
Accountants’ fees and expenses
|
|
|
350,000
|
|
|
Legal fees and expenses
|
|
|
350,000
|
|
|
Printing and engraving expenses
|
|
|
135,000
|
|
|
Miscellaneous fees
|
|
|
50,307
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
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.
We are in the process of obtaining directors’ and
officers’ liability insurance with $10.0 million of
coverage.
II-1
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 70,000 shares of our common
stock to an investor in connection with our repurchase of
certain restaurant assets from that entity, which was wholly
owned by one accredited investor. 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 8,000 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 200,000 shares of our common
stock at an exercise price of $5.00 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 200 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 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.
II-2
During December 2004, we issued 2,800 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 40,000 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
$6.00 per share. In addition, in January 2005, we granted
to Mr. Jundt options to purchase 20,000 shares of
our common stock at an exercise price of $6.00 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 June 2005, we agreed to issue immediately prior to the
closing of our pending initial public offering,
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 500,000 shares of common stock upon the voluntary
conversion by the holder of such shares of the Series B
preferred stock. In addition, we agreed to issue
833,331 shares of common stock upon the voluntary
conversion by the holders of our outstanding shares of
Series A preferred stock. We agreed to issue 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. The recipients of
securities in each of these transactions listed above
represented to the Company their intention to acquire the
securities for investment only and not with view to or for sale
in connection with any distribution thereof. All recipients had
adequate access, through their relationship with the Company or
through other access to information provided by the Company, to
information about the Company.
|
|
|
|
Item 16.
|
Exhibits and Financial Statement Schedules
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Exhibit
|
|
|
|
|
|
|
†1
|
|
|
Form of Underwriting Agreement
|
|
|
†3
|
.1
|
|
Amended and Restated Certificate of Incorporation of the
Registrant
|
|
|
†3
|
.2
|
|
Amended and Restated Bylaws of the Registrant
|
|
|
4
|
.1
|
|
Form of Common Stock Certificate
|
|
|
4
|
.2
|
|
Kona Grill, Inc. Stockholders’ Agreement, dated
August 29, 2003.
|
|
|
4
|
.3
|
|
Kona Grill, Inc. Series A Investor Rights Agreement, dated
August 29, 2003.
|
|
|
4
|
.4
|
|
Amendment No. 1 to Kona Grill, Inc. Series A Investor
Rights Agreement, dated May 31, 2005.
|
|
|
†5
|
|
|
Opinion of Greenberg Traurig, LLP
|
|
|
†10
|
.1(a)
|
|
Employment Letter Agreement, effective May 1, 2004, between
the Company and C. Donald Dempsey
|
|
|
†10
|
.1(b)
|
|
Amendment to Employment Letter Agreement, effective May 1,
2004, between the Company and C. Donald Dempsey
|
|
|
†10
|
.2
|
|
Mutual Waiver and Release of Claims, effective December 1,
2004, between the Company and Chandler
|
|
|
†10
|
.3
|
|
Employment Agreement, effective October 1, 2003, between
the Company and Jason J. Merritt.
|
|
|
†10
|
.4
|
|
Employment Letter Agreement, effective October 15, 2004,
between the Company and Mark S. Robinow
|
II-3
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Exhibit
|
|
|
|
|
|
|
†10
|
.5
|
|
Common Stock Purchase Warrant dated July 23, 2004 in favor
of Richard J. Hauser
|
|
|
†10
|
.6(a)
|
|
Loan Agreement, dated May 19, 2003, between GE Capital
Franchise Finance Corporation and Kona Grill Kansas City, Inc.
|
|
|
†10
|
.6(b)
|
|
Promissory Note, dated May 19, 2003, issued by Kona Grill
Kansas City, Inc. in favor of GE Capital Franchise Finance
Corporation
|
|
|
†10
|
.7(a)
|
|
Loan Agreement, dated April 30, 2004, between GE Capital
Franchise Finance Corporation and Kona Grill Las Vegas, Inc.
|
|
|
†10
|
.7(b)
|
|
Promissory Note, dated April 30, 2004, issued by Kona Grill
Las Vegas, Inc. in favor of GE Capital Franchise Finance
Corporation
|
|
|
†10
|
.8(a)
|
|
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
|
|
|
†10
|
.8(b)
|
|
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.
|
|
|
†10
|
.8(c)
|
|
Equipment Promissory Note, dated September 17, 2004, issued
by Kona Grill Denver, Inc. in favor of GE Capital Franchise
Finance Corporation
|
|
|
†10
|
.9
|
|
Lease Purchase, dated December 26, 2001, between the
Company and Bank of America, N.A.
|
|
|
†10
|
.10
|
|
Kona Grill, Inc. 2002 Stock Plan (as of November 13, 2002)
|
|
|
†10
|
.11
|
|
Kona Grill, Inc. 2005 Stock Award Plan
|
|
|
†10
|
.12
|
|
Kona Grill, Inc. 2005 Employee Stock Purchase Plan
|
|
|
†10
|
.13
|
|
Supply Agreement, dated May 13, 2002, between Kona Grill,
Inc. and U.S. Food Service
|
|
|
†21
|
|
|
List of Subsidiaries
|
|
|
23
|
.1
|
|
Consent of Ernst & Young LLP, Independent Registered
Public Accounting Firm
|
|
|
†23
|
.2
|
|
Consent of Greenberg Traurig, LLP (included in Exhibit 5)
|
|
|
†24
|
|
|
Power of Attorney of Directors and Executive Officers (included
on the Signature Page of the Registration Statement)
|
(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.
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
II-4
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.
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
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
July 20, 2005.
|
|
|
|
|
|
By:
|
/s/ C. Donald Dempsey
|
|
|
|
|
|
|
|
|
C. Donald Dempsey
|
|
|
President and Chief Executive Officer
|
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
|
|
|
|
|
|
|
|
|
*
Marcus
E. Jundt
|
|
Chairman of the Board
|
|
July 20, 2005
|
|
|
/s/ C. Donald Dempsey
C.
Donald Dempsey
|
|
President, Chief Executive Officer, and Director (Principal
Executive Officer)
|
|
July 20, 2005
|
|
|
/s/ Mark S. Robinow
Mark
S. Robinow
|
|
Executive Vice President, Chief Financial Officer, and Secretary
(Principal Accounting and
Financial Officer)
|
|
July 20, 2005
|
|
|
*
Frank
B. Bennett
|
|
Director
|
|
July 20, 2005
|
|
|
*
Richard
J. Hauser
|
|
Director
|
|
July 20, 2005
|
|
|
*
Douglas
G. Hipskind
|
|
Director
|
|
July 20, 2005
|
|
|
*
W.
Kirk Patterson
|
|
Director
|
|
July 20, 2005
|
|
|
*
Anthony
L. Winczewski
|
|
Director
|
|
July 20, 2005
|
|
|
*By:/s/ Mark S. Robinow
Attorney-in-Fact
|
|
|
|
|
II-6
INDEX TO EXHIBITS
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Exhibit
|
|
|
|
|
|
|
†1
|
|
|
Form of Underwriting Agreement
|
|
|
†3
|
.1
|
|
Amended and Restated Certificate of Incorporation of the
Registrant
|
|
|
†3
|
.2
|
|
Amended and Restated Bylaws of the Registrant
|
|
|
4
|
.1
|
|
Form of Common Stock Certificate
|
|
|
4
|
.2
|
|
Kona Grill, Inc. Stockholders’ Agreement, dated
August 29, 2003.
|
|
|
4
|
.3
|
|
Kona Grill, Inc. Series A Investor Rights Agreement, dated
August 29, 2003.
|
|
|
4
|
.4
|
|
Amendment No. 1 to Kona Grill, Inc. Series A Investor
Rights Agreement, dated May 31, 2005.
|
|
|
†5
|
|
|
Opinion of Greenberg Traurig, LLP
|
|
|
†10
|
.1(a)
|
|
Employment Letter Agreement, effective May 1, 2004, between
the Company and C. Donald Dempsey
|
|
|
†10
|
.1(b)
|
|
Amendment to Employment Letter Agreement, effective May 1,
2004, between the Company and C. Donald Dempsey
|
|
|
†10
|
.2
|
|
Mutual Waiver and Release of Claims, effective December 1,
2004, between the Company and Chandler
|
|
|
†10
|
.3
|
|
Employment Agreement, effective October 1, 2003, between
the Company and Jason J. Merritt.
|
|
|
†10
|
.4
|
|
Employment Letter Agreement, effective October 15, 2004,
between the Company and Mark S. Robinow
|
|
|
†10
|
.5
|
|
Common Stock Purchase Warrant dated July 23, 2004 in favor
of Richard J. Hauser
|
|
|
†10
|
.6(a)
|
|
Loan Agreement, dated May 19, 2003, between GE Capital
Franchise Finance Corporation and Kona Grill Kansas City, Inc.
|
|
|
†10
|
.6(b)
|
|
Promissory Note, dated May 19, 2003, issued by Kona Grill
Kansas City, Inc. in favor of GE Capital Franchise Finance
Corporation
|
|
|
†10
|
.7(a)
|
|
Loan Agreement, dated April 30, 2004, between
GE Capital Franchise Finance Corporation and Kona Grill Las
Vegas, Inc.
|
|
|
†10
|
.7(b)
|
|
Promissory Note, dated April 30, 2004, issued by Kona Grill
Las Vegas, Inc. in favor of GE Capital Franchise Finance
Corporation
|
|
|
†10
|
.8(a)
|
|
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
|
|
|
†10
|
.8(b)
|
|
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.
|
|
|
†10
|
.8(c)
|
|
Equipment Promissory Note, dated September 17, 2004, issued
by Kona Grill Denver, Inc. in favor of GE Capital Franchise
Finance Corporation
|
|
|
†10
|
.9
|
|
Lease Purchase, dated December 26, 2001, between the
Company and Bank of America, N.A.
|
|
|
†10
|
.10
|
|
Kona Grill, Inc. 2002 Stock Plan (as of November 13, 2002)
|
|
|
†10
|
.11
|
|
Kona Grill, Inc. 2005 Stock Award Plan
|
|
|
†10
|
.12
|
|
Kona Grill, Inc. 2005 Employee Stock Purchase Plan
|
|
|
†10
|
.13
|
|
Supply Agreement, dated May 13, 2002, between Kona Grill
Inc. and U.S. Foodservice
|
|
|
†21
|
|
|
List of Subsidiaries
|
|
|
23
|
.1
|
|
Consent of Ernst & Young LLP, Independent Registered
Public Accounting Firm
|
|
|
†23
|
.2
|
|
Consent of Greenberg Traurig, LLP (included in Exhibit 5)
|
|
|
†24
|
|
|
Power of Attorney of Directors and Executive Officers (included
on the Signature Page of the Registration Statement)
|
EXHIBIT 4.2
STOCKHOLDERS' AGREEMENT
THIS STOCKHOLDERS' AGREEMENT (this "Agreement"), dated as of August 29,
2003, is by and among KONA GRILL, INC., a Delaware corporation (the "Company"),
and each of the Series A holders of capital stock of the Company as of the date
of this Agreement, all of which holders are signatories to this Agreement and
whose names are are set forth on Exhibit "A" (individually, a "Stockholder," and
collectively, the "Stockholders").
WITNESSETH:
A. The Company has an authorized capitalization consisting of (i)
40,000,000 shares of common stock, $.01 par value per share (the "Common
Stock"), and (ii) 20,000,000 shares of preferred stock, $.01 par value per share
(the "Preferred Stock"), including the designation of 4,166,666 shares of Series
A Convertible Preferred Stock, $.01 par value per share (the "Series A Preferred
Stock").
B. The record and beneficial ownership of the issued and outstanding
shares of the Series A Preferred Stock held by the Stockholders are set forth
that certain Series A Convertible Preferred Stock Purchase Agreement of even
date herewith (the "Stock Purchase Agreement") (such shares of capital stock
listed on Exhibit "A" are collectively referred to in this Agreement as the
"Existing Stock").
C. In accordance with the Stock Purchase Agreement, the Company and the
Stockholders have agreed to enter into this Agreement, to provide for continuity
and harmony in the management of the Company and to restrict the sale and other
disposition of Existing Stock now held by any of the Stockholders and any shares
of capital stock of the Company hereafter issued to or hereinafter acquired by
the Stockholders (the Existing Stock, together with such subsequently issued or
acquired capital stock, including any securities convertible into or
exchangeable or exercisable for, directly or indirectly, any capital stock,
whether or not currently convertible, exchangeable, or exercisable, being
hereinafter referred to collectively as the "Capital Stock") and to create other
rights and duties among the Stockholders.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained in this Agreement, and intending to be legally bound hereby, each of
the parties covenants and agrees as follows:
ARTICLE I
STOCK CERTIFICATES
1.01 Restrictive Legend. The Stockholders agree that the stock
certificate or certificates from time to time representing the respective shares
of Capital Stock shall be registered in the name of the Stockholders and shall
bear a conspicuous legend substantially stating the following:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A SERIES A
STOCKHOLDERS' AGREEMENT DATED AS OF AUGUST 29, 2003, AS MAY BE AMENDED OR
RESTATED, AMONG THE COMPANY AND ITS STOCKHOLDERS. A COPY OF SUCH
STOCKHOLDERS' AGREEMENT IS AVAILABLE FOR INSPECTION AT THE OFFICES OF THE
COMPANY AND MAY BE REVIEWED BY THE HOLDER OF THIS CERTIFICATE UPON
REQUEST.
1.02 Additional Requirements. The foregoing legend shall be in addition
to any legend imposed pursuant to any other agreement or required to comply with
any applicable law. The Company agrees to furnish a copy of this Agreement upon
request to any Stockholder.
1.03 Application of this Agreement. The parties to this Agreement agree
that all shares of Capital Stock issued by the Company after the date of this
Agreement will be subject to this Agreement and that all certificates
representing shares of the Company's Capital Stock issued by the Company shall
be endorsed with the legend described in Section 1.01.
ARTICLE II
TRANSFER RIGHTS AND RESTRICTIONS
2.01 General Restriction. Notwithstanding anything to the contrary
contained in this Agreement, none of the Stockholders may sell, exchange, give,
devise, pledge, encumber, or dispose of ("Transfer"), either voluntarily or
involuntarily or by operation of law (including any Transfer pursuant to
equitable distribution proceedings or pursuant to a divorce decree) any of the
Capital Stock, or any rights or interest appertaining to the Capital Stock,
whether now owned or hereafter acquired, except as permitted by this Agreement.
Notwithstanding anything to the contrary in this Article II, no Capital Stock
may be Transferred unless such Transfer is made in compliance with all
applicable federal and state securities laws.
2.02 Transfer Requirements. A Stockholder may Transfer Capital Stock only
to the pursuant to the following provisions:
(a) Each Stockholder who is an individual may transfer or
retransfer, any Capital Stock held by such Stockholder to or for the
benefit of (i) any spouse, parent, child, grandchild, or lineal descendant
(including adopted children and stepchildren) of such holder (including,
without limitation, trustee(s) of a trust exclusively for the benefit of
the Stockholder or any of the foregoing); (ii) any trustee or other
fiduciary holding securities for the benefit of the Stockholder upon
retirement; or (iii) any legal representative, devisee, or heir of a
Stockholder upon his or her death.
(b) Any Stockholder may Transfer Capital Stock to such
Stockholder's partners, stockholders or other equity owners.
(c) Any Stockholder may Transfer Capital Stock with the prior
written consent of the Company or after compliance with the requirement of
Section 2.04.
The Persons to whom transfers are made pursuant to subsections (a),
(b) and (c) above are collectively referred to in this Agreement as the
"Permitted Transferees". All Permitted Transferees shall take such Offered
Stock subject to all the restrictions, terms, and conditions of this
Agreement and shall comply with Section 5.02; and provided further, that
there shall be no further Transfer of such Capital Stock except in
accordance with this Agreement. The provisions of this Section 2.02 shall
not apply to any Compelled Sale in accordance with Section 2.05.
2.03 Transfers in Violation of this Agreement. Any transfer of Capital
Stock in violation of the terms of this Agreement will be void and of no effect,
and the purported transferee of such shares will not be recognized as the owner
or holder of the Capital Stock purportedly transferred. The Stockholders consent
to the notation of "Stop Transfer" restrictions in the Company's stock transfer
books with respect to their holdings of Capital Stock in order to assist in the
enforcement of the restrictions set forth in this Agreement. A Stockholder shall
not pledge any shares of Stock unless the Company consents in writing and the
pledgee agrees in writing to be subject, upon foreclosure or disposition of the
collateral, to the right of first refusal contained herein as if such pledgee
were the Stockholder. A pledgee shall not transfer all or any portion of the
Stock unless and until the Stock has been offered for sale as provided in this
Agreement, and a pledgee of a Stockholder's Stock shall not itself acquire
ownership or vote the Stock without such Stock first being subject to the right
of first refusal contained in this Section 2.04.
2.04 Right of First Refusal. Except for Transfers in accordance with
Section 2.05 and as otherwise provided herein, transfer of all or any portion of
Capital Stock by any Stockholder (the "Selling Stockholder"), directly or
indirectly, shall be made only to a third party and shall be subject to a right
of first refusal by the Company after receipt of notice from the selling
stockholder stating the number of shares and the terms and price of the Offered
Shares of Capital Stock (the "Notice"). The Company shall have 15 days to notify
the Selling Stockholder whether it shall purchase the Offered Shares on the
terms in the Notice. If the Company does not agree to purchase the Offered
Shares, the Selling Stockholder
2
shall then send the Notice to the other Stockholders who shall have 15 days from
receipt to purchase the Offered Shares on the same terms in the Notice.
2.05 Compelled Sale Right.
(a) Compelled Sale. If any Stockholder or group of Stockholders
shall desire to Transfer all or substantially all of the Capital Stock
held by them to any third party other than a Permitted Transferee (the
"Third Party Purchaser"), which Capital Stock represents at least fifty
percent (50%) of the outstanding Series A Preferred Shares (the "Majority
Holders"), then all the other Stockholders (the "Minority Holders") shall
be required, at the election of the Majority Holders, to Transfer to the
Third Party Purchaser (a "Compelled Sale") all of the shares of Capital
Stock then held by the Minority Holders (the "Compelled Sale Shares"), on
the same terms and conditions upon which the Majority Holders propose to
Transfer their shares of Capital Stock. In the event of a Compelled Sale,
options that are not at such time exercisable shall become exercisable by
reason of such transaction only to the extent provided in the instrument
evidencing the grant of such options.
(b) Notice. The Majority Holders shall give written notice (the
"Compelled Sale Notice") to each of the Minority Holders setting forth the
terms and conditions, including the proposed sale price, of the Compelled
Sale (the "Compelled Sale Terms") and the name of the Third Party
Purchaser. Within ten (10) days after receipt of the Compelled Sale
Notice, the Minority Holders shall deliver to the Company stock
certificate(s) (or voting trust certificate(s)) representing the Compelled
Sale Shares, duly endorsed for transfer, and all other documents
reasonably requested by the Majority Holders. Pending consummation of the
Compelled Sale, the Majority Holders shall promptly notify the Minority
Holders of any material changes in the Compelled Sale Terms and any other
material developments in connection with the Compelled Sale.
(c) Closing. The Compelled Sale shall be consummated at a closing
to be held in accordance with the Compelled Sale Terms. Promptly after the
closing, the Company shall remit or cause to be remitted to Minority
Holders the consideration with respect to the Compelled Sale Shares. If
the closing has not occurred within one hundred twenty (120) days after
delivery of the Compelled Sale Notice, the Company shall promptly return
to the Minority Holders all certificates representing the Compelled Sale
Shares previously delivered to the Company. The provisions of this Section
2.05 shall remain in effect, notwithstanding any such return of the
Compelled Sale Shares.
2.06 "Market Stand Off" Agreement. In addition to any other restrictions
hereunder, Stockholders hereby agree that, during the period of duration
specified by the Company and an underwriter of Common Stock or other securities
of the Company, following the effective date of a registration statement of the
Company filed under the Securities Act, each Stockholder shall not, to the
extent requested by the Company and such underwriter, (i) directly or indirectly
lend, offer, pledge, sell, contract to sell (including, without limitation, any
short sale), sell any option or contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant to purchase, or otherwise
transfer or dispose of any securities of the Company held by him at any time
during such period except Common Stock included in such registration, or (ii)
enter into any swap or other arrangement that transfers to another, in whole or
in part, any of the economic consequences of ownership of the Company's
securities, whether any such transaction described in clause (i) or (ii) above
is to be settled by delivery of the Company's securities, in cash or otherwise;
provided, however, that:
(a) such agreement shall be applicable only to the first such
registration statement of the Company which covers Common Stock (or other
securities) to be sold on its behalf to the public in an underwritten
offering; and
(b) such market stand-off time period shall not exceed 180 days.
3
In order to enforce the foregoing covenant, the Company may impose stop-transfer
instructions respect to the Shares until the end of such period. Notwithstanding
the foregoing, the obligations described in this Section 2.06 all not apply to a
registration relating to any employee benefit plans or a corporate
reorganization or other transaction on Form S-4 or successor form.
ARTICLE III
CORPORATE GOVERNANCE
3.01 Elections of Directors. From and after the date of this Agreement,
each Stockholder shall vote all of the Capital Stock over which such Stockholder
has voting control, and shall take all other necessary or desirable actions
within his or its control (whether in his or its capacity as a stockholder,
director, member of a board committee or officer of the Company or otherwise,
and including, without limitation, attendance at meetings in person or by proxy
for purposes of obtaining a quorum and execution of written consents or
resolutions in lieu of meetings), and the Company shall take all necessary or
desirable actions within its control (including, without limitation, calling
special board and stockholders' meetings) so that:
(a) the authorized number of directors of the Company's Board of
Directors shall be established at seven (7) directors;
(b) The holders of Series A Preferred Stock shall be entitled to
the voting rights given them in the Certificate of Designations
Privileges, Powers, Preferences and Rights of the Series A Preferred
Stock;
(c) except following their resignation, death, or removal for
Cause (defined below) from the Board, the following persons shall be
elected to the Board at each election of directors during the term of this
Agreement: Marcus Jundt, Chandler, Michael McDermott, and two directors to
be appointed according to the provisions in the Bylaws of the Company (the
"Common Stock Directors"), and Dr. Paul Bothum and Doug Hopskind (the
"Series A Directors").
The term "Cause" shall mean (i) malfeasance in office (including, but not
limited to, acts of fraud, misappropriation, embezzlement or dishonesty with
respect to the Company), (ii) breach of the fiduciary duty of care or duty of
loyalty, (iii) conviction of, or plea of guilt or no contest to, any felony or
other crime involving moral turpitude, (iv) incompetency, (v) gross
inefficiency, (vi) failure to perform, (vii) moral turpitude or (viii) chronic
alcohol abuse or drug use.
3.02 Vacancies. Upon the resignation, death or removal for Cause of any
of the directors named above, the remaining directors may fill such vacancy with
an individual elected by the vote of all of the remaining directors, and the
Stockholders shall elect such person to the Board at each election of directors
during the term of this Agreement (until his or her death, resignation or
removal for Cause). However, if there is a vacancy occurs due to the
resignation, death or removal for Cause of any Series A Director, then the
holders of the Series A Preferred Stock shall vote separately as a class to fill
such vacancy pursuant to their rights under the Certificate of Designation.
ARTICLE IV
TERM AND AMENDMENT
4.01 Term. This Agreement will terminate upon the earliest to occur of:
(a) the closing of a firmly underwritten initial public offering of the Common
Stock pursuant to an effective registration statement filed under the Securities
Act of 1933, as amended, in which the gross proceeds to the Company are at least
$25,000,000 (before deduction of underwriters' commissions and expenses) and in
which the per share price to the public is at least $7.00 (subject to adjustment
for any stock split, reverse stock split, stock dividends, recapitalizations,
and other re-classifications affecting the Company's capitalization); (b)
immediately before the closing of an acquisition of the Company by another
person, entity or organization (a "Person") by consolidation, merger or other
reorganization in which the holders of the Company's outstanding voting stock
immediately before the acquisition transaction own, immediately
4
after the acquisition transaction, securities representing less than fifty
percent (50%) of the voting power of the Company or other Person surviving such
transaction; provided that no such acquisition will be deemed to have occurred
in a merger effected solely for the purpose of changing the Company's domicile
or solely for the purpose of raising operating capital; or (c) a sale, lease, or
other conveyance of all or substantially all of the Company's assets.
4.02 Amendment. This Agreement shall not be changed, waived, discharged,
or terminated except by written agreement signed by Stockholders holding not
less than seventy-five percent (75%) of the issued and outstanding Series A
Preferred Stock.
ARTICLE V
MISCELLANEOUS
5.01 Parties. This Agreement shall be binding upon and shall inure to the
benefit of the Company and the Stockholders and their heirs, personal
representatives, successors, and permitted assigns; provided, however, that no
Person other than the Stockholders shall have any rights hereunder or the power
to enforce any of the duties created hereby unless such Person shall have become
bound to the provisions of this Agreement, as described in Section 5.02.
5.02 Additional Stockholders. The Company and the Stockholders
acknowledge that other Persons may become stockholders of the Company after the
date of this Agreement. The Company shall require such Persons and such Persons'
spouses, if any, as a condition to the issuance or Transfer of shares of Capital
Stock to them, to execute and deliver to the Company a counterpart or joinder to
this Agreement. No Person shall be deemed to have any rights under this
Agreement or as a holder of Capital Stock, or the power to enforce any of the
duties created by this Agreement or as a holder of Capital Stock, until
execution or delivery of such counterpart or joinder. Upon execution of such
counterpart or joinder as a Stockholder, (i) such Person shall become a party to
this Agreement, shall be entitled to all of the rights and benefits of this
Agreement, shall be bound by all of the obligations hereunder, and shall be
considered a "Stockholder" hereunder, and (ii) Exhibit "A" shall be deemed to be
amended to reflect the issuance or Transfer of Capital Stock and shall be
distributed to each of the Stockholders by the Company.
5.03 Specific Performance. The Company and the Stockholders agree that a
breach or violation of any of the terms, covenants, or other obligations under
this Agreement will result in immediate and irreparable harm to the
non-breaching parties in an amount that will be impossible to ascertain at the
time of the breach or violation and that the award of monetary damages will not
be adequate relief to the non-breaching parties. Therefore, the failure on the
part of any party to perform all of the terms, covenants, and obligations
established by this Agreement shall give rise to a right to the other parties to
obtain enforcement of this Agreement in a court of equity by a decree of
specific performance, a writ of mandamus, or other injunctive relief. This
remedy, however, shall be cumulative and in addition to any other remedy the
parties may have.
5.04 Severability. If any provision of this Agreement or the application
of this Agreement shall be invalid or unenforceable, the parties to this
Agreement shall take such action as may be necessary to effectuate the intent of
such provision, and the remainder of this Agreement and any other application of
such provision shall not be affected by such action.
5.05 Sections and Exhibits. The headings of sections in this Agreement
are provided for convenience only and will not affect the Agreement's
construction or interpretation. Unless indicated otherwise, references to
"Section," "Sections," "Exhibit," or "Exhibits" refer to the corresponding
section, sections, exhibit, or exhibits, respectively, of this Agreement.
5.06 Notices. Any notice required or permitted hereunder shall be given
in writing and shall be deemed to have been given, made, or delivered when
actually received (regardless of the manner of transmission) or five (5) days
after deposited in the mail and sent by registered or certified mail, postage
5
prepaid; or, by facsimile transmission when transmitted with confirmation of
receipt, addressed as the case may be as follows:
If to the Company: Kona Grill, Inc.
7373 East Doubletree Ranch Road
Suite 210
Scottsdale, Arizona 85258
Attention: Chief Executive Officer
Facsimile: (480) 991-6811
If to a Stockholder: (as set forth on Exhibit "A")
|
or to such other address as the Company shall have furnished to the
Stockholders, or any Stockholder shall have furnished to the Company, in writing
in accordance with the provisions of this Section 5.06.
5.07 Counterparts. This Agreement may be executed in as many counterparts
as may be deemed necessary or convenient, each of which, when so executed, shall
be deemed an original, but all such counterparts shall constitute but one and
the same instrument.
5.08 Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of Arizona.
5.09 Entire Agreement. This Agreement constitutes the entire agreement
between the Company and the Stockholders relating to the subject matter of this
Agreement, and there are no other terms other than those contained in this
Agreement.
5.10 Further Assurances. Each party to this Agreement will take such
further action and will execute and deliver such further documents as may be
reasonably requested by any other party to carry out the provisions and purposes
of this Agreement. In addition, the Company shall use its best efforts to ensure
that the rights granted under this Agreement are effective and that the parties
to this Agreement enjoy the benefits of the rights granted under this Agreement.
Without limiting the generality of the foregoing, the Company (i) shall use its
best efforts to cause the nomination and election of the directors as provided
in Article III; (ii) shall not avoid or seek to avoid the observance or
performance of any of the terms to be performed by the Company under this
Agreement; (iii) shall at all times in good faith assist in carrying out all of
this Agreement's provisions and in taking all such actions as may be necessary,
appropriate, or reasonably requested by any Stockholder to protect against
impairment of such Stockholder's rights as set forth in this Agreement; (iv)
shall not transfer on the Company's books any Capital Stock that has been
purportedly Transferred in violation of this Agreement; (v) shall not give
effect to any action in contravention of this Agreement undertaken by any
Person; and (vi) shall promptly inform the Stockholders of any breach or action
in contravention of this Agreement of which the Company becomes aware.
5.11 Grant of Proxy. If any provisions of this Agreement cause the
termination of the ownership of Capital Stock of any Stockholder, then such
Stockholder hereby grants the Company a power of attorney to take all actions,
and execute and deliver all documents, necessary or appropriate to evidence the
transfer of such Capital Stock on the books of the Company. Such proxy, and if
any provisions of this Agreement are construed to constitute the granting of
proxies, then such other proxies, will be deemed coupled with an interest and
are irrevocable for the term of this Agreement.
[The remainder of this page is intentionally left blank.]
6
IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of
the day and year first above written.
THE COMPANY:
KONA GRILL, INC.
By: /s/ Jason Merritt
-------------------------------
Name: Jason Merritt
Title: Vice President of Operations
|
STOCKHOLDERS:
[SEE ATTACHED SIGNATURE PAGES]
7
STOCKHOLDER SIGNATURE PAGE
STOCKHOLDERS' AGREEMENT
This Stockholder Signature Page is a part of, and shall be attached to,
that certain Stockholders' Agreement dated August 29, 2003, by and among Kona
Grill, Inc., a Delaware corporation, and its Stockholders (as it may be amended,
the "Stockholders' Agreement"). By execution of this signature page, the
undersigned acknowledges that such person is a stockholder of Kona Grill, Inc.
and is subject to, and bound by, all of the terms and conditions of the
Stockholders' Agreement, as it may be amended pursuant to its terms.
STOCKHOLDER:
/s/ Marcus E. Jundt
___________________________________
Marcus E. Jundt
|
8
STOCKHOLDER SIGNATURE PAGE
STOCKHOLDERS' AGREEMENT
This Stockholder Signature Page is a part of, and shall be attached to,
that certain Stockholders' Agreement dated August 29, 2003, by and among Kona
Grill, Inc., a Delaware corporation, and its Stockholders (as it may be amended,
the "Stockholders' Agreement"). By execution of this signature page, the
undersigned acknowledges that such person is a stockholder of Kona Grill, Inc.
and is subject to, and bound by, all of the terms and conditions of the
Stockholders' Agreement, as it may be amended pursuant to its terms.
STOCKHOLDER:
KONA KC INVESTMENT LLC
By: RJN II, LLC, an Arizona limited liability company
Its: Manager
By: /s/ Robert J. Novak
_________________________________________________
Robert J. Novak, Manager
|
9
STOCKHOLDER SIGNATURE PAGE
STOCKHOLDERS' AGREEMENT
This Stockholder Signature Page is a part of, and shall be attached to,
that certain Stockholders' Agreement dated August 29, 2003, by and among Kona
Grill, Inc., a Delaware corporation, and its Stockholders (as it may be amended,
the "Stockholders' Agreement"). By execution of this signature page, the
undersigned acknowledges that such person is a stockholder of Kona Grill, Inc.
and is subject to, and bound by, all of the terms and conditions of the
Stockholders' Agreement, as it may be amended pursuant to its terms.
STOCKHOLDER:
CARL REDFIELD TRUST 2000 U-I, dated 10/18/00
/s/ Carl Redfield
____________________________________________
By: Carl Redfield
Its: Trustee
|
10
STOCKHOLDER SIGNATURE PAGE
STOCKHOLDERS' AGREEMENT
This Stockholder Signature Page is a part of, and shall be attached to,
that certain Stockholders' Agreement dated August 29, 2003, by and among Kona
Grill, Inc., a Delaware corporation, and its Stockholders (as it may be amended,
the "Stockholders' Agreement"). By execution of this signature page, the
undersigned acknowledges that such person is a stockholder of Kona Grill, Inc.
and is subject to, and bound by, all of the terms and conditions of the
Stockholders' Agreement, as it may be amended pursuant to its terms.
STOCKHOLDER:
/s/ D. David Sebold
____________________________________________
D. David Sebold
|
11
STOCKHOLDER SIGNATURE PAGE
STOCKHOLDERS' AGREEMENT
This Stockholder Signature Page is a part of, and shall be attached to,
that certain Stockholders' Agreement dated August 29, 2003, by and among Kona
Grill, Inc., a Delaware corporation, and its Stockholders (as it may be amended,
the "Stockholders' Agreement"). By execution of this signature page, the
undersigned acknowledges that such person is a stockholder of Kona Grill, Inc.
and is subject to, and bound by, all of the terms and conditions of the
Stockholders' Agreement, as it may be amended pursuant to its terms.
STOCKHOLDER:
/s/ Murray R. Williamson
____________________________________________
Murray R. Williamson
/s/ Patricia R. Williamson
____________________________________________
Patricia R. Williamson
|
12
STOCKHOLDER SIGNATURE PAGE
STOCKHOLDERS' AGREEMENT
This Stockholder Signature Page is a part of, and shall be attached to,
that certain Stockholders' Agreement dated August 29, 2003, by and among Kona
Grill, Inc., a Delaware corporation, and its Stockholders (as it may be amended,
the "Stockholders' Agreement"). By execution of this signature page, the
undersigned acknowledges that such person is a stockholder of Kona Grill, Inc.
and is subject to, and bound by, all of the terms and conditions of the
Stockholders' Agreement, as it may be amended pursuant to its terms.
STOCKHOLDER:
/s/ Holly Callen Hamilton
____________________________________________
Holly Callen Hamilton
/s/ Robert W. Hamilton
____________________________________________
Robert W. Hamilton
|
13
STOCKHOLDER SIGNATURE PAGE
STOCKHOLDERS' AGREEMENT
This Stockholder Signature Page is a part of, and shall be attached to,
that certain Stockholders' Agreement dated August 29, 2003, by and among Kona
Grill, Inc., a Delaware corporation, and its Stockholders (as it may be amended,
the "Stockholders' Agreement"). By execution of this signature page, the
undersigned acknowledges that such person is a stockholder of Kona Grill, Inc.
and is subject to, and bound by, all of the terms and conditions of the
Stockholders' Agreement, as it may be amended pursuant to its terms.
STOCKHOLDER:
/s/ Ted Mitsakopoulos
--------------------------------------------
Ted Mitsakopoulos
|
14
STOCKHOLDER SIGNATURE PAGE
STOCKHOLDERS' AGREEMENT
This Stockholder Signature Page is a part of, and shall be attached to,
that certain Stockholders' Agreement dated August 29, 2003, by and among Kona
Grill, Inc., a Delaware corporation, and its Stockholders (as it may be amended,
the "Stockholders' Agreement"). By execution of this signature page, the
undersigned acknowledges that such person is a stockholder of Kona Grill, Inc.
and is subject to, and bound by, all of the terms and conditions of the
Stockholders' Agreement, as it may be amended pursuant to its terms.
STOCKHOLDER:
CAPITAL REAL ESTATE, INC.
/s/ Richard Hauser
-------------------------------------------
By: Richard Hauser
Its: President
|
15
STOCKHOLDER SIGNATURE PAGE
STOCKHOLDERS' AGREEMENT
This Stockholder Signature Page is a part of, and shall be attached to,
that certain Stockholders' Agreement dated August 29, 2003, by and among Kona
Grill, Inc., a Delaware corporation, and its Stockholders (as it may be amended,
the "Stockholders' Agreement"). By execution of this signature page, the
undersigned acknowledges that such person is a stockholder of Kona Grill, Inc.
and is subject to, and bound by, all of the terms and conditions of the
Stockholders' Agreement, as it may be amended pursuant to its terms.
STOCKHOLDER:
/s/ James R. Jundt
------------------------------------------
James R. Jundt
|
16
EXHIBIT 4.3
EXECUTION VERSION
SERIES A INVESTOR RIGHTS AGREEMENT
THIS SERIES A INVESTOR RIGHTS AGREEMENT (this "Agreement") dated as of
August 29, 2003, is entered into by and among Kona Grill, Inc., a Delaware
corporation having a principal place of business at 7373 East Doubletree Ranch
Road, Suite 210, Scottsdale, Arizona 85258 (the "Company"), and the Series A
Stockholders named in the attached Exhibit A and having an address as set forth
therein (each an "Investor" and collectively the "Investors"), as amended from
time to time to add such other person(s) who may hereafter become a party to
this Agreement.
Recitals
A. Concurrently herewith the Company is issuing and selling to the
Investors an aggregate of 4,166,666 shares (the "Preferred Shares") of its
Convertible Preferred Stock, $0.01 par value per share (the "Convertible
Preferred Stock"), pursuant to the terms and conditions of that certain Series A
Convertible Preferred Stock Purchase Agreement, dated as of August 29, 2003.
B. The Company and the Investors desire to enter into an agreement
granting the Investors certain registration rights, information rights and other
rights in connection with their ownership of shares of the Company's Preferred
Shares (and the Conversion Shares into which such Preferred Shares are
convertible).
Agreement
NOW, THEREFORE, in consideration of the promises and mutual agreements set
forth herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
SECTION 1.
DEFINITIONS; REGISTRATION RIGHTS
1.1 Certain Definitions. As used in this Agreement, the following terms
shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission, or any
other federal agency at the time administering the Securities Act.
"Common Stock" shall mean the common stock, $0.01 par value, of the
Company.
"Conversion Shares" shall mean shares of Common Stock issued or issuable
upon conversion of the Preferred Shares.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
or any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Excluded Stock" shall mean (i) the Reserved Employee Shares, (ii)
securities issuable as a stock dividend or upon any subdivision of shares of
Common Stock, provided that the securities issued pursuant to such stock
dividend or subdivision are limited to additional shares of Common Stock, (iii)
securities issuable pursuant to a Qualified Public Offering, (iv) debt
securities with no equity feature, (v) securities issued in connection with
equipment or debt financing or leases (including securities issued in
consideration of guarantees of such financing or leases) which are approved by
the Series A Investor Directors, (vi) the Conversion Shares, and (vii) if
expressly approved by the Company's Board of Directors, securities issued to
vendors, customers or co-venturers or other persons in similar commercial or
corporate partnering situations.
"Series A Investor Directors(s)" shall have the meaning given to that term
in the Stockholders' Agreement entered into contemporaneously herewith.
"Investor Transferee" shall have the meaning set forth in Section 4.1
hereof.
"Qualified Public Offering" shall mean a firm commitment underwritten
public offering of the Company's Common Stock underwritten by a nationally
recognized full-service investment bank pursuant to which the aggregate gross
proceeds received by the Company are at least $25,000,000 at a price per share
of not less than $7.00 (following appropriate adjustment in the event of any
stock dividends, stock split, combination or other similar recapitalization
affecting such shares).
"Register," "registered" and "registration" refer to a registration
effected by preparing and filing a registration statement in compliance with the
Securities Act, as defined below, and the declaration or ordering of the
effectiveness of such registration statement.
"Registrable Securities" shall mean (i) the Conversion Shares, and (ii)
shares of Common Stock issued or issuable with respect to the Conversion Shares
upon an adjustment for stock splits, stock dividends and similar events.
Notwithstanding the foregoing, Registrable Securities shall not include shares
of Common Stock issued or issuable upon conversion of the Series A Convertible
Preferred Stock which have been (i) registered under the Securities Act pursuant
to an effective registration statement filed thereunder and disposed of in
accordance with the registration statement covering them, (ii) publicly sold
pursuant to Rule 144 under the Securities Act, (iii) eligible for sale under
Rule 144(k) under the Securities Act, or (iv) sold in a private transaction in
which the transferor's rights under this Agreement are not assigned.
"Reserved Employee Shares" shall mean shares of Common Stock (or options
to purchase such shares of Common Stock) issued or issuable at not less than
fair market value to officers, employees or directors of, or consultants to, the
Company pursuant to any stock purchase or option plan or other employee stock
bonus arrangement as approved by the Company's Board of Directors.
"Securities Act" shall mean the Securities Act of 1933, as amended, or any
similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Stockholders' Agreement" shall mean the Stockholders' Agreement, dated
the date hereof, among the Company and the Investors.
1.2 Required Registration.
(a) Six (6) months following the date of a Qualified Public
Offering, the holders of Preferred Shares (including the Common Stock issuable
upon conversion thereof) constituting at least fifty percent (50%) of the
Registrable Securities then owned beneficially or of record by Investors and
Investor Transferees (as hereinafter defined) may request the Company to
register under the Securities Act all or any portion of the shares of
Registrable Securities held by such requesting holder or holders for sale in the
manner specified in such notice; provided, however, that the Company may, by
notice to the requesting holders, delay such requested registration if the
Company's Board of Directors determines in good faith that such registration at
the time requested would have a material adverse effect upon the Company;
provided, further, however, that the Company's ability to delay such
registration shall be limited to durations of no longer than ninety (90) days
and the Company shall not delay more than once during any twelve (12) month
period.
The Company shall not be obligated pursuant to this Section 1.2 to
effectuate more than: (i) one (1) registration before a Qualified Public
Offering for the benefit of the holders set forth in Section 1.2(a) above; or
(ii) one (1) registration after a Qualified Public Offering for the benefit of
the holders set forth in Section 1.2(a) above. In addition, the aggregate
offering price of the Registrable Securities to be sold pursuant to
2
each such registration shall be at least $5,000,000. Notwithstanding anything to
the contrary contained herein, no request may be made under this Section 1.2:
(i) within one hundred eighty (180) days after the effective
date of a registration statement filed by the Company covering a firm commitment
underwritten public offering of securities of the Company under the Securities
Act, or
(ii) during the period starting with the date sixty (60) days
prior to the Company's estimated date of filing of, and ending on the date six
(6) months immediately following the effective date of any registration
statement pertaining to securities of the Company (other than a registration of
securities in a Rule 145 transaction or with respect to an employee benefit
plan), provided that the Company is actively employing in good faith all
reasonable efforts to cause such registration statement to become effective and
that the Company's estimate of the date of filing such registration statement is
made in good faith.
(b) Following receipt of any notice pursuant to Section 1.2(a), the
Company shall promptly notify all Investors and Investor Transferees from whom
such notice has not been received and, as soon thereafter as practicable, shall
use its reasonable efforts to register under the Securities Act, for public sale
in accordance with the method of disposition specified in such notice from
requesting holders, the number of shares of Registrable Securities specified in
such notice (and in all notices received by the Company from other holders
within twenty (20) days after the giving of such notice by the Company). If such
method of disposition shall be an underwritten public offering, the Company
shall designate the managing underwriter of such offering, following
consultation and subject to the approval of the Investors and Investor
Transferees from whom notice has been received, which approval shall not be
unreasonably withheld or delayed. All sellers must participate in the
underwriting. The Company's registration obligation hereunder shall be deemed
satisfied only when a registration statement or statements covering all shares
of Registrable Securities specified in notices received as aforesaid, for sale
in accordance with the method of disposition specified by the requesting
holders, shall have become effective and, if such method of disposition is a
firm commitment underwritten public offering, all such shares shall have been
sold pursuant thereto.
(c) The Company shall be entitled to include in any registration
statement referred to in this Section 1.2, for sale in accordance with the
method of disposition specified by the requesting holders, shares of Common
Stock to be sold by the Company for its own account and for the account of other
selling stockholders, except as and to the extent that, in the reasonable
opinion of the managing underwriter (if such method of disposition shall be an
underwritten public offering), such inclusion would materially adversely affect
the marketing of the Registrable Securities to be sold. Except for registration
statements on Form S-4, S-8 or any successor thereto, the Company will not file
with the Commission any other registration statement with respect to its Common
Stock, whether for its own account or that of other stockholders, from the date
of receipt of a notice from requesting holders pursuant to this Section 1.2
until the completion of the lesser of (i) the period of distribution of the
shares of Registrable Securities registered thereby or (ii) 180 days from the
effective date of the registration statement, unless the Registrable Securities
shall be entitled to be included therein in accordance with Section 1.3 below.
(d) The Company will use commercially reasonable efforts to maintain
the effectiveness of any form used to register the shares pursuant to this
Section 1.2 for up to one hundred eighty (180) days or such earlier time as all
of the Registrable Securities have been sold.
1.3 Registration on Form S-3. If at any time the holders of at least
twenty percent (20%) of the Registrable Securities then owned beneficially or of
record by Investors and Investor Transferees request that the Company file a
registration statement on Form S-3 or any successor thereto for a public
offering of all or any portion of the shares of Registrable Securities held by
such requesting holder or holders, the reasonably anticipated gross aggregate
price to the public of which would exceed $2,000,000, and the Company is a
registrant entitled to use Form S-3 or any successor thereto to register such
shares, then the Company shall use all reasonable efforts to register under the
Securities Act on Form S-3 or any successor
3
thereto, for public sale in accordance with the method of disposition specified
in such notice, the number of shares of Registrable Securities specified in such
notice; provided, however, that the Company may, by notice to the requesting
holders, delay such requested registration, if the Company's Board of Directors
determines in good faith that such registration at the time requested would have
a material adverse effect upon the Company; provided, further, however, that the
Company's ability to delay such registration shall be limited to durations of no
longer than ninety (90) days and the Company shall not delay more than once
during any twelve (12) month period. Whenever the Company is required by this
Section 1.4 to use all reasonable efforts to effect the registration of
Registrable Securities, each of the procedures and requirements of Section 1.2
(including but not limited to the requirement that the Company notify all
holders of Registrable Securities from whom notice has not been received and
provide them with the opportunity to participate in the offering) shall apply to
such registration. The Company will use its commercially reasonable efforts to
maintain the effectiveness of any registration statement on Form S-3 for a
period of up to one (1) year.
1.4 Registration Procedures. If and whenever the Company is required by
the provisions of Sections 1.2 and 1.3 to use all reasonable efforts to effect
the registration of any shares of Registrable Securities under the Securities
Act, the Company will, at its cost and expense (including, without limitation,
payment of the costs and expenses described in Section 1.7), as expeditiously as
reasonably practicable:
(a) prepare and file with the Commission a registration statement
(which, in the case of an underwritten public offering pursuant to Section 1.2,
shall be on Form S-1 or other form of general applicability satisfactory to the
managing underwriter selected as therein provided) with respect to such
securities and use all reasonable efforts to cause such registration statement
to become and remain effective for the period of the distribution contemplated
thereby (determined as hereinafter provided);
(b) prepare and file as expeditiously as reasonably practicable and
in any event within 90 days with the Commission such amendments and supplements
to such registration statement and the prospectus used in connection therewith
as may be necessary to keep such registration statement effective for the period
specified in Section 1.6(a) above and comply with the provisions of the
Securities Act with respect to the disposition of all Registrable Securities
covered by such registration statement in accordance with the sellers' intended
method of disposition set forth in such registration statement for such period;
(c) furnish to each seller of Registrable Securities and to each
underwriter such number of copies of the registration statement and the
prospectus included therein (including each preliminary prospectus) as such
persons reasonably may request in order to facilitate the public sale or other
disposition of the Registrable Securities covered by such registration
statement;
(d) use all reasonable efforts to register or qualify the
Registrable Securities covered by such registration statement under the
securities or "blue sky" laws of such jurisdictions as the sellers of
Registrable Securities or, in the case of an underwritten public offering, the
managing underwriter reasonably shall request, provided, however, that the
Company shall not for any such purpose be required to qualify generally to
transact business as a foreign corporation in any jurisdiction where it is not
so qualified or to consent to general service of process in any such
jurisdiction;
(e) use all reasonable efforts to list the Registrable Securities
covered by such registration statement with Nasdaq or any securities exchange on
which the Common Stock of the Company is then listed, or Nasdaq or such
securities exchange as shall be selected by the Company, or, if the Company
fails to make an application to so list within thirty (30) days of a request for
the same by the Investors in connection with a Qualified Public Offering, the
Investors may determine the place of listing, subject to qualification by the
Company to list its shares thereon;
(f) immediately notify each seller of Registrable Securities and
each underwriter under such registration statement, at any time when a
prospectus relating thereto is required to be delivered under the Securities
Act, of the happening of any event of which the Company has knowledge as a
result of which the prospectus contained in such registration statement, as then
in effect, includes an untrue statement of a
4
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances then existing. The sellers of Registrable Securities agree upon
receipt of such notice forthwith to cease making offers and sales of Registrable
Securities pursuant to such registration statement or deliveries of the
prospectus contained therein for any purpose until the Company has prepared and
furnished such amendment or supplement to the prospectus as may be necessary so
that, as thereafter delivered to purchasers of such Registrable Securities, such
prospectus shall not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances then existing;
(g) notify each seller of Registrable Securities under such
registration statement of (i) the effectiveness of such registration statement,
(ii) the filing of any post-effective amendments to such registration statement,
or (iii) the filing of a supplement to such registration statement;
(h) if the distribution is an underwritten offering, at the request
of any seller of Registrable Securities, use all reasonable efforts to furnish
on the date that Registrable Securities is delivered to the underwriters for
sale pursuant to such registration: (i) an opinion (dated such date) of counsel
representing the Company for the purposes of such registration, addressed to the
sellers and the underwriters, and in customary form; and (ii) a letter (dated
such date) from the independent public accountants retained by the Company,
addressed to the sellers and the underwriters and covering such matters with
respect to such registration as such underwriters reasonably may request; and
(i) make available for inspection upon reasonable notice during the
Company's regular business hours by each seller of Registrable Shares, any
underwriter participating in any distribution pursuant to such registration
statement, and any attorney, accountant or other agent retained by such seller
or underwriter, all material financial and other records, pertinent corporate
documents and properties of the Company, and cause the Company's officers and
directors to supply all information reasonably requested by any such seller,
underwriter, attorney, accountant or agent in connection with such registration
statement.
For purposes of Sections 1.6(a), 1.6(b) and 1.2(c), the period of
distribution of Registrable Securities in a firm commitment underwritten public
offering shall be deemed to extend until each underwriter has completed the
distribution of all securities purchased by it, and the period of distribution
of Registrable Securities in any other registration shall be deemed to extend
until the earlier of (i) the sale of all Registrable Securities covered thereby
or (ii) one hundred eighty (180) days after the effective date thereof, with
reasonable extensions to be granted for suspensions thereof.
In connection with each registration pursuant to Sections 1.2 and 1.3
covering an underwritten public offering, the Company and each seller agree to
enter into a written agreement with the managing underwriter selected in the
manner herein provided in such form and containing such provisions as are
customary in the securities business for such an arrangement between such
underwriter and companies of the Company's size and investment stature.
1.5 Expenses. All expenses incurred by the Company in complying with
Sections 1.2 and 1.3, including, without limitation, all registration and filing
fees, printing expenses, fees and disbursements of counsel and independent
public accountants for the Company, fees and expenses (including counsel fees)
incurred in connection with complying with state securities or "blue sky" laws,
transfer taxes, fees of transfer agents and registrars, and the fees and
disbursements of one counsel for the sellers of Registrable Securities but
excluding any Selling Expenses, are called "Registration Expenses." All
underwriting discounts and selling commissions applicable to the sale of
Registrable Securities and the fees of more than one counsel are called "Selling
Expenses."
The Company will pay all Registration Expenses in connection with each
registration statement under Sections 1.2 and 1.3. The Company shall not,
however, be required to pay for the Registration Expenses of any registration
proceeding begun pursuant to Section 1.2, the request for which is subsequently
withdrawn by the requesting holders of Registrable Securities, in which event
the Registration
5
Expenses shall be borne by the requesting holders of the Registrable Securities
in proportion to the number of shares for which registration was requested. All
Selling Expenses in connection with each registration statement under Sections
1.2 and 1.3 shall be borne by the participating sellers in proportion to the
number of shares sold by each, or by such participating sellers other than the
Company (except to the extent the Company shall be a seller) as they may agree.
1.6 Information by Holder. The holder or holders of Registrable Securities
included in any registration shall furnish to the Company such information
regarding such holder or holders of Registrable Securities, the Registrable
Securities held by them and the distribution proposed by such holder or holders
of Registrable Securities as the Company may reasonably request in writing and
as shall be required in connection with any registration (including any
amendment to a registration statement or prospectus), qualification or
compliance.
1.7 Lock-Up Agreements. Each holder of Registrable Securities shall agree
to be bound by such lock-up agreements (not to exceed a period of one hundred
eighty (180) days following the date of the prospectus relating to any such
underwriting) as the managing underwriter of any such registration shall specify
as a requirement to any such underwriting, provided that the entry of such
holder of Registrable Securities into such agreements shall be conditioned upon
all principal stockholders (i.e., all stockholders who could reasonably be
expected to be considered by the applicable underwriters to be affiliates of the
Company) and executive officers and directors of the Company also agreeing to
execute such lock-up agreements.
1.8 Indemnification and Contribution.
(a) In the event of a registration of any of the Registrable
Securities under the Securities Act pursuant to Sections 1.2 or 1.3, the Company
will indemnify and hold harmless each seller of such Registrable Securities
thereunder, each underwriter of such Registrable Securities thereunder and each
other person, if any, who controls such seller or underwriter within the meaning
of Section 15 of the Securities Act, from and against any losses, claims,
damages or liabilities, joint or several, to which such seller, underwriter or
controlling person may become subject under the Securities Act or under any
other statute or at common law or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in any registration statement under which such Registrable Securities
were registered under the Securities Act, any preliminary prospectus or final
prospectus contained therein, or any amendment or supplement thereof, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading or any violations of applicable law relating to such
registration, and will pay the legal fees and other expenses of each such
seller, each such underwriter and each such controlling person incurred by them
in connection with investigating or defending any action, whether or not
resulting in any liability, insofar as such loss, claim, damage, liability or
action results from the foregoing; provided, however, that the Company will not
be liable to a seller, underwriter or controlling person in any such case if and
to the extent that any such loss, claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission so made in reliance upon and in conformity with information
furnished in writing by any such seller, any such underwriter or any such
controlling person specifically for use in such registration statement or
prospectus; and, provided, further, however, that the Company will not be liable
to a holder in any such case to the extent that any such loss, claim, damage,
liability or action arises out of or is based upon an untrue or alleged untrue
statement or omission or an alleged omission made in any preliminary prospectus
or final prospectus if (1) such holder failed to send or deliver a copy of the
final prospectus or prospectus supplement with or prior to the delivery of
written confirmation of the sale of the Registrable Securities, and (2) the
final prospectus or prospectus supplement would have corrected such untrue
statement or omission.
(b) In the event of a registration of any of the Registrable
Securities under the Securities Act pursuant to Sections 1.2 or 1.3, each seller
of such Registrable Securities thereunder, severally and not jointly, will
indemnify and hold harmless the Company, each person, if any, who controls
6
the Company within the meaning of the Securities Act, each officer of the
Company who signs the registration statement, each director of the Company, each
underwriter and each person who controls any underwriter within the meaning of
the Securities Act, against all losses, claims, damages or liabilities, joint or
several, to which the Company or such officer, director, underwriter or
controlling person may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the registration statement under
which such Registrable Securities were registered under the Securities Act, any
preliminary prospectus or final prospectus contained therein, or any amendment
or supplement thereof, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will pay the legal
fees and other expenses of the Company and each such officer, director,
underwriter and controlling person incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that such seller will be liable hereunder in any such case if
and only to the extent that any such loss, claim, damage or liability arises out
of or is based upon an untrue statement or alleged untrue statement or omission
or alleged omission made in reliance upon and in conformity with information
furnished in writing to the Company by such seller specifically for use in such
registration statement or prospectus; and provided, further, however, that the
liability of each seller hereunder shall be limited to the amount of net
proceeds received by such seller in connection with such registration.
(c) Promptly after receipt by an indemnified party hereunder of
notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against the indemnifying party hereunder,
notify the indemnifying party in writing thereof, but the omission so to notify
the indemnifying party shall not relieve it from any liability that it may have
to such indemnified party under this Section 1.10 except and only to the extent
the indemnifying party is prejudiced by such omission. In case any such action
shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate in and, to the extent it shall wish, to assume and
undertake the defense thereof with counsel satisfactory to such indemnified
party, and, after notice from the indemnifying party to such indemnified party
of its election so to assume and undertake the defense thereof, the indemnifying
party shall not be liable to such indemnified party under this Section 1.10 for
any legal expenses subsequently incurred by such indemnified party in connection
with the defense thereof; provided, however, that, if the defendants in any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded (based on the advice of
counsel) that there may be reasonable defenses available to it which are
different from or additional to those available to the indemnifying party or if
the interests of the indemnified party reasonably may be deemed to conflict with
the interests of the indemnifying party, the indemnified party shall have the
right to select a separate counsel and to assume such legal defenses and
otherwise to participate in the defense of such action, with the expenses and
fees of such separate counsel and other expenses related to such participation
to be reimbursed by the indemnifying party as incurred, it being understood,
however, that the indemnifying party shall not, in connection with any one such
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the fees and expenses of more than one separate firm of attorneys
(together with appropriate local counsel as required by the local rules of such
jurisdiction) at any time for all such indemnified parties.
(d) In order to provide for just and equitable contribution to joint
liability under the Securities Act in any case in which either (i) any holder of
Registrable Securities exercising rights under this Agreement, or any
controlling person of any such holder, makes a claim for indemnification
pursuant to this Section 1.10 but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
this Section 1.10 provides for indemnification in such case, or (ii)
contribution under the Securities Act may be required on the part of any such
selling holder or any such controlling person in circumstances for which
indemnification is provided under this Section 1.10; then, and in each such
case, the Company and each such holder will contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (after contribution
from
7
others) in such proportion as may be reasonable taking into account such matters
as (i) their relative fault as to the matters giving rise to such losses,
claims, damages or liabilities and (ii) their relative ability or opportunity to
have avoided such losses, claims, damages or liabilities; provided, however,
that, in any such case, no person or entity guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
will be entitled to contribution from any person or entity who was not guilty of
such fraudulent misrepresentation.
(e) No indemnifying party shall, without the prior written consent
of the indemnified party, effect any settlement of any pending or threatened
action, suit or proceeding in respect of which any indemnified party is or could
have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such action, suit or proceeding.
(f) Notwithstanding the foregoing, to the extent that the provisions
on indemnification and contribution contained in the underwriting agreement
entered into in connection with the underwritten public offering are in conflict
with the foregoing provisions, the provisions in the underwriting agreement
shall control.
1.9 Changes in Common Stock or Preferred Shares. If, and as often as,
there is any change in the Common Stock or the Preferred Shares by way of a
stock split, stock dividend, combination or reclassification, or through a
merger, consolidation, reorganization or recapitalization, or by any other
means, appropriate adjustment shall be made in the provisions hereof so that the
rights and privileges granted hereby shall continue with respect to the Common
Stock or the Preferred Shares as so changed.
1.10 Rule 144 Reporting and Rule 144A Information. With a view to making
available the benefits of certain rules and regulations of the Commission that
may at any time permit the resale of the Registrable Shares without
registration, the Company will:
(a) at all times after ninety (90) days after the first registration
statement covering a public offering of securities of the Company under the
Securities Act shall have become effective or following registration under
Section 12 of the Exchange Act, use its best efforts to:
(i) make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act;
(ii) file with the Commission in a timely manner all reports
and other documents required of the Company under the Securities Act and the
Exchange Act; and
(iii) furnish to each holder of Registrable Securities,
forthwith upon request, (a) a written statement by the Company as to its
compliance with the reporting requirements of such Rule 144 and of the
Securities Act and the Exchange Act, (b) a copy of the most recent annual or
quarterly report of the Company, and (c) such other reports and documents so
filed by the Company as such holder may reasonably request in availing itself of
any rule or regulation of the Commission allowing such holder to sell any
Registrable Securities without registration; and
(b) at any time, at the request of any holder of Preferred Shares or
shares of Registrable Securities, make available to such holder and to any
prospective transferee of such Preferred Shares or shares of Registrable
Securities the information concerning the Company described in Rule 144A(d)(4)
under the Securities Act.
1.11 Damages. The Company recognizes and agrees that the holders of
Registrable Securities will suffer irreparable harm and will not have an
adequate remedy at law if the Company fails to comply with any provision of this
Section 1, and the Company expressly agrees that, in the event of such failure,
the holders of Registrable Securities or any other person entitled to the
benefits of this Section 1 shall be
8
entitled to seek specific performance of any and all provisions hereof and may
seek to enjoin the Company from continuing to commit any further breach of this
Section 1.
SECTION 2.
INFORMATION RIGHTS; INSPECTION RIGHTS
2.1 Information Rights. As long as any Investor or any Investor Transferee
owns at least 50% of the outstanding Preferred Shares, each such Investor or
Investor Transferee shall be entitled to receive, and the Company shall mail to
any such Investor or Investor Transferee, at the times specified, the following
reports:
(a) as soon as available, and in any event within thirty (30) days
after the end of each month, a balance sheet for the Company as of the end of
such month and the related statements of income, stockholder's equity and
cashflows for the year to date, prepared in accordance with generally accepted
accounting principles and certified by the Chief Financial Officer of the
Company as true, correct and complete;
(b) as soon as available and in any event within ninety (90) days
after the end of each fiscal year of the Company, a balance sheet of the Company
as of the end of such fiscal year and the related statements of income,
stockholders' equity and cash flows for the fiscal year then ended, prepared in
accordance with generally accepted accounting principles and audited by a firm
of independent public accountants of national recognition selected by the Board
of Directors of the Company and reasonably acceptable to the Investors;
(c) no later than thirty (30) days prior to the start of each fiscal
year, the Company's annual operating plan, including, without limitation,
consolidated capital and operating expense budgets, cash flow projections and
income and loss projections for the Company in respect of such fiscal year, all
itemized in reasonable detail and prepared on a monthly basis, and, promptly
after preparation, any revisions to any of the foregoing;
(d) promptly following receipt by the Company, each audit response
letter, accountant's management letter and other written report submitted to the
Company by its independent public accountants in connection with an annual or
interim audit of the books of the Company or any of its subsidiaries;
(e) promptly after the commencement thereof, notice of all actions,
suits, claims, proceedings, investigations and inquiries that are likely to
materially adversely affect the Company or any of its subsidiaries;
(f) promptly upon sending, making available or mailing the same, all
press releases, reports and financial statements that the Company sends or makes
available to its stockholders; and
(g) promptly, from time to time, such other material information
regarding the business, prospects, financial condition, operations, property or
affairs of the Company and its subsidiaries as such Investor reasonably may
request.
2.2 Inspection Rights. As long as any Investor owns at least 50% of the
outstanding Preferred Shares, the Company shall permit such Investor (and such
persons as it may designate subject to the Company's reasonable approval and the
execution of a confidentiality agreement acceptable to the Company), at such
Investor's expense, to visit and inspect, during normal business hours and
without disruption to the Company's business, any of the properties of the
Company, examine its books (and take copies and extracts therefrom), discuss the
affairs, finances and accounts of the Company with its officers and employees,
and consult with and advise the management of the Company as to its affairs,
finances and accounts, all at reasonable times and upon reasonable notice. Each
Investor agrees that it and its designees will keep confidential and will not
disclose, divulge or use (other than for purposes of monitoring its investment
in the Company) any confidential, proprietary or secret information which such
Investor may
9
obtain from the Company pursuant to financial statements, reports and other
materials submitted by the Company to such Investor pursuant to this Agreement,
or pursuant to inspection rights granted hereunder, unless such information is
known to the public through no fault of any Investor or its designees or
representatives; provided, however, an Investor may disclose such information
(i) to its attorneys, accountants and other professionals to the extent
necessary to obtain their services in connection with its investment in the
Company, (ii) to any prospective permitted transferee of the Series A Preferred
Stock, so long as the prospective transferee agrees to be bound by the
provisions of this Section 2.2, (iii) to any general partner or affiliate of
such Investor, so long as such general partner or affiliate agrees to be bound
by the provisions of this Section 2.2, and (iv) to any other Investor.
2.3 Termination of Information and Inspection Rights. The obligations of
the Company to furnish financial information to the Investors pursuant to
Sections 2.1 and 2.2 shall terminate upon the earlier to occur of (i) the
completion of a Qualified Public Offering, or (ii) such time as the Company
otherwise becomes subject to the reporting requirements of the Exchange Act.
SECTION 3.
RIGHT TO PURCHASE NEW SECURITIES
3.1 Preemptive Rights. In the event that the Company proposes an issuance
of any of its securities other than Excluded Stock to any party, it shall give
written notice of such issuance to each holder of Preferred Shares and/or
Conversion Shares (the "Offerees"). The Company's written notice to the Offerees
shall describe the securities proposed to be issued by the Company and specify
the number, price and payment terms. Each holder of the Preferred Shares and/or
Conversion Shares shall have the right, for a period of twenty (20) days from
such notice, to agree to purchase, at the same price and on the same terms and
conditions, that number of additional securities of the Company as would be
necessary to preserve such holder's percentage interest in the equity of the
Company on a fully diluted, as converted basis, as of the time immediately prior
to such issuance. Each Offeree may accept the Company's offer as to the full
number of securities offered to it or any lesser number, by written notice
thereof given by it to the Company prior to the expiration of the aforesaid
twenty (20) day period in which event the Company shall promptly sell and such
Offeree shall buy, upon the terms specified, the number of securities agreed to
be purchased by such Offeree.
The Company shall be free at any time after the end of the aforesaid
twenty (20) day period and prior to ninety (90) days after the date of its
notice of offer to the Offerees, to offer and sell to any third party or parties
the number of such securities not agreed by the Offerees to be purchased by
them, at a price and on payment terms no less favorable to the Company than
those specified in such notice of offer to the Offerees. However, if such third
party sale or sales are not consummated within such ninety (90) day period, the
Company shall not sell such securities and shall not have been purchased within
such period without again complying with this Section 3.1. The obligations of
the Company under this Section 3.1 shall terminate upon the completion of a
Qualified Public Offering. Notwithstanding anything contained in this Agreement
to the contrary, the Company's written notice of its proposed issuance of newly
issued shares to which a participation right applies (as provided in the
preceding paragraph) need not be given prior to the issuance of such newly
issued shares, provided such notice is sent within five (5) days thereafter and
the Offeree's participation rights remain open for a twenty (20) day period from
the receipt thereof, and further provided that the Company has set aside a
number of shares sufficient to satisfy the obligations of the Company pursuant
to this section.
SECTION 4
MISCELLANEOUS
3.2 Successors and Assigns. All covenants and agreements contained in this
Agreement by or on behalf of any of the parties hereto shall bind and inure to
the benefit of the respective successors and assigns of the parties hereto,
whether so expressed or not; provided, however, that the rights conferred in
10
this Agreement on the Investors shall only inure to the benefit of a transferee
of Preferred Shares or Registrable Securities if: (a) (1) there is transferred
to such transferee at least $400,000 Registrable Securities (the transferee in
any such case being referred to as an "Investor Transferee"), or (2) such
transferee is an affiliate of the transferor; (b) such transfer may otherwise be
effected in accordance with applicable securities laws; and (c) notice of such
transfer or assignment is given to the Company and such Transferee has agreed in
writing to be bound by the terms of this Agreement and the Stockholders'
Agreement.
3.3 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Arizona for all purposes and in all
respects, without giving effect to the conflict of law provisions thereof.
3.4 Integration; Amendment. This Agreement and the other documents
delivered pursuant hereto constitute the full and entire understanding and
agreement among the parties with regard to the subjects hereof and thereof, and
supersede any previous agreement or understanding between or among the parties
with respect to such subjects. No party shall be liable or bound to any other
party in any manner by any warranties, representations or covenants except as
specifically set forth herein or therein. Except as expressly provided herein
neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party against whom
enforcement of any such amendment, waiver, discharge or termination is sought;
provided, however, that with the written consent of the Company and holders of
at least a majority of the Registrable Securities that are outstanding
(including, for these purposes, Conversion Shares) may waive, modify or amend,
on behalf of all parties hereto, any provisions of this Agreement and such
waiver, modification or amendment may be given or withheld for any reason or no
reason in the sole discretion of any party. Any amendments, waivers, discharges
or terminations of this Agreement effected in accordance herewith shall be
binding upon all parties hereto, including those not signing such amendment,
waiver, discharge or termination.
3.5 Notices. All notices, requests, demands, and other communications
under this Agreement shall be in writing and shall be deemed to have been duly
given on the date of service if served personally on the party to whom notice is
to be given, on the date of transmittal of services via telecopy to the party to
whom notice is to be given (with a confirming copy being delivered within 24
hours thereafter), or on the third day after mailing if mailed to the party to
whom notice is to be given, by first class mail, registered or certified,
postage prepaid, or via overnight courier providing a receipt and properly
addressed as set forth on Exhibit A hereto. Any party may change its address for
purposes of this paragraph by giving notice of the new address to each of the
other parties in the manner set forth above.
3.6 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
3.7 Severability. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided that no such severability shall be effective if
it materially changes the economic benefit of this Agreement to any party.
3.8 Dispute Resolution. If the parties should have a material dispute
arising out of or relating to this Agreement or the parties' respective rights
and duties hereunder, then the parties will resolve such dispute in the
following manner: (i) any party may at any time deliver to the others a written
dispute notice setting forth a brief description of the issue for which such
notice initiates the dispute resolution mechanism contemplated by this Section
3.8; (ii) during the forty-five (45) day period following the delivery of the
notice described in Section 3.8(i) above, appropriate representatives of the
various parties will meet and seek to resolve the disputed issue through
negotiation, (iii) if representatives of the parties are unable to resolve the
disputed issue through negotiation, then within thirty (30) days after the
period described in Section 3.8(ii) above, the parties will refer the issue (to
the exclusion of a court of law) to final and binding arbitration in Phoenix,
Arizona in accordance with the then existing rules (the "Rules") of the American
Arbitration
11
Association ("AAA"), and judgment upon the award rendered by the arbitrators may
be entered in any court having jurisdiction thereof; provided, however, that the
law applicable to any controversy shall be the law of the State of Arizona,
regardless of principles of conflicts of laws. In any arbitration pursuant to
this Agreement, (i) discovery shall be allowed and governed by the Arizona Code
of Civil Procedure and (ii) the award or decision shall be rendered by a
majority of the members of a Board of Arbitration consisting of three (3)
members, one of whom shall be appointed by each of the respective parties and
the third of whom shall be the chairman of the panel and be appointed by mutual
agreement of said two party-appointed arbitrators. In the event of failure of
said two arbitrators to agree within sixty (60) days after the commencement of
the arbitration proceeding upon the appointment of the third arbitrator, the
third arbitrator shall be appointed by the AAA in accordance with the Rules. In
the event that either party shall fail to appoint an arbitrator within thirty
(30) days after the commencement of the arbitration proceedings, such arbitrator
and the third arbitrator shall be appointed by the AAA in accordance with the
Rules. Nothing set forth above shall be interpreted to prevent the parties from
agreeing in writing to submit any dispute to a single arbitrator in lieu of a
three (3) member Board of Arbitration. Upon the completion of the selection of
the Board of Arbitration (or if the parties agree otherwise in writing, a single
arbitrator), an award or decision shall be rendered within no more than
forty-five (45) days. Notwithstanding the foregoing, the request by either party
for preliminary or permanent injunctive relief, whether prohibitive or
mandatory, shall not be subject to arbitration and may be adjudicated only by
the courts of the State of Arizona or the U.S. District Court in Arizona.
3.9 Titles and Subtitles. The titles and subtitles used in this Agreement
are used for convenience only and are not to be considered in construing or
interpreting this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
12
IN WITNESS WHEREOF, the Company and the Investors have executed this
Agreement under seal as of the date first above written.
THE COMPANY:
KONA GRILL, INC.
By: /s/ Jason Merritt
-------------------------------------------------------
Name: Jason Merritt
Its: Vice President of Operations
|
THE INVESTORS:
/s/ Marcus E. Jundt
-----------------------------------------------------------
Marcus E. Jundt
|
KONA KC INVESTMENT LLC
an Arizona limited liability company
By: JN II, LLC, an Arizona limited liability company
Its: Manager
By: /s/ Robert J. Novak
---------------------------------------------------
Robert J. Novak, Manager
|
CARL REDFIELD TRUST 2000 U-I, dated 10/18/00
By: /s/ Carl Redfield
-------------------------------------------------------
Carl Redfield
Its: Trustee
/s/ D. David Sebold
-----------------------------------------------------------
D. David Sebold
/s/ Murray R. Williamson
-----------------------------------------------------------
Murray R. Williamson
/s/ Patricia R. Williamson
-----------------------------------------------------------
Patricia R. Williamson
/s/ Holly Callen Hamilton
-----------------------------------------------------------
Holly Callen Hamilton
|
13
/s/ Robert W. Hamilton
-----------------------------------------------------------
Robert W. Hamilton
/s/ Ted Mitsakopoulos
-----------------------------------------------------------
Ted Mitsakopoulos
|
14
CAPITAL REAL ESTATE, INC., a Minnesota corporation
By: /s/ Richard Hauser
_______________________________________________________
Name: Richard Hauser
Its: President
/s/ James R. Jundt
___________________________________________________________
James R. Jundt
|
15
