<PAGE>
As filed with the Securities and Exchange Commission on March 13, 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)
-----------------------------
Minnesota 41-1564262
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
-----------------------------
5555 West 78th Street
Edina, Minnesota 55439
(612) 941-0108
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
-----------------------------
Phillip R. Danford
President and Director
Ciatti's, Inc.
5555 West 78th Street
Edina, Minnesota 55439-2702
(612) 941-0108
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
-----------------------------
Copies to:
Thomas G. Lovett IV
Lindquist & Vennum P.L.L.P.
4200 IDS Center
80 South Eighth Street
Minneapolis, Minnesota 55402
(612) 371-3211
-----------------------------
As soon as practicable after the effective date of this offering.
(Approximate date of commencement of proposed sale to the public)
-----------------------------
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]
<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>
Subordinated Fixed-Term Notes $2,000,000 100% $2,000,000 $606.00
==============================================================================================================================
</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>
<CAPTION>
Form S-2 Item Number and Description Caption of Location in Prospectus
- ------------------------------------ ---------------------------------
<S> <C> <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; Plan
of Distribution
Item 9. Description of Securities To Be
Registered................................ Prospectus Summary; Description of Notes and Terms of
Offering
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 Information by Reference;
Selected Consolidated Financial Data;
Management's Discussion and Analysis
of Financial Condition and Results of
Operations; Business; Description of
Notes and Terms of Offering; Certain
Transactions
Item 12. Incorporation of Certain Information
by Reference............................. Incorporation of Certain Information by Reference
Item 13. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. Not applicable
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+Information contained herein is subject to completion or amendment. A +
+registration statement relating to these Notes has been filed with the +
+Securities and Exchange Commission. These Notes 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 of sale would be +
+unlawful prior to registration or qualification under the securities laws of +
+any such State +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PRELIMINARY PROSPECTUS
Subject to Completion
$2,000,000
PRINCIPAL AMOUNT
------------------
CIATTI'S, INC.
One and Three Year Subordinated Fixed-Term Notes
------------------
The Fixed-Term Notes (the "Notes") offered hereby are unsecured, general
obligations of Ciatti's, Inc. (the "Company") and are subordinated to all
existing and future Senior Indebtedness (as defined hereafter) of the Company
(of which $997,850 in principal amount was outstanding at March 1, 1997). The
Company has no debt covenants in place restricting the amount of Senior
Indebtedness the Company may incur in the future.
The interest rates of the Notes offered by the Company are expected to
change from time to time, based on the Company's financial needs and current
market conditions. Interest rates will initially be set at 9.00 % for One-Year
Notes and 9.25% for Three-Year Notes. See "Plan of Distribution."
Changes in interest rates will not affect the rates on outstanding
Notes. The Company may prepay the Notes at any time, in whole or in part. See
"Description of Notes and Terms of Offering."
The Notes will be sold directly by officers and employees of the
Company. The minimum investment is $1,000. The Notes are being offered on a
continuous basis. There will be no public market for the Notes. The Company
reserves the right to reject any subscription in whole or in part. See "Plan of
Distribution."
These Notes are being offered only to Minnesota residents.
For a discussion of certain risk factors which should be considered by
prospective purchasers of the Notes offered hereby, see "Risk Factors,"
beginning at page 5 herein.
------------------
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 Note 100% 0.0% 100% (1)
- --------------------------------------------------------------------------------------------------------------
Total $2,000,000 0.0% $2,000,000 (1)
==============================================================================================================
</TABLE>
(1) Before deducting estimated offering expenses of $22,000.
The date of this prospectus is March xx, 1997.
<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"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and at the Commission's regional offices
located at Seven World Trade Center, 13th Floor, New York, New York 10048, and
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can be obtained at prescribed rates from the Public Reference Branch 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
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 under the symbol "CIAT".
The Company has filed with the Commission a Registration Statement on
Form S-2 (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the Notes offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, 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. Statements contained in this Prospectus as to the contents of any
contract or any other document referred to are not necessarily complete, and 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 Notes 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 Branch
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 and (iv) the Company's 10-QSB
for the quarter ended December 29, 1996. The Company's Annual Report for the
fifty-two weeks ended June 30, 1996 and the Company's 10-QSB for the quarter
ended December 29, 1996 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 Joseph W. Fesenmaier, Ciatti's,
Inc., 5555 West 78th Street, Edina, Minnesota 55439-2702. Telephone requests may
be directed to (612) 941-0108, extension 205.
-----------------------------------------
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 Notes offered hereby should carefully review all of
such risk factors.
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 Notes 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, Big D Bagels,
Inc. ("Big D"), the wholly-owned subsidiary of the Company, entered into an
exclusive Development Agreement with Bruegger's Franchise Corporation to develop
bagel restaurants in the Dallas-Fort Worth, Texas area. As of February 28, 1997,
Big D has opened and is operating five bagel restaurants in the Dallas-Fort
Worth, Texas area.
The Company is issuing these Notes to raise working capital, including
additional capital to expand the number of bagel restaurants owned and operated
by Big D in Dallas-Fort Worth, Texas. Under the Development Agreement, Big D
must have nine bagel restaurants open by July 1, 1997 and thirty bagel
restaurants 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 business opportunities.
Ciatti's, Inc. and its wholly-owned subsidiary, Big D 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,
Big D Bagels, Inc. References to the Company's development and operation of its
bagel restaurants will generally mean Big D Bagels, Inc.
<TABLE>
<CAPTION>
THE OFFERING
<S> <C>
Securities Offered............................. The Company is offering up to $2.0 million in principal amount of its
unsecured subordinated notes (the "Notes") in minimum denominations of
$1,000. The Notes are fixed-term notes having maturities of one or three
years after the date of issue.
Subordination................................. The Notes are unsecured general obligations of the Company and are
subordinated in right of payment to all existing and future Senior
Indebtedness (as defined hereafter), $997,850 of which was outstanding at
March 1, 1997. The Notes are not secured by any lien on the Company's assets
and are not insured or guaranteed by any public or private entity. See
"Description of Notes and Terms of Offering - Subordination."
</TABLE>
3
<PAGE>
Interest Rates and Payment ......... Interest rates are being initially set at
9.00% for One Year Notes and 9.25% for
Three Year Notes. Interest on the Notes
accrues from the date of issuance and
will be paid semi-annually on January 1
and July 1.
The interest rate of a Note will not
adjust prior to Maturity.
Prepayment by Company .............. The Notes are prepayable at the election
of the Company, in whole or in part, at
any time if otherwise permitted under the
restrictions and covenants pertaining to
Senior Indebtedness. See "Description of
Notes and Terms of Offering -Prepayment
by the Company."
Modification, Termination or
Extension of Offering............... The Company reserves the right to modify
at any time the terms of the offering or
the Notes. Any modification will apply
only to Notes offered after the date of
the modification, except as described
under "Description of Notes and Terms of
Offering." The Company reserves the right
to terminate the offering at any time.
From time to time, the Company may issue
additional debt securities in private
placements or through additional
registered public offerings.
-----------------------------------------------------------
"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 Notes offered hereby are securities of Ciatti's, Inc. They are not
direct or indirect interests in Big D Bagels, Inc.
Further, neither Bruegger's Corporation, nor Bruegger's Franchise
Corporation, nor Quality Dining, Inc. 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.
4
<PAGE>
RISK FACTORS
Investors should carefully consider the following matters in connection
with an investment in the Notes in addition to the other information contained
or incorporated by reference in the Prospectus or in any applicable Prospectus
Supplement. Information contained or incorporated by reference in this
Prospectus or in any applicable Prospectus Supplement 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 twenty-six weeks
ended December 29, 1996 the Company incurred losses of $1,363,000 and
$1,575,000, respectively. 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 restaurants.
Dependence Upon Bagel Restaurants 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 restaurants generated sales of only $627,000. Further,
during the twenty-six week period ended December 29, 1996, the Company's full
service restaurants generated sales of $7.8 million while its bagel restaurants
generated sales of only $880,000. The Company currently operates five bagel
restaurants. 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 restaurants. The Company's ability
to successfully expand its bagel restaurant operations will depend upon a number
of factors, including the availability and cost of suitable locations, the
hiring, training and retention of skilled restaurant management and personnel,
the ability of the Company to generate funds from operations, obtain adequate
restaurant 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 restaurants; 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 restaurants. See "Business -
Restaurant Operations" and "Business - Restaurant Development."
Dependence upon Bruegger's and Quality Dining, Inc.; Litigation with Bruegger's
and Quality Dining, Inc.
The development of the Dallas-Fort Worth area for bagel restaurants by
Big D 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 Development Agreement, Big D is required
to comply with a number of requirements with respect to construction and
maintenance of bagel restaurants. Big D is required to have nine bagel
restaurants open by July 1, 1997 and thirty bagel restaurants open by July 1,
2001. The Development Agreement provides that Big D and Bruegger's will enter
into a pre-agreed-upon franchise agreement for each bagel restaurant opened by
Big D. The franchise agreement grants Big D the right to establish and operate a
bagel restaurant and to use the Bruegger's system and various trademarks. The
bagel restaurants must conform to Bruegger's methods, such as its core products,
decor, fixtures, furnishings, and maintenance. Under the franchise agreement,
Big D is obligated to pay fees to Bruegger's, including, but not limited to, a
$20,000 franchise fee upon the opening of each bagel restaurant. In the event
the Company fails to comply with certain terms of the 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. See "Business -
Relationship with Bruegger's and Quality Dining, Inc."
On October 1, 1996, the Company filed a Registration Statement with the
Securities and Exchange Commission for a Rights Offering to its existing
shareholders. In response to Ciatti's filing of the Registration Statement,
Bruegger's
5
<PAGE>
asserted that Bruegger's has certain rights of consent and of first refusal
regarding any sale of securities of Ciatti's. Bruegger's is the franchisor and
Big D, the Company's wholly-owned subsidiary, is the franchisee under a
Development Agreement in which Big D has the exclusive right to develop
Bruegger's bagel restaurants in the Dallas-Fort Worth, Texas area. Ciatti's
believes that such rights exist only with respect to securities of Big D, who is
the "Developer" under the Development Agreement between Big D and Bruegger's,
and not with respect to Ciatti's, which is not a party to the Development
Agreement.
Ciatti's and Bruegger's were unable to agree upon resolution of the
matter and, on November 8, 1996, Ciatti's and Big D filed a lawsuit in United
States District Court for the District of Minnesota against Bruegger's and its
parent corporation, Quality Dining, Inc. ("Quality Dining"). In the lawsuit,
Ciatti's and Big D asked for declaratory and injunctive relief against the
defendants with respect to the Development Agreement. In response, Bruegger's
and Quality Dining filed a counterclaim seeking declaratory relief that (i) the
Development Agreement required Ciatti's to provide prior notice of its offering
to Bruegger's and obtain consent of Bruegger's and (ii) that the Company's use
of any trademark of Bruegger's in the Company's proposed rights offering without
the written consent of Bruegger's would violate the Development Agreement and
related Franchise Agreements between Big D and Bruegger's. The Company believes
that Bruegger's counterclaims are substantially without merit.
In light of the lawsuit and its desire to have this matter resolved
prior to commencement of the Rights Offering, Ciatti's announced that it was
postponing the Record Date and the Commencement Date of its Rights Offering. The
Company also announced that it has not set a new record date for the Rights
Offering.
On February 14, 1997, a Summary Judgment hearing was held by the Court.
The Court denied the Company's motion for Summary Judgment as premature and
scheduled a trial or rehearing on the motion to be held on or about April 1,
1997 and permitted the parties to conduct limited discovery.
If the Court rules in favor of Bruegger's, Bruegger's will have the
right to consent to, and a right of first refusal with respect to, any issuance
of equity securities by the Company in the future. The refusal of Bruegger's to
consent to any offering by the Company in the future or the exercise by
Bruegger's of its right of first refusal could result in Bruegger's
significantly inhibiting the Company's ability to raise additional funds in the
future or could result in Bruegger's obtaining control of the Company. Further,
if the Court determines that Bruegger's has the rights that it asserts under the
Development Agreement, and neither the Court nor Bruegger's extends the July 1,
1997 date by which the Company is required to have nine bagel restaurants open,
and the Company fails to have nine bagel restaurants open by such date, then
Bruegger's will have the right to cancel the Development Agreement. Although the
Company currently is operating five bagel restaurants, has signed leases for
three additional bagel restaurants and is negotiating leases for five additional
bagel restaurants, the Company requires additional working capital to open those
restaurants. In addition, as noted above, Bruegger's has alleged that the use by
the Company of certain of Bruegger's trademarks in the Company's Prospectus
violates the Development Agreement. The Company believes that any use of any
trademark by the Company to describe rights under the Development Agreement does
not violate the Development Agreement. If the Court were to otherwise determine,
and Bruegger's took steps to terminate the Development Agreement, it would have
an adverse effect on the Company.
Subordination of Notes
The Notes are subordinated to Senior Indebtedness of the Company, which
includes indebtedness to financial institutions and certain other obligations.
See "Description of Notes and Terms of Offering - Subordination." In the event
that the Company is in default on any Senior Indebtedness, the Company will be
precluded from making any payment of principal or interest on the Notes until
the default is cured or the Senior Indebtedness is paid in full.
Guarantee by Ciatti's, Inc.
Although the Company's wholly-owned subsidiary, Big D Bagels, Inc., is
the developer and operator of the Company's bagel restaurants, Ciatti's, Inc.
has guaranteed certain of the leases entered into be Big D. If Big D were to
default on these leases, and the assets of Big D were otherwise insufficient to
satisfy these obligations, the landlords would have a claim against Ciatti's and
its assets.
6
<PAGE>
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 does the Company. The restaurant business is often 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."
Need for Additional Capital
Under the Company's Development Agreement with Bruegger's, it is
required to open a total of thirty bagel restaurants prior to July 1, 2001. The
Company estimates that it will cost approximately $350,000 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, which the Company plans to build in fiscal 1998. Accordingly, the
Company will need funds in addition to those raised by these Notes to support
its expansion plans and comply with the terms of its Development Agreement with
Bruegger's. There can be no assurance that the Company will be able to obtain
such additional financing.
Borrowing from Affiliates
In order to finance certain working capital requirements, on February
11, 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 amortizes in four installments from October 1997 through
June 1998. The Company anticipates that it may be necessary fro it to 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.
Market Penetration
Experience obtained from industry sources demonstrates that the
profitability of any individual bagel restaurant often depends to a high degree
on the penetration of a particular market by the bagel restaurant operator. The
Company assumes that individual bagel restaurants will typically become
profitable only after the Company has opened a number of bagel restaurants
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
restaurants needed for such penetration is between twelve and twenty.
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. 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
7
<PAGE>
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 southern portion of the country. 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 restaurant, 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
restaurant, 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 restaurant 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 Other Franchisee
Currently, the Company obtains its shaped bagel dough, as well as other
food supplies through the commissary of another Bruegger's franchisee in Austin,
Texas. Based upon industry information, the Company does not consider it
economically advantageous to invest in the construction of its own commissary
until it has opened approximately ten to fifteen of its own bagel restaurants,
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 restaurants 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. In addition, although the Company does not expect federally mandated wage
increases which became effective October 1, 1996 to have 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."
No Financial Covenants; Absence of Sinking Fund
The Notes do not have the benefit of covenants designed to protect
holders of the Notes in the event of a material adverse change in the Company's
financial condition or results of operations or to impose restrictions on the
Company's
8
<PAGE>
ability to create Senior Indebtedness, pay dividends or make other payments. The
Notes do not contain provisions that permit the holders of the Notes to require
that the Company repurchase or prepay the Notes in the event of a takeover,
recapitalization or similar restructuring, and the Notes do not contain
covenants specifically designed to protect holders of the Notes in the event of
a highly leveraged transaction involving the Company. In addition, the Notes
will not have the benefit of sinking fund payments by the Company. See
"Description of the Notes and Terms of Offering."
Risk of Prepayment at the Option of the Company
The Company, at its option and if permitted under the restrictions and
covenants pertaining to Senior Indebtedness, may at any time prepay, in whole or
in part, any or all of the outstanding Notes of any type selected by interest
rate or maturity. The Notes will be prepayed at 100% of the principal amount
plus accrued, but unpaid interest. Any such prepayment may have the effect of
reducing the overall return that any investor may receive on an investment in
the Notes by reducing the term of the investment. In addition, no assurance can
be given that an investor in the Notes will be able to reinvest the proceeds of
any such prepayment for the remainder of the original term of the Notes at an
interest rate comparable to the rate paid on the Notes. See "Description of
Notes and Terms of Offering - Prepayment by the Company."
Limited Blue Sky Registration
The Notes being offered by this Prospectus are offered only to residents
of the State of Minnesota. Accordingly, any resale of these Notes to persons
outside Minnesota may be limited.
Absence of Public Market
There is no existing market for the Notes and there can be no assurance
as to the liquidity of any market that may develop for the Notes, the ability of
holders of the Notes to sell their Notes or the price at which holders will be
able to sell their Notes. If such a market were to develop, the Notes could
trade at prices that may be higher or lower than the initial offering price
thereof depending on many factors, including prevailing interest rates, the
Company's operating results and the markets for similar securities. The Company
does not intend to apply for listing of the Notes on any securities exchange or
on the Nasdaq SmallCap Market.
9
<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES
The following are the consolidated ratios of earnings to fixed charges
for the periods presented:
<TABLE>
<CAPTION>
Fiscal Year 26 weeks ended
------------------------------------------------------ Dec. 29,
1992 1993 1994 1995 1996 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges 1.64x 4.90x 3.93x
Deficiency of earnings to fixed charges $235,000 $1,523,000 $1,585,000
</TABLE>
For purposes of calculating the ratios of earnings to fixed charges,
earnings are defined as earnings (loss) before income taxes plus fixed charges.
Deficiency of earnings to fixed charges represents the amount of loss before
income taxes plus fixed charges. Fixed charges consist of interest expense,
amortization of debt discount and the interest factor in rental charges.
USE OF PROCEEDS
The net proceeds to the Company from the sale of all the Notes is
$1,978,000 (net of offering expenses of $22,000). There can be no assurance,
however, that any Notes will be sold.
The Company is issuing these Notes to raise working capital, including
additional capital to expand the number of bagel restaurants owned and operated
by Big D in Dallas-Fort Worth, Texas. Under the Development Agreement, Big D
must have nine bagel restaurants open by July 1, 1997 and thirty bagel
restaurants open by July 1, 2001. In addition to expanding the number of bagel
restaurants, the Company may use some of the capital raised to construct a
commissary to supply fresh dough and other products to its bagel restaurants.
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. Pending the use specified above, the Company will invest the
proceeds in short-term interest bearing investments. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
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
have been derived from audited financial statements of the Company for the
fiscal years then ended. The selected consolidated financial data for the
twenty-six weeks ended December 29, 1996 and December 31, 1995 have 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.
Consolidated Statement of Operating Data
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
26 weeks ended
Fiscal year (1) --------------------
----------------------------------------------------- Dec. 31, Dec. 29,
1992 1993 1994 1995 1996 1995 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Sales
Full-service restaurants $20,935 $22,359 $22,969 $18,935 $16,962 $8,569 7,786
Bagel restaurants - - - - 627 100 880
----------------------------------------------------- --------------------
Total sales 20,935 22,359 22,969 18,935 17,589 8,669 8,666
Cost of food and beverage 6,275 6,760 6,848 5,781 5,191 2,517 2,642
----------------------------------------------------- --------------------
Gross profit 14,660 15,599 16,121 13,154 12,398 6,152 6,024
Restaurant operating expenses
Labor and benefits 7,034 7,590 7,383 6,266 6,145 2,967 3,141
Direct and occupancy 6,348 7,001 7,039 5,722 6,375 3,048 3,117
----------------------------------------------------- --------------------
Total restaurant and operating
expenses 13,382 14,591 14,422 11,988 12,520 6,015 6,258
General and administrative 1,071 1,173 1,347 1,054 1,305 548 683
Impairment of assets write-down - - - - 78 - 640
----------------------------------------------------- --------------------
1,071 1,173 1,347 1,054 1,383 548 1,323
----------------------------------------------------- --------------------
Earnings (loss) from operations 207 (165) 352 112 (1,505) (411) (1,557)
Other income (expense), net (84) (70) 92 88 (18) 6 (28)
Income tax (expense) benefit (92) (107) (134) (6) 160 65 10
----------------------------------------------------- --------------------
Net earnings (loss) $31 ($342) $310 $194 ($1,363) ($340) ($1,575)
===================================================== ====================
Net earnings (loss) per common and
common equivalent share $0.04 ($0.42) $0.40 $0.25 ($1.85) ($0.46) ($2.12)
===================================================== ====================
Weighted average number of common and
common equivalent shares outstanding 813,315 805,118 769,586 763,226 736,917 732,486 742,819
</TABLE>
Consolidated Balance Sheet Data (at end of period)
(in thousands)
<TABLE>
<CAPTION>
Fiscal year (1)
------------------------------------------------- Dec. 29,
1992 1993 1994 1995 1996 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Current assets $1,610 $2,308 $2,763 $2,713 $2,184 $1,066
Current liabilities 2,081 2,219 2,201 1,969 2,569 2,357
Total assets 8,318 7,899 7,206 7,684 6,652 4,784
Long-term obligations, less
current maturities 1,706 1,491 655 1,179 907 827
</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 Notes 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 twenty-six weeks ended
December 29, 1996 and December 31, 1995. Fiscal 1994 was a fifty-three week year
while fiscal 1992, 1993, 1995 and 1996 were fifty-two week years.
<TABLE>
<CAPTION>
26 weeks ended
Fiscal year ----------------------
-------------------------------------------------- Dec. 31, Dec. 29,
1992 1993 1994 1995 1996 1995 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Sales
Full-service restaurants 100.0% 100.0% 100.0% 100.0% 96.4% 98.8% 89.8%
Bagel restaurants - - - - 3.6% 1.2% 10.2%
--------------------------------------------------- ---------------------
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% 29.0% 30.5%
--------------------------------------------------- ---------------------
Gross profit 70.0% 69.8% 70.2% 69.5% 70.5% 71.0% 69.5%
Restaurant operating expenses
Labor and benefits 33.6% 33.9% 32.1% 33.1% 34.9% 34.2% 36.2%
Direct and occupancy 30.3% 31.3% 30.7% 30.2% 36.2% 35.2% 36.0%
--------------------------------------------------- ---------------------
Total restaurant and operating 63.9% 65.2% 62.8% 63.3% 71.1% 69.4% 72.2%
expenses
General and administrative 5.1% 5.3% 5.9% 5.6% 7.5% 6.3% 7.9%
Impairment of assets write-down - - - - 0.4% - 7.4%
--------------------------------------------------- ---------------------
5.1% 5.3% 5.9% 5.6% 7.9% 6.3% 15.3%
--------------------------------------------------- ---------------------
Earnings (loss) from operations 1.0% (0.7%) 1.5% 0.6% (8.5%) (4.7%) (18.0%)
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% 0.7% 0.1%
--------------------------------------------------- ---------------------
Net earnings (loss) 0.1% (1.5%) 1.3% 1.0% (7.7%) (4.0%) (18.2%)
=================================================== =====================
</TABLE>
Comparison of Twenty-six Weeks Ended December 29, 1996 to Twenty-six Weeks Ended
December 31, 1995
Sales. Consolidated sales of $8,665,462 for the first twenty-six weeks
of fiscal 1997 were down slightly from consolidated sales of $8,668,667 reported
during the first twenty-six weeks of fiscal 1996. The decrease 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
restaurants, as described below.
Full-service restaurant sales of $7,785,702 for the first twenty-six
weeks of fiscal 1997 decreased 9.1% from sales of $8,568,694 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.
This restaurant contributed $487,566 of sales to
12
<PAGE>
the first twenty-six weeks of fiscal 1996 while only $166,188 to the same period
of fiscal 1997. After adjusting for the sale of this restaurant, full-service
restaurant sales were down 5.7% for the first twenty-six weeks of fiscal 1997
when compared to the same period of last year. The remaining decrease in full-
service restaurant sales was primarily due to the continued competition of local
and national chain restaurants in each of the markets in which the Company's
full-service restaurants operate. The Company expects competition to intensify
and anticipates that most of its full-service restaurants will face continuing
pressures to maintain sales levels. In order to improve the competitiveness of
these restaurants, in January 1997 the Company began an extensive advertising
campaign utilizing radio, newspaper, billboards, direct customer mailings and a
rewards program for customers who frequent the Company's restaurants on a
regular basis. Although it is too early to determine the direct results of this
advertising, the Company believes these efforts should help reverse the recent
trend of same store sales decreases.
Sales at the Company's bagel restaurants of $879,760 for the first
twenty-six weeks of fiscal 1997 increased 780.0% from $99,973 of sales for the
same period of fiscal 1996. This increase in sales was primarily a function of
the Company having five bagel restaurants open as of December 29, 1996, while
only having two bagel restaurants open as of December 31, 1995. The Company is
required by its development agreement to have nine stores open by July 1, 1997
and thirty stores open by July 1, 2001.
Cost of Food and Beverage. The cost of food and beverage as a percentage
of sales increased to 30.5% for the first twenty-six weeks of fiscal 1997 from
29.0% for the same period of fiscal 1996. The increase in the cost of food and
beverage was due, in part, to an increase in prices of selected products at the
Company's Italian and steakhouse restaurants without corresponding menu price
increases. In addition, the mix of the Company's business has changed in fiscal
1997 to include a larger percentage of bagel restaurant sales, which have a
higher cost of food and beverage associated with them.
The Company does not expect the cost of food and beverage to increase
significantly in the future. The Company is in process of implementing a new
menu at its Italian restaurants which should help to stabilize the cost of food
and beverage. In addition, the Company expects to construct a commissary during
fiscal 1998 to lower the cost of food and beverage at its bagel restaurants.
Labor and Benefits. Labor and benefit costs as a percentage of sales
increased to 36.2% for the first twenty-six weeks of fiscal 1997 from 34.2%
during the same period of last year. This increase in labor and benefit costs
was mainly due to the fixed labor and benefit costs at the Company's Italian and
steakhouse restaurants being spread across a lower sales base and high labor and
benefit costs associated with the opening of the Company's new bagel
restaurants.
Although the Company does not expect the federally mandated minimum wage
increase which became effective October 1, 1996 to have 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 36.0% of
sales for the first twenty-six weeks of fiscal 1997 from 35.2% 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 restaurants being spread across a small
sales base. If sales at the Company's bagel restaurants 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 restaurants 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 1.9% of
full-service restaurant sales during the first twenty-six weeks of fiscal 1997
from 3.6% of full-service restaurant sales in the first twenty-six 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% of bagel restaurant
sales for advertising and promotion expenses in order to implement several
direct mailing and local store marketing campaigns in the Dallas-Fort Worth,
Texas area.
13
<PAGE>
General and Administrative. General and administrative costs as a
percentage of sales increased to 7.9% for the first twenty-six weeks of fiscal
1997 from 6.3% of sales for the same period of last year. The increase in
general and administrative costs was primarily due to the Company incurring
approximately $90,000 of additional general and administrative costs in the
first twenty-six weeks of fiscal 1997 related to the operating of additional
bagel restaurants. General and administrative costs at the Company's
full-service restaurants have remained relatively constant, but have increased
as a percent of sales due to lower sales at these restaurants. The Company does
not expect general and administrative costs at its full-service and bagel
restaurants to increase significantly during the remainder of the fiscal year.
Impairment of Assets Write-down. During the first twenty-six weeks of
fiscal 1997 the Company recognized an impairment loss of $640,286 for the
long-lived assets at its Madison, Wisconsin restaurant. During November 1997, 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 has attempted several advertising and promotional campaigns during the
first twenty-six weeks of fiscal 1997 that have not produced the results
management had expected. Based on these items, management has revised their
forecasts for this restaurant and has projected operating losses and cash flow
deficits for the remainder of the restaurant's lease, which expires in fiscal
2005. Accordingly, the Company has fully written off the cost of the long-lived
assets at this restaurant.
Other Income (Expense) Net. Other income (expense) decreased to a net
expense of $27,846 for the first twenty-six weeks of fiscal 1997 from a net
income of $6,699 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). The income tax benefit for the first
twenty-six weeks of fiscal 1997 was $10,108 as compared to an income tax benefit
of $65,000 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 twenty-six 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 $4,475 of state and franchise taxes
paid during the period.
As of December 29, 1996, the Company has $144,000 of alternative minimum
tax credit carryforwards and $1,494,000 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 restaurants 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.
14
<PAGE>
Offsetting the decrease in sales by the Company's Italian and
steakhouse restaurants was the opening of four bagel restaurants during fiscal
1996. These stores were opened in the Dallas-Forth Worth, Texas 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 the new bagel restaurants.
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 the bagel restaurants.
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.
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 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 restaurants 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 December 29, 1996 the Company had cash and cash equivalents on hand
of $637,257, which represents a decrease of $965,679 from the $1,602,936 in cash
and cash equivalents reported as of June 30, 1996. Net cash used in operating
activities was $442,705 for the first twenty-six weeks of fiscal 1997. In
addition to the net loss of $1,575,125, the Company reduced its accounts payable
balance by $366,763 during the first twenty-six 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 restaurant. These uses of cash were partially offset by non-cash
expenses including depreciation of $505,101 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 $151,039.
15
<PAGE>
Net cash used in investing activities was $395,802 during the first
twenty-six weeks of fiscal 1997. This cash was used primarily for purchases of
equipment and leasehold improvements for the Company's fifth bagel restaurant in
the Dallas-Fort Worth, Texas area.
Net cash used in financing activities was $127,172 for the first twenty-
six weeks of fiscal 1997, reflecting a net repayment of amounts due under the
Company's debt financing.
Big D Bagels, Inc. ("Big D"), 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 requires Big D to build
30 bagel restaurants by July 1, 2001. During fiscal 1996, four bagel restaurants
were built, thus meeting the initial terms of this agreement. Big D is required
to open five additional bagel restaurants during fiscal 1997. As of December 29,
1996, Big D has opened one additional bagel restaurant, and as of January 31,
1997 has entered into lease agreements for two additional bagel restaurant
sites. The Company believes each new site will require approximately $350,000
for capital expenditures, including the initial franchise fee. In addition, Big
D intends to construct a commissary in fiscal 1998 at an estimated cost of
$500,000. Currently, Big D is supplying fresh dough to its bagel restaurants
from the commissary of another Bruegger's franchisee in Austin, Texas.
On October 15, 1996, the Company filed a Registration Statement with
the Securities and Exchange Commission for a Rights Offering to its existing
shareholders. In response to assertion by Bruegger's that it had certain rights
of consent and first refusal with respect to the common stock being offered, the
Company and Big D filed a lawsuit in United States District Court against
Bruegger's and Quality Dining. In light of the lawsuit and the Company's desire
to have this matter resolved prior to the commencement of the Rights Offering,
Ciatti's announced that it was postponing the record date and commencement date
of its rights offering.
The Company plans to finance its working capital and capital resource
needs with its current cash, future cash generated from operations, proceeds
from this offering, and additional debt or equity financing. The Company
believes that these sources will be sufficient to enable it to satisfy its
working capital and capital resource needs for the next twelve months. If the
Company is unable to successfully raise funds from this offering or the rights
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.
In order to finance its working capital requirements, on February 11,
1997, the Company borrowed $50,000 from its Chairman of the Board of Directors.
See "Certain Transactions."
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(R)" and one Steakhouse restaurant operating in Wisconsin
under the name "Spurs Steakhouse & Saloon(R)". On January 1, 1995, Big D Bagels,
Inc. ("Big D"), the wholly-owned subsidiary of the Company, entered into an
exclusive Area Development Agreement with Bruegger's Franchise Corporation to
develop bagel restaurants in the Dallas-Fort Worth, Texas area. As of February
28, 1997, Big D is operating five bagel restaurants in the Dallas-Fort Worth,
Texas area.
The Company is issuing these Notes to raise working capital, including
additional capital to expand the number of bagel restaurants owned and operated
by Big D in Dallas-Fort Worth, Texas. Under the Development Agreement, Big D
must have nine bagel restaurants open by July 1, 1997 and thirty bagel
restaurants 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 St. 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 St. 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 St. Cloud restaurant is located
in a community of approximately 50,000 residents, 50 miles northwest of the
Minneapolis-St. Paul metropolitan area and the LaCrosse, Wisconsin restaurant is
located in a community of approximately 50,000 residents, 90 miles southeast of
the Minneapolis-St. 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.
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<PAGE>
Bagel Restaurants
-----------------
Big D currently operates five bagel restaurants in the Dallas-Forth
Worth area. These bagel restaurants range in size from 2,130 to 3,000 square
feet and seat between 45 and 50 customers. These bagel restaurants also offer a
limited area for outdoor patio dining.
The following table sets forth the opening date and square footage of
the Company's bagel restaurants:
<TABLE>
<CAPTION>
Approximate
Date Opened Location Square Footage
----------- -------- --------------
<S> <C> <C>
October, 1995 Plano, Texas 3,000
December, 1995 Plano, Texas 2,250
February, 1996 Dallas, Texas 2,500
June, 1996 Fort Worth, Texas 2,130
November, 1996 Dallas, Texas 2,200
</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.
For customers waiting to be seated for dining, the Company has available in most
restaurants lounge areas, which have full-service liquor licenses. 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 12:00 a.m. (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(R) 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.
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<PAGE>
Bagel Restaurants
-----------------
The Company's bagel restaurants specialize in 12 varieties of freshly
baked bagels and branded cream cheeses, as well as their 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 restaurant offers deli-style bagel sandwiches, freshly-made soups, and
other food and beverage items. The bagel restaurants 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 restaurants is
based on plans and guidelines issued by Bruegger's. Bruegger's updated its plans
and designs for all bagel restaurants in 1995 and all of the Company's existing
bagel restaurants 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 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. These manuals include a Construction
Specifications Manual, a Furniture, Fixtures and Equipment Specifications
Manual, a Pre-Opening Manual, a Recipe Manual and an Operations Manual. The
Company has also developed a Training Manual for each position in its Italian
restaurants.
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 restaurants. Additionally, a Vice President
for Administration, a Corporate Controller, a Director for Purchasing, a
Director for Training 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
19
<PAGE>
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 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 Restaurants
-----------------
Effective January 1, 1995, the Company entered into a Development
Agreement with Bruegger's Franchise Corporation. 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 June 30, 1996, Bruegger's,
directly or through franchises, operated in 52 metropolitan markets in 32
states. Since it was founded in 1983, Bruegger's has experienced 11 consecutive
years of systemwide comparable store sales growth. Bruegger's generated
systemwide net sales of over $150 million, and for the 12 months ended May 1996
(the latest date available) mature Bruegger's bakeries (open two or more years)
were reported to generate on average approximately $801,000 in net sales.
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 January 1, 1997, there were 440 bagel
restaurants 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 systemwide 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 restaurants. 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 Development Agreement between the Company and Bruegger's, the Company is
required to build 30 bagel restaurants 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. Four bagel restaurants have
been opened in the north-central portion of the Dallas area, and one was opened
in the western portion of Fort Worth.
The ability of the Company to open additional bagel restaurants 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 leasehold improvements for the existing bakeries varied from
$150,000 to $300,000 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 ranged from $150,000 to $200,000 for
each bakery. Other preopening expenses, including design services, smallwares,
training, and initial inventory has varied from $28,000 to $45,000 for each
bakery, including the initial franchise fee.
20
<PAGE>
Relationship with Bruegger's and Quality Dining, Inc.
The development by Big D of bagel restaurants is based upon franchise
documents entered into between Big D 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 restaurant.
The Development Agreement gives Big D the right to construct, own and
operate bagel restaurants 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 Development Agreement grants Big D
the exclusive right and obligation to develop thirty (30) bagel restaurants
within the Development Area by July 1, 2001 on the following schedule:
<TABLE>
<CAPTION>
Minimum number
of bagel restaurants
Big D must have in
Deadline operation by deadline
-------- ---------------------
<S> <C>
July 1, 1996 4
July 1, 1997 9
July 1, 1998 14
July 1, 1999 19
July 1, 2000 24
July 1, 2001 30
</TABLE>
Big D is to choose the sites for the bagel restaurants at its sole
expense but must seek site approval from Bruegger's in writing prior to
beginning construction. The Development Agreement also defines the relationship
of Big D to Bruegger's as that of independent contractor and states that none of
the rights granted therein may be assigned or otherwise transferred. Under the
terms of the Development Agreement, Big D also agreed that it will not sell any
of its securities to any other person, with certain limited exceptions, without
notice to, and the consent of, Bruegger's. In addition, Ciatti's, Inc. agreed
that any sales of its interest in Big D shall be 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 Development Agreement may be reviewed in one year increments after
the initial term if Big D continues opening bagel restaurants at the rate of
three per year. After five years of renewals, however, Big D is obligated to
open only one bagel restaurant per year.
The Development Agreement gives Big D the exclusive right to operate
bagel restaurants in the Development Area. The 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 Big D has
a right to act as distributor.
The Development Agreement provides that if Big D breaches any term of
the Development Agreement, Bruegger's has the right to terminate the Development
Agreement.
The Development Agreement provides that Big D and Bruegger's will enter
into a predetermined Franchise Agreement for each bagel restaurant opened by Big
D. The Franchise Agreement grants Big D the right to establish and operate the
particular bagel restaurant and to use the Bruegger's system and various
trademarks. The Franchise Agreement designates the locations approved pursuant
to the Development Agreement as the exclusive sites for the operation of the
bagel restaurants. Under the terms of the Franchise Agreement, Bruegger's agrees
to provide Big D 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 Big D operates a bagel restaurant within such area
it must immediately become a member of the Coop. Big D's duties under the
Franchise Agreement include constructing bagel restaurants at its own expense
from pre-approved plans and sending new managers to Bruegger's training program.
Big D also promises that its bagel restaurants will strictly conform to
Bruegger's methods,
21
<PAGE>
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, Big D
is obligated to pay certain franchise and other fees to Bruegger's.
Each Franchise Agreement has a term of twenty (20) years and may be
renewed in ten (10) year increments. If Big D chooses to renew, the terms of the
Franchise Agreement will change to whatever terms are being offered new
franchisees at the time of renewal.
The Company and Bruegger's are currently engaged in litigation. See "-
Legal Proceedings."
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 sales historically have occurred during the period
from July through December. The Company is currently unable to determine whether
the operation of its bagel restaurants will result in any change in its
seasonality.
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.
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 restaurants, 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 3.75 percent of its projected fiscal 1997
full service restaurant sales for advertising. Under the terms of the Company's
franchise agreement 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 restaurants currently
existing in the franchise area, the majority of the Company's efforts in this
respect are directed to local
22
<PAGE>
store marketing. Television 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.
In some instances the Company may have to obtain zoning variances and land use
permits for its new restaurants. 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 Development Agreement between Big D and
Bruegger's, Big D, as a franchisee of Bruegger's, has the right to use all
trademarks associated with the Bruegger's bagels franchise in connection with
the operation of bagel restaurants in the Dallas-Fort Worth area.
Employees
As of March 1, 1997, the Company employed approximately 915 persons,
including 10 corporate employees, 55 restaurant 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
23
<PAGE>
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 restaurants 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
On October 1, 1996, the Company filed a Registration Statement with the
Securities and Exchange Commission for a Rights Offering to its existing
shareholders. In response to Ciatti's filing of the Registration Statement,
Bruegger's asserted that Bruegger's has certain rights of consent and of first
refusal regarding the sale of securities of Ciatti's. Bruegger's is the
franchisor and Big D, the Company's wholly-owned subsidiary, is the franchisee
under a Development Agreement in which Big D has the exclusive right to develop
Bruegger's bagel restaurants in the Dallas-Fort Worth, Texas area. Ciatti's
believes that such rights exist only with respect to securities of Big D, who is
the "Developer" under the Development Agreement between Big D and Bruegger's,
and not with respect to Ciatti's, which is not a party to the Development
Agreement.
Ciatti's and Bruegger's were unable to agree upon resolution of the
matter and, on November 8, 1996, Ciatti's and Big D filed a lawsuit in United
States District Court for the District of Minnesota against Bruegger's and its
parent corporation, Quality Dining, Inc. ("Quality Dining"). In the lawsuit,
Ciatti's and Big D asked for declaratory and injunctive relief against the
defendants with respect to the Development Agreement. In response, Bruegger's
and Quality Dining filed a counterclaim seeking declaratory relief that (i) the
Development Agreement required Ciatti's to provide prior notice of its offering
to Bruegger's and obtain consent of Bruegger's and (ii) that the Company's use
of any trademark of Bruegger's in the Company's proposed rights offering without
the written consent of Bruegger's would violate the Development Agreement and
related Franchise Agreements between Big D and Bruegger's. The Company believes
that Bruegger's counterclaims are substantially without merit.
On February 14, 1997, a Summary Judgment hearing was held by the Court.
The Court denied the Company's motion for Summary Judgment as premature and
scheduled a trial or rehearing on the motion to be held on or about April 1,
1997 and permitted the parties to conduct limited discovery.
In light of the lawsuit and its desire to have this matter resolved
prior to commencement of the rights offering, Ciatti's announced that it was
postponing the record date and the commencement date of its rights offering.
CERTAIN TRANSACTIONS
In order to finance certain working capital requirements, on February
11, 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 amortizes in four installments from October 1997 through
June 1998. The Company anticipates that it may be necessary fro it to 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.
24
<PAGE>
DESCRIPTION OF NOTES AND TERMS OF OFFERING
General
The Notes are general obligations of the Company. The Company will issue
up to a principal amount of $2,000,000 of Notes. The Notes may be issued in one
or more series having various maturities, interest rates, principal amounts,
prepayment provisions and other features as the Company may establish. This
Prospectus relates to Subordinated Fixed-Term notes having maturities of one or
three years after the date of issue. There is no limitation on the respective
amounts of each series of Notes which may be outstanding.
The Notes will be issued in registered form, without coupons, in any
multiple of $1,000. In the future, the Notes may be offered and issued in such
denominations as may be designated from time to time by the Company. The Company
currently intends to issue the Notes in certificated form; however, the Company
may elect to issue Notes in uncertificated from pursuant to Article 8 of the
Uniform Commercial Code.
The Notes are unsecured general obligations of the Company, subordinated
to all existing and future Senior Indebtedness. There is no sinking fund or
other provision for payment of the Notes at maturity. Notes which mature will be
paid from general funds of the Company or from the sale of new Notes. See
"Description of Notes and Terms of Offering - Subordination."
Interest
Initial interest rates are set at 9.00% for One Year Notes and 9.25% for
Three Year Notes. The initial interest rate payable on any unsold Notes will be
subject to change by the Company from time to time based on market conditions
and the Company's financial requirements, but no such change will affect the
interest rate on any Note purchased prior to the effective date of such change.
Interest payable on the Notes accrues from the date of issuance and is
calculated based on a 360-day year.
Interest on all the Notes will be paid semi-annually, on January 1 and
July 1.
Prepayment by the Company
The Company reserves the right to prepay any Note, in whole or in part,
plus accrued interest to the prepayment date, without penalty or premium upon
15 days written notice. Any partial prepayment shall be in multiples of $1,000.
Interest Accrual Date
Interest on the Notes accrues from the date of purchase, which is deemed
to be the date the Company receives funds prior to 3:00 p.m. on a business day,
or the next business day if the Company receives such funds on a non-business
day or after 3:00 p.m. on a business day. For this purpose, the Company's
business day will be deemed to be Monday through Friday, except for national
bank holidays.
Interest Withholding
With respect to those investors who do not provide the Company with a
fully executed Internal Revenue Service Form W-8 or Form W-9, the Company will
withhold 31% of any interest paid. Otherwise, no interest will be withheld.
Subordination
The Notes are subordinated in right of payment to the prior payment in
full of all Senior Indebtedness. The Company and each Noteholder by accepting a
Note agrees to the subordination and authorizes the Company to give it effect.
Senior Indebtedness means all Indebtedness (as defined below) of the Company
except (a) indebtedness evidenced by the Notes and (b) indebtedness which is
expressly made equal in right of payment to the Notes. As of March 1, 1997, the
25
<PAGE>
Company's $997,850 of Senior Indebtedness includes (i) $224,111 of an 11.5% note
payable to a financial institution due in monthly installments through December
2000, (ii) $337,837 of 10.5% notes payable to a financial institution due in
monthly installments May 2001, (iii) $385,902 of amounts due under a capital
lease through the January 2005 and (iv) $50,000 of a 10.5% promissory note to an
affiliate of the Company due in quarterly installments through June 1998. See
"Certain Transactions." "Indebtedness" of the Company on any date includes (i)
all indebtedness for money borrowed by the Company, (ii) indebtedness of the
Company under leases which are capitalized under generally accepted accounting
principles ("GAAP") and (iii) indebtedness of the Company representing the
deferred and unpaid purchase price of any property or business (excluding trade
and service payables incurred in the ordinary course of business and
constituting current liabilities).
Upon the maturity of any Senior Indebtedness by lapse of time,
acceleration of otherwise, all such Senior Indebtedness must first be paid in
full before any payment is made by the Company on account of the Notes. The
Company may not pay any amounts in respect of the Notes, designate or set aside
any amount for such payment, or acquire any Notes for cash or property, other
than capital stock of the Company, (a) if the Company is then in default in the
payment of any obligation due with respect to Senior Indebtedness or (b) if a
default on Senior Indebtedness occurs and is continuing that permits holders of
such Senior Indebtedness to accelerate its maturity (other than a payment
default) and the Company receives a notice of the default. The Company may
resume payments on the Notes and may acquire them when the default is cured or
waived.
Default
In the event of nonpayment when due of any payment due on any Note, and
if such default continues for a period of 30 days, then at the option of the
holder the Note, all amounts then owing under the Note shall become due and
payable, subject to the subordination provisions of the Note.
Place, Method and Time of Payment
Principal and interest upon the Notes will be payable at the principal
executive office of the Company, as it may be established from time to time, or
at such other place as the Company may designate for that purpose; provided,
however, that payments may be made at the option of the Company by check or
draft mailed to the person entitled thereto at his or her address appearing in
the register which the Company maintains for that purpose. Any payment of
principal or interest which is due on a non-business day will be payable by the
Company on the next business day immediately following such non-business day.
Exchanges
The Company, in its discretion, may offer or accept outstanding Notes in
exchange for other Notes under this Prospectus.
Transfer and Exchange
A holder may transfer or exchange Notes in accordance with this
Prospectus. The Company or other registrar under this Prospectus may require a
holder, among other things, to furnish appropriate endorsements and transfer
documents, and to pay any taxes and fees required by law or permitted by this
Prospectus. The Company is not required to transfer or exchange any Notes
selected for prepayment, beginning at the opening of business 15 days before the
day notice of prepayment is mailed by the Company. Also, the Company is not
required to transfer or exchange any Note for a period of 15 days before the
maturity of the Note.
Reports
The Company publishes annual reports containing audited financial
statements and quarterly reports containing unaudited financial information for
the first three quarters of each fiscal year. Copies of such reports will be
sent to any Noteholder upon oral or written request to the Company. The
requesting Noteholder shall identify itself as such in such request.
26
<PAGE>
Service Charges
The Company reserves the right to assess reasonable service charges for
services such as changing the registration of any Note when such change is
occasioned by a change in name of the holder or a transfer (whether by operation
of law or otherwise) of a Note by the holder to another person.
Variations in Terms and Conditions
The Company may elect to offer only certain of the series of Notes
described in this Prospectus, depending on the Company's financial requirements
and market conditions. The Company reserves the right from time to time to offer
securities different from the Notes and to vary the terms and conditions of the
offering depending upon various factors, including the state or locality where
the purchaser resides, the purchaser's tenure as an investor with the Company or
whether an investor is increasing or renewing his or her investment in the
Company's securities. In addition, the Company may vary certain terms and
conditions of the Notes for its employees.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain federal income tax
consequences relating to the purchase, ownership, and disposal of the Notes. The
discussion is based upon the current provisions of the Internal Revenue Code of
1986, as amended (the "Code"), the Treasury regulations promulgated thereunder
and judicial or ruling authority, all of which are subject to change, which may
be retroactive. The discussion assumes that the Notes are held as capital assets
and does not purport to deal with federal income tax consequences applicable to
all categories of investors, some of which may be subject to special rules.
Investors should consult their own tax advisors to determine the federal, state,
local, and any other tax consequences of the purchase, ownership, and
disposition of the Notes.
Sale, Exchange or Retirement
Upon the sale, exchange or retirement of a Note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale, exchange or retirement and the holder's adjusted tax basis
in the Note. The adjusted tax basis of a Note to a particular holder generally
will equal the holder's cost for the Note, increased by any accrued but unpaid
interest previously included by such Holder in income with respect to the Note
and decreased by principal payments previously received by such Holder with
respect to the Note. Any such gain or loss will be capital gain or loss, except
for gain representing accrued interest not previously included in income.
Reporting and Backup Withholding
The Company will report annually to the Internal Revenue Service and to
holders of record that are not excepted from the reporting requirements such
information as may be required by law with respect to interest on the Notes.
Under certain circumstances, a holder of a Note may be subject to "backup
withholding" at a 31% rate. Backup withholding may apply to a holder who is a
United States person if the holder, among other circumstances, fails to furnish
his Social Security number or other taxpayer identification number to the
Company. Backup withholding, however, does not apply to payments on a Note made
to certain exempt recipients, such as corporations and tax exempt organizations.
PLAN OF DISTRIBUTION
The Notes are being offered on a continuous basis. The Notes will be
sold directly by officers and other employees of the Company, without an under
writer or selling agent.
From time to time, the Company may limit the volume of Notes sold. The
Company may vary the terms and conditions of the offering as otherwise described
under "Description of Notes - Variations in Terms and Conditions."
27
<PAGE>
Further, the Company may offer different securities at different times depending
on such factors as the Company's liquidity requirements, the interest rate
environment and other economic conditions.
The Company's employees participating in the sale of the Notes are not
required to be registered as brokers under the Exchange Act, based upon the safe
harbor provided by Rule 3a4-1 under the Exchange Act. Pursuant to Rule 3a4-1,
such employees will not be deemed to be brokers because they will not receive a
commission or other remuneration in connection with the sale of the Notes, and
are not and will not be associated persons of a broker or dealer. In addition,
the employees will restrict their participation in the sale of the Notes to the
following activities, as required under Rule 3a4-1(a)(4)(iii) of the Exchange
Act: (i) preparing and delivering written communications as generally approved
by an officer or director of the Company, without making any oral solicitations
of potential purchasers, (ii) responding to inquiries of a potential purchaser
in a communication initiated by the potential purchaser; provided, however, that
the content of such responses will be limited to information contained in this
Prospectus and any applicable Prospectus Supplement, and (iii) performing
ministerial and clerical work involved in effecting any transaction.
LEGAL MATTERS
The validity of the Notes offered will be passed upon for the Company by
Lindquist & Vennum, P.L.L.P., 4200 IDS Center, Minneapolis, Minnesota 55402.
EXPERTS
The consolidated financial statements of the Company 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 public accountants, given on the authority of said
firm as experts in auditing and accounting.
28
<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 Notes offered hereby, nor does it constitute an
offer to sell or a solicitation of an offer to buy any of the Notes 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>
Available Information.......................................... 2
Incorporation of Certain Documents by
Reference.............................................. 2
Prospectus Summary............................................. 3
Risk Factors................................................... 5
Ratio of Earnings to Fixed Charges............................. 10
Use of Proceeds................................................ 10
Selected Financial Data........................................ 11
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................................ 12
Business...................................................... 17
Description of Notes and Terms of Offering.................... 25
Certain Federal Income Tax Consequences....................... 27
Plan of Distribution.......................................... 27
Legal Matters................................................. 28
Experts....................................................... 28
</TABLE>
$2,000,000
PRINCIPAL AMOUNT
---------------------------------------
CIATTI'S, INC.
---------------------------------------
PROSPECTUS
March xx, 1997
---------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14: Other Expenses of Issuance and Distribution
<TABLE>
<S> <C>
SEC registration fee $ 606
Legal fees 12,500
Accounting fees 4,000
Printing expenses 1,500
Blue Sky fees 1,000
Miscellaneous fees and expenses 2,394
--------
Total $ 22,000
========
</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.
II-1
<PAGE>
Item 16. Exhibits
Exhibit No. Description
- ---------------------------
4.1.1 Form of One-Year Promissory Note
4.1.2 Form of Three-Year Promissory Note
4.2 Form of Subscription Agreement
5 Opinion and Consent of Lindquist & Vennum P.L.L.P., counsel to
the Company (1)
23.1 Consent of Grant Thornton LLP
23.2 Consent of Lindquist & Vennum P.L.L.P. (see Exhibit 5 above)
24 Powers of Attorney
- ------------------------------------------------
(1) To be filed by amendment.
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 Notes offered herein, and the
offering of such Notes 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 Notes being registered which remain unsold at the expiration of the
offering.
II-2
<PAGE>
(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.
(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 12th day of March, 1997.
CIATTI'S, INC.
(Registrant)
By /s/ Phillip R. Danford
----------------------
Phillip R. Danford
President and Director
II-4
<PAGE>
Exhibit 4.1.1
Amount $ Number:
------------- -------------
One-Year Subordinated Note
---------------------------
Name (the "Noteholder")
---------------------------
Date Received
FOR VALUE RECEIVED, Ciatti's, Inc. (the "Company"), a Minnesota
corporation, hereby promises to pay to the Noteholder, or registered assigns,
interest (computed on the basis of a 360-day year) on the unpaid balance thereof
at the rate of 9.00% percent per annum from the date noted above, payable
semiannually on the 1st day of January and the 1st day of July each year
commencing with July 1, 1997 until the principal hereof has become due and
payable The entire principal sum of this Note in the amount noted above and any
accrued interest yet unpaid shall become due and payable in full on
_______________, _____.
Payments of both principal and interest are to be made at 5555 West 78th
Street, Edina, Minnesota 55439-2702, or any other place the Noteholder
designates to the Company in writing. If any payment on this Note becomes due
and payable of a Saturday, Sunday, or business holiday, the maturity date
thereof shall be extended to the next succeeding business day. The Company
reserves the right to prepay this Note in whole or in part plus accrued interest
to the prepayment date, without penalty or premium. Any partial prepayment shall
be in multiples of $1000.
This Note is unsecured in all respects. This Note is subordinated in
right of payment to the prior payment in full of all Senior Indebtedness. The
Company and the Noteholder by accepting this Note agrees to the subordination
and authorizes the Company to give it effect. Senior Indebtedness means all
Indebtedness (as defined below) of the Company except (a) indebtedness evidenced
by this Note and (b) indebtedness which is expressly made equal in right of
payment to this Note. "Indebtedness" of the Company on any date includes (i) all
indebtedness for money borrowed by the Company, (ii) indebtedness of the Company
under leases which are capitalized under generally accepted accounting
principles ("GAAP") and (iii) indebtedness of the Company representing the
deferred and unpaid purchase price of any property or business (excluding trade
and service payables incurred in the ordinary course of business and
constituting current liabilities).
Upon the maturity of any Senior Indebtedness by lapse of time,
acceleration of otherwise, all such Senior Indebtedness must first be paid in
full before any payment is made by the Company on account of this Note. The
Company may not pay any amounts in respect of this Note, designate or set aside
any amount for such payment, or acquire any Note for cash or property, other
than capital stock of the Company, (a) if the Company is then in default in the
payment of any obligation due with respect to Senior Indebtedness or (b) if a
default on Senior Indebtedness occurs and is continuing that permits holders of
such Senior Indebtedness to accelerate its maturity (other than a payment
default) and the Company receives a notice of the default. The Company may
resume payments on this Note and may acquire them when the default is cured or
waived.
In the event of nonpayment when due of any payment due on this Note, and
if such default continues for a period of 30 days, then at the option of this
Noteholder, all amounts then owing under this Note shall become due and payable,
subject to the subordination provisions of this Note.
This Note shall be governed by and construed and enforced in accordance
with the laws of the State of Minnesota.
CIATTI'S, INC.
By: /s/ Phillip R. Danford Attest: /s/ Joseph W. Fesenmaier
- --------------------------- --------------------------
Phillip R. Danford, President Joseph W. Fesenmaier, Controller
<PAGE>
Exhibit 4.1.2
Amount $ Number:
------------- -------------
Three-Year Subordinated Note
---------------------------
Name (the "Noteholder")
---------------------------
Date Received
FOR VALUE RECEIVED, Ciatti's, Inc. (the "Company"), a Minnesota
corporation, hereby promises to pay to the Noteholder, or registered assigns,
interest (computed on the basis of a 360-day year) on the unpaid balance thereof
at the rate of 9.00% percent per annum from the date noted above, payable
semiannually on the 1st day of January and the 1st day of July each year
commencing with July 1, 1997 until the principal hereof has become due and
payable The entire principal sum of this Note in the amount noted above and any
accrued interest yet unpaid shall become due and payable in full on
_______________, _____.
Payments of both principal and interest are to be made at 5555 West 78th
Street, Edina, Minnesota 55439-2702, or any other place the Noteholder
designates to the Company in writing. If any payment on this Note becomes due
and payable of a Saturday, Sunday, or business holiday, the maturity date
thereof shall be extended to the next succeeding business day. The Company
reserves the right to prepay this Note in whole or in part plus accrued interest
to the prepayment date, without penalty or premium. Any partial prepayment shall
be in multiples of $1000.
This Note is unsecured in all respects. This Note is subordinated in
right of payment to the prior payment in full of all Senior Indebtedness. The
Company and the Noteholder by accepting this Note agrees to the subordination
and authorizes the Company to give it effect. Senior Indebtedness means all
Indebtedness (as defined below) of the Company except (a) indebtedness evidenced
by this Note and (b) indebtedness which is expressly made equal in right of
payment to this Note. "Indebtedness" of the Company on any date includes (i) all
indebtedness for money borrowed by the Company, (ii) indebtedness of the Company
under leases which are capitalized under generally accepted accounting
principles ("GAAP") and (iii) indebtedness of the Company representing the
deferred and unpaid purchase price of any property or business (excluding trade
and service payables incurred in the ordinary course of business and
constituting current liabilities).
Upon the maturity of any Senior Indebtedness by lapse of time,
acceleration of otherwise, all such Senior Indebtedness must first be paid in
full before any payment is made by the Company on account of this Note. The
Company may not pay any amounts in respect of this Note, designate or set aside
any amount for such payment, or acquire any Note for cash or property, other
than capital stock of the Company, (a) if the Company is then in default in the
payment of any obligation due with respect to Senior Indebtedness or (b) if a
default on Senior Indebtedness occurs and is continuing that permits holders of
such Senior Indebtedness to accelerate its maturity (other than a payment
default) and the Company receives a notice of the default. The Company may
resume payments on this Note and may acquire them when the default is cured or
waived.
In the event of nonpayment when due of any payment due on this Note, and
if such default continues for a period of 30 days, then at the option of this
Noteholder, all amounts then owing under this Note shall become due and payable,
subject to the subordination provisions of this Note.
This Note shall be governed by and construed and enforced in accordance
with the laws of the State of Minnesota.
CIATTI'S, INC.
By: /s/ Phillip R. Danford Attest: /s/ Joseph W. Fesenmaier
- --------------------------- --------------------------
Phillip R. Danford, President Joseph W. Fesenmaier, Controller
<PAGE>
CIATTI'S, INC.
SUBSCRIPTION AGREEMENT
For Fixed Term Notes
5555 West 78th Street, Edina, Minnesota 55439-2702
(612) 941-0108 extension 205 (800) 952-2809 extension 205
INVESTMENT INFORMATION:
Enclosed is $ _______________ for the purchase of Subordinated Note(s) as
follows (minimum investment is $1,000 per note. Please make checks payable
to Ciatti's, Inc.):
One Year Fixed Term Note $ _______________ (desired amount of investment)
Three Year Fixed Term Note $ _______________ (desired amount of investment)
OWNERSHIP INFORMATION: (Select one of A, B, C, or D)
Ownership of Notes will be registered exactly as written below.
<TABLE>
<S> <C> <C> <C> <C> <C>
A. [_] Individual
-------------------------------- --------------------
Name Social Security #
Beneficiary
-------------------------------- --------------------
Name Social Security #
B. [_] Joint Tenants
(with right of -------------------------------- --------------------
survivorship) Name Social Security #
-------------------------------- --------------------
Name Social Security #
C. [_] Uniform Transfers
to Minors Act -------------------------------- -------------------- --------------
Minor's Name Social Security # Date of Birth
-------------------------------- --------------------
Custodian's Name (only one allowed by law) Social Security #
D. [_] Corporation
-------------------------------- -------------------
Name Taxpayer I.D. #
</TABLE>
MAILING ADDRESS (Note Certificates and interest payments will be mailed only to
the first address listed):
<TABLE>
<S> <C>
- --------------------------------------------------- ------------------------------------------------------
Street Address Street address of Joint Tenant, if any
- --------------------------------------------------- ------------------------------------------------------
City State/ZIP Day Telephone # City State/ZIP
</TABLE>
SIGNATURE:
I certify that (i) I am a resident of the State of Minnesota, (ii) I have
received and read Ciatti's, Inc.'s Prospectus dated March xx, 1997, (iii) the
number shown on this form is the correct Tax Identification Number of Social
Security Number, and (iv) I am not subject to backup withholding as a result of
a failure to report all interest or dividends, or the IRS has notified me that I
am no longer subject to backup withholding. I understand that Ciatti's, Inc. may
reject my offer to purchase a Note in whole or in part, and my offer to purchase
Notes will not become effective until accepted by Ciatti's, Inc.
<TABLE>
<S> <C>
- ------------------------------------------------------- ------------------------------------------------
Signature of Owner, Joint Tenant or Custodian. Date Signature of Joint Tenant, if any. Date
</TABLE>
The offer to sell securities is made by Prospectus only.
<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
Minneapolis, Minnesota
March 10, 1997
<PAGE>
Exhibit 24
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 March 12,
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 Danford Financial Officer)
/s/ Thomas A. Kelm Director
- ------------------
Thomas A. Kelm
/s/ Joseph Fesenmaier Controller
- ---------------------
Joseph Fesenmaier
