<PAGE>
As filed with the Securities and Exchange Commission on August 8, 1997
Registration No. 333-______
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
________________
CIATTI'S, INC.
(Exact name of registrant as specified in its charter)
__________________
<TABLE>
<S> <C>
Minnesota 41-1564262
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
</TABLE>
___________________
5555 West 78th Street
Edina, Minnesota 55439-2702
(612) 941-0108
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
__________________
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<S> <C>
Phillip R. Danford Copies to:
President and Director Thomas G. Lovett IV
Ciatti's, Inc. Kristin L. Johnson
5555 West 78th Street Lindquist & Vennum P.L.L.P.
Edina, Minnesota 55439-2702 4200 IDS Center
(612) 941-0108 80 South Eighth Street
(Name, address, including zip code, and telephone number, Minneapolis, Minnesota 55402
including area code, of agent for service) (612) 371-3211
</TABLE>
__________________
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on the Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: [X]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration number of the earlier effective registration
statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
<TABLE>
<CAPTION>
Calculation of Registration Fee
====================================================================================================================
Title of Each Class Proposed Maximum Proposed Maximum
of Securities to Amount to be Offering Aggregate Amount of
be Registered Registered Price Per Unit Offering Price Registration Fee
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units consisting of one share of Common 3,000,000 $2.25 $ 6,750,000 $2,045
Stock and a Warrant to purchase an additional
share of Common Stock
- --------------------------------------------------------------------------------------------------------------------
Common Stock Underlying Warrants 3,000,000 $5.00 $15,000,000 $4,545
------
====================================================================================================================
Total $6,590
======
====================================================================================================================
</TABLE>
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 that 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 said Section 8(a),
may determine.
<PAGE>
CIATTI'S, INC.
CROSS REFERENCE SHEET
<TABLE>
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Form S-2 Item Number and Description Caption of Location in Prospectus
- ------------------------------------ ---------------------------------
<S> <C>
Item 1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus..................... Front of the Registration Statement; Outside Front Cover Page
Item 2. Inside Front and Outside Back Cover Pages
of Prospectus...................................... Inside Front Cover Page; Additional Information; Outside Back
Cover Page
Item 3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges....................... Outside Front Cover Page; Prospectus Summary; Risk Factors
Item 4. Use of Proceeds.................................... Prospectus Summary; Use of Proceeds
Item 5. Determination of Offering Price.................... Not applicable
Item 6. Dilution........................................... Not applicable
Item 7. Selling Security Holders........................... Not applicable
Item 8. Plan of Distribution............................... Outside Front Cover Page; Inside Front Cover Page; Description
of Securities
Item 9. Description of Securities To Be Registered......... Prospectus Summary; Description of Securities
Item 10. Interests of Named Experts and Counsel............. Not applicable
Item 11. Information with Respect to Registrant............. Outside Front Cover Page; Prospectus Summary; Available
Information; Incorporation of Certain Documents by Reference;
Selected Consolidated Financial Data; Management's Discussion
and Analysis of Financial Condition and Results of Operations;
Business; Description of Securities; Certain Transactions
Item 12. Incorporation of Certain Information
by Reference....................................... Incorporation of Certain Documents by Reference
Item 13. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities..... Not applicable
</TABLE>
2
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Information contained herein is subject to completion or amendment. A
registration statement relating to these Securities has been filed with the
Securities and Exchange Commission. These Securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy, nor shall there be any sales of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PRELIMINARY PROSPECTUS
Subject to Completion
3,000,000 Units
Each Unit Consisting of One Share
of Common Stock and One Redeemable
Common Stock Purchase Warrant
Price Per Unit - $2.25
Minimum Offering
$2,000,000 (888,889 Units)
__________________________________
CIATTI'S, INC.
__________________________________
The units offered hereby are being sold by Ciatti's, Inc. (the
"Company"). Each unit ("Unit") consists of one share of the Company's common
stock, $.01 par value per share ("Common Stock"), and one Redeemable Common
Stock Purchase Warrant ("Warrant"). The Common Stock and Warrants are
immediately detachable and separately transferable. One Warrant entitles the
holder to purchase, at any time up to December 31, 2002, one share of Common
Stock at a price of $5.00, subject to adjustment in certain circumstances.
Beginning January 1, 1998, the Warrants are redeemable, in whole, by the Company
at a redemption price of $.05 per Warrant on not less than 30 days written
notice, provided that the market price of the Common Stock exceeds $6.00 per
share (subject to adjustment) for any 20 consecutive trading days within 15 days
prior to such notice. Holders of Warrants may exercise their rights until the
close of business on the date fixed for redemption, unless extended by the
Company. See "Description of Securities."
The Company's Common Stock is traded on the Nasdaq SmallCap Market
under the symbol "CIAT." Prior to this Offering, there has been no public market
for the Units and no assurance can be given that any such market will exist or
develop upon completion of this Offering or, if developed, will be maintained.
The Company has filed an application for quotation of the Units and Warrants on
the Nasdaq SmallCap Market under the symbols CIATU and CIATW, respectively.
These Units are being sold by the Company's officers and directors.
Until the Company has received commitments to purchase 888,889 Units
($2,000,000), all proceeds will be placed in an Escrow Account at Norwest Bank,
Minnesota, N.A. If the minimum number of Units is not sold by _______________,
then all proceeds will be returned to subscribers with interest, less any escrow
fees.
THE UNITS OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE X.
___________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=======================================================================
Underwriting
Price to Commissions and Proceeds to
Public Discount Company
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Per Unit $2.25 0.0% $2.25
- -----------------------------------------------------------------------
Minimum 888,889 Units 0.0% $2,000,000 (1)
- -----------------------------------------------------------------------
Maximum 3,000,000 Units 0.0% $6,750,000 (1)
=======================================================================
</TABLE>
(1) Before deducting estimated offering expenses of $75,000.
The date of this Prospectus is __________, 1997.
<PAGE>
Ciatti's Inc., through its wholly-owned subsidiary DFW Bagels, Inc.,
owns and operates seven Bruegger's Bagel Bakery restaurants in the Dallas-Fort
Worth area.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus and by the information and
financial statements appearing in the documents incorporated by reference
herein. See "Risk Factors" for a discussion of certain factors that should be
considered by prospective purchasers of the Units offered hereby. Terms not
defined in this summary are defined elsewhere in this Prospectus.
THE COMPANY
The Company owns and operates ten full-service restaurants in Minnesota and
Wisconsin. Included in these full-service restaurants are nine Italian
restaurants operating in Minnesota and Wisconsin under the name "Ciatti's
Italian Restaurant(R)" and one steakhouse restaurant operating in Wisconsin
under the name "Spurs Steakhouse & Saloon(R)". On January 1, 1995, DFW Bagels,
Inc. ("DFW Bagels")(formerly known as Big D Bagels, Inc.), the wholly-owned
subsidiary of the Company, entered into an exclusive Development Agreement with
Bruegger's Franchise Corporation ("Bruegger's Development Agreement") to develop
bagel bakeries in the Dallas-Fort Worth area. As of August 1, 1997, DFW Bagels
has opened and is operating seven bagel bakeries in the Dallas-Fort Worth area.
All bagel bakeries are operated under the name "Bruegger's Bagel Bakery"
pursuant to the terms of the Bruegger's Development Agreement and related
franchise documents.
The Company is conducting this Offering to raise working capital, including
additional capital to expand the number of bagel bakeries owned and operated by
DFW Bagels in the Dallas-Fort Worth area. Under the Bruegger's Development
Agreement, as amended, DFW Bagels must have nine bagel bakeries open by January
1, 1998 and thirty bagel bakeries open by July 1, 2001. The Company may also use
part of any capital raised for remodeling and updating of some of its Italian
restaurants, as well as for other general business purposes.
Ciatti's, Inc. and its wholly-owned subsidiary, DFW Bagels, Inc., are
Minnesota corporations. The Company's principal office and mailing address is
Ciatti's, Inc., 5555 West 78th Street, Edina, Minnesota 55439-2702 and its
telephone number is (612) 941-0108. Unless the context otherwise requires,
references to the Company include the Company and its wholly-owned subsidiary,
DFW Bagels, Inc. References to the Company's development and operation of its
bagel bakeries will generally mean DFW Bagels, Inc.
THE OFFERING
Securities Offered.......... 3,000,000 Units. Each Unit offered hereby
consists of one share of Common Stock and one
Redeemable Common Stock Purchase Warrant. Each
Warrant entitles the holder to purchase, at any
time during the period ending December 31, 2002,
one share of Common Stock at a price of $5.00,
subject to adjustment in certain circumstances.
Beginning January 1, 1998, the Warrants are
redeemable, in whole, by the Company at a
redemption price of $.05 per Warrant on not less
than 30 days written notice, provided that the
market price of the Common Stock exceeds $6.00
per share (subject to adjustment) for any 20
consecutive trading days within 15 days prior to
such notice. Holders of Warrants may exercise
their rights until the close of business on the
date fixed for redemption, unless extended by
the Company. See "Description of Securities."
Common Stock Outstanding
Before the Offering....... 742,819 shares of Common Stock at August 1,
1997.
Use of Proceeds............. Working capital, including additional capital to
expand the number of bagel bakeries owned and
operated by DFW Bagels in the Dallas-Fort Worth
area. The Company may also use part of any
capital raised for remodeling and updating of
its Italian restaurants, as well as for other
general business purposes.
3
<PAGE>
Current and Proposed Nasdaq SmallCap Market(DM)
symbols ...................................... Units......... CIATU (Proposed)
Common Stock.. CIAT
Warrants...... CIATW (Proposed)
________________________________________
"Bruegger's" and "Bruegger's Bagel Bakery" are trademarks of Bruegger's
Corporation. "Ciatti's Italian Restaurant" and "Spurs Steakhouse & Saloon"
are registered trademarks of the Company.
The Common Stock and Warrants included in the Units offered hereby are
securities of Ciatti's, Inc. They are not direct or indirect interests in DFW
Bagels, Inc. Neither Bruegger's Corporation, nor Bruegger's Franchise
Corporation, nor Quality Dining, Inc., the parent corporation of Bruegger's
Corporation, nor any of their affiliates have reviewed, or are in any way a
party to, this Prospectus or any of the disclosures contained in this
Prospectus.
________________________________________
This Prospectus, including the information incorporated by reference
herein, contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Actual results could differ significantly from those projected or
contemplated in the forward-looking statements as a result, in part, of the
risk factors set forth elsewhere in this Prospectus. In connection with the
forward-looking statements which appear in these disclosures, prospective
purchasers of the Company's Common Stock offered hereby should carefully
review all of such risk factors.
4
<PAGE>
RISK FACTORS
Investors should carefully consider the following matters in connection
with an investment in the Units in addition to the other information contained
or incorporated by reference in the Prospectus. Information contained or
incorporated by reference in this Prospectus contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, which can be identified by the use of forward-looking terminology such
as "may," "will," "expect," "anticipate," "estimate" or "continue" or the
negative thereof or other variations thereon or comparable terminology. The
following matters constitute cautionary statements identifying important factors
with respect to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to differ materially from those
in such forward-looking statements.
Recent Losses
During the fiscal year ended June 30, 1996 and the thirty-nine weeks ended
March 30, 1997 the Company incurred net losses of approximately $1,363,000 and
$1,905,000, respectively. The Company expects to report a net loss of
approximately $664,000 (unaudited) in the fourth quarter of fiscal 1997 which
would result in a net loss of $2,569,000 (unaudited) for the fiscal year ended
June 29, 1997. While the Company expects that its full service restaurants will
operate on a profitable basis in the near future, the Company expects to incur
losses from its bagel bakeries until it has achieved satisfactory market
penetration in the Dallas-Fort Worth area. The Company projects a consolidated
net loss for fiscal 1998. Assuming the Company can achieve significant
penetration in the Dallas-Fort Worth area and increase sales per bagel bakery to
a level needed to achieve profitability, the Company believes it will achieve
profitability on a consolidated basis in fiscal 1999. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Statement Regarding Future Profitability of the Company's Bagel Bakeries."
Dependence Upon Bagel Bakeries For Future Growth
Substantially all of the Company sales in the past have been generated from
the operation of its full service restaurants. During the fiscal year ended June
30, 1996, the Company's full service restaurants generated sales of $17.0
million, while its bagel bakeries generated sales of only $627,000. Further,
during the thirty-nine week period ended March 30, 1997, the Company's full
service restaurants generated sales of $11.8 million while its bagel bakeries
generated sales of only $1.3 million. For the fiscal year ended June 29, 1997,
on an unaudited basis, the Company's full service restaurants generated sales of
$15.8 million while its bagel bakeries generated sales of $1.9 million. The
Company currently operates seven bagel bakeries. The retail bagel segment is an
emerging concept, the long-term appeal and potential of which have not yet been
fully determined. Future growth in sales and profits will depend to a
substantial extent on the Company's ability to increase the number of its bagel
bakeries. The Company's ability to successfully expand its bagel bakery
operations will depend upon a number of factors, including the availability and
cost of suitable locations, the hiring, training and retention of skilled
management and personnel, the ability of the Company to generate funds from
operations, obtain adequate financing on favorable terms or to obtain cash
concessions from landlords, the competitive environment, and the ability to
obtain the necessary governmental permits and approvals. There can be no
assurance that the Company will be able to open new bagel bakeries and, if
opened, that those restaurants can be operated profitably or that the opening of
any new locations will not result in reduced sales at existing bagel bakeries.
See "Business - Restaurant Operations" and "Business -Restaurant Development."
Dependence upon Bruegger's and Quality Dining, Inc.
The development of the Dallas-Fort Worth area for bagel bakeries by DFW
Bagels is subject to the terms and conditions of a Development Agreement and
related franchise agreements with Bruegger's Franchise Corporation
("Bruegger's"). Under the terms of the Bruegger's Development Agreement, as
amended, DFW Bagels is required to comply with a number of requirements with
respect to construction and maintenance of bagel bakeries. DFW Bagels is
required to have nine bagel bakeries open by January 1, 1998 and thirty bagel
bakeries open by July 1, 2001. The Development Agreement provides that DFW
Bagels and Bruegger's will enter into a pre-agreed-upon franchise agreement for
each bagel bakery opened by DFW Bagels. The franchise agreement grants DFW
Bagels the right to establish and operate a bagel bakery and to use the
Bruegger's system and various trademarks. The bagel bakeries must conform to
Bruegger's methods, such as its core products, decor, fixtures, furnishings, and
maintenance. Under the franchise agreement, DFW Bagels is obligated to pay fees
to Bruegger's, including, but not limited to, a $20,000 franchise fee upon the
opening of each bagel bakery. In the event the Company fails to comply with
certain terms of the Bruegger's Development Agreement or of the franchise
agreement with respect to a specific restaurant, Bruegger's has the right to
terminate the applicable agreement. In May 1996, Bruegger's was acquired by
Quality Dining, Inc., a publicly held corporation ("Quality Dining").
5
<PAGE>
As a result of a dispute between the Company and Bruegger's with respect to
whether Bruegger's had the right to consent to issuances of securities by
Ciatti's and a right of first refusal to purchase securities of Ciatti's, the
Company commenced litigation against Quality Dining and Bruegger's in November
1996 in United States District Court for the District of Minnesota. Quality
Dining and Bruegger's counterclaimed and the parties conducted discovery. In
April 1997, in connection with the settlement of the lawsuit, Ciatti's and
Bruegger's entered into a Settlement Agreement. Under the terms of the
Settlement Agreement, Bruegger's agreed to extend the dates on which the Company
was required to complete the opening of certain bagel bakeries under the
Bruegger's Development Agreement, and the Company and DFW Bagels agreed to enter
into certain indemnification and license arrangements with Bruegger's. The
parties also agreed that Bruegger's would have no right of first refusal to
purchase securities of Ciatti's so long as Ciatti's remained a publicly held
corporation and that Bruegger's would have no right of consent for certain
issuances of securities by Ciatti's, including any issuance of securities by
Ciatti's (i) if the issuance does not result in the acquisition of over 40% of
the voting power of any class of securities of Ciatti's after the completion of
the issuance by any shareholder (other than Phillip R. Danford or L.E. "Dan"
Danford, Jr.) who previously held less than 40% of the voting power of such
securities and (ii) such issuance does not result in Phillip R. Danford and L.E.
"Dan" Danford, Jr. collectively owning less than 10% of the voting power of all
classes of securities of Ciatti's. In order to ensure that no shareholder (other
than Phillip R. Danford or L.E. "Dan" Danford, Jr.) acquires more than 40% of
the Company's Common Stock as a result of this Offering, the Company will have
the right to reject any subscription if, in the Company's judgment, such
purchase will violate the provisions of the Bruegger's Development Agreement. On
May 12, 1997, Quality Dining announced that its Board of Directors approved a
plan to divest its Bruegger's bagel-related businesses. The Company does not
know when this divestiture will occur or what effect, if any, this divestiture
will have on the Company. See "Business - Relationship with Bruegger's and
Quality Dining."
Need to Establish Market Penetration in Dallas-Fort Worth Area
Experience obtained from industry sources demonstrates that the
profitability of any individual bagel bakery often depends to a high degree on
the penetration of a particular market by the bagel bakery operator. The Company
assumes that individual bagel bakeries will typically become profitable only
after the Company has opened a number of bagel bakeries sufficient to make the
franchise name well-known in that market. The Company estimates that in the
Dallas-Fort Worth area the minimal number of bagel bakeries needed for such
penetration is between twelve and twenty. If the Company is unable to achieve
this level of penetration, its ability to achieve profitability may be affected.
The Company's bagel bakeries are averaging sales of $8,000 per week. The Company
believes its bagel bakeries will generate positive cash flow when they reach
average sales of $11,000 per week and will become profitable when they achieve
average sales of $12,000 per week. Although the Company believes that the
proceeds from this Offering will enable it to build the additional bagel
bakeries necessary for it to achieve the sales levels necessary to achieve
positive cash flow and profitability of its bagel bakeries, there can be no
assurance that the Company will be able to achieve such sales levels. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Statement Regarding Future Profitability of the Company's Bagel
Bakeries."
Need for Additional Capital
Under the Bruegger's Development Agreement, the Company is required to open
a total of thirty bagel bakeries prior to July 1, 2001. The Company estimates
that it will cost approximately $370,000 for the capital expenditures and
initial franchise fee for each location. In addition, the Company estimates it
will cost approximately $500,000 for the construction of a commissary where the
Company would prepare fresh dough and other products for its bagel bakeries. The
Company plans to build the commissary in fiscal 1998 if the proceeds from this
Offering are adequate. Although the Company is conducting this Offering to raise
funds for the development of these bagel bakeries, there can be no assurance
that the Company will be successful in this Offering.
Guarantee of Subsidiary's Leases by Ciatti's, Inc.
Although the Company's wholly-owned subsidiary, DFW Bagels, is the
developer and operator of the Company's bagel bakeries, Ciatti's, Inc. has
guaranteed certain of the leases entered into by DFW Bagels. If DFW Bagels were
to default on these leases, and the assets of DFW Bagels were otherwise
insufficient to satisfy these obligations, the landlords would have a claim
against Ciatti's and its assets.
The Competitive Restaurant and Food Service Industry
The restaurant and food service industry is highly competitive and
fragmented. There are numerous restaurants and other food service operations
that compete directly and indirectly with the Company. Many of these entities
have significantly greater financial resources and higher total sales volume
than the Company. The restaurant business is often
6
<PAGE>
affected by changes in consumer taste and discretionary spending priorities,
national, regional and/or local economic conditions, demographic trends,
consumer confidence in the economy, traffic patterns, weather conditions,
employee availability, and the type, number and location of competing
restaurants. Any change in these factors could adversely affect the Company. In
addition, factors such as inflation and increased food, labor and other employee
compensation costs could adversely affect the Company. In the Dallas-Fort Worth
area, the Company expects to encounter competition from Einstein Bagels and
Bagel Boulevard, as well as a number of local, owner-operated bagel shops that
in many cases have developed a loyal local clientele. See "Business."
Borrowing from Affiliate
In order to finance certain working capital requirements, the Company has
borrowed an aggregate of $100,000 from L.E. "Dan" Danford, Jr., the Chairman of
the Board of Directors of the Company. See "Certain Transactions." The Company
anticipates that it may borrow additional funds from Mr. Danford in the future.
There are, however, no guarantees that funds will be available from Mr. Danford
when needed by the Company.
Increases in Food Costs
The Company's profitability is dependent on its ability to anticipate and
react to changes in food costs. Various factors beyond the Company's control,
including climatic changes, may affect food costs. While in the past management
has been able to anticipate and react to increasing food costs through
purchasing practices and price adjustments, there can be no assurance that it
will be able to do so in the future.
Control by Directors, Executive Officers and Affiliates
The Company's directors, executive officers and members of their families
currently beneficially own 59.6% of the Company's outstanding Common Stock
immediately prior to this Offering. One of these shareholders, L.E. "Dan"
Danford, Jr., the Chairman of the Board of Directors of the Company, has
indicated that he intends to buy additional shares in this Offering subject to
the Company otherwise achieving the minimum. As a result, these shareholders
currently exercise and are expected to continue to exercise influence and, if
acting together, control all matters requiring approval by the shareholders of
the Company, including the election of directors, approval of amendments to the
Company's Articles of Incorporation and approval of mergers or other business
combination transactions. Such control by existing shareholders could have the
effect of delaying, deferring or preventing a change in control of the Company.
Local Food Tastes
The bagel concept has become successful in many parts of the United States,
but is new in the South. Although the Company believes that bagels can be
successfully introduced to the Company's development area as it has been done in
other metropolitan areas of the country, there can be no assurances that this
effort will be successful in Texas.
Labor Costs, Availability of Employees
Similar to its Italian and steakhouse restaurants, the Company needs to
hire essentially unskilled workers for each bagel bakery, although fewer workers
are required for a bakery compared to a full service restaurant. While the
Company pays wages higher than the statutory minimum wage in every bagel bakery,
the minimum wage nevertheless has a direct proportionate impact on the actual
wages the Company is required to offer to compete for available employees. Any
increases mandated by state or federal laws, such as those that became effective
October 1, 1996, may have a negative impact on the Company's profitability
because, in most instances, competition with other restaurants does not allow
such increases to be passed on to the customer.
Costs of Construction Materials
The construction of any bagel bakery involves several building materials,
such as construction-grade and furniture-grade lumber, stainless steel, and
plastic laminates, which are highly sensitive to nationwide price fluctuations.
Any significant price increases of such materials will increase the construction
costs of any bakery and will consequently have an adverse effect on its
profitability.
Reliance on Commissary of Third Party
Currently, the Company obtains its shaped bagel dough, as well as other
food supplies through the commissary of another Bruegger's operator in Austin,
Texas. Based upon industry information, the Company does not consider it
7
<PAGE>
economically advantageous to invest in the construction of its own commissary
until it has opened approximately ten to fifteen of its own bagel bakeries,
which the Company expects to occur in fiscal 1998. While the current arrangement
represents the most cost effective way of obtaining bagel dough and other
supplies, an unscheduled interruption of the Austin commissary, which is not
under the control of the Company, would have a severe and immediate impact on
the continuation of the Company's business in Dallas-Fort Worth, Texas.
Government Regulation
The Company's business is subject to extensive state and local government
regulation in the various jurisdictions in which its full service and bagel
bakeries are located, including regulations relating to alcoholic beverage
control, public health and safety and fire codes. The failure to obtain or
retain required licenses could adversely affect the operation of the Company's
restaurants. While the Company has not experienced, and does not anticipate any
problems in obtaining required licenses, permits or approvals, any difficulties,
delays or failures in obtaining such licenses, permits or approvals could delay
or prevent the opening of a restaurant in a particular area. Although the
federally mandated wage increases, which became effective October 1, 1996, have
not had a significant impact on the Company's financial results, additional
increases in state or federal minimum wage requirements or changes in applicable
state law with respect to minimum wages for "tipped" employees may have an
adverse impact on the Company. See "Business -Government Regulation."
Continued Inclusion on Nasdaq SmallCap Market
Under the Rules of the Nasdaq SmallCap Market, an issuer must maintain
shareholders' equity of at least $1,000,000. At March 30, 1997, the end of the
third quarter of its fiscal year, the Company had shareholders' equity of
$1,270,000. The Company expects to incur a net loss of approximately $664,000
(unaudited) in the fourth quarter of fiscal 1997. As a result, its shareholders'
equity as of June 29, 1997 will be approximately $606,000 (unaudited), which is
less than the minimum required for continued inclusion on the Nasdaq SmallCap
Market. Although the results of this Offering, assuming the minimum number of
Units are sold, will be sufficient to enable the Company to satisfy the SmallCap
requirements, there can be no assurance that Nasdaq will grant the Company an
exemption to continue to be quoted on the Nasdaq system pending completion of
this Offering. If the Company is unable to achieve the minimum or Nasdaq denies
the Company's application for continued quotation on the Nasdaq SmallCap Market
pending completion of the Offering, the Company expects that its securities will
trade in the over-the counter market or through the Nasdaq Bulletin board, which
may have an adverse effect on the liquidity of the Company's securities.
In addition, the Nasdaq has proposed to increase the requirements for
listing and continued inclusion on the SmallCap Market. Although it is unclear
as to if and when the SEC would approve the Nasdaq's proposal, the Company would
be required to meet any new requirements for continued inclusion on the SmallCap
Market.
Additional Indebtedness
Subsequent to March 29, 1997, the Company has incurred additional
indebtedness in the amount of $566,500 from the general contractor and equipment
vendors that constructed certain of the Company's bagel bakeries in the Dallas
Fort-Worth area. In addition, through July 31, 1997, the Company has raised
approximately $200,000 from its Note Offering. The Company intends to repay the
general contractor and equipment vendors from the proceeds of this Offering. If
the Company is unable to successfully raise funds from this Offering, it may be
necessary for it to obtain other means of financing to repay the general
contractor and equipment vendors. Although the Company believes that it will be
able to secure the necessary financing, there can be no assurances that the
Company will be successful in such efforts.
8
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from this Offering are expected to be
$1,925,000 if the minimum number of Units offered hereby are sold and $6,675,000
if the maximum number of Units offered hereby are sold, after payment of all
legal, accounting, and filing fees and miscellaneous expenses related to the
Offering (estimated at approximately $75,000).
The Company is issuing these Units to raise working capital, including
additional capital to expand the number of bagel bakeries owned and operated by
DFW Bagels in the Dallas-Fort Worth area. Under the Development Agreement, DFW
Bagels must have nine bagel bakeries open by January 1, 1998 and thirty bagel
bakeries open by July 1, 2001. In addition to expanding the number of bagel
bakeries, the Company may use some of the capital raised to construct a
commissary to supply fresh dough and other products to its bagel bakeries. The
Company may also use part of any capital raised for major remodeling and
updating of some of its Italian restaurants, as well as for other general
business purposes. If the Company decides to pursue a strategy of building bagel
bakeries at a rate faster than that required by the Development Agreement, it
may need funds in addition to those generated from this Offering. In such event,
the Company will attempt to raise additional funds through debt or equity
offerings. If the Company is unable to successfully raise funds from this
Offering or otherwise in a timely manner, it may be necessary for it to raise
additional capital through other means of financing. Although the Company
believes that it will be able to secure the necessary capital, there can be no
assurances that the Company will be successful in such efforts. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
The following table sets forth the anticipated use of the net proceeds from
this Offering assuming the minimum and maximum number of Units are sold:
<TABLE>
<CAPTION>
Minimum Maximum
------- -------
<S> <C> <C>
Construction of new bagel bakeries, including
franchise fee $1,110,000 $4,440,000
Payment of short-term indebtedness 566,500 566,500
Construction of commissary --- 500,000
Advertising and promotion for bagel bakeries 200,000 200,000
Working capital 48,500 968,500
---------- ----------
$1,925,000 $6,675,000
========== ==========
</TABLE>
The above amounts and categories for use of the proceeds of this Offering
represent management's best estimate based upon current conditions and
assumptions as to anticipated levels of investment among the foregoing
categories. Although no material changes are contemplated in the proposed use of
proceeds, the Company reserves the right to adjust such amounts by reason of
business conditions existing at the time of expenditure.
Pending application of the proceeds of the Offering, the proceeds will be
invested in short-term liquid securities.
9
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is currently traded on the Nasdaq SmallCap
Market under the symbol "CIAT." The following table sets forth the range of
high and low prices for the Company's Common Stock on the Nasdaq SmallCap
Market for fiscal 1996 and 1997. The prices listed below indicate inter-
dealer prices without retail mark up, mark down or commissions. They may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
Fiscal Year Low High
--- ----
<C> <S> <C> <C>
1996 First Quarter $3.75 $5.00
Second Quarter 4.00 6.125
Third Quarter 4.25 6.25
Fourth Quarter 2.75 5.25
1997 First Quarter $3.50 $5.00
Second Quarter 2.50 4.00
Third Quarter 2.50 2.50
Fourth Quarter 2.25 2.25
1998 First Quarter (through July 31, 1997) $2.00 $2.25
</TABLE>
The closing bid and ask prices for the Company's Common Stock as reported
on the Nasdaq SmallCap Market on July 31, 1997 were $2.00 and $2.25,
respectively. As of August 1, 1997, the Company had 79 shareholders of record,
plus an additional 386,950 shares held by depository institutions for an
undetermined number of additional shareholders. The total number of outstanding
shares was 742,819.
The Company has not paid cash dividends on its Common Stock in the past and
does not intend to pay cash dividends in the foreseeable future.
10
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the fiscal years
ended June 28, 1992, June 27, 1993, July 3, 1994, July 2, 1995 and June 30,
1996 has been derived from audited financial statements of the Company for the
fiscal years then ended. The selected consolidated financial data for the
thirty-nine weeks ended March 31, 1996 and March 30, 1997 has been prepared by
the Company without audit. Results from interim periods are not necessarily
indicative of the full fiscal year. This data should be read in conjunction
with the consolidated financial statements, related notes and other financial
information, included or incorporated by reference, elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
Consolidated Statement of Operations Data
(in thousands, except share and per share data)
39 weeks ended
Fiscal year (1) ------------------
-------------------------------------------- Mar. 31, Mar. 30,
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Sales
Full-service restaurants $20,935 $22,359 $22,969 $18,935 $16,962 $12,787 $11,789
Bagel bakeries - - - - 627 331 1,351
------- ------- ------- ------- ------- ------- -------
Total sales 20,935 22,359 22,969 18,935 17,589 13,118 13,140
Cost of food and beverage 6,275 6,760 6,848 5,781 5,191 3,857 3,998
------- ------- ------- ------- ------- ------- -------
Gross profit 14,660 15,599 16,121 13,154 12,398 9,261 9,142
Restaurant operating expenses
Labor and benefits 7,034 7,590 7,383 6,266 6,145 4,536 4,691
Direct and occupancy 6,348 7,001 7,039 5,722 6,375 4,666 4,746
------- ------- ------- ------- ------- ------- -------
Total restaurant and operating expenses 13,382 14,591 14,422 11,988 12,520 9,202 9,437
General and administrative 1,071 1,173 1,347 1,054 1,305 823 932
Impairment of assets write-down - - - - 78 - 640
------- ------- ------- ------- ------- ------- -------
1,071 1,173 1,347 1,054 1,383 823 1,572
------- ------- ------- ------- ------- ------- -------
Earnings (loss) from operations 207 (165) 352 112 (1,505) (764) (1,867)
Other income (expense), net (84) (70) 92 88 (18) 1 (47)
Income tax (expense) benefit (92) (107) (134) (6) 160 102 9
------- ------- ------- ------- ------- ------- -------
Net earnings (loss) $ 31 $ (342) $ 310 $ 194 $(1,363) $ (661) $(1,905)
======= ======= ======= ======= ======= ======= =======
Net earnings (loss) per common and
common equivalent share $ 0.04 $ (0.42) $ 0.40 $ 0.25 $ (1.85) $ (0.90) $ (2.56)
======= ======= ======= ======= ======= ======= =======
Weighted average number of common and
common equivalent shares outstanding 813,315 805,118 769,586 763,226 736,917 734,950 742,819
Consolidated Balance Sheet Data (at end of period)
(in thousands)
Fiscal year (1)
---------------------------------------------------- Mar. 30,
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
Current assets $1,610 $2,308 $2,763 $2,713 $2,184 $ 760
Current liabilities 2,081 2,219 2,201 1,969 2,569 2,199
Total assets 8,318 7,899 7,206 7,684 6,652 4,276
Long-term obligations, less
current maturities 1,706 1,491 655 1,179 907 807
</TABLE>
(1) The Company's fiscal year ends on the Sunday closest to June 30.
Fiscal 1994 was a fifty-three week year while fiscal 1992, 1993, 1995 and 1996
were fifty-two week years.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus, including the information set forth in this section and
the information incorporated by reference herein, contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Actual results could
differ significantly from those projected in the forward-looking statements as
a result, in part, of the risk factors set forth in this Prospectus. In
connection with the forward-looking statements which appear in these
disclosures, prospective purchasers of the Units offered hereby should
carefully review the factors set forth in this Prospectus under "Risk
Factors."
Results of Operations
The following sets forth certain financial data expressed as a percentage
of sales for the fiscal years ended June 28, 1992, June 27, 1993, July 3,
1994, July 2, 1995 and June 30, 1996 and the thirty-nine weeks ended March 31,
1996 and March 30, 1997. Fiscal 1994 was a fifty-three week year while fiscal
1992, 1993, 1995 and 1996 were fifty-two week years.
<TABLE>
<CAPTION>
39 weeks ended
Fiscal year ----------------
---------------------------------------------- Mar. 31, Mar. 30,
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Sales
Full-service restaurants 100.0% 100.0% 100.0% 100.0% 96.4% 97.5% 89.7%
Bagel bakeries - - - - 3.6% 2.5% 10.3%
----------------------------------------------------------------------
Total sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of food and beverage 30.0% 30.2% 29.8% 30.5% 29.5% 29.4% 30.4%
----------------------------------------------------------------------
Gross profit 70.0% 69.8% 70.2% 69.5% 70.5% 70.6% 69.6%
Restaurant operating expenses
Labor and benefits 33.6% 33.9% 32.1% 33.1% 34.9% 34.6% 35.7%
Direct and occupancy 30.3% 31.3% 30.7% 30.2% 36.2% 35.5% 36.1%
----------------------------------------------------------------------
Total restaurant and operating expenses 63.9% 65.2% 62.8% 63.3% 71.1% 70.1% 71.8%
General and administrative 5.1% 5.3% 5.9% 5.6% 7.5% 6.3% 7.1%
Impairment of assets write-down - - - - 0.4% - 4.9%
----------------------------------------------------------------------
5.1% 5.3% 5.9% 5.6% 7.9% 6.3% 12.0%
----------------------------------------------------------------------
Earnings (loss) from operations 1.0% (0.7%) 1.5% 0.6% (8.5%) (5.8%) (14.2%)
Other income (expense), net (0.4%) (0.3%) 0.4% 0.4% (0.1%) - (0.3%)
Income tax (expense) benefit (0.5%) (0.5%) (0.6%) - 0.9% 0.8% -
----------------------------------------------------------------------
Net earnings (loss) 0.1% (1.5%) 1.3% 1.0% (7.7%) (5.0%) (14.5%)
======================================================================
</TABLE>
Comparison of Thirty-nine Weeks Ended March 30, 1997 to Thirty-nine Weeks
Ended March 31, 1996
Sales. Consolidated sales of $13,139,917 for the first thirty-nine weeks
of fiscal 1997 increased $21,899, or 0.2%, from consolidated sales of
$13,118,018 reported during the first thirty-nine weeks of fiscal 1996. The
increase in consolidated sales during fiscal 1997 was due to a decline in
sales at the Company's full-service restaurants offset by an increase in sales
at the Company's bagel bakeries, as described below.
Full-service restaurant sales of $11,789,394 for the first thirty-nine
weeks of fiscal 1997 decreased 7.8% from sales of $12,787,315 for the same
period of fiscal 1996. This decrease in full-service restaurant sales was
due, in part, to the Company closing its Glendale, Wisconsin restaurant on
September 8, 1996. After adjusting for the sale of this restaurant, year-to-
date same store full-service restaurant sales were down $463,260, or 3.8%,
when compared to the same period of last year. The Company believes the
extensive advertising campaign entered into during the third quarter of this
year will have a positive influence on full-service restaurant sales.
However, the continued competitiveness of the full-service restaurant industry
may make sales increases difficult to achieve.
12
<PAGE>
Bagel bakery sales of $1,350,523 for the first thirty-nine weeks of
fiscal 1997 increased $1,019,820, or 308.4%, over bagel bakery sales of
$330,703 for the same period of fiscal 1996. This increase in bagel bakery
sales was primarily a function of the Company having five bagel bakeries open
as of March 30, 1997, while only having three bagel bakeries open as of March
31, 1996. The Company is required by the Bruegger's Development Agreement to
have nine stores open by January 1, 1998 and thirty stores open by July 1,
2001.
Cost of Food and Beverage. Cost of food and beverage as a percentage of
sales increased 30.4% for the first thirty-nine weeks of fiscal 1997 from
29.4% for the same period of fiscal 1996. The increase in the cost of food
and beverage for the first thirty-nine weeks of fiscal 1997 was primarily due
to increases, during the first two quarters of this fiscal year, in the costs
of selected products at the Company's full-service restaurants without
corresponding menu price increases. The Company believes that its new menu at
its full-service restaurants, which was implemented during the second and
third quarters of fiscal 1997, has allowed the Company to stabilize the cost
of food and beverage and does not expect the cost of food and beverage to
increase significantly in the future.
Labor and Benefits. Labor and benefit costs as a percentage of sales
increased to 35.7% for the first thirty-nine weeks of fiscal 1997 compared to
34.6% during the same period of last year. The increase in labor and benefits
costs as a percent of sales for the first thirty-nine weeks of fiscal 1997 was
mainly due to increases in labor and benefit costs as a percentage of sales at
the Company's full-service restaurants during the first and second quarters of
this fiscal year. The Company believes that the introduction of a new menu at
its full-service restaurants has helped the Company stabilize its labor and
benefit costs and does not expect these costs to increase significantly in the
future.
Although the federally mandated minimum wage increases, which became
effective October 1, 1996, have not had a significant impact on the Company's
financial results, additional increases in state or federal minimum wage
requirements or changes in applicable state law with respect to minimum wages
for "tipped" employees may have an adverse impact on the Company.
Direct and Occupancy. Direct and occupancy costs increased to 36.1% of
sales for the first thirty-nine weeks of fiscal 1997 compared to 35.5% of
sales during the same period of last year. The increase in direct and
occupancy costs as a percentage of sales was due primarily to fixed costs such
as rent and depreciation at the Company's bagel bakeries being spread across a
small sales base. If sales at the Company's bagel bakeries increase in the
future, these fixed costs will decrease as a percentage of sales.
Offsetting the increase in direct and occupancy costs as a percentage of
sales at the Company's bagel bakeries was a decrease in direct and occupancy
costs at the Company's Italian and steakhouse restaurants. This decrease was
mainly due to a reduction in advertising and promotion expense to 2.6% of
full-service restaurant sales during the first thirty-nine weeks of fiscal
1997 from 3.5% of full-service restaurant sales in the first thirty-nine weeks
of fiscal 1996. The Company expects its advertising and promotion costs to
increase to approximately 4.0% of sales for the remainder of fiscal 1997 as
the phases of the Company's new advertising plan are implemented.
The Company also expects to spend approximately 4.0% of bagel bakery
sales for advertising and promotion expenses in order to implement several
direct mailing and local store marketing campaigns in the Dallas-Fort Worth
area.
General and Administrative. General and administrative costs increased
to 7.1% of sales for the first thirty-nine weeks of fiscal 1997 compared to
6.3% of sales for the same period of last year. The increase in general and
administrative costs was primarily due to increases in general and
administrative expenses at the Company's bagel bakeries. The Company incurred
approximately $156,000 of additional general and administrative costs related
to operating additional bagel bakeries in the first thirty-nine weeks of
fiscal 1997.
Impairment of Assets Write-down. During the second quarter of fiscal
1997, the Company recognized an impairment loss of $640,286 for the long-lived
assets at its Madison, Wisconsin restaurant. During this time period, a major
national competitor opened a steakhouse restaurant in close proximity to the
Company's restaurant. The competitor's restaurant has the Company's
restaurant out-positioned in the market area, and sales at the Company's
restaurant have suffered due to the opening of this restaurant. In addition,
the Company attempted several advertising and promotional campaigns during the
first twenty-six weeks of fiscal 1997 that did not produce the results
management expected. Based on these items, management revised its forecasts
for this restaurant and projected operating losses and cash flow deficits for
the remainder of the restaurant's lease, which expires in 2005. Accordingly,
the Company has fully written off the long-lived assets at this restaurant.
13
<PAGE>
Other Income (Expense), Net. Other income (expense) decreased to a net
expense of $47,007 for the first thirty-nine weeks of fiscal 1997 from a net
income of $1,037 during the same period of last year. This decrease in other
income (expense) was primarily due to a decrease in investment income in
fiscal 1997 as a result of fewer funds available for investment. In addition,
interest expense increased during fiscal 1997 due to the additional debt
financing that was arranged during the fourth quarter of fiscal 1996.
Income Tax Expense (Benefit). For the first thirty-nine weeks of fiscal
1997 the Company recorded an income tax benefit of $8,883 as compared to an
income tax benefit of $102,750 for the same period of last year. The fiscal
1996 tax benefit recorded was limited to the amount of taxes recoverable from
the carryback of losses; there was no tax benefit recorded for the
carryforward of losses generated in the first thirty-nine weeks of fiscal
1997. The Company's fiscal 1997 tax benefit was due to the receipt of state
and federal income taxes in excess of the amount recorded as an income tax
receivable as of June 30, 1996. The fiscal 1997 tax benefit was offset by
$5,700 of state and franchise taxes during the period.
As of March 30, 1997, the Company has $144,000 of alternative minimum tax
credit carryforwards and $1,824,000 of net operating loss carryforwards.
These tax carryforwards may only be utilized against future earnings and there
is no assurance that the Company will realize these benefits. The utilization
of these carryforwards may be limited if there are significant changes in the
ownership of the Company.
Seasonality. The Company's highest sales from its Italian and steakhouse
restaurants have historically occurred during the months of July through
December. The Company is currently unable to determine whether the operation
of its bagel bakeries will result in any change in its seasonality.
Effects of Inflation. Inflationary factors such as increases in food and
labor costs directly affect the Company's operations. Because most of the
Company's employees are paid hourly rates related to federal and state minimum
wage and tip credit laws, changes in these laws may result in an increase in
the Company's labor costs. The Company cannot always implement immediate
price increases to offset higher costs, and no assurance can be given that the
Company will be able to do so in the future.
Comparison of Year Ended June 30, 1996 to Year Ended July 2, 1995
Sales. Sales for fiscal 1996 decreased $1,345,904, or 7.1%, to
$17,589,187 from fiscal 1995 sales of $18,935,091. The decrease in sales was
primarily due to the increased competition of national chain restaurants in
each of the markets in which the Company's Italian and steakhouse restaurants
operate. In addition, the Minneapolis, Minnesota restaurant, which was closed
on December 24, 1994, contributed approximately six months of additional sales
to fiscal 1995.
Offsetting the decrease in sales by the Company's Italian and steakhouse
restaurants was the opening of four bagel bakeries during fiscal 1996. These
stores were opened in the Dallas-Forth Worth area during the last nine months
of fiscal 1996.
Cost of Food and Beverage. The cost of food and beverage was 29.5% of
sales in fiscal 1996. These costs were down significantly from the 30.5% of
sales reported in fiscal 1995 due to the Company changing its food vendor in
order to take advantage of lower pricing.
Labor and Benefits. Labor and benefit costs were 34.9% of sales in
fiscal 1996, an increase from the 33.1% of sales reported in fiscal 1995.
This increase in labor and benefit costs as a percent of sales was primarily
due to decreased sales at the Company's Italian restaurants. In addition, the
Company incurred higher labor and benefit costs as a percentage of sales
during the early phase of operating its new bagel bakeries.
Direct and Occupancy. Direct and occupancy costs primarily include
individual restaurant advertising, promotion, supplies, utilities, occupancy
and depreciation expenses. These costs were 36.2% of sales in fiscal 1996, an
increase from the 30.2% reported in fiscal 1995. This increase was due to the
following three reasons. First, the Company increased its advertising and
promotion costs from 2.3% of sales during fiscal 1995 to 3.6% of sales in
fiscal 1996. Second, lower sales levels caused fixed costs such as occupancy
and depreciation to be spread over a smaller sales base, thus significantly
increasing those respective percentages as compared to sales. Third, the
Company incurred significant costs related to the start-up of its bagel
bakeries.
General and Administrative. General and administrative costs increased
to 7.5% of sales for fiscal 1996, up from the 5.6% of sales reported in fiscal
1995. This increase was primarily due to the Company recording a reserve of
$147,368 for the entire balance of an outstanding note receivable related to
the closing of its Milwaukee, Wisconsin, restaurant.
14
<PAGE>
Impairment of Assets Write-down. During the fourth quarter of fiscal
1996, the Company resolved to close its Italian restaurant located in
Glendale, Wisconsin, effective September 8, 1996. Accordingly, the Company
recorded a $77,691 charge during the fourth quarter of 1996 to reduce the cost
of the assets at this location by the excess of the cost over the accumulated
depreciation and amortization.
Other Income (Expense), Net. Other income (expense) decreased to a net
expense of $17,601 in fiscal 1996 from a net income of $87,854 in fiscal 1995.
The Company's interest expense increased to $92,634 in fiscal 1996 from
$68,295 in fiscal 1995 as a result of higher debt in 1996 due to the
construction of the Company's bagel bakeries in the Dallas-Fort Worth area.
The Company's investment income decreased to $59,526 in fiscal 1996 from
$77,469 in fiscal 1995 primarily as a result of fewer funds available for
investment. In addition, other income decreased to $15,507 in fiscal 1996
from $78,680 in 1995 as 1995 included a gain of $55,000 from the closure of
the Company's Minneapolis, Minnesota restaurant.
Income Tax Expense (Benefit). The income tax benefit for fiscal 1996 was
$160,000 as compared to income tax expense of $6,000 in fiscal 1995. The
income tax benefit recorded was limited to the amount of taxes recoverable
from a carryback of the current year loss; there was no tax benefit recorded
for the effect of the carryforward of losses generated in fiscal 1996. As of
June 30, 1996 the Company has $144,000 of alternative minimum tax credit
carryforwards and $559,000 of net operating loss carryforwards.
Liquidity and Capital Resources
At March 30, 1997 the Company had cash and cash equivalents on hand of
$227,297, which represents a decrease of $1,375,639 from the $1,602,936 in
cash and cash equivalents reported as of June 30, 1996. Net cash used in
operating activities was $846,145 for the first thirty-nine weeks of fiscal
1997. In addition to the net loss of $1,904,889, the Company reduced its
accounts payable balance by $395,646 during the first thirty-nine weeks of
fiscal 1997. The reduction in the Company's accounts payable balance related
primarily to payments made to vendors of $215,816 for capital expenditures for
the Company's fourth bagel bakery. These uses of cash were partially offset
by non-cash depreciation expenses of $726,977 and an impairment of assets
write-down of $640,286. In addition, the Company received proceeds from an
income tax receivable of $165,576, and had increases in other accrued
liabilities of $111,456.
Net cash used in investing activities was $415,794 during the first
thirty-nine weeks of fiscal 1997. This cash was used primarily for purchases
of equipment and leasehold improvements for the Company's fifth bagel bakery
in the Dallas-Fort Worth area.
Net cash used in financing activities was $113,700 for the first thirty-
nine weeks of fiscal 1997. The net cash used in financing activities is the
net of repayments of amounts due under the Company's debt financing of
$163,700 and proceeds of borrowings from the Chairman of the Board of
Directors of the Company of $50,000.
DFW Bagels, Inc. ("DFW Bagels"), a wholly-owned subsidiary of Ciatti's,
Inc., entered into a Development Agreement with Bruegger's Franchise
Corporation ("Bruegger's) effective January 1, 1995. This agreement, as
amended in April 1997, requires DFW Bagels to build thirty bagel bakeries by
July 1, 2001. During fiscal 1996, four bagel bakeries were built, thus
meeting the initial terms of this agreement. During fiscal 1997, three
additional bagel bakeries were opened. DFW Bagels is required to open two
additional bagel bakeries by January 1, 1998. As of August 1, 1997, DFW
Bagels will open one additional bagel bakery in August 1997 and has entered
into lease agreements for four additional bagel bakery sites. The Company
intends, however, to open bagel bakeries at a faster rate than that obligated
under the Bruegger's Development Agreement, subject to available financing.
The Company believes each new site will require approximately $370,000 for
capital expenditures, including the initial franchise fee.
In June 1997, the Company commenced a Note Offering of $2,000,000 in one
and three year notes. Through July 31, 1997, the Company had raised
approximately $200,000 in the offering.
The Company plans to finance its working capital and capital resource
needs with its current cash, future cash generated from operations, proceeds
from its current and future debt and equity financing. In addition, during
the third and fourth quarters of fiscal 1997, the Company borrowed $100,000
from the Chairman of the Board of Directors of the Company and may borrow
additional amounts. See "Certain Transactions." In addition, in connection
with its construction of its bagel bakeries, the Company has relied upon
financing from its general contractor and equipment vendors in the aggregate
amount of $566,500. The Company intends to pay this amount from the proceeds
of this Offering. The Company believes that these sources will be sufficient
to enable it to satisfy its working capital needs for the next twelve months.
If the Company decides to pursue a strategy of building bagel bakeries at a
rate faster than that required by the Development Agreement, it may need funds
in addition to those generated from this Offering. In such event, the Company
will attempt
15
<PAGE>
to raise additional funds through debt or equity offerings. If the Company is
unable to successfully raise funds from this Offering in a timely manner, it
may be necessary for it to raise additional capital through other means of
financing. Although the Company believes that it will be able to secure the
necessary capital, there can be no assurances that the Company will be
successful in such efforts.
Statement Regarding Future Profitability of the Company's Bagel Bakeries
In order for the Company to achieve profitability of its Bruegger's Bagel
Bakeries in the Dallas-Fort Worth market, it will be necessary for it both to
increase the number of bagel bakeries that it has open and to increase the
sales per bagel bakery. As of July 1997, the Company's bagel bakeries in the
2,100 to 3,000 square foot range had achieved average sales of $8,000 per
week.
The Company believes that its bagel bakeries will generate positive cash
flow when they reach average sales of $11,000 per week and will become
profitable when they achieve average sales of $12,000 per week. Accordingly,
the Company needs to increase its average sales per bagel bakery by
approximately $3,000 per week to achieve positive cash flow and $4,000 per
week to achieve profitability.
There are some important factors that are needed for the Company to
achieve these results. First, the Company believes that it needs to achieve
penetration of between twelve and twenty stores before it can achieve these
sales levels. Second, the Company believes that it needs to increase its
advertising in the Dallas-Fort Worth area to approximately $15,000 per month.
Third, the Company must be able to continue to obtain products from a
Bruegger's commissary, whether owned by Bruegger's Corporation, another
Bruegger's franchisee or a Company owned commissary.
The Company is required under the Bruegger's Development Agreement to
have nine bagel bakeries open by January 1, 1998. As of August 1, 1997, the
Company has seven bagel bakeries open, will open an additional bagel bakery in
August 1997 and has signed leases for four additional bagel bakeries. The
Company is unable to commence construction of these leased spaces, however,
until it has attained additional funds. If the Company opens all of these
bagel bakeries, it would have twelve bagel bakeries which, it believes is the
minimum number needed to penetrate into this market.
Assuming that it receives the minimum proceeds of this Offering of $2.0
million, plus approximately $1.0 million from additional sources, including
equipment financing, the Company believes it can have twelve stores open by
the end of calendar 1997 and would have additional working capital to commence
an aggressive advertising campaign. If the Company is able to have twelve
stores open and raise sufficient working capital to commence the advertising
needed by the end of calendar 1997, the Company believes that it can achieve
average per bagel bakery sales of $11,000 per week by June 1998 and average
bagel bakery sales of $12,000 per week by June 1999. If the Company raises
more than the minimum proceeds from this Offering, it intends to build
additional stores in the Dallas-Fort Worth area. Although the Company believes
that it will be able to raise the minimum proceeds from this Offering, there
can be no assurances that the Company will be successful in its efforts.
16
<PAGE>
BUSINESS
General
The Company owns and operates ten full-service restaurants in Minnesota
and Wisconsin. Included in these full-service restaurants are nine Italian
restaurants operating in Minnesota and Wisconsin under the name "Ciatti's
Italian Restaurant" and one Steakhouse restaurant operating in Wisconsin under
the name "Spurs Steakhouse & Saloon". On January 1, 1995, DFW Bagels, Inc.
("DFW Bagels"), the wholly-owned subsidiary of the Company, entered into an
exclusive Area Development Agreement with Bruegger's Franchise Corporation to
develop bagel bakeries in the Dallas-Fort Worth area. As of August 1, 1997,
DFW Bagels is operating seven bagel bakeries in the Dallas-Fort Worth area.
The Company is conducting this Offering to raise working capital,
including additional capital to expand the number of bagel bakeries owned and
operated by DFW Bagels in the Dallas-Fort Worth area. Under the Bruegger's
Development Agreement, DFW Bagels must have nine bagel bakeries open by
January 1, 1998 and thirty bagel bakeries open by July 1, 2001. The Company
may also use part of any capital raised for major remodeling and updating of
some of its Italian restaurants, as well as for other business opportunities.
Restaurant Demographics
Full-Service Restaurants
------------------------
The Company currently operates eight Italian restaurants in Minnesota and
one Italian and one steakhouse restaurant in Wisconsin. The Company's Italian
and steakhouse restaurants range in size from 6,500 to 9,800 square feet. Each
seats between 70 and 100 customers in the lounge and between 110 and 220
customers in the dining area. Two of the Company's restaurants have a meeting
room/banquet facility and some of the Company's restaurants also offer outdoor
patio dining on a seasonal basis.
The following table sets forth the opening date and square footage of the
Company's full-service restaurants:
<TABLE>
<CAPTION>
Approximate
Date Opened Location Square Footage
----------- -------- --------------
<S> <C> <C>
September, 1984 Saint Paul, Minnesota 8,600
February, 1985 Madison, Wisconsin 9,800
November, 1987 Falcon Heights, Minnesota 7,000
November, 1988 Eden Prairie, Minnesota 7,800
June, 1989 Burnsville, Minnesota 7,800
February, 1990 Maplewood, Minnesota 7,800
November, 1990 St. Cloud, Minnesota 6,700
October, 1991 Edina, Minnesota 6,500
November, 1991 LaCrosse, Wisconsin 7,100
April, 1992 Woodbury, Minnesota 7,000
</TABLE>
The Saint Paul restaurant is located in an urban area. The Madison,
Falcon Heights, Eden Prairie, Burnsville, Maplewood, Edina and Woodbury
restaurants are located in suburban areas. The Saint Cloud restaurant is
located in a community of approximately 50,000 residents, 50 miles northwest
of the Minneapolis-Saint Paul metropolitan area and the LaCrosse, Wisconsin
restaurant is located in a community of approximately 50,000 residents, 90
miles southeast of the Minneapolis-Saint Paul metropolitan area. The actual
cost of opening an Italian or steakhouse restaurant, including leasehold
improvements, furniture, fixtures, and equipment and other pre-opening costs
has varied from $480,000 to $930,000 per restaurant.
The Company has not opened a Italian or steakhouse restaurant since April
1992 and has no plans to open any additional full-service restaurants in the
future.
Bagel Bakeries
--------------
As of August 1, 1997, DFW Bagels operates seven bagel bakeries in the
Dallas-Forth Worth area, is scheduled to open an additional bakery in August
1997 and has signed leases for an additional four bakeries. Generally, these
bagel bakeries range in size from 2,100 to 3,000 square feet and seat between
45 and 50 customers. Most bagel bakeries also offer a limited area for
outdoor patio dining. As a test, the Company opened a 520 square foot bagel
bakery as part of a service station/convenience store in Irving, Texas during
the last quarter of fiscal 1997. In the future, the Company plans to open
bagel bakeries ranging in size from 1,800 to 2,200 square feet.
17
<PAGE>
The following table sets forth the opening date and square footage of the
Company's bagel bakeries:
<TABLE>
<CAPTION>
Approximate
Date Opened Location Square Footage
----------- -------- --------------
<S> <C> <C>
October, 1995 Plano (Lancer's Square) 3,000
December, 1995 Plano (Shepard Place) 2,250
February, 1996 Dallas (Preston Center) 2,500
June, 1996 Fort Worth (Bowie) 2,130
November, 1996 Dallas (Preston Campbell) 2,200
April, 1997 Irving (Valley Ranch) 520
June, 1997 Fort Worth (Fossil Creek) 2,100
August, 1997 (estimated) University Park (Southern Methodist University) 2,300
</TABLE>
Restaurant Formats
Italian Restaurants
-------------------
The Company's restaurants have traditionally had an Italian format. The
Company's Italian restaurants serve appetizers, pizza, soups, salads,
sandwiches, pasta, chicken, seafood, bread and desserts, together with
alcoholic and non-alcoholic beverages. Menu items are prepared at each
restaurant pursuant to the Company's uniform recipes and ingredient
specifications.
The Company has traditionally designed the dining areas and lounges of
its Italian restaurants to convey an atmosphere of casual elegance. The
dining area of each restaurant features booths and individual tables with
either chairs or banquettes. Each restaurant differs in interior design and
decor, depending upon the location and nature of the space. The Company has
recently redesigned one of its restaurants to be a more informal, open-kitchen
style restaurant. Most restaurants accept reservations for a limited portion
of their dining area. The Company has lounge areas, which have full-service
liquor licenses, available in most restaurants for customers waiting to be
seated for dining. In most of the Company's restaurants, appetizers and other
menu items are available in the lounge as well as in the restaurant.
Each Italian restaurant employs a standardized menu with entree prices
ranging from $5.99 to $8.99 at lunch, and $7.99 to $14.99 at dinner. During
fiscal year 1996, food sales comprised approximately 77% and beverage sales
comprised approximately 23% of total sales.
The Company's Italian restaurants are typically open for lunch and dinner
daily during the year, except for Thanksgiving, Christmas Eve and Christmas
Day. Hours of operation may vary depending on local custom and customer
traffic. Menu service is normally available from 11:00 a.m. to 10:00 p.m.
(9:00 p.m. on Sunday). A Sunday brunch is served in some of the Minnesota
restaurants from 10:00 a.m. to 2:00 p.m. Each restaurant's lounge is
typically open from 11:00 a.m. until midnight (10:00 p.m. on Sundays). In
addition to in-restaurant dining, all of the menu items are available for
carry-out. Carry-out sales constitute a small portion of the Company's total
sales.
Steakhouse Restaurant
---------------------
In 1993, the Company converted its Madison, Wisconsin, Italian restaurant
into a Spurs Steakhouse & Saloon-restaurant. The Company's Steakhouse
restaurant has a more casual atmosphere than the Company's Italian
restaurants, with a menu that features a Texas theme, featuring a variety of
steaks, ribs, chicken, seafood, sandwiches, salads, soup and appetizers.
Prices at the steakhouse restaurant range from $4.99 to $17.95 and the hours
of operation are consistent with those of the Company's Italian restaurants.
Bagel Bakeries
--------------
The Company's bagel bakeries specialize in 12 varieties of freshly baked
bagels and branded cream cheeses, as well as freshly ground, premium branded
coffee which is brewed fresh every 19 minutes. Bruegger's bagels are unique
because certified bagel masters make the bagels by kettle-boiling them in malt
and water and then baking them in a stone hearth oven. In addition, each
bagel bakery offers deli-style bagel sandwiches, freshly-made soups, and other
food and beverage items. The bagel bakeries are open from approximately 6:30
a.m. to 7:00 p.m. each day, depending upon location, and offer both carry-out
and in-store dining.
The design and general lay-out of the Company's bagel bakeries is based
on plans and guidelines issued by Bruegger's. Bruegger's updated its plans
and designs for all bagel bakeries in 1995 and all of the Company's existing
bagel
18
<PAGE>
bakeries have been constructed following this new design. It is anticipated
that the new design will be the national standard for a number of years. The
Company's ability to make material changes to such design is limited and any
such change requires the written approval of Bruegger's. The new design and
ambiance is bright and clean looking, using materials to withstand heavy
customer use.
Bruegger's also issues standard plans for furniture, fixtures and
equipment ("FF&E"), including standard menu boards and art work. The Company,
similarly to other franchisees of Bruegger's, is required to equip each bakery
with such FF&E. In a number of cases, Bruegger's offers franchisees an option
to purchase major equipment from two different manufacturers.
Restaurant and Bakery Operations
The Company has established uniform operational standards for all of its
restaurants, which are maintained by each restaurant's management team in
accordance with the Company's manuals that emphasize quality of ingredients,
food preparation and presentation, maintenance of the restaurant premises and
employee training and conduct.
The Company's President supervises the operations of all restaurants with
the assistance of a Director of Operations for Full-Service restaurants and a
Director of Operations for bagel bakeries. Additionally, a Vice President for
Administration, a Corporate Controller and a Corporate Chef administer their
respective areas of responsibility at the corporate office.
Each restaurant normally employs a general manager and assistant
managers. General managers have primary responsibility for restaurant
operations, including customer relations, food service, cost control,
maintenance, personnel, implementation of Company policies and procedures, and
restaurant profitability. Assistant managers share day-to-day responsibility
for restaurant operations. The Company has a bonus program to compensate its
managers and assistant managers for achieving sales, service and profitability
goals.
Supervisory personnel visit each restaurant an average of one day a week.
During these visits each aspect of the restaurant's operations is scrutinized
to ensure that the restaurant is being operated in conformance with Company
policies and procedures and that the Company's high levels of customer service
are being maintained.
For its Italian restaurants, the Company periodically prepares and
revises menu items, recipes and lists of approved ingredients. Menu items,
recipes and the ingredients used in preparing them are chosen based upon
quality, cost and customer acceptance. Each restaurant's food and beverage
inventories and supplies are purchased by the general managers directly from
suppliers approved by the Company.
All supplier invoices are paid at the Company's home office after
approval by the appropriate general manager. The Company believes it has a
good working relationship with its suppliers. The Company limits the number
of its suppliers to take advantage of volume discounts, to achieve better
quality control and to simplify the purchasing process for the general
managers. Although the Company purchases a majority of its food ingredients
and restaurant supplies from a single distributor, which is not uncommon in
the restaurant industry, the Company believes that its food and beverage
supplies can be obtained from more than one supplier if any one supplier is
unable to meet the Company's demand or quality specifications.
The Company maintains centralized financial and accounting controls for
its restaurants. Restaurant and bakery personnel are required to report sales
and deposit information to the Company on a daily basis. On a weekly basis,
general managers complete and forward to the Company a food and liquor
inventory, supplier invoices, payroll reports and other various information.
Restaurant Development
Bagel Bakeries
--------------
Effective January 1, 1995, the Company entered into the Bruegger's
Development Agreement. Bruegger's, which was acquired in May 1996 by Quality
Dining, Inc., has aggressively expanded its franchise system to most major
markets of the country. Bruegger's has indicated that its objectives are to
establish the Bruegger's brand as the leading, most recognized brand in the
bagel industry, to enhance Bruegger's existing position as the largest chain
of fresh bagel bakeries in the United States and to be the industry leader in
the markets it enters. As of May 11, 1997, Bruegger's, directly or through
franchises, operated in 52 metropolitan markets in 32 states. On May 12,
1997, Quality Dining, Inc. announced that its Board of Directors approved a
plan to divest its Bruegger's bagel-related businesses. The Company does not
know
19
<PAGE>
what effect, if any, this divestiture will have on the Company. See "Business
- Relationship with Bruegger's and Quality Dining."
All franchisees are required to open a contractually specified number of
bakeries in their territory within a specified period of time or they will
lose their territorial franchise rights. As of June 30, 1997, there were 475
bagel bakeries open for business, owned and operated by either Bruegger's or
by franchisees. The reported goal of Bruegger's is to have 2,000 Bruegger's
bakeries system-wide by the end of October 2000. Although Bruegger's is
generally considered the largest bagel concept in the country, there are
several franchise or company-owned systems with aggressive development plans
in direct competition in all areas of the country.
The Company intends to devote significant resources to the development of
its bagel bakeries. This decision to concentrate on Bruegger's reflects the
Company's judgment concerning the potential market for bagel-based restaurant
concepts, the continuing appeal of the Bruegger's format to customers and the
Company's ability to successfully manage its growth. Under the terms of the
Bruegger's Development Agreement, the Company is required to build thirty
bagel bakeries in the Dallas-Fort Worth area by July 1, 2001.
The Company is concentrating its development efforts in the socioeconomic
well-to-do areas of the greater Dallas-Fort Worth area. Experience gained
from other Bruegger's franchises has shown that the typical customer tends to
be well educated and financially well-off. As of August 1, 1997, five bagel
bakeries have been opened in the north-central portion of the Dallas area, and
two were opened in the Fort Worth area.
The ability of the Company to open additional bagel bakeries will depend
to a large degree on the availability of suitably sized spaces in desired
areas at economically justifiable terms. Other bagel chains, as well as
coffee houses, are vying for the same locations, thus providing strong
competition for space.
The cost of opening a new bagel bakery is approximately $370,000. The
cost of leasehold improvements for the existing bakeries has averaged $175,000
per bakery, depending on the size of the space, contributions by the lessor
and the condition of the buildings. The cost of equipment for the existing
bakeries has averaged $150,000 for each bakery. Other pre-opening expenses,
including design services, smallwares, training, and initial inventory is
$45,000 for each bakery, including the initial franchise fee.
Relationship with Bruegger's and Quality Dining
The development by DFW Bagels of bagel bakeries is based upon franchise
documents entered into between DFW Bagels and Bruegger's. The principal
documents are a Development Agreement dated as of January 1, 1995 and a
Franchise Agreement pertaining to each existing bagel bakery. On May 12,
1997, Quality Dining announced that its Board of Directors approved a plan to
divest its Bruegger's bagel-related businesses. The Company does not know
what effect, if any, this divestiture will have on the Company.
The Bruegger's Development Agreement, as amended, gives DFW Bagels the
right to construct, own and operate bagel bakeries in the counties of Tarrant
and Dallas, Texas and certain areas immediately north of the City of Dallas,
including the City of Plano, Texas (the "Development Area"). The Bruegger's
Development Agreement grants DFW Bagels the exclusive right and obligation to
develop thirty bagel bakeries within the Development Area by July 1, 2001 on
the following schedule:
<TABLE>
<CAPTION>
Minimum number
of bagel bakeries
DFW Bagels must have in
Deadline operation by deadline
-------- ---------------------
<S> <C>
July 1, 1996 4
January 1, 1998 9
October 1, 1998 14
July 1, 1999 19
July 1, 2000 24
July 1, 2001 30
</TABLE>
DFW Bagels is to choose the sites for the bagel bakeries at its sole
expense but must seek site approval from Bruegger's in writing prior to
beginning construction. The Bruegger's Development Agreement also defines the
relationship of DFW Bagels to Bruegger's as that of independent contractor and
states that none of the rights granted therein may be assigned or otherwise
transferred. In addition, Ciatti's, Inc. agreed that any sales of its
interest in DFW Bagels shall be
20
<PAGE>
subject to a right of first refusal and prior written consent by Bruegger's.
Bruegger's has additional rights to acquire equity securities of Ciatti's,
Inc. if Ciatti's stock ceases to be publicly traded.
The Bruegger's Development Agreement may be renewed in one year
increments after the initial term if DFW Bagels continues opening bagel
bakeries at the rate of three per year. After five years of renewals, however,
DFW Bagels is obligated to open only one bagel bakery per year.
The Bruegger's Development Agreement gives DFW Bagels the exclusive right
to operate bagel bakeries in the Development Area. The Bruegger's Development
Agreement provides, however, that certain Bruegger's specialty products
(specifically cheese spreads and related products) may be distributed by a
third party through supermarkets, delicatessens, specialty food stores,
convenience stores, and other wholesale and retail food stores within the
Development Area, but in such event DFW Bagels has a right to act as
distributor.
The Bruegger's Development Agreement provides that if DFW Bagels breaches
any term of the Development Agreement, Bruegger's has the right to terminate
the Bruegger's Development Agreement.
The Bruegger's Development Agreement provides that DFW Bagels and
Bruegger's will enter into a predetermined franchise agreement for each bagel
bakery opened by DFW Bagels. The Franchise Agreement grants DFW Bagels the
right to establish and operate the particular bagel bakery and to use the
Bruegger's system and various trademarks. The Franchise Agreement designates
the locations approved pursuant to the Bruegger's Development Agreement as the
exclusive sites for the operation of the bagel bakeries. Under the terms of
the franchise agreement, Bruegger's agrees to provide DFW Bagels with
operation assistance, layout as well as manuals, training and annual audits.
The franchise agreement also states that Bruegger's may at its discretion
establish an Advertising Cooperative (the "Coop") for certain geographic areas
and that if DFW Bagels operates a bagel bakery within such area it must
immediately become a member of the Coop. DFW Bagels's duties under the
franchise agreement include constructing bagel bakeries at its own expense
from pre-approved plans and sending new managers to Bruegger's training
program. DFW Bagels also promises that its bagel bakeries will strictly
conform to Bruegger's methods, such as its core products, management of the
business, fixtures, furnishings, and maintenance, and that it will keep
confidential the Operations and Bagel Production Manuals provided it. In
consideration of the rights granted it, DFW Bagels is obligated to pay certain
franchise and other fees to Bruegger's. Each franchise agreement has a term of
twenty years and may be renewed in ten year increments. If DFW Bagels chooses
to renew, the terms of the franchise agreement will change to whatever terms
are being offered new franchisees at the time of renewal.
As a result of a dispute between the Company and Bruegger's with respect
to whether Bruegger's had the right to consent to issuances of securities by
Ciatti's and a right of first refusal to purchase securities of Ciatti's, the
Company commenced litigation against Quality Dining and Bruegger's in November
1996 in United States District Court for the District of Minnesota. Quality
Dining and Bruegger's counterclaimed and the parties conducted discovery. In
April 1997, in connection with the settlement of the lawsuit, Ciatti's and
Bruegger's entered into a Settlement Agreement. Under the terms of the
Settlement Agreement , Bruegger's agreed to extend the dates on which the
Company was required to complete the opening of certain bagel bakeries under
the Bruegger's Development Agreement, and the Company and DFW Bagels agreed to
enter into certain indemnification and license arrangements with Bruegger's.
Fiscal Year
The Company's fiscal year ends on the Sunday closest to June 30 of each
year. Therefore, the Company's fiscal years are either 52 or 53 week periods.
Seasonality
The Company's highest full service restaurant sales historically have
occurred during the period from July through December. The Company's bagel
bakeries' highest sales have occurred during the period from September through
May.
Competition
The restaurant industry is intensely competitive and is affected by
changes in taste and eating habits of the public, local and national economic
conditions affecting spending habits, population and traffic patterns. Menu,
price, service, convenience, location, decor, and atmosphere are all important
competitive factors, with the relative importance of such factors varying
among different segments of the consuming public. By serving high-quality food
and beverages at reasonable prices in pleasant, casual surroundings, the
Company seeks to appeal to a wide range of customers.
21
<PAGE>
Although the full-service Italian restaurant market segment is highly
fragmented, a few regional and national chains compete directly against the
Company in this market segment. Dardens' concept, The Olive Garden, is
represented in the Company's Minnesota and Wisconsin markets. The Company's
Italian and Steakhouse restaurants compete not only with other chain or
locally owned restaurants with similar menus, but also with other full-service
restaurants.
For its bagel bakeries, the Company's primary competitors are several
chain bagel operators offering menu items essentially similar to Bruegger's,
all vying for speedy market penetration. For example, Einstein Bagels and
Bagel Boulevard are represented in the Company's territory as well as a number
of local, owner-operated bagel shops which in several cases have developed a
loyal local clientele. In addition, any quick-service or home-replacement meal
restaurants are competing with the Company for breakfast or lunch customers.
Through the Bruegger's concept, the Company does, however, differentiate
itself from these competitors by providing its customers with bagels baked in
small batches on site throughout the day using fresh, not frozen, dough.
Additionally, by constructing and operating its own commissary to produce and
distribute fresh dough daily, the Company will vertically integrate its bagel
operations. This integration will allow the Company to provide its bagel
customers with a consistently high-quality product and to minimize
transportation and production costs.
Advertising and Promotion
The Company develops and executes annual advertising and promotional
programs customized to each of the markets in which the Company currently
operates. The Company has budgeted 2.7% of its projected fiscal 1998 full
service restaurant sales for advertising. Under the terms of the franchise
agreements with Bruegger's, the Company is required to spend approximately
four percent of its sales from the bakeries for advertising and promotion,
including advertising and promotions due in connection with Bruegger's
efforts. Due to the small number of bagel bakeries currently existing in the
franchise area, the majority of the Company's efforts in this respect are
directed to local store marketing and direct mail. As part of its efforts to
increase sales of its bagel bakeries, the Company intends to spend more than
four percent of sales for advertising in the near future. Television, radio or
other wide coverage advertising will not be economically justifiable until a
larger number of bakeries exists in the Company's territory.
Government Regulation
Various federal, state and local laws affect the Company's restaurant
business, including laws and regulations relating to health, sanitation,
alcoholic beverage control and safety standards and access for disabled
persons. To date, federal and state environmental regulations have not had a
material effect on the Company's operations. Varied and sometimes stringent
requirements of local government bodies with respect to zoning, building
codes, land use and environmental factors have, in the past, increased, and in
the future can be expected to increase, the cost and time required for
developing new restaurants or bakeries. In some instances the Company may have
to obtain zoning variances and land use permits for its new restaurants or
bakeries. A significant portion of the Company's Italian and steakhouse
restaurant business is also derived from the sale of alcoholic beverages. Any
action by an alcoholic beverage control agency to suspend or revoke a
restaurant's liquor license would have an adverse effect on that restaurant's
business. The Company believes that it is operating in compliance with all
material laws and regulations covering its operations.
The Company is also subject to the Fair Labor Standards Act, which covers
such matters as minimum wages, overtime and other working conditions. A
significant portion of the Company's food service personnel are paid at rates
above, but related to, the minimum wage. Accordingly, additional increases in
state or federal minimum wage requirements or changes in applicable state law
with respect to minimum wages for "tipped" employees may have an adverse
impact on the Company.
Trademarks and Licenses
The Company has obtained a trademark of the stylized words and design for
"Ciatti's Italian Restaurant," which was renewed in March 1994. The Company
also obtained a trademark for the words and design of "Spurs Steakhouse &
Saloon" in June 1994. Generally, federal registration of a trademark gives the
registrant the exclusive use of the trademark in the United States in
connection with the goods or services associated with the trademark, subject
to the common law rights of any other person who began using the trademark
prior to the date of federal registration. The Company believes that its marks
are important to its business.
"Bruegger's" and "Bruegger's Bagel Bakery" are trademarks of Bruegger's
Corporation. Under the terms of the Bruegger's Development Agreement, DFW
Bagels has the right to use all trademarks associated with the Bruegger's
bagels franchise in connection with the operation of bagel bakeries in the
Dallas-Fort Worth area.
22
<PAGE>
Employees
As of August 1, 1997, the Company employed approximately 915 persons,
including 10 corporate employees, 55 restaurant and bakery managers and
assistant managers, and 850 hourly restaurant employees. Hourly employees
comprise approximately 93% of the Company's total work force and most work on
a part-time basis. Other than corporate and restaurant management personnel,
employees are paid on an hourly basis. No employees are covered by collective
bargaining agreements and no work stoppages have occurred. The Company
considers its employee relations to be good.
Description of Property
The Company's existing restaurants are located in leased facilities, all
of which the Company believes to be adequate. The Company owns substantially
all of the furniture, fixtures, and equipment in each of its restaurants.
Leasehold improvements paid for by the Company generally will become the
property of the landlord upon expiration or termination of a lease.
The Company's corporate offices are located in Edina, Minnesota, a
Minneapolis suburb. These premises include a test kitchen and a small
warehouse area. The lease currently runs through August 31, 1998, with the
Company having the option to renew the lease for an additional three year term
at the then current market rates. The Company believes this facility will be
adequate to accommodate its administrative needs for the foreseeable future
and that it will be able to renew its existing lease upon satisfactory terms
or obtain comparable space on satisfactory terms.
The Company leases real estate and improvements for its restaurants. The
leases for its Italian restaurants generally provide for an initial term of
ten or twelve years although one restaurant had an initial term of twenty
years. These leases generally have a minimum of two five-year renewal options.
Base rent under the Company's leases varies depending, in part, upon leasehold
allowance funds provided by the lessor. Base rent at some locations also
escalates during the term of the lease. At a few restaurants, the Company also
is required to pay a percentage rate between 4% and 5.5% of sales in excess of
specified amounts. The Company pays all real estate taxes, insurance,
utilities and maintenance expenses for its leased properties.
The Company's leases for its bagel bakeries generally run for either five
or ten years, and have an option to renew for one or two additional five year
terms. The existing leases provide for a fixed rent for the primary term in an
amount that varies with the location.
Legal Proceedings
The Company is not subject to any pending legal proceedings.
CERTAIN TRANSACTIONS
In order to finance certain working capital requirements, in February
1997, the Company borrowed $50,000 from L.E. "Dan" Danford, Jr., the Chairman
of the Board of Directors of the Company, pursuant to an unsecured 10.5%
Promissory Note that is payable in four installments from October 1997 through
June 1998. In addition, in June 1997 the Company borrowed an additional
$50,000 from Mr. Danford under similar provisions. The Company anticipates
that it may borrow additional funds from Mr. Danford in the future. There are,
however, no guarantees that funds will be available from Mr. Danford when
needed by the Company.
DESCRIPTION OF SECURITIES
Units
Each Unit offered hereby consists of one share of Common Stock, $.01 par
value, and one Warrant to purchase one share of Common Stock. The Common Stock
and Warrants are detachable and separately transferable immediately.
Common Stock
The Company's authorized capital stock consists of 10,000,000 shares of
Common Stock, $.01 par value, of which 742,819 shares were outstanding at
August 1, 1997.
23
<PAGE>
Holders of Common Stock are entitled to receive such dividends as are
declared by the Board of Directors of the Company out of funds legally
available for the payment of dividends. The Company expects to retain any
earnings to finance the development of its business. Accordingly, the Company
does not anticipate payment of any dividends on the Common Stock for the
foreseeable future. In the event of any liquidation, dissolution or winding-up
of the Company, the holders of Common Stock will be entitled to receive a pro
rata share of the net assets of the Company remaining after payment or
provision for payment of the debts and other liabilities of the Company.
Holders of Common Stock are entitled to one vote per share in all matters
to be voted upon by shareholders. There is no cumulative voting for the
election of directors, which means that the holders of shares entitled to
exercise more than 50% of the voting rights in the election of directors are
able to elect all of the directors. Holders of Common Stock have no preemptive
rights to subscribe for to purchase any additional shares of Common Stock or
other obligations convertible into shares of Common Stock which may hereafter
be issued by the Company.
All of the outstanding shares of Common Stock are, and the shares
included in the Units to be sold pursuant to this Offering will be, fully paid
and non-assessable. Holders of Common Stock of the Company are not liable for
further calls or assessments.
Warrants
Warrant Agreement
The Warrants included as part of the Units offered hereby will be issued
under and governed by the provisions of the Warrant Agreement between the
Company and Norwest Bank Minnesota, National Association, as Warrant Agent. A
copy of the Warrant Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The following statements are
summaries of certain provisions contained therein, are not complete, and are
qualified in their entirety by reference to the Warrant Agreement.
The shares of Common Stock and the Warrants offered of the Units are
detachable and separately transferrable immediately for issuance. One Warrant
entitles the holder ("Warrantholder") thereof to purchase one share of Common
Stock through December 31, 2002. Each Warrant will be exercisable at a price
equal to $5.00 per share, subject to adjustment in certain circumstances.
Beginning January 1, 1998, the Warrants are redeemable, in whole, by the
Company at a redemption price of $.05 per Warrant on not less than 30 days
written notice, provided that the market price of the Common Stock exceeds
$6.00 per share (subject to adjustment) for any 20 consecutive trading days
within 15 days prior to such notice. "Market price" shall mean (i) if the
Common Stock is listed or admitted to unlisted trading privileges, the last
reported sale price of the Common Stock on such exchange on the last business
day prior to the date of exercise, or if no such sale is made on such day, the
average of the closing bid and asked prices for such day on such exchange, or
(ii) if the Common Stock is not so listed or admitted, the mean of the last
reported bid and asked prices reported by the Nasdaq Bulletin Board on the
last business day prior to the date of exercise, or (iii) if the Common Stock
is not so listed, admitted or reported, an amount determined in such
reasonable manner as may be prescribed by the Board of Directors of the
Company. Holders of Warrants may exercise their rights until the close of
business on the date fixed for redemption, unless extended by the Company.
Warrantholders as such are not entitled to vote, receive dividends, or
exercise any of the rights of holders of shares of Common Stock for any
purpose until such Warrants have been duly exercised and payment of the
purchase price has been made. The Warrants are in registered form and may be
presented for transfer, exchange, or exercise at the corporate office of the
Warrant Agent. Although the Company has applied for listing of the Warrants on
the Nasdaq SmallCap Market, there is currently no established market for the
Warrants, and there is no assurance that any such market will develop.
The Warrant Agreement provides for adjustment of the exercise price and
the number of shares of Common Stock purchasable upon exercise of the Warrants
to protect Warrantholders against dilution in certain events, including stock
dividends, stock splits, reclassification and any combination of Common Stock,
or the merger, consolidation or disposition of substantially all the assets of
the Company.
Registration
The Company has sufficient shares of Common Stock authorized and reserved
for issuance upon exercise of the Warrants, and such shares when issued will
be fully paid and non-assessable. The Company must have a current registration
statement on file with the Securities and Exchange Commission and, unless
exempt therefrom, with the securities
24
<PAGE>
commission of the state in which the Warrantholder resides in order for the
Warrantholder to exercise his or her Warrants and obtain shares of Common
Stock free of any transfer restrictions. The shares so reserved for issuance
upon exercise of the Warrants are registered pursuant to the Registration
Statement for which this Prospectus is a part. Furthermore, the Company has
agreed to use its best efforts to maintain an effective registration statement
(by filing any necessary post-effective amendments or supplements to the
Registration Statement) throughout the term of the Warrants with respect to
the shares of Common Stock issuable upon exercise thereof. The Company will
incur significant legal and other related expenses in order to keep such
registration statement current. There can be no assurance, however, that the
Company will be able to keep any such registration statement current or that
such registration statement will be effective at the time the Warrantholder
desires to exercise his or her Warrants. Additionally, the Company has agreed
to use its best efforts to maintain qualifications in those jurisdictions
where the Units were originally qualified for sale to permit exercise of the
Warrants and issuance of shares of Common Stock upon such exercise. However,
there can be no assurance that any such qualification will be effective at the
time the Warrantholder desires to exercise his or her Warrants. If for any
reason the Company's Registration Statement is not kept current, or if the
Company is unable to qualify its Common Stock underlying the Warrants for sale
in particular states, Warrantholders in those states will, absent an
applicable exemption, have no choice but to either sell such Warrants or let
them expire.
Exercise
The Warrants may be exercised upon surrender of the certificate therefore
on or prior to the expiration date (or earlier redemption date) at the offices
of the Company's Warrant Agent, with the "Purchase Form" on the reverse side
of the certificate filled out and executed as indicated, accompanied by
payment of the full exercise price (by certified or cashier's check payable to
the order of the Company) for the number of Warrants being exercised.
For the term of the Warrants, the Warrantholders are given the
opportunity to profit from a rise in the market price of the Company's Common
Stock with a resulting dilution in the interest of the Company's shareholders.
During such term, the Company may be deprived of opportunities to sell
additional equity securities at a favorable price. The Warrantholders may be
expected to exercise their Warrants at a time when the Company would, in all
likelihood, be able to obtain equity capital by a sale or a new offering on
terms more favorable to the Company than the terms of the Warrants.
Tax Considerations
The cost of each Unit will be allocable between each of its two elements
(one share of Common Stock and one Warrant) in accordance with their relative
fair market value to determine the adjusted basis of each element for federal
income tax purposes. No gain or loss will be recognized by a holder of a
Warrant upon purchase of Common Stock for cash pursuant to the exercise of the
Warrant. The adjusted basis of a share of Common Stock so acquired will equal
the adjusted basis of the Warrant plus the exercise price. There may be other
federal tax considerations, and state, local or foreign tax considerations.
Investors should consult their own tax advisors before determining whether to
purchase the Units or exercise the Warrants.
Indemnification and Waiver of Director Liability
The Minnesota Business Corporation Act provides that officers and
directors of the Company have the right to indemnification from the Company
for liability arising out of certain actions. Such indemnification may be
available for liabilities arising in connection with this offering. Insofar as
indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers or persons controlling the Company
pursuant to such indemnification provisions, the Company 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.
The Company has adopted in its Articles of Incorporation a provision
which limits personal liability for breach of the fiduciary duty of its
directors, to the extent provided 392A.251 of the Minnesota Business
Corporation Act. Such provision eliminates the personal liability of directors
for damages occasioned by breach of fiduciary duty, except for liability based
on a breach of the director's duty of loyalty to the Company, liability for
acts or omissions not made in good faith, liability for acts or omissions
involving intentional misconduct, liability based on payments of improper
dividends, liability based on violations of state securities laws and
liability for acts occurring prior to the date such provision was added.
Section 302A.521 of the Minnesota Business Corporation Act provides that
a Minnesota business corporation shall indemnify any director, officer,
employee or agent of the corporation made or threatened to be made a party to
a proceeding, by reason of the former or present official capacity (as defined
therein) of the person, against judgments, penalties, fines, settlements and
reasonable expenses incurred by the person in connection with the proceeding
if certain statutory standards
25
<PAGE>
are met. "Proceeding" means a threatened, pending or completed civil,
criminal, administrative, arbitration or investigative proceeding, including
one by or in the right of the Company. Article IX of the Company's By-Laws
provides that the Company shall indemnify persons to the fullest extent
permissible by the Minnesota Corporation Act. Section 302A.521 contains
detailed terms regarding such right of indemnification and reference is made
thereto for a complete statement of such indemnification rights.
Commitment of Existing Shareholder
L.E. "Dan" Danford, the Chairman of the Company's Board of Directors, has
advised the Company that he intends to purchase $500,000 (222,222 Units) in
this Offering. Mr. Danford's commitment is contingent upon the Company
obtaining additional funds in an amount of $1,500,000 (666,667 Units) to reach
the minimum. Mr. Danford may, but is not committed to, purchase additional
Units.
Limitation on Purchases
As noted above under "Business-Relationship with Bruegger's and Quality
Dining," in connection with the execution of a Settlement Agreement dated as
of April 24, 1997, the Company and Bruegger's agreed that Bruegger's would
have no right of consent for certain issuances of securities by Ciatti's,
including any issuance of securities by Ciatti's (i) if the issuance does not
result in the acquisition of over 40% of the voting power of any class of
securities of Ciatti's after the completion of the issuance by any shareholder
(other than Phillip R. Danford or L.E. "Dan" Danford, Jr.) who previously held
less than 40% of the voting power of such securities and (ii) such issuance
does not result in Phillip R. Danford and L.E. "Dan" Danford, Jr. collectively
owning less than 10% of the voting power of all classes of securities of
Ciatti's. In order to ensure that no shareholder (other than Phillip R.
Danford or L.E. "Dan" Danford, Jr.) acquires more than 40% of the Company's
Common Stock as a result of this Offering, the Company will have the right to
reject any subscription if, in the Company's judgment, such purchase will
violate the provisions of the Bruegger's Development Agreement.
LEGAL MATTERS
The validity of the shares issuable upon exercise of the Warrants will be
passed upon by Lindquist & Vennum P.L.L.P., 4200 IDS Center, Minneapolis,
Minnesota 55402.
EXPERTS
The Company's consolidated financial statements as of and for the fifty-
two weeks ended June 30, 1996, incorporated by reference into this Prospectus,
have been so incorporated in reliance upon the report of Grant Thornton LLP,
independent certified public accountants, given on the authority of said firm
as experts in auditing and accounting.
ADDITIONAL INFORMATION
Neither Bruegger's Franchise Corporation ("Bruegger's") nor any of its
parents, subsidiaries, affiliates, officers, directors, agents, employees,
accountants or attorneys are in any way participating in, approving or
endorsing this Offering of securities by the Company, any of the offering or
accounting procedures used in the Prospectus, or any representations made in
connection with the Offering. The grant by Bruegger's of any franchise or
other rights to Ciatti's or DFW Bagels is not intended as, and should not be
interpreted as, an express or implied approval, endorsement or adoption of any
statement regarding financial or other performance which may be contained in
this Prospectus. Any review by Bruegger's of this Prospectus or the
information included in this Prospectus has been conducted solely for the
benefit of Bruegger's to determine conformance with Bruegger's internal
policies, and not to benefit or protect any other person. No investor should
interpret any such review by Bruegger's or the use and display of any of
Bruegger's logos, trademarks or service marks herein as approval, endorsement,
acceptance or adoption of any representation, warranty or covenant contained
in the materials reviewed. The enforcement or waiver of any obligation of
Ciatti's or DFW Bagels under any agreement between Ciatti's or DFW Bagels and
Bruegger's or any of Bruegger's affiliates is a matter of Bruegger's or its
affiliates' sole discretion. No investor should rely on any representation,
assumption or belief that Bruegger's or its affiliates will enforce or waive
particular obligations of Ciatti's or DFW Bagels under such agreements.
26
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Reports,
proxy and information statements and other information filed by the Company
can be inspected and copied at the public facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and
the Commission's regional offices located at Seven World Trade Center, 13th
Floor, New York, New York 10048, and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained
at prescribed rates from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549. The Commission also maintains a
Web site (http://www.sec.gov) at which reports, proxy and information
statements and other information regarding the Company may be accessed. Such
reports, proxy statements and other information can also be inspected at the
offices of the National Association of Securities Dealers, Inc., 1735 K Street
N.W., Washington, D.C. 20006. The Company's Common Stock is quoted on The
Nasdaq SmallCap Market ("Nasdaq") under the symbol "CIAT."
The Company has filed with the Commission a Registration Statement on
Form S-2 under the Securities Act of 1933, as amended, with respect to the
Units offered hereby. This Prospectus does not contain all information set
forth in such Registration Statement and the exhibits and schedules thereto,
as permitted by the rules and regulations of the Commission. In each
instance, reference is made to the copy of such contract or document (if any)
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 the Company and the shares offered hereby, reference is made to
such Registration Statement, including the exhibits and financial schedules
filed as part thereof. Such information may be inspected in the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549. Copies thereof may be obtained from the Commission at prescribed
prices.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by the Company with the
Commission (File No. 0-16348), are incorporated by reference in this
Prospectus: (i) the Company's Annual Report on Form 10-KSB for the fifty-two
weeks ended June 30, 1996, (ii) the Company's Proxy Statement dated October
10, 1996 for its Annual Meeting of Shareholders held November 19, 1996, (iii)
the Company's 10-QSB for the quarter ended September 29, 1996, (iv) the
Company's 10-QSB for the quarter ended December 29, 1996 and (v) the Company's
10-QSB for the quarter ended March 30, 1997. The Company's Annual Report for
the fifty-two weeks ended June 30, 1996 and the Company's 10-QSB for the
quarter ended March 30, 1997 are being included as part of this Prospectus.
The foregoing documents contain financial and other information
concerning the Company. Such documents constitute a part of this Prospectus,
and the information contained therein should be reviewed together with all
other information contained herein. Any statement contained in a document
incorporated by reference herein shall be deemed to be modified or superseded
hereby to the extent that a statement contained herein modifies or supersedes
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, upon the written or oral request of such
person, a copy of any or all of the documents which are incorporated by
reference into this Prospectus, other than exhibits to such documents (unless
such exhibits are specifically incorporated by reference in such documents).
Requests for such copies should be directed to Scott P. McGuire, Ciatti's,
Inc., 5555 West 78th Street, Edina, Minnesota 55439-2702. Telephone requests
may be directed to (612) 941-0108, extension 205.
27
<PAGE>
No person is authorized in connection with any offering made hereby to
give any information or to make any representation not contained or incorporated
by reference in this Prospectus or a Prospectus Supplement, and, if given or
made, such information or representation must not be relied upon as having been
authorized by the Company. The delivery of this Prospectus of a Prospectus
Supplement does not constitute an offer to sell or a solicitation of an offer to
buy any security other than the Units offered hereby, nor does it constitute an
offer to sell or a solicitation of an offer to buy any of the Units offered
hereby to any person in any jurisdiction in which it is unlawful to make such an
offer or solicitation. Neither the delivery of this Prospectus or a Prospectus
Supplement nor any sale made thereunder shall under any circumstances create any
implication that the information contained herein or therein is correct as of
any date subsequent to the date hereof.
---------------------------
TABLE OF CONTENTS
---------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................... 3
Risk Factors............................. 5
Ratio of Earnings to Fixed Charges....... 5
Use of Proceeds.......................... 9
Selected Consolidated Financial Data..... 11
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 12
Business................................. 17
Description of Securities................ 23
Certain Federal Income Tax Consequences.. 23
Plan of Distribution..................... 23
Legal Matters............................ 26
Experts.................................. 26
Available Information.................... 27
Incorporation of Certain Documents by
Reference............................... 27
</TABLE>
-------------------------------
CIATTI'S, INC.
---------------------------
PROSPECTUS
________, 1997
---------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14: Other Expenses of Issuance and Distribution
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee $ 6,590
Nasdaq Fees 23,500
Legal fees 15,000
Accounting fees 10,000
Transfer Agent expenses 2,500
Printing expenses 10,000
Blue Sky fees 5,000
Miscellaneous fees and expenses 2,410
-------
Total $75,000
=======
</TABLE>
Item 15: Indemnification of Directors and Officers
The Company's Bylaws require indemnification of its directors and
officers to the fullest extent permitted by Minnesota law. The Bylaws provide
that the Company shall indemnify any person made or threatened to be made a
party to any threatened, pending or completed civil, criminal administrative,
arbitration or investigative proceeding, including a proceeding by or in the
right of the corporation, by reason of the former or present official capacity
of the person, provided the person seeking indemnification meets five criteria
set forth in Section 302A.521 of the Minnesota Business Corporation Act.
The Company's Bylaws also authorize the Board of Directors, to the extent
permitted by applicable law, to indemnify any person or entity not described
in the Bylaws pursuant to, and to the extent described in, an agreement
between the Company and such person, or as otherwise determined by the Board
of Directors in its discretion.
Section 302A.521 of the Minnesota Business Corporation Act provides that
a corporation shall indemnify any person who was or is made or is threatened
to be made a party to any proceeding by reason of the former or present
official capacity of such person against judgments, penalties, fines,
including, without limitation, excise taxes assessed against such person with
respect to an employee benefit plan, settlements, and reasonable expenses,
including attorneys' fees and disbursements, incurred by such person in
connection with the proceeding if, with respect to the acts or omissions of
such person complained of in the proceeding, such person (i) has not been
indemnified by another organization or employee benefit plan for the same
expenses with respect to the same acts or omissions; (ii) acted in good faith;
(iii) received no improper personal benefit and Section 302A.255 (regarding
conflicts of interest), if applicable, has been satisfied; (iv) in the case
of a criminal proceeding, had no reasonable cause to believe the conduct was
unlawful; and (v) in the case of acts or omissions by person in their official
capacity for the corporation, reasonably believed that the conduct was in the
best interests of the corporation, or in the case of acts or omissions by
persons in their capacity for other organizations, reasonably believed that
the conduct was not opposed to the best interests of the corporation.
Item 16. Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
4.1 Form of Warrant Agreement
4.2 Form of Warrant Certificate
5.1 Opinion and Consent of Lindquist & Vennum P.L.L.P., counsel to the
Company
23.1 Consent of Grant Thornton LLP
23.2 Consent of Lindquist & Vennum P.L.L.P. (see Exhibit 5 above)
24.1 Powers of Attorney (included on signature page hereof)
- --------------
</TABLE>
II-1
<PAGE>
Item 17. Undertakings
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the Registration Statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
Prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
Registration Statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the Registration Statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the Registrant pursuant to Section 13
or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the Units offered herein, and the
offering of such Units at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the Units being registered which remain unsold at the expiration of the
offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's Annual Report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the Notes offered therein, and the offering of such Notes at that
time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
(d) 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.
II-2
<PAGE>
(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-3
<PAGE>
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 Edina,
State of Minnesota, on the 8th day of August, 1997.
CIATTI'S, INC.
(Registrant)
By /s/ Phillip R. Danford
------------------------------
Phillip R. Danford
President and Director
POWER OF ATTORNEY
The undersigned hereby constitute and appoint Phillip R. Danford, our
true and lawful attorney-in-fact and agent, with full power of substitution
and resubstitution for us and in our stead, in any and all capacities, to sign
any or all amendments to this Registration Statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorney-in-fact
and requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as such person, hereby ratifying and confirming all
that said attorney-in-fact and agent or his substitute of substitutes may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on August 8,
1997 in the capacities indicated.
Signature Title
--------- -----
/s/ L.E. "Dan" Danford, Jr. Director and Chairman of the Board
----------------------------
L.E. "Dan" Danford, Jr.
/s/ Phillip R. Danford President and Director
----------------------- (Principal Executive Officer; Principal
Phillip R. Danford Financial Officer)
/s/ Thomas A. Kelm Director
-------------------
Thomas A. Kelm
/s/ Scott P. McGuire Controller
---------------------
Scott P. McGuire
II-4
<PAGE>
EXHIBIT 4.1
-----------
WARRANT AGREEMENT
-----------------
AGREEMENT, dated as of _______________, 1997, by and between Ciatti's, Inc.
a Minnesota corporation (the "Company"), and Norwest Bank Minnesota, N.A., as
Warrant Agent (the "Warrant Agent").
W I T N E S E T H
-----------------
WHEREAS, in connection with a public offering pursuant to a registration
statement (the "Registration Statement") on Form S-2 declared effective by the
Securities and Exchange Commission on _________, 19__, of 3,000,000 units
("Units"), each Unit consisting of one share of the Company's Common Stock, $.01
par value ("Common Stock") and one Redeemable Common Stock Purchase Warrant (the
"Warrants"), the Company will issue a minimum of 888,889 and a maximum of
3,000,000 Warrants; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer, exchange and redemption of the Warrants, the
issuance of certificates representing the Warrants, the exercise of the
Warrants, and the rights of the holders thereof;
NOW THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth and for the purpose of defining the terms and provisions
of the Warrants and the certificates representing the Warrants and the
respective rights and obligations thereunder of the Company, the holders of
certificates representing the Warrants and the Warrant Agent, the parties hereto
agree as follows:
SECTION 1. Definitions
-----------
As used herein, the following terms shall have the following meanings,
unless the context shall otherwise require:
(a) "Common Stock" shall mean the authorized stock of the Company of
any class, whether now or hereafter authorized, which has the right to
participate in the distribution of earnings and assets of the Company
without limit as to amount or percentage, which at the date hereof consists
of 10,000,000 shares of Common Stock, $.01 par value,
(b) "Corporate Office" shall mean the office of the Warrant Agent
(or its successor) at which at any particular time its principal business
shall be administered, which office is located on the date hereof at 161
North Concord Exchange, South St. Paul, MN 55075.
(c) "Exercise Date" shall mean, as to any Warrant, the date on which
the Warrant Agent shall have received both (i) the Warrant Certificate
representing such Warrant, with the exercise form thereon duly executed by
the Registered Holder thereof or such Holder's attorney duly authorized in
writing, and (ii) payment in cash, official bank or certified check or wire
transfer made payable to the Company, of an amount in lawful money of the
United States of America equal to the applicable Purchase Price.
(d) "Initial Warrant Exercise Date" shall mean, as to each Warrant,
the original issuance date of the Warrants.
(e) "Purchase Price" shall mean the price to be paid upon exercise
of each Warrant in accordance with the terms hereof, which price shall be
$5.00, subject to adjustment from time to time pursuant to the provisions
of Section 9 hereof, and subject to the Company's right to reduce the
Purchase Price upon notice to all Warrantholders.
(f) "Redemption Price" shall mean the price at which the Company
may, at its option, redeem the Warrants, in accordance with the terms
hereof, which price shall be $0.05 per Warrant, subject to adjustment from
time to time pursuant to the provisions of Section 8 hereof.
(g) "Registered Holder" shall mean the person in whose name any
certificate representing a Warrant shall be registered on the books
maintained by the Warrant Agent pursuant to Section 6.
(h) "Transfer Agent" shall mean Norwest Bank Minnesota, N.A., as the
Company's transfer agent, or its authorized successor, as such.
<PAGE>
(i) "Warrant Expiration Date" shall mean 5:00 p.m. (Minneapolis
time) on December 31, 2002, or the Redemption Date as defined in Section 8,
whichever is earlier; provided that if such date shall in the State of
Minnesota be a holiday or a day on which banks are authorized to close,
then 5:00 p.m. (Minneapolis time) on the next following day which in the
State of Minnesota is not a holiday or a day on which banks are authorized
to close. Upon notice to all Warrantholders, the Company shall have the
right to extend the Warrant Expiration Date.
SECTION 2. Warrants and Issuance of Warrant Certificates.
---------------------------------------------
(a) Each Warrant shall initially entitle the Registered Holder of
the Warrant Certificate representing such Warrant to purchase one share of
Common Stock upon the exercise thereof, in accordance with the terms
hereof, subject to modification and adjustment as provided in Section 9.
(b) Upon execution of this Agreement and designation to the Warrant
Agent that the Company has sold the minimum number of Units, Warrant
Certificates representing the number of Warrants sold shall be executed by
the Company and delivered to the Warrant Agent. Upon written order of the
Company signed by its President or a Vice President and by its Secretary or
an Assistant Secretary, the Warrant Certificates shall be countersigned,
issued and delivered by the Warrant Agent as part of the Units. Upon
designation to the Warrant Agent by the Company that it has sold additional
Units, additional Warrants shall be executed by the Company and delivered
by the Warrant Agent. Upon written order of the Company signed by its
President or a Vice President and by its Secretary or an Assistant
Secretary, the Warrant Certificates shall be countersigned, issued and
delivered by the Warrant Agent as part of the Units.
(c) From time to time, up to the Warrant Expiration Date, the
Transfer Agent shall countersign and deliver stock certificates in required
whole number denominations representing up to an aggregate of 3,000,000
shares of Common Stock, subject to adjustment as described herein, upon the
exercise of warrants in accordance with this Agreement.
(d) From time to time, up to the Warrant Expiration Date, the
Warrant Agent shall countersign and deliver Warrant Certificates in
required whole number denominations to the persons entitled thereto in
connection with any transfer or exchange permitted under this Agreement;
provided that no Warrant Certificates shall be issued except (i) those
initially issued hereunder or pursuant to Company instructions; (ii) those
issued on or after the Initial Warrant Exercise Date, upon the exercise of
fewer than all Warrants represented by any Warrant Certificate, to evidence
any unexercised Warrants held by the exercising Registered Holder; (iii)
those issued upon any transfer or exchange pursuant to Section 6; (iv)
those issued in replacement of lost, stolen, destroyed or mutilated Warrant
Certificates pursuant to Section 7; and (v) at the option of the Company,
in such form as may be approved by its Board of Directors, to reflect any
adjustment or change in the Purchase Price, the number of shares of Common
Stock purchasable upon exercise of the Warrants or the Redemption Price
therefor made pursuant to Section 9 hereof.
SECTION 3. Form and Execution of Warrant Certificates.
------------------------------------------
(a) The Warrant Certificates shall be substantially in the form
annexed hereto as Exhibit A and may have such letters, numbers or other
marks of identification or designation and such legends, summaries or
endorsements printed, lithographed or engraved thereon as the Company may
deem appropriate and as are not inconsistent with the provisions of this
Agreement or as may be required to comply with any law or with any rule or
regulation made pursuant thereto or with any rule or regulation of any
stock exchange on which the warrants may be listed, or to conform to usage.
The Warrant Certificates shall be dated the date of issuance thereof
(whether upon initial issuance, transfer, exchange or in lieu of mutilated,
lost, stolen, or destroyed Warrant Certificates) and issued in registered
form. Warrants shall be numbered serially with the letter W on the
Warrants.
(b) Warrant Certificates shall be executed on behalf of the Company
by its President or any Vice President and by its Secretary or an Assistant
Secretary, by manual signatures or by facsimile signature printed thereon.
Warrant Certificates shall be manually countersigned by the Warrant Agent
and shall not be valid for any purpose unless so countersigned. In case any
officer of the Company who shall have signed any of the Warrant
Certificates shall cease to be such officer of the Company before the date
of issuance of the Warrant Certificates or before countersignature by the
Warrant Agent and issue and delivery thereof, such Warrant Certificates may
nevertheless be countersigned by the Warrant Agent, issued and delivered
with the
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same force and effect as though the person who signed such Warrant
Certificates had not ceased to be such officer of the Company. After
countersignature by the Warrant Agent, Warrant Certificates shall be delivered
by the Warrant Agent to the Registered Holder without further action by the
Company, except as otherwise provided by Section 4(a) hereof.
SECTION 4. Exercise.
--------
(a) Each Warrant may be exercised by the Registered Holder thereof at
any time on or after the Initial Warrant Exercise Date, but not after the
Warrant Expiration Date, upon the terms and subject to the conditions set
forth herein and in the applicable Warrant Certificate. A Warrant shall be
deemed to have been exercised immediately prior to the close of business on
the Exercise Date and the person entitled to receive the securities
deliverable upon such exercise shall be treated for all purposes as the holder
upon exercise thereof as of the close of business on the Exercise Date. As
soon as practicable on or after the Exercise Date the Warrant Agent shall
deposit the proceeds received from the exercise of a Warrant and shall notify
the Company in writing of the exercise of the Warrants. The Warrant Agent, on
behalf of the Company, shall cause to be issued and delivered by the Transfer
Agent, to the person or persons entitled to receive the same, a certificate or
certificates for the securities deliverable upon such exercise, plus a Warrant
Certificate for any remaining unexercised Warrants of the Registered Holder,
unless prior to the date of issuance of such certificates the Company shall
instruct the Warrant Agent to refrain from causing such issuance of
certificates pending clearance of checks received in payment of the Purchase
Price pursuant to such Warrants. Notwithstanding the foregoing, in the case of
payment made in the form of a check drawn on an account of such investment
banks and brokerage houses as the Company shall approve in writing to the
Warrant Agent, certificates shall immediately be issued without prior notice
to the Company or any delay. Upon the exercise of any warrant and clearance of
the funds received, the Warrant Agent shall promptly remit the payment
received for the Warrant to the Company or as the Company may direct in
writing.
SECTION 5. Reservation of Shares; Listing; Payment of Taxes; etc.
-----------------------------------------------------
(a) The Company covenants that it will at all times reserve and keep
available out of its authorized Common Stock, solely for the purpose of issue
upon exercise of Warrants, such number of shares of Common Stock as shall then
be issuable upon the exercise of all outstanding Warrants. The Company
covenants that all shares of Common Stock which shall be issuable upon
exercise of the Warrants shall, at the time of delivery, be duly and validly
issued, fully paid, nonassessable and free from all taxes, liens and charges
with respect to the issue thereof (other than those which the Company shall
promptly pay or discharge) and that upon issuance such shares shall be listed
on each national securities exchange, if any, on which the other shares of
outstanding Common Stock of the Company are then listed.
(b) The Company covenants that if any securities to be reserved for the
purpose of exercise of Warrants hereunder require registration with, or
approval of, any governmental authority under any federal securities law
before such securities may be validly issued or delivered upon such exercise,
then the Company will in good faith and as expeditiously as reasonably
possible, endeavor to secure such registration or approval. The Company will
use reasonable efforts to obtain appropriate approvals or registrations under
state "blue sky" securities laws with respect to any such securities. The
Company reserves the right not to accept exercise of warrants in any state in
which such exercise would be unlawful.
(c) The Company shall pay all documentary, stamp or similar taxes and
other governmental charges that may be imposed with respect to the issuance of
Warrants, or the issuance or delivery of any shares upon exercise of the
Warrants; provided, however, that if the shares of Common Stock are to be
delivered in a name other than the name of the Registered Holder of the
Warrant Certificate representing any Warrant being exercised, then no such
delivery shall be made unless the person requesting the same has paid to the
Warrant Agent the amount of transfer taxes or charges incident thereto, if
any.
(d) The Warrant Agent is hereby irrevocably authorized to requisition
the Company's Transfer Agent from time to time for certificates representing
shares of Common Stock required upon exercise of the Warrants, and the Company
will authorize the Transfer Agent to comply with all such proper requisitions.
The Company will file with the Warrant Agent a statement setting forth the
name and address of the Transfer Agent of the Company for shares of Common
Stock issuable upon exercise of the Warrants, unless the Warrant Agent and the
Transfer Agent are the same entity.
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SECTION 6. Exchange and Registration of Transfer.
-------------------------------------
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants of the same
class or may be transferred in whole or in part. Warrant Certificates to be
exchanged shall be surrendered to the Warrant Agent at its Corporate
Office, and upon satisfaction of the terms and provisions hereof, the
Company shall execute and the Warrant Agent shall countersign, issue and
deliver in exchange therefor the Warrant Certificate or Certificates which
the Registered Holder making the exchange shall be entitled to receive.
(b) The Warrant Agent shall keep at its office books in which,
subject to such reasonable regulations as it may prescribe, it shall
register Warrant Certificates and the transfer thereof in accordance with
its regular practice. Upon due presentment for registration of transfer of
any Warrant Certificate at such office, the Company shall execute and the
Warrant Agent shall issue and deliver to the transferee or transferees a
new Warrant Certificate or Certificates representing an equal aggregate
number of Warrants of the same class.
(c) With respect to all Warrant Certificates presented for
registration or transfer, or for exchange or exercise, the subscription
form or the assignment form on the reverse thereof shall be duly endorsed,
or be accompanied by a written instrument or instruments of transfer and
subscription, in form satisfactory to the Company and the Warrant Agent,
duly executed by the Registered Holder or his attorney-in-fact duly
authorized in writing.
(d) A service charge may be imposed by the Warrant Agent for any
exchange or registration of transfer of Warrant Certificates. In addition,
the Company may require payment by such holder of a sum sufficient to cover
any tax or other governmental charge that may be imposed in connection
therewith.
(e) All Warrant Certificates surrendered for exercise or for
exchange in case of mutilated Warrant Certificates shall be promptly
canceled by the Warrant Agent and thereafter retained by the Warrant Agent
until termination of this Agreement or resignation as Warrant Agent, or, at
the direction of the Company.
(f) Prior to due presentment for registration of transfer thereof,
the Company and the Warrant Agent may deem and treat the Registered Holder
of any Warrant Certificate as the absolute owner thereof and of each
Warrant represented thereby (notwithstanding any notations of ownership or
writing thereon made by anyone other than a duly authorized officer of the
Company or the Warrant Agent) for all purposes and shall not be affected by
any notice to the contrary. The Warrants, which are being publicly offered
in Units with shares of Common Stock pursuant to the Underwriting
Agreement, will be immediately detachable from the Common Stock and
transferable separately therefrom.
SECTION 7. Loss or Mutilation. Upon receipt by the Company and the
Warrant Agent of evidence satisfactory to them of the ownership of and loss,
theft, destruction or mutilation of any Warrant Certificate and (in case of
loss, theft or destruction) of indemnity satisfactory to them, and (in the case
of mutilation) upon surrender and cancellation thereof, the Company shall
execute and the Warrant Agent shall (in the absence of notice to the Company
and/or Warrant Agent that the Warrant Certificate has been acquired by a bona
fide purchaser) countersign and deliver to the Registered Holder in lieu thereof
a new Warrant Certificate of like tenor representing an equal aggregate number
of Warrants. Applicants for a substitute Warrant Certificate shall comply with
such other reasonable regulations and pay such other reasonable charges as the
Warrant Agent may prescribe.
SECTION 8. Redemption.
----------
(a) Commencing on not less than thirty (30) days' prior written
notice, the Warrants may be redeemed, at the option of the Company, at a
redemption price of $0.05 per Warrant, if the market price for the Common
Stock has exceeded $6.00 for at least twenty (20) consecutive trading days
within 15 calendar days of the date of notice. All Warrants must be
redeemed if any of the Warrants are redeemed. For purposes of this Section
8(a), "market price" shall have the meaning set forth in Section 10.
(b) In case the Company shall desire to exercise its right to so
redeem the Warrants, it shall request the Warrant Agent to mail a notice of
redemption to each of the Registered Holders of the Warrants to be
redeemed, first class, postage prepaid, not later than the twentieth day
before the date fixed for redemption, at their last address as shall appear
on the records of the Warrant Agent. Any notice mailed in the manner
provided herein shall be conclusively presumed to have been duly given
whether or not the Registered Holder receives such notice.
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<PAGE>
(c) The notice of redemption shall specify (i) the redemption price,
(ii) the date fixed for redemption (the "Redemption Date"), (iii) the place
where the Warrant Certificates shall be delivered and the redemption price
paid, and (iv) that the right to exercise the Warrant shall terminate at
5:00 p.m. (Minneapolis time) on the business day immediately preceding the
date fixed for redemption. The date fixed for the redemption of the
Warrants that have been called for redemption shall be the Redemption Date.
No failure to mail such notice nor any defect therein or in the mailing
thereof shall affect the validity of the proceedings for such redemption
except as to a holder (a) to whom notice was not mailed or (b) whose notice
was defective. An affidavit of the Warrant Agent or of the Secretary or an
Assistant Secretary of the Company that notice of redemption has been
mailed shall, in the absence of fraud, be prima facie evidence of the facts
stated therein.
(d) Any right to exercise a Warrant that has been called for
redemption shall terminate at 5:00 p.m. (Minneapolis time) on the business
day immediately preceding the Redemption Date on and after the Redemption
Date, Holders of the redeemed Warrants shall have no further rights except
to receive, upon surrender of the redeemed Warrant, the Redemption Price.
(e) From and after the date specified for redemption, the Company
shall, at the place specified in the notice of redemption, upon
presentation and surrender to the Company by or on behalf of the Registered
Holder thereof of one or more Warrants to be redeemed, deliver or cause to
be delivered to or upon the written order of such Holder a sum in cash
equal to the Redemption Price of each such Warrant. From and after the date
fixed for redemption and upon the deposit or setting aside by the Company
of a sum sufficient to redeem all the Warrants called for redemption, such
Warrants shall expire and become void and all rights hereunder and under
the Warrant Certificates, except the right to receive payment of the
redemption price, shall cease.
SECTION 9. Adjustment of Exercise Price and Number of Shares of Common
-----------------------------------------------------------
Stock Warrants.
- --------------
(a) Subject to the exceptions referred to in Section 9(g) below, in
the event the Company shall, at any time or from time to time after the
date hereof, issue any shares of Common Stock as stock dividend to the
holders of Common Stock, or subdivide or combine the outstanding shares of
Common Stock into a greater or lesser number of shares (any such sale,
issuance, subdivision or combination being herein called a "Change of
Shares"), then, and thereafter upon each further Change of Shares, the
applicable Purchase Price in effect immediately prior to such Change of
Shares shall be changed to a price (including any applicable fraction of a
cent) determined by multiplying the Purchase Price in effect immediately
prior thereto by a fraction, the numerator of which shall be the sum of (a)
the total number of shares of Common Stock outstanding immediately prior to
such Change of Shares and (b) the number of shares of Common Stock which
the aggregate consideration received by the Company upon such sale,
issuance, subdivision or combination (determined in accordance with
subsection (f) below) could have purchased at the then current Purchase
Price, and the denominator of which shall be the total number of shares of
Common Stock outstanding immediately after such Change of Shares.
Upon each adjustment of the applicable Purchase Price pursuant to this
Section 9, the total number of shares of Common Stock purchasable upon the
exercise of each Warrant shall (subject to the provisions contained in
Section 9(b) hereof) be such number of shares (calculated to the nearest
tenth) purchasable at the applicable Purchase Price immediately prior to
such adjustment multiplied by a fraction, the numerator of which shall be
the applicable Purchase Price in effect immediately prior to such
adjustment and the denominator of which shall be the applicable Purchase
Price in effect immediately after such adjustment.
(b) The Company may elect, upon any adjustment of the applicable
Purchase Price hereunder, to adjust the number of Warrants outstanding, in
lieu of adjusting the number of shares of Common Stock purchasable upon the
exercise of each Warrant as hereinabove provided, so that each Warrant
outstanding after such adjustment shall represent the right to purchase one
share of Common Stock. Each Warrant held of record prior to such adjustment
of the number of Warrants shall become that number of Warrants (calculated
to the nearest tenth) determined by multiplying the number by a fraction,
the numerator of which shall be the applicable Purchase Price in effect
immediately prior to such adjustment and the denominator of which shall be
the applicable Purchase Price in effect immediately after such adjustment.
Upon each such adjustment of the number of Warrants, the Redemption Price
in effect immediately prior to such adjustment also shall be adjusted by
multiplying such Redemption Price by a fraction, the numerator of which
shall be the Purchase Price in effect immediately after such adjustment and
the denominator of which shall be the Purchase Price in effect immediately
prior to such adjustment. Upon each adjustment of the number of Warrants
pursuant to this Section 9, the Company shall, as promptly as practicable,
cause to be distributed to each Registered Holder of
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<PAGE>
Warrant Certificates on the date of such adjustment, Warrant Certificates
evidencing, subject to Section 10 hereof, the number of additional
Warrants, if any, to which such Holder shall be entitled as a result of
such adjustment or, at the option of the Company, cause to be distributed
to such Holder in substitution and replacement for the Warrant Certificates
held by him prior to the date of adjustment (and upon surrender thereof, if
required by the Company) new Warrant Certificates evidencing the number of
Warrants to which such Holder shall be entitled after such adjustment.
(c) In case of any reclassification, capital reorganization or other
change of outstanding shares of Common Stock, or in case of any
consolidation or merger of the Company with or into another corporation
(other than a consolidation or merger in which the Company is the
continuing corporation and which does not result in any reclassification,
capital reorganization or other change of outstanding shares of Common
Stock), or in case of any sale or conveyance to another corporation of the
property of the Company as, or substantially as, an entirety (other than a
sale/leaseback, mortgage or other financing transaction), the Company shall
cause effective provision to be made so that each holder of a Warrant then
outstanding shall have the right thereafter, by exercising such Warrant, to
purchase the kind and number of shares of stock or other securities or
property (including cash) receivable upon such reclassification, capital
reorganization or other change, consolidation, merger, sale or conveyance
by a holder of the number of shares of Common Stock that might have been
purchased upon exercise of such Warrant, immediately prior to such
reclassification, capital reorganization or other change, consolidation,
merger, sale or conveyance. Any such provision shall include provision for
adjustments that shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 9. The foregoing provisions shall
similarly apply to successive reclassification, capital reorganizations and
other changes of outstanding shares of Common Stock and to successive
consolidations, mergers, sales or conveyances.
(d) After each adjustment of the Purchase Price pursuant to this
Section 9, the Company will promptly prepare a certificate signed by the
President, and by the Secretary or an Assistant Secretary, of the Company
setting forth: (i) the applicable Purchase Price as so adjusted, (ii) the
number of shares of Common Stock purchasable upon exercise of each Warrant
after such adjustment, and, if the Company shall have elected to adjust the
number of Warrants, the number of Warrants to which the registered holder
of each Warrant shall then be entitled, and the adjustment in Redemption
Price resulting therefrom, and (iii) a brief statement of the facts
accounting for such adjustment. The Company will promptly file such
certificate with the Warrant Agent and cause a brief summary thereof to be
sent by ordinary first class mail to Steichen and to each registered holder
of Warrants at his last address as it shall appear on the registry books of
the Warrant Agent. No failure to mail such notice nor any defect therein or
in the mailing thereof shall affect the validity thereof except as to the
holder to whom the Company failed to mail such notice, or except as to the
holder whose notice was defective. The affidavit of an officer of the
Warrant Agent or the Secretary or an Assistant Secretary of the Company
that such notice has been mailed shall, in the absence of fraud, be prima
facie evidence of the facts stated therein.
(e) For purposes of Section 9(a) and 9(b) hereof, the following
provisions (A) to (F) shall also be applicable:
(A) The number of shares of Common Stock outstanding at any given
time shall include shares of Common Stock owned or held by or for the
account of the Company and the sale or issuance of such treasury
shares or the distribution of any such treasury shares shall not be
considered a Change of Shares for purposes of said sections.
(B) No adjustment of the Purchase Price shall be made unless such
adjustment would require an increase or decrease of at least $.05 in
such price; provided that any adjustments which by reason of this
clause (B) are not required to be made shall be carried forward and
shall be made at the time of and together with the next subsequent
adjustment which, together with any adjustment(s) so carried forward,
shall require an increase or decrease of at least $.05 in the Purchase
Price then in effect hereunder.
(C) In case of (1) the sale by the Company solely for cash of any
rights or warrants to subscribe for or purchase, or any options for
the purchase of, Common Stock or any securities convertible into or
exchangeable for Common Stock without the payment of any further
consideration other than cash, if any (such convertible or
exchangeable securities being herein called "Convertible Securities"),
or (2) the issuance by the Company, without the receipt by the Company
of any
6
<PAGE>
consideration therefor, of any rights or warrants to subscribe for or
purchase, or any options for the purchase of, Common Stock or
Convertible Securities, in each case, if (and only if) the
consideration payable to the Company upon the exercise of such rights,
warrants or options shall consist solely of cash, whether or not such
rights, warrants or options, or the right to convert or exchange such
Convertible Securities, are immediately exercisable, and the price per
share for which Common Stock is issuable upon the exercise of such
rights, warrants or options or upon the conversion or exchange of such
Convertible Securities (determined by dividing (x) the minimum
aggregate consideration payable to the Company upon the exercise of
such rights, warrants or options, plus the consideration received by
the Company for the issuance or sale of such rights, warrants or
options, plus, in the case of such Convertible Securities, the minimum
aggregate amount of additional consideration, if any, other than such
Convertible Securities, payable upon the conversion or exchange
thereof, by (y) the total maximum number of shares of Common Stock
issuable upon the exercise of such rights, warrants or options or upon
the conversion or exchange of such Convertible Securities issuable
upon the exercise of such rights, warrants or options) is less than
the then Purchase Price immediately prior to the date of the issuance
or sale of such rights, warrants or options, then the total maximum
number of shares of Common Stock issuable upon the exercise of such
rights, warrants or options or upon the conversion or exchange of such
Convertible Securities (as of the date of the issuance or sale of such
rights, warrants or options) shall be deemed to be outstanding shares
of Common Stock for purposes of Sections 9(a) and 9(b) hereof and
shall be deemed to have been sold for cash in an amount equal to such
price per share.
(D) In case of the sale by the Company solely for cash of any
Convertible Securities, whether or not the right of conversion or
exchange thereunder is immediately exercisable, and the price per
share for which Common Stock is issuable upon the conversion or
exchange of such Convertible Securities (determined by dividing (x)
the total amount of consideration received by the Company for the sale
of such Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, other than such Convertible
Securities, payable upon the conversion or exchange thereof, by (y)
the total maximum number of shares of Common Stock issuable upon the
conversion or exchange of such Convertible Securities) is less than
the then Purchase Price immediately prior to the date of the sale of
such Convertible Securities, then the total maximum number of shares
of Common Stock issuable upon the conversion or exchange of such
Convertible Securities (as of the date of the sale of such Convertible
Securities) shall be deemed to be outstanding shares of Common Stock
for purposes of Sections 9(a) and 9(b) hereof and shall be deemed to
have been sold for cash in an amount equal to such price per share.
(E) If the exercise or purchase price provided for in any right,
warrant or option referred to in (C) above, or the rate at which any
Convertible Securities referred to in (C) or (D) above are convertible
into or exchangeable for Common Stock, shall change at any time (other
than under or by reason of provisions designed to protect against
dilution), the Purchase Price then in effect hereunder shall forthwith
be readjusted to such Purchase Price as would have been obtained (1)
had the adjustments made upon the issuance or sale of such rights,
warrants, options or Convertible Securities been made upon the basis
of the issuance of only the number of shares of Common Stock
theretofore actually delivered (and the total consideration received
therefor) upon the exercise of such rights, warrants or options or
upon the conversion or exchange of such Convertible Securities, (2)
had adjustments been made on the basis of the Purchase Price as
adjusted under clause (1) for all transactions (which would have
affected such adjusted Purchase Price) made after the issuance or sale
of such rights, warrants, options or Convertible Securities, and (3)
had any such rights, warrants, options or Convertible Securities then
still outstanding been originally issued or sold at the time of such
change on the expiration of any such right, warrant or option or the
termination of any such right to convert or exchange any such
Convertible Securities, the Purchase Price then in effect hereunder
shall forthwith be readjusted to such Purchase Price as would have
been obtained (a) had the adjustments made upon the issuance or sale
of such rights, warrants, options or Convertible Securities been made
upon the basis of the issuance of only the number of shares of Common
Stock theretofore actually delivered (and the total consideration
received therefor) upon the exercise of such rights, warrants or
options or upon the conversion or exchange of such Convertible
Securities and (b) had adjustments been made on the basis of the
Purchase Price as adjusted under clause (a) for all transactions
(which would have affected such adjusted Purchase Price) made after
the issuance or sale of such rights, warrants, options or Convertible
Securities.
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<PAGE>
(F) In case of the sale for cash of any shares of Common Stock, any
Convertible Securities, any rights or warrants to subscribe for or
purchase, or any options for the purchase of, Common Stock or
Convertible Securities, the consideration received by the Company
therefore shall be deemed to be the gross sales price therefor without
deducting therefrom any expense paid or incurred by the Company or any
underwriting discounts or commissions or concessions paid or allowed
by the Company in connection therewith.
(f) No adjustment to the Purchase Price of the Warrants or to the
number of shares of Common Stock purchasable upon the exercise of each
Warrant will be made, however,
(i) upon the grant or exercise of any other options which may
hereafter be granted or exercised under any employee benefit plan of
the Company as described in the Registration Statement; or
(ii) upon the sale or exercise of the Warrants; or
(iii) upon the issuance or sale of Common Stock or Convertible
Securities upon the exercise of any rights or warrants to subscribe
for or purchase, or any options for the purchase of, Common Stock or
Convertible Securities, whether or not such rights, warrants or
options were outstanding on the date of the original sale of the
Warrants or were thereafter issued or sold; or
(iv) upon the issuance or sale of Common Stock upon conversion
or exchange of any Convertible Securities, whether or not any
adjustment in the Purchase Price was made or required to be made upon
the issuance or sale of such Convertible Securities and whether or not
such Convertible Securities were outstanding on the date of the
original sale of the Warrants or were thereafter issued or sold; or
(v) upon any amendment to or change in the terms of any rights
or warrants to subscribe for or purchase, or options for the purchase
of, Common Stock or Convertible Securities or in the terms of any
Convertible Securities, including, but not limited to, any extension
of any expiration date of any such right, warrant or option, any
change in any exercise or purchase price provided for in any such
right, warrant or option, any extension of any date through which any
Convertible Securities are convertible into or exchangeable for Common
Stock or any change in the rate at which any Convertible Securities
are convertible into or exchangeable for Common Stock (other than
rights, warrants, options or Convertible Securities issued or sold
after the close of business on the date of the original issuance of
the Units (i) for which an adjustment in the Purchase Price then in
effect was theretofore made or required to be made, upon the issuance
or sale thereof, or (ii) for which such an adjustment would have been
required had the exercise or purchase price of such rights, warrants
or options at the time of the issuance or sale thereof or the rate of
conversion or exchange of such Convertible Securities, at the time of
the sale of such Convertible Securities, or the issuance or sale of
rights or warrants to subscribe for or purchase, or options for the
purchase of, such Convertible Securities, been the price or rate as
changed, in which case the provisions of Section 9(f)(E) hereof shall
be applicable if, but only if, the exercise or purchase price thereof,
as changed or the rate of conversion or exchange thereof, as changed,
consists solely of cash or requires the payment of additional
consideration, if any, consisting solely of cash and the Company did
not receive any consideration other than cash, if any, in connection
with such change).
(g) As used in this Section 9, the term "Common Stock" shall mean and
include the Company's Common Stock authorized on the date of the original
issue of the Units and shall also include any capital stock of any class of
the Company thereafter authorized which shall not be limited to a fixed sum
or percentage in respect of the rights of the holders thereof to
participate in dividends and in the distribution of assets upon the
voluntary liquidation, dissolution or winding up of the Company; provided,
however, that the shares issuable upon exercise of the Warrants shall
include only shares of such class designated in the Company's Articles of
Incorporation as Common Stock on the date of the original issue of the
Units or (i), in the case of any reclassification, change, consolidation,
merger, sale or conveyance of the character referred to in Section 9(c)
hereof, the stock, securities or property provided for in such section or
(ii), in the case of any reclassification or change in the outstanding
shares of Common Stock issuable upon exercise of the Warrants as a result
of a subdivision or combination or consisting of a change in par value, or
from par value to no par value, or from no par value to par value, such
shares of Common Stock as so reclassified or changed.
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<PAGE>
(h) Any determination as to whether an adjustment in the Purchase
Price in effect hereunder is required pursuant to Section 9, or as to the
amount of any such adjustment, if required, shall be binding upon the
holders of the Warrants and the Company if made in good faith by the Board
of Directors of the Company.
(i) If and whenever the Company shall grant to the holders of Common
Stock, as such, rights or warrants to subscribe for or to purchase, or any
options for the purchase of, Common Stock or securities convertible into or
exchangeable for or carrying a right, warrant or option to purchase Common
Stock, the Company shall concurrently therewith grant to each of the then
Registered Holders of the Warrants all of such rights, warrants or options
to which each such holder would have been entitled if, on the date of
determination of stockholders entitled to the rights, warrants or options
being granted by the Company, such holder were the holder of record of the
number of whole shares of Common Stock then issuable upon exercise
(assuming, for purposes of this Section 9(i), that exercise of Warrants is
permissible during periods prior to the Initial Warrant Exercise Date) of
his Warrants. Such grant by the Company to the holders of the Warrants
shall be in lieu of any adjustment which otherwise might be called for
pursuant to this Section 9.
SECTION 10. Fractional Warrants and Shares.
------------------------------
(a) If the number of shares of Common Stock purchasable upon the
exercise of each Warrant is adjusted pursuant to Section 9 hereof, the
Company shall nevertheless not be required to issue fractions of shares,
upon exercise of the Warrants or otherwise, or to distribute certificates
that evidence fractional shares. With respect to any fraction of a share
called for upon any exercise hereof, the Company shall pay to the Holder an
amount in cash equal to such fraction multiplied by the market price of
such fractional share, determined as follows:
(1) If the Common Stock is listed on a National Securities
Exchange or admitted to unlisted trading privileges on such exchange
or listed for trading on the Nasdaq National Market or SmallCap
Market, the market price shall be the last reported sale price of the
Common Stock on such exchange on the last business day prior to the
date of exercise of the Warrant or if no such sale is made on such
day, the average of the closing bid and asked prices for such day on
such exchange; or
(2) If the Common Stock is not listed or admitted to unlisted
trading privileges or traded on the Nasdaq system, the market price
shall be the mean of the last reported bid and asked prices reported
by the Nasdaq Bulletin Board on the last business day prior to the
date of the exercise of the Warrant; or
(3) If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported, the
market price shall be an amount determined in such reasonable manner
as may be prescribed by the Board of Directors of the Company.
SECTION 11. Warrant Holders Not Deemed Stockholders. No holder of
Warrants shall, as such, be entitled to vote or to receive dividends or be
deemed the holder of Common Stock that may at any time be issuable upon exercise
of such Warrants for any purpose whatsoever, nor shall anything contained herein
be construed to confer upon the holder of Warrants, as such, any of the rights
of a stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to stockholders at any meeting thereof,
or to give or withhold consent to any corporate action (whether upon any
recapitalization, issue or reclassification of stock, change of par value or
change of stock to no par value, consolidation, merger or conveyance or
otherwise), or to receive notice of meetings, or to receive dividends or
subscription rights, until such Holder shall have exercised such Warrants and
been issued shares of Common Stock in accordance with the provisions hereof.
SECTION 12. Rights of Action. All rights of action with respect to this
Agreement are vested in the respective Registered Holders of the Warrants, and
any Registered Holder of a Warrant, without consent of the Warrant Agent or of
the holder of any other Warrant, may, in his own behalf and for his own benefit,
enforce against the Company his right to exercise his Warrants for the purchase
of shares of Common Stock in the manner provided in the Warrant Certificates and
this Agreement.
SECTION 13. Agreement of Warrant Holders. Every holder of a Warrant, by
his acceptance thereof, consents and agrees with the Company, the Warrant Agent
and every other holder of a Warrant that:
9
<PAGE>
(a) The Warrants are transferable only on the registry books of the
Warrant Agent by the Registered Holder thereof in person or by his attorney
duly authorized in writing and only if the Warrant Certificates
representing such Warrants are surrendered at the office of the Warrant
Agent, duly endorsed or accompanied by a proper instrument of transfer
satisfactory to the Warrant Agent and the Company in their sole discretion,
together with payment of any applicable transfer taxes; and
(b) The Company and the Warrant Agent may deem and treat the person in
whose name the Warrant Certificate is registered as the holder and as the
absolute, true and lawful owner of the Warrants represented thereby for all
purposes, and neither the Company nor the Warrant Agent shall be affected
by any notice or knowledge to the contrary, except as otherwise expressly
provided in Section 7 hereof.
SECTION 14. Cancellation of Warrant Certificates. If the Company shall
purchase or acquire any Warrant or Warrants, the Warrant Certificate or Warrant
Certificates evidencing the same shall thereupon be delivered to the Warrant
Agent and canceled by it and retired. The Warrant Agent shall also cancel Common
Stock following exercise of any or all of the Warrants represented thereby or
delivered to it for transfer, split-up, combination or exchange.
SECTION 15. Concerning the Warrant Agent. The Warrant Agent acts
hereunder as agent and in a ministerial capacity for the Company, and its duties
shall be determined solely by the provisions hereof. The Warrant Agent shall
not, by issuing and delivering Warrant Certificates or by any other act
hereunder be deemed to make any representations as to the validity, value or
authorization of the Warrant Certificates or the Warrants represented thereby or
of any securities or other property delivered upon exercise of any Warrant or
whether any stock issued upon exercise of any Warrant is fully paid and
nonassessable.
The Warrant Agent shall not at any time be under any duty or responsibility
to any holder of Warrant Certificates to make or cause to be made any adjustment
of the Purchase Price or the Redemption Price provided in this Agreement, or to
determine whether any fact exists which may require any such adjustments, or
with respect to the nature or extent of any such adjustment, when made, or with
respect to the method employed in making the same. It shall not (i) be liable
for any recital or statement of facts contained herein or for any action taken,
suffered or omitted by it in reliance on any Warrant Certificate or other
document or instrument believed by it in good faith to be genuine and to have
been signed or presented by the proper party or parties, (ii) be responsible for
any failure on the part of the Company to comply with any of its covenants and
obligations contained in this Agreement or in any Warrant Certificate, or (iii)
be liable for any act or omission in connection with this Agreement except for
its own negligence or willful misconduct.
The Warrant Agent may at any time consult with counsel satisfactory to it
(who may be counsel for the Company) and shall incur no liability or
responsibility for any action taken, suffered or omitted by it in good faith in
accordance with the opinion or advice of such counsel.
Any notice, statement, instruction, request, direction, order or demand of
the Company shall be sufficiently evidenced by an instrument signed by the
President, any Vice President, its Secretary, or Assistant Secretary, (unless
other evidence in respect thereof is herein specifically prescribed). The
Warrant Agent shall not be liable for any action taken, suffered or omitted by
it in accordance with such notice, statement, instruction, request, direction,
order or demand believed by it to be genuine.
The Company agrees to pay the Warrant Agent reasonable compensation for its
services hereunder and to reimburse it for its reasonable expenses hereunder; it
further agrees to indemnify the Warrant Agent and save it harmless against any
and all losses, expenses and liabilities, including judgments, costs and counsel
fees, for anything done or omitted by the Warrant Agent in the execution of its
duties and powers hereunder except losses, expenses and liabilities arising as a
result of the Warrant Agent's negligence or willful misconduct.
The Warrant Agent may resign its duties and be discharged from all further
duties and liabilities hereunder (except liabilities arising as a result of the
Warrant Agent's own negligence or wilful misconduct), after giving 30 days'
prior written notice to the Company. At least 15 days prior to the date such
resignation is to become effective, the Warrant Agent shall cause a copy of such
notice of resignation to be mailed to the Registered Holder of each Warrant
Certificate at the Company's expense. Upon such resignation, or any inability of
the Warrant Agent to act as such hereunder, the Company shall appoint a new
warrant agent in writing. If the Company shall fail to make such appointment
within a period of 15 days after it has been notified in writing of such
resignation by the resigning warrant Agent, then the Registered Holder of any
Warrant Certificate may apply to any court of competent jurisdiction for the
10
<PAGE>
appointment of a new warrant agent. Any new warrant agent, whether appointed by
the Company or by such a court shall be a bank or trust company having a capital
and surplus as shown by its last published report to its stockholders, of not
less than $10,000,000, or a stock transfer company. After acceptance in writing
of such appointment by the new warrant agent is received by the Company, such
new warrant agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named herein as the Warrant Agent,
without any further assurance, conveyance, act or deed; but if for any reason it
shall be necessary or expedient to execute and deliver any further assurance,
conveyance, act or deed, the same shall be done at the expense of the Company
and shall be legally and validly executed and delivered by the resigning warrant
Agent. Not later than the effective date of any such appointment the Company
shall file notice thereof with the resigning Warrant Agent and shall forthwith
cause a copy of such notice to be mailed to the Registered Holder of each
Warrant Certificate.
Any corporation into which the Warrant Agent or any new warrant agent may
be converted or merged or any corporation resulting from any consolidation to
which the Warrant Agent or any new warrant agent shall be a party or any
corporation succeeding to the trust business of the Warrant Agent shall be a
successor warrant agent under this Agreement without any further act, provided
that such corporation is eligible for appointment as successor to the Warrant
Agent under the provisions of the preceding paragraph. Any such successor
warrant agent shall promptly cause notice of its succession as warrant agent to
be mailed to the Company and to the Registered Holder of each Warrant
Certificate.
The Warrant Agent, its subsidiaries and affiliates, and any of its or their
officers or directors, may buy and hold or sell Warrants or other securities of
the Company and otherwise deal with the Company in the same manner and to the
same extent and with like effects as though it were not Warrant Agent. Nothing
herein shall preclude the Warrant Agent from acting in any other capacity for
the Company or for any other legal entity.
SECTION 16. Modification of Agreement. Subject to the provisions of
Section 4(b), the Warrant Agent and the Company may by supplemental agreement
make any changes or corrections in this Agreement (i) that they shall deem
appropriate to cure any ambiguity or to correct any defective or inconsistent
provision or manifest mistake or error herein contained; or (ii) that they may
deem necessary or desirable and which shall not adversely affect the interests
of the holders of Warrant Certificates provided, however, that this Agreement
shall not otherwise be modified, supplemented or altered in any respect except
with the consent in writing of the Registered Holders of Warrant Certificates
representing not less than 50% of the Warrants then outstanding; and provided,
further, that no change in the number or nature of the securities purchasable
upon the exercise of any Warrant, or the Purchase Price therefor, or the
acceleration of the Warrant Expiration Date, shall be made without the consent
in writing of the Registered Holder of the Warrant Certificate representing such
Warrant, other than such changes as are specifically prescribed by this
Agreement as originally executed.
SECTION 17. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
made when delivered or mailed first class registered or certified mail, postage
prepaid as follows: if to the Registered Holder of a Warrant Certificate, at the
address of such holder as shown on the registry books maintained by the Warrant
Agent; if to the Company, at 5555 West 78th Street, Edina, Minnesota 55439,
attention: President, or at such other address as may have been furnished to the
Warrant Agent in writing by the Company; if to the Warrant Agent, at 161 North
Concord Exchange, South St. Paul, Minnesota 55075.
SECTION 18. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Minnesota, without
reference to principles of conflict of laws.
SECTION 19. Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the Company and, the Warrant Agent and their respective
successors and assigns, and the holders from time to time of Warrant
Certificates. Nothing in this Agreement is intended or shall be construed to
confer upon any other person any right, remedy or claim, in equity or at law, or
to impose upon any other person any duty, liability or obligation.
SECTION 20. Termination. This Agreement shall terminate at the close of
business on the Expiration Date of all the Warrants or such earlier date upon
which all Warrants have been exercised, except that the Warrant Agent shall
account to the Company for cash held by it and the provisions of Section, 15
hereof shall survive such termination.
SECTION 21. Counterparts. This Agreement may be executed in several
counterparts, which taken together shall constitute a single document.
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
CIATTI'S, INC.
By:
-------------------------------
Phillip R. Danford, President
NORWEST BANK MINNESOTA, N.A.
By:
-------------------------------
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<PAGE>
EXHIBIT 4.2
-----------
WARRANT CERTIFICATE
WARRANTS TO PURCHASE SHARES OF COMMON STOCK OF
CIATTI'S INC.
WARRANTS CUSIP
UNIT CUSIP
THIS CERTIFIES THAT
*** ***
or assigns, is the owner of the number of Warrants set forth above,
each of which represents the right from Ciattis, a Minnesota
corporation (herein called the "Company"), at any time on or before
5:00 p.m. Minneapolis time on December 31, 2002, one share (subject to
the adjustments referred to below) of the Common Stock, $.01 par
value, of the Company (such shares or other securities or property
purchasable upon exercise of the Warrants being herein called the
"Shares"), by surrendering this Warrant Certificate, with the Purchase
Form on the reverse hereof duly executed, at the principal office of
Norwest Bank Minnesota, N.A., or its successor, as warrant agent (the
"Warrant Agent"), in South Saint Paul, Minnesota, and by paying in
full, in cash or by certified or official bank check payable to the
order of the Company, the purchase price of $5.00 per share, and upon
compliance with and subject to the conditions set forth herein and in
the Warrant Agreement hereinafter referred. Upon any exercise of less
than all the Warrants evidenced by this Warrant Certificate, there
shall be issued to the holder a new Warrant Certificate in respect of
the Warrants as to which this Warrant Certificate was not exercised.
Upon the surrender for transfer or exchange hereof, properly endorsed,
to the Warrant Agent, the Warrant Agent, at the Company's expense will
issue and deliver to, or upon the order of the holder hereof, a new
Warrant Certificate or Warrant Certificates of like tenor, in the name
of such holder or as such holder (upon payment by such holder of any
applicable transfer taxes) may direct, calling in the aggregate on the
face or faces thereof for the number of Warrants called for on the
face hereof. The Warrant Certificates are issued only as registered
Warrant Certificates. Until this Warrant Certificate is transferred
in the Warrant Register, the Company and the Warrant Agent may treat
the person in whose name this Warrant Certificate is registered as the
absolute owner hereof and of the Warrants represented hereby for all
purposes, notwithstanding any notice to the contrary. This Warrant
Certificate is issued under the Warrant Agreement dated as of August
___, 1997, between the Company and the Warrant Agent and is subject to
the terms and provisions contained in said Warrant Agreement, to all
of which terms and provisions the registered holder of this Warrant
Certificate consents by acceptance hereof. Copies of said Warrant
Agreement are on file at the principal office of the Warrant Agent in
South Saint Paul, Minnesota and may be obtained by writing to the
Warrant Agent. The number of Shares receivable upon the exercise of
the Warrants represented by this Warrant Certificate and the purchase
price per share are subject to adjustment upon the happening of
certain events specified in the Warrant Agreement (which provisions
are contained in the Warrant Agreement and are hereby incorporated by
reference). No fractional Shares of the Company's Common Stock will
be issued upon the exercise of Warrants. As to any final fraction of
a Share which a holder of Warrants exercised in the same transaction
would otherwise be entitled to purchase on such exercise, the Company
shall pay a cash adjustment in lieu of any fractional Share determined
as provided in the Warrant Agreement. This Warrant may be redeemed at
the option of the Company upon at least 30 days written notice on any
date after January 1, 1998, if the Market Price of the Common Stock
(as defined) has been equal to or in excess of 120% of the then
Exercise Price of the Warrants for any 20 consecutive trading days.
This Warrant Certificate shall not entitle the holder hereof to any of
the rights of a holder of a share of Common Stock of the Company,
including, without limitation, the right to vote, to receive dividends
and other distribution, to exercise any preemptive right, or to
receive any notice of, or to attend, meetings of holders of Common
Stock or any other proceedings of the Company. This Warrant
Certificate shall be void and the Warrants and any rights represented
hereby shall cease unless exercised on or before 5:00 p.m. Minneapolis
time on December 31, 2002. This Warrant Certificate shall not be
valid for any purpose until it shall have been countersigned by the
Warrant Agent.
WITNESS the facsimile seal of the Company and the facsimile signatures
of the Company's duly authorized officers.
Dated: CIATTIS' INC.
Countersigned:
By: Norwest Bank Minnesota, N.A.
President as Warrant Agent
Attest:
Secretary By:
Authorized Signature
<PAGE>
TO: Ciatti's, Inc.
c/o Norwest Bank Minnesota, N.A.
Warrant Agent
180 East Fifth Street
South Saint Paul, MN 55101
PURCHASE FORM
(To be Executed by the Registered Holder
in Order to Exercise Warrant Certificates)
The undersigned hereby irrvocably elects to exercise * of the
Warrants represented by the within Warrant Certificate and to purchase for
cash, the Shares issuable upon the exercise of said Warrants, and requests
that certificates for such Shares shall be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF REGISTERED HOLDER
OF CERTIFICATE
-------------------------
(Name)
-------------------------
(Address)
-------------------------
(Name)
-------------------------
(Address)
Dated:_________________ Signature__________________
-------------
*Insert here the number of Warrants called for on the face of this Warrant
Certificate (or, in the case of a partial exercise, the portion thereof being
exercised), in either case without making any adjustment for additional Common
Stock or any other securities or property or cash which, pursuant to the
adjustment provisions referred to in this Warrant Certificate, may be
deliverable upon exercise.
-------------------------
ASSIGNMENT FORM
(To be Executed by the Registered Holder
in Order to Transfer Warrant Certificates)
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE FOR VALUE RECEIVED, the undersigned
hereby sells, assigns and transfers
_____________ of the Warrants
represented by this Warrant
Certificate unto
-------------------------
----------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS
INCLUDING POSTAL ZIP CODE OF ASSIGNEE)
and does hereby irrevocably constitue and appoint___________________________
Attorney to transfer this Warrant Certificate on the records of the Company
with full power of substitution in the premises.
Dated:________________ Signature(s)________________________________
________________________________
Signature(s) Guaranteed:
-------------------------
NOTICE
The Signature(s) to the Purchase Form or the Assignment Form must
correspond to the name as written upon the face of this Warrant Certificate in
every particular without alteration or enlargement or any change whatsoever.
Signatures(s) should be guaranteed by a commercial bank or trust company, or
by a member firm of any national securities exchange whose signature is known
to the Warrant Agent.
<PAGE>
EXHIBIT 23.1
------------
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated August 14, 1996 accompanying the consolidated
financial statements of Ciatti's, Inc. included in the Annual Report on Form
10-KSB for the fifty-two weeks ended June 30, 1996 which is incorporated by
reference in the Registration Statement and Prospectus. We consent to the
incorporation by reference in the Registration Statement and Prospectus of our
report and to the use of our name as it appears under the caption "Experts."
GRANT THORNTON LLP
/s/ Grant Thornton LLP
Minneapolis, Minnesota
August 4, 1997
