<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark one)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
DECEMBER 28, 1997.
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
-- EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO
_______.
Commission file number 0-16348.
PREMIUM RESTAURANT COMPANY
(Formerly Ciatti's, Inc.)
(Exact name of small business issuer as specified in its charter)
Minnesota 41-1564262
---------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
(612) 941-0108
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. [X]
The Company had 742,819 shares of Common Stock, $.01 par value per share,
outstanding as of January 30, 1998.
<PAGE>
PREMIUM RESTAURANT COMPANY AND SUBSIDIARY
INDEX
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 28, 1997
and June 29, 1997. 3
Consolidated Statements of Operations for the thirteen and twenty-
six weeks ended December 28, 1997 and December 29, 1996. 4
Consolidated Statements of Cash Flows for the twenty-six weeks
ended December 28, 1997 and December 29, 1996. 5
Consolidated Notes to Financial Statements 6-8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 9-13
PART II. OTHER INFORMATION 14-15
2
<PAGE>
PART I - FINANCIAL INFORMATION
PREMIUM RESTAURANT COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 28, 1997 AND JUNE 29, 1997
<TABLE>
<CAPTION>
DEC. 28, JUNE 29,
1997 1997
----------- -----------
(unaudited) (note A)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 576,851 $ 454,157
Receivables 63,595 72,930
Current portion of notes receivable 56,206 -
Inventories 100,017 146,598
Prepaid expenses and other current assets 73,472 83,574
Assets held for sale - 663,108
------------ -------------
Total current assets 870,141 1,420,367
PROPERTY AND EQUIPMENT
Equipment 3,182,540 3,870,418
Leasehold improvements 2,318,771 2,638,024
Automobiles 15,058 15,058
------------ -------------
5,516,369 6,523,500
Less accumulated depreciation and
amortization (2,790,541) (3,281,305)
------------ -------------
Net property and equipment 2,725,828 3,242,195
OTHER ASSETS
Notes receivable 282,479 -
------------ -------------
$ 3,878,448 $ 4,662,562
------------ -------------
------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term notes payable and current maturities of
long-term obligations
Related party $ 400,000 $ 100,000
Other 1,096,995 779,807
Accounts payable 790,601 1,369,290
Accrued salaries and wages 265,471 322,071
Other accrued liabilities 662,927 720,818
------------ -------------
Total current liabilities 3,215,994 3,291,986
LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES 695,841 764,467
SHAREHOLDERS' EQUITY(DEFICIT)
Preferred stock, $.01 par value;
authorized 10,000,000 shares;
no shares issued or outstanding - -
Common stock, $.01 par value;
authorized 10,000,000 shares;
issued and outstanding 742,819 shares 7,428 7,428
Additional paid-in capital 4,335,214 4,335,214
Accumulated deficit (4,376,029) (3,736,533)
------------ -------------
(33,387) 606,109
------------ -------------
$ 3,878,448 $ 4,662,562
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
PREMIUM RESTAURANT COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE 13 WEEKS ENDED FOR THE 26 WEEKS ENDED
--------------------------- -------------------------
DEC. 28, DEC. 29, DEC. 28, DEC. 29,
1997 1996 1997 1996
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales
Full-service restaurants $2,312,970 $3,939,814 $5,896,382 $7,785,702
Bagel bakeries 686,538 456,161 1,386,216 879,760
---------- ---------- ---------- ---------
Total sales 2,999,508 4,395,975 7,282,598 8,665,462
Cost of food and beverage 963,218 1,348,269 2,264,556 2,641,919
---------- ---------- ---------- ---------
Gross profit 2,036,290 3,047,706 5,018,042 6,023,543
Restaurant operating expenses
Labor and benefits 1,085,401 1,541,288 2,644,325 3,140,268
Direct and occupancy 1,221,521 1,585,892 3,011,418 3,117,133
General and administrative expenses 291,385 330,463 671,271 683,243
Gain on sale of full-service restaurants (440,086) - (926,341) -
Loss from closure of bagel bakery 63,039 - 63,039 -
Impairment of assets write-down 90,732 640,286 90,732 640,286
---------- ---------- ---------- ---------
2,311,992 4,097,929 5,554,444 7,580,930
Loss from operations (275,702) (1,050,223) (536,402) (1,557,387)
Other income (expense), net
Interest expense (56,090) (25,058) (113,143) (54,235)
Investment income 5,791 5,717 6,526 15,625
Other, net 1,270 2,139 3,523 10,764
---------- ---------- ---------- ---------
(49,029) (17,202) (103,094) (27,846)
---------- ---------- ---------- ---------
Loss before income taxes (324,731) (1,067,425) (639,496) (1,585,233)
Income tax benefit - (12,058) - (10,108)
---------- ---------- ---------- ---------
Net loss ($324,731) ($1,055,367) ($639,496) ($1,575,125)
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Net loss per share-basic and diluted ($0.44) ($1.42) ($0.86) ($2.12)
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Weighted average number of shares
outstanding during the year-basic and diluted 742,819 742,819 742,819 742,819
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
PREMIUM RESTAURANT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE TWENTY-SIX WEEKS ENDED
-------------------------------
DEC. 28, DEC. 29,
1997 1996
------------ -------------
(unaudited) (unaudited)
<S> <C> <C>
Operating activities:
Net loss $ (639,496) $ (1,575,125)
Adjustment to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 455,392 505,101
Impairment of assets write-down 90,732 640,286
Gain on sale of full-service restaurants (926,341) -
Loss from closure of bagel bakery 63,039 -
Changes in operating assets and liabilities
net of the effects of the sale of full-service restaurants
Receivables 9,335 (24,548)
Income taxes receivable - 165,576
Inventories (22,517) 22,347
Prepaid expenses and other current assets (8,722) (10,701)
Accounts payable (578,689) (366,763)
Accrued salaries and wages (56,600) 50,083
Other accrued liabilities (57,891) 151,039
------------ -------------
Net cash used in operating activities (1,671,758) (442,705)
Investing activities:
Purchases of leasehold improvements and equipment (76,131) (395,802)
Receipts from collections of notes receivable 5,813 -
Proceeds from sale of full-service restaurants 1,483,423 -
------------ -------------
Net cash provided by (used in) investing activities 1,413,105 (395,802)
Financing activities:
Proceeds from debt obligations 451,390 -
Payments of debt obligations (70,043) (127,172)
------------ -------------
Net cash provided by (used in) financing activities 381,347 (127,172)
------------ -------------
Net increase (decrease) in cash and cash equivalents 122,694 (965,679)
Cash and cash equivalents at beginning of period 454,157 1,602,936
------------ -------------
Cash and cash equivalents at end of period $ 576,851 $ 637,257
------------ -------------
------------ -------------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 44,940 $ 56,587
Income taxes - 6,425
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
PREMIUM RESTAURANT COMPANY AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - FINANCIAL STATEMENTS
The unaudited consolidated balance sheet as of December 28, 1997 and the
unaudited consolidated statements of operations and cash flows for the
twenty-six weeks ended December 28, 1997 and December 29, 1996 have been
prepared by the Company. In the opinion of management, all adjustments (all of
which are normal and recurring in nature) necessary to present fairly the
financial position at December 28, 1997 and the results of operations and cash
flow activity for the periods ended December 28, 1997 and December 29, 1996 have
been made. The consolidated balance sheet as of June 29, 1997 has been taken
from the audited financial statements as of that date. Results of operations
for interim periods are not necessarily indicative of results that may be
expected for a full fiscal year or other interim periods.
NOTE B - NET LOSS PER SHARE-BASIC AND DILUTED
On December 28, 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) 128 - "Earnings per Share." The statement requires restatement
of all current and prior year loss per share data. This restatement had no
impact on per share data presented.
The Company's basic net loss per share amounts have been computed by
dividing net loss by the weighted average number of outstanding common shares.
The Company's diluted net loss per share amounts are computed by dividing net
loss by the weighted average number of outstanding common shares and common
share equivalents relating to stock options, when dilutive. Options to purchase
41,548 and 65,921 shares of common stock with a weighted average exercise price
of $2.70 and $2.54 were outstanding during the thirteen weeks ended December 28,
1997 and December 29, 1996 and options to purchase 48,018 and 66,296 shares of
common stock with a weighted average exercise price of $2.63 and $2.52 were
outstanding during the twenty-six weeks ended December 28, 1997 and December 29,
1996, but were excluded from the computation of common share equivalents because
they were anti-dilutive.
NOTE C - RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued SFAS 130, "Reporting
Comprehensive Income," which requires the Company to display an amount
representing total comprehensive income, as defined by the statement, as part of
the Company's basic financial statements. Additionally, SFAS 131, "Disclosures
about Segments of an Enterprise and Related Information," requires the Company
to disclose financial and other information about its business segments, their
products and services, geographic areas, sales, profits, assets and other
information. These statements will be effective in fiscal year 1999.
The adoption of these statements is not expected to have a material effect
on the consolidated financial statements of the Company.
6
<PAGE>
NOTE D - GAIN ON SALE OF FULL-SERVICE RESTAURANTS
During the twenty-six weeks ended December 28, 1997, the Company sold five
of its full-service restaurants. The effect of these sales on the financial
statements was as follows:
<TABLE>
<CAPTION>
<S> <C>
Increase in cash and cash equivalents $ 1,483,423
Increase in notes receivable 344,498
Reduction of accumulated depreciation 433,272
Reduction of equipment and leaseholds (640,193)
Reduction of assets held for sale (606,737)
Reduction of inventories (69,098)
Reduction of prepaid expenses and other current assets (18,824)
------------
Gain on sale $ 926,341
------------
------------
</TABLE>
NOTE E - IMPAIRMENT OF ASSETS WRITE-DOWN
During the second quarter of fiscal 1998, the Company recognized an
impairment loss of $90,732 for the long-lived assets at its Maplewood, Minnesota
restaurant. The Company has determined that the geographic area this restaurant
is located in can no longer support two Italian restaurants (Ciatti's Italian
Restaurant and a competitor restaurant) in such close proximity to each other.
In addition, the Company attempted several advertising and promotional campaigns
during the first twenty-six weeks of fiscal 1998 that did not produce the
results management expected. Based on these items, management revised its
forecasts for this restaurant and projected operating losses and cash flow
deficits for the remainder of the restaurant's lease, which expires in 2000.
Accordingly, the Company has fully written off the long-lived assets at this
restaurant as follows:
<TABLE>
<CAPTION>
<S> <C>
Equipment $ 427,921
Leasehold improvements 104,106
Accumulated depreciation (441,295)
----------
Write-down of impaired assets $ 90,732
----------
----------
</TABLE>
NOTE F - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the second quarter of fiscal 1998, the Company closed one of its
bagel bakeries. The effect of this closure on the financial statements was as
follows:
<TABLE>
<CAPTION>
<S> <C>
Reduction of accumulated depreciation $ 15,218
Reduction of equipment and leaseholds (78,257)
----------
Loss on disposal $ (63,039)
----------
----------
</TABLE>
During the first quarter of fiscal 1998, leasehold improvements of $167,215
were acquired by issuance of debt obligations.
During the twenty-six weeks ended December 29, 1996, the Company recorded a
write-down of impaired assets in connection with one of its full-service
restaurants. The effect of this write-down was to reduce the Company's assets
as follows:
<TABLE>
<CAPTION>
<S> <C>
Building $ 610,829
Equipment 620,710
Leasehold improvements 231,229
Accumulated depreciation (822,482)
------------
Write-down of impaired assets
$ 640,286
------------
------------
</TABLE>
7
<PAGE>
NOTE G - SHAREHOLDERS' EQUITY
On October 8, 1997, the Company's Common Stock was delisted from the Nasdaq
SmallCap Market because of the Company's inability to comply with the Nasdaq
SmallCap Market shareholders' equity requirement. The Company's Common Stock
is now quoted on the Nasdaq OTC Bulletin Board. There can be no assurance that
a deep and liquid market will ever develop in the Company's Common Stock.
NOTE H - CONSULTING AGREEMENT
In January 1998, the Company entered into a Consulting Agreement
("Consulting Agreement") with Select Investor Relations Corporation under which
Select agreed to provide a variety of consulting services to the Company,
including assisting the Company in developing a business plan, providing public
relations activities for the Company, increasing the Company's visibility in the
marketplace and assisting the Company in locating sources of debt and equity
financing. Select is not, however, acting as a broker-dealer and will not
effect any transactions for the Company. Under the terms of the Consulting
Agreement, the Company agreed to pay Select an initial fee of $29,500, plus
monthly fees of $26,042 for a period of one year. The Company has also agreed,
however, that upon its achieving of the minimum and maximum proceeds from this
Offering, it will prepay certain of the amounts due under the Consulting
Agreement. The Company has also agreed to issue a warrant to Select to purchase
24,759 shares of the Company's Common Stock. Of the shares subject to the
warrant, 8,253 shares are exercisable at a price of $.001 per share, 8,253
shares are exercisable at a price of $1.25 a share for a period of 12 months
from the date of the Consulting Agreement and 8,253 shares are exercisable at a
price of $1.625 a share for a period of 15 months from the date of the
Consulting Agreement.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
SALES
Consolidated sales of $2,999,508 for the second quarter of fiscal 1998
decreased 31.8% from consolidated sales of $4,395,975 for the second quarter of
fiscal 1997. Consolidated sales of $7,282,598 for the first twenty-six weeks of
fiscal 1998 were also down 16.0% from consolidated sales of $8,665,462 reported
during the first twenty-six weeks of fiscal 1997. The decrease in consolidated
sales during fiscal 1998 was due to a decline in sales at the Company's
full-service restaurants offset by an increase in sales at the Company's bagel
bakeries, as described below.
Sales at the Company's full-service Italian and steakhouse restaurants of
$2,312,970 for the second quarter of fiscal 1998 decreased 41.3% from sales of
$3,939,814 for the same quarter of fiscal 1997. Full-service restaurant sales
of $5,896,382 for the first twenty-six weeks of fiscal 1998 decreased 24.3% from
sales of $7,785,702 for the same period of fiscal 1997. This decrease in
full-service restaurant sales was due, in part, to the Company selling three of
its full-service restaurants in the first quarter of fiscal 1998, and two of its
full-service restaurants in the second quarter of fiscal 1998. In addition, this
decrease in sales was due to the increased competition of national chain
restaurants in each of the markets in which the Company's Italian and Steakhouse
restaurants operate. The Company expects competition to intensify and,
therefore, most of the Company's restaurants will continue to face significant
pressure to maintain sales levels. To offset this the Company developed a new
menu that was introduced to the Italian restaurants in September 1997. The
focus of the new menu is to increase portion sizes and increase the offerings of
chicken and seafood in order to create a higher quality and value to the
customer. In addition, the purpose of the new menu is to increase the check
average per person without decreasing the value. As of December 28, 1997 the
Company has seen an increase in the check average per person.
Sales at the Company's bagel bakeries of $686,538 for the second quarter of
fiscal 1998 increased 50.5% from $456,161 of sales for the same quarter of
fiscal 1997. Sales of $1,386,216 for the first twenty-six weeks of fiscal 1998
increased 57.6% over bagel bakery sales of $879,760 for the same period of
fiscal 1997. This increase in sales was primarily a function of the Company
having seven bagel bakeries open as of December 28, 1997, while having five
bagel bakeries open as of December 29, 1996. The Company closed one of its
bagel bakeries in November 1997.
COST OF FOOD AND BEVERAGE
Cost of food and beverage as a percentage of sales increased to 32.1% for
the second quarter of fiscal 1998 from 30.7% for the same period in fiscal 1997,
and increased to 31.1% for the first twenty-six weeks of fiscal 1998 from 30.5%
for the same period of fiscal 1997. These costs were up due to the mix of the
Company's business including a larger percentage of bagel bakery sales, which
have a slightly 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 expects to construct a commissary in
calendar 1998 to lower the food and beverage costs associated with its bagel
bakeries and believes the addition of the new menu at the Company's Italian
restaurants will help to lower their cost of food and beverage as a percent of
sales.
LABOR AND BENEFITS
Labor and benefit costs as a percentage of sales increased to 36.2% for the
second quarter of fiscal 1998 from 35.1% for the same quarter of fiscal 1997,
and increased to 36.3% for the first twenty-six weeks of fiscal 1998 compared to
36.2% during the same period of last year. This slight increase was primarily
due to the minimum wage increase that took effect on September 1, 1997. In
response to this minimum wage increase, the Company implemented menu price
increases at its full-service restaurants which took effect October 1, 1997.
These increases have partially offset the cost of the wage increases.
9
<PAGE>
This minimum wage increase is not expected to have a material effect on the
Company's bagel bakeries as all employee pay rates are already at or above the
new minimum wage.
DIRECT AND OCCUPANCY
Direct and occupancy costs increased to 40.7% of sales for the second
quarter of fiscal 1998 from 36.1% during the same period of fiscal 1997, and
increased to 41.4% of sales for the first twenty-six weeks of fiscal 1998
compared to 36.0% of sales during the same period of last year. This increase
was primarily due to the fact that the Company is currently paying rent on four
bagel bakery leases that are not yet under construction. Bagel bakeries will
not be constructed at these locations until financing can be acquired.
Secondly, the Company increased its advertising and promotional costs at its
full-service restaurants from 1.9% of sales for the first twenty-six weeks of
fiscal 1997 to 6.1% of sales for the same period of fiscal 1998. The Company
expects advertising and promotional expenses to decrease to 4.0% of sales for
the remainder of fiscal 1998. The Company is obligated by its development
agreement with Bruegger's to spend a minimum of 2% of sales on advertising and,
following its current practice, expects to spend between 4% and 5% of bakery
sales in the near future. Lastly, direct and occupancy costs at the Company's
bagel bakeries were affected by fixed costs such as rent and depreciation being
spread across a lower sales base than at its full-service restaurants. As sales
at the Company's bagel bakeries increase in the future, these fixed costs will
decrease as a percent of sales.
GENERAL AND ADMINISTRATIVE
General and administrative costs as a percentage of sales increased to 9.7%
for the second quarter of fiscal 1998 from 7.5% of sales reported during the
same quarter of last year, and increased to 9.2% for the first twenty-six weeks
of fiscal 1998 compared to 7.9% of sales for the same period of last year. This
increase in general and administrative costs was primarily due to the Company
incurring approximately $217,000 of general and administrative costs in the
first and second quarters of fiscal 1998 relating to the development of a
corporate infrastructure at its bagel bakery operation, as compared to only
$122,000 of costs in the first and second quarters of fiscal 1997. The Company
also had increased professional fees pertaining to its attempts to acquire
financing for its bagel bakery concept.
GAIN ON SALE OF FULL-SERVICE RESTAURANTS
The Company sold two of its full-service restaurants during the second
quarter of fiscal 1998. The restaurants are located in St. Cloud, Minnesota and
LaCrosse, Wisconsin. The sale of these restaurants generated proceeds of
approximately $852,000. The gain recognized on the sale of the two restaurants
sold in the second quarter of fiscal 1998 was $440,086. The Company sold three
of its full-service restaurants in the first quarter of fiscal 1998. The
restaurants are located in Burnsville, Falcon Heights and Woodbury, Minnesota.
The sale of these restaurants generated proceeds of approximately $975,000. The
gain recognized on the sale of the three restaurants sold in the first quarter
of fiscal 1998 was $486,255.
LOSS FROM CLOSURE OF BAGEL BAKERY
The Company closed one of its bagel bakeries in November, 1997. The bakery
is located in Irving, Texas. This bakery was an experimental site, as it was
connected to a gas station and was only one-third the size of a standard bakery.
The Company determined it was unlikely that this bakery would generate the sales
necessary to achieve profitability. The equipment at this bakery was removed
and can be used at current and/or future bakeries. The Company recognized a
loss of $63,039 on the net book value of the leasehold improvements at the
bakery.
10
<PAGE>
IMPAIRMENT OF ASSETS WRITE-DOWN
During the second quarter of fiscal 1998, the Company recognized an
impairment loss of $90,732 for the long-lived assets at its Maplewood, Minnesota
restaurant. The Company has determined that the geographic area this restaurant
is located in can no longer support two Italian restaurants (Ciatti's Italian
Restaurant and a competitor restaurant) in such close proximity to each other.
In addition, the Company attempted several advertising and promotional campaigns
during the first twenty-six weeks of fiscal 1998 that did not produce the
results management expected. Based on these items, management revised its
forecasts for this restaurant and projected operating losses and cash flow
deficits for the remainder of the restaurant's lease, which expires in 2000.
Accordingly, the Company has fully written off the long-lived assets at this
restaurant.
OTHER INCOME (EXPENSE), NET
Other income (expense) increased to a net expense of $49,029 for the second
quarter of fiscal 1998, up from a net expense of $17,202 reported in the same
quarter of last year, and increased to a net expense of $103,094 for the first
twenty-six weeks of fiscal 1998 from a net expense of $27,846 during the same
period of last year. This increase in expense was primarily due to the Company
carrying higher debt as a result of the construction of the Company's bagel
bakeries.
INCOME TAX EXPENSE (BENEFIT)
For the thirteen and twenty-six weeks ended December 28, 1997, no tax
benefit was recorded for the losses generated because no taxes would have been
recoverable from a carryback of the net losses. For the thirteen and twenty-six
weeks ended December 29, 1996, the Company recorded an income tax benefit of
$12,058 and $10,108 which 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, offset by state and franchise taxes paid during fiscal 1997. There
was no tax benefit recorded for the losses generated during fiscal 1997 because
no taxes would have been recoverable from a carryback of the net losses. As of
December 28, 1997, the Company has approximately $166,000 of alternative minimum
tax credit carryforwards and $3,282,000 in 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's bagel bakeries' highest sales have occurred during the period from
September through May.
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 effect 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.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At December 28, 1997 the Company had cash and cash equivalents on hand of
$576,851, which represents an increase of $122,694 from the $454,157 in cash and
cash equivalents reported as of June 29, 1997. Net cash used in operating
activities was $1,671,758 for the first twenty-six weeks of fiscal 1998. For the
first twenty-six weeks of fiscal 1998 the Company incurred a net loss of
$639,496 which was net of a gain of $926,341 pertaining to the sale of five of
the Company's full-service restaurants and a loss of $90,732 pertaining to the
impairment of assets write-down at one of the Company's full-service
restaurants. In addition, the Company reduced its accounts payable balance by
$578,689 for the first twenty-six weeks of fiscal 1998 as a result of the sale
of the five full-service restaurants. These uses of cash were partially offset
by non-cash depreciation and amortization expense of $455,392.
Net cash provided by investing activities was $1,413,105 during the first
twenty-six weeks of fiscal 1998 which is the net of $1,483,423 generated from
the sale of five of the Company's full-service restaurants, $5,813 from
collections on notes receivable, and $76,131 for the purchase of leasehold
improvements and equipment for bagel bakeries.
Net cash provided by financing activities was $381,347 for the first
twenty-six weeks of fiscal 1998. The net cash provided by financing activities
consists of borrowings from the Chairman of the Board of Directors of the
Company of $300,000 and borrowings of $151,390 from a note offering commenced in
June 1997. These borrowings were partially offset by payments of $70,043 due
under other debt financing.
DFW Bagels, Inc. (DFW Bagels), a wholly-owned subsidiary of Premium
Restaurant Company, has entered into an exclusive development agreement with
Bruegger's Franchise Corporation (Bruegger's). This agreement, as last amended
in November 1997, requires DFW Bagels to build thirty bagel bakeries by July 1,
2002. Through January 30, 1998, DFW Bagels has opened seven bagel bakeries and
is required to open two additional bagel bakeries by July 1, 1998. Currently,
DFW Bagels has entered into lease agreements for four additional bagel bakery
sites. The Company intends to open bagel bakeries at a faster rate than that
obligated under the development agreement, subject to available financing. The
Company believes each new site will require approximately $370,000 for capital
expenditures, including pre-opening expenses and the initial franchise fee.
During the period from May 1996 through October 1997, Bruegger's was owned
by Quality Dining, Inc. In October 1997, Bruegger's was sold back to its
original owners. The Company is working with the current owners of Bruegger's
to provide the Company with additional working capital and to increase sales at
the Company's bagel bakeries. The current owners of Bruegger's have agreed to
waive the initial franchise fee for all Bruegger's Bagel Bakery restaurants
opened in calendar 1998 and reduce franchise royalties through calendar 1998.
The Company believes that the profitability of any individual bagel bakery
often depends to a high degree on the penetration of a particular market by the
bagel bakery operator. The Company believes that individual bagel bakeries will
generally become profitable only after the Company has opened a number of bagel
bakeries sufficient to make the franchise name well-known in that market. The
Company estimates that in the Dallas-Fort Worth area the minimal number of bagel
bakeries needed for such penetration is between twelve and twenty. If the
Company is unable to achieve this level of penetration, its ability to achieve
profitability may be affected. In addition, if the Company is unable to obtain
adequate financing to open the bagel bakeries, it could have a material adverse
effect on the Company's consolidated financial position or results of
operations.
In June 1997, the Company commenced a note offering of $2,000,000 in one
and three year notes. The Company is not currently offering any notes pursuant
to this offering, and has raised approximately $224,000 from the offering.
The Company has also filed a registration statement with the Securities and
Exchange Commission for a unit offering of common stock and warrants. The
Company expects to commence this offering in February 1998.
12
<PAGE>
As of the quarter ended December 28, 1997, the Company has borrowed
$400,000 from the Chairman of the Board of Directors of the Company pursuant to
an unsecured promissory note due December 31, 1998. Although the Company may
borrow additional amounts from Mr. Danford, there are no agreements between Mr.
Danford and the Company with respect to future financing or any guarantee that
such funds will be available.
The Company sold three of its full-service restaurants in September 1997,
one of its full-service restaurants in October 1997 and one of its full-service
restaurants in November 1997. The three restaurants sold in September 1997 are
located in Burnsville, Falcon Heights and Woodbury, Minnesota. The restaurant
sold in October 1997 is located in St. Cloud, Minnesota, and the restaurant sold
in November 1997 is located in LaCrosse, Wisconsin. The sale of these
restaurants generated proceeds of approximately $1,827,000. The gain recognized
on the sale of the three restaurants sold in the first quarter of fiscal 1998
was $486,255 and the gain recognized on the sale of the two restaurants sold in
the second quarter of fiscal 1998 was $440,086. The restaurants sold are
initially being operated as Ciatti's Italian Restaurants-Registered Trademark-,
however, the new operators have the right to change the name. The Company
decided to sell these restaurants to focus on achieving and maintaining
profitability at its remaining full-service restaurants and to generate cash to
continue to expand its bagel bakery concept in the Dallas-Fort Worth market.
During fiscal 1997, the restaurants sold generated approximately $8,270,000 of
sales, net earnings of $445,000 and cash flows from operations of $799,000.
Although the Company has no agreements to sell any of its remaining full-service
restaurants, it is exploring alternatives to maximize its cash flow, including
the possible sale of any of its remaining full-service restaurants and
sale-leaseback opportunities.
The Company plans to finance its working capital and capital resource
needs with its current cash and proceeds from its current and future debt and
equity financing. The Company has and is continuing to explore several
alternatives for lease financing and equipment financing for its bagel bakeries
including sale and lease-back financing arrangements with respect to its
existing bakeries and full-service restaurants.
The Company believes that these sources will be sufficient to enable
it to satisfy its working capital needs for the next twelve months. If the
Company decides to pursue a strategy of building bagel bakeries at a rate faster
than that required by the development agreement, it may need funds in addition
to those generated from the current unit offering. In such event, the Company
will attempt to raise additional funds through debt or equity offerings. If the
Company is unable to successfully raise funds from the unit 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 assurance that the Company will be
successful.
FORWARD LOOKING STATEMENT
Statements included in this 10-QSB that are not historical or current facts
are "forward-looking statements" made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 and are subject to certain
risks and uncertainties that could cause actual results to differ materially.
The Company's ability to succeed in the future is dependent upon the Company's
ability to achieve and maintain profitability in its existing restaurants and,
together with its subsidiary, DFW Bagels, Inc., to open additional Bruegger's
Bagel Bakery restaurants and to operate those restaurants in a profitable
manner. The Company's ability to achieve these goals will be affected by
factors such as (i) the ability of the Company to generate funds from
operations, obtain adequate restaurant financing on favorable terms and raise a
significant amount of additional working capital, (ii) the strength of the
Bruegger's name, including in the areas in which the Company is the franchisee,
(iii) the ability of the Company to locate and negotiate favorable leases for
additional locations, (iv) the ability of the Company to hire, train and retain
skilled restaurant management and personnel, and (v) the competitive environment
within the restaurant industry.
13
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on November 13,
1997. At that meeting, the Company's shareholders reelected L.E.
"Dan" Danford, Jr., Phillip R. Danford and Thomas A. Kelm as
directors. The shareholders also authorized the Company's name change
from Ciatti's Inc. to Premium Restaurant Company.
Item 5. Other Information
(a) Change of corporate name
As noted in Item 4, the Company changed its name from
Ciatti's Inc. to Premium Restaurant Company.
(b) Delisting from Nasdaq Small Cap Market
On October 8, 1997, the Company's Common Stock was delisted
from the Nasdaq SmallCap Market because of the Company's
inability to comply with the Nasdaq SmallCap Market
shareholders' equity requirement. The Company's Common
Stock is now quoted on the Nasdaq OTC Bulletin Board.
There can be no assurance that a deep and liquid market will
ever develop in the Company's Common Stock.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1. Amendment to the Articles of Incorporation
2. Amendment to the Development Agreement between Bruegger's
Corporation and Premium Restaurant Company dated November
17, 1997.
3. Financial Data Schedule
(b) Reports on Form 8-K
None.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PREMIUM RESTAURANT COMPANY
(Registrant)
/s/ Phillip R. Danford
----------------------
Phillip R. Danford
President
/s/ Scott P. McGuire
---------------------
Scott P. McGuire
Controller
Dated February 4, 1998
15
<PAGE>
AGREEMENT AND RELEASE
This AGREEMENT AND RELEASE (the "Agreement and Release") is made as of this
___ day of ______, 1997, by and between Bruegger's Franchise Corporation, a
Delaware corporation ("Franchisor") and DFW Bagels, Inc. (formerly known as Big
D. Bagels, Inc.), a Minnesota Corporation, d/b/a Bruegger's Bagels Bakery
("Developer") and Ciatti's, Inc. a ___________ corporation ("Ciatti's").
WHEREAS, Developer is a developer of Bruegger's Bagels bakeries pursuant to
that certain Bruegger's Fresh Bagel Bakery Shareholder Development Agreement,
dated as of January 1, 1995, as amended, between Developer and Franchisor (the
"Development Agreement");
WHEREAS, Developer is a franchisee of Bruegger's Bagels bakeries pursuant
to those certain Bruegger's Fresh Bagel Bakery Shareholder Franchise Agreements,
as amended, between Developer and Franchisor set forth on Exhibit A, attached
hereto (collectively, the "Existing Franchise Agreements") for those Bruegger's
Bagels bakeries at the locations set forth on Exhibit A (the "Bakeries") (the
Existing Franchise Agreements and the New Franchise Agreements, as hereinafter
defined, shall be sometimes collectively referred to as the "Franchise
Agreements" or sometimes individually a "Franchise Agreement");
WHEREAS, Developer operates Bruegger's Bagels commissaries, if any, at the
locations set forth on Exhibit A (the "Commissaries");
WHEREAS, the parties hereto desire to enter into this Agreement and Release
for the purpose, among other things, of amending in certain respects the
Development Agreement and the Existing Franchise Agreements, and to release
certain claims that either party has or may have against the other.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
1. INITIAL FRANCHISE FEES FOR NEW FRANCHISE AGREEMENTS. With respect to any
Bruegger's Bagels franchise agreements (the "New Franchise Agreements") entered
into between Developer and Franchisor for Bruegger's Bagels bakeries opened for
business to the public during the period commencing on the date of this
Agreement and Release and ending on December 31, 1998 (the "Initial Period"),
Franchisor shall waive the initial franchise fee that would otherwise be payable
under the New Franchise Agreements.
2. ROYALTY FEES. Notwithstanding anything to the contrary contained in
the Existing Franchise Agreements or New Franchise
<PAGE>
Agreements, the Developer shall pay Franchisor a weekly royalty fee for the
periods and in the amounts set forth below (The term "Gross Sales" as used in
this Agreement and Release shall mean Gross Sales as defined in the Franchise
Agreements. The term "Bakery" as used in Sections 2 and 3 of this Agreement and
Release shall mean Bakery as defined in the Franchise Agreements):
(1) For the Gross Sales generated during the period commencing on the
date of this Agreement and Release and ending on March 31, 1998,
the Developer shall pay the Franchisor a weekly royalty fee in an
amount equal to two percent (2%) of the Gross Sales of each
Bakery;
(2) For the Gross Sales generated during the period commencing on
April 1, 1998, and ending on August 31, 1998, Developer shall pay
Franchisor a weekly royalty fee in an amount equal to three
percent (3%) of the Gross Sales of each Bakery;
(3) For the Gross Sales generated during the period commencing on
September 1, 1998, and ending on December 31, 1998, Developer
shall pay Franchisor a weekly royalty fee in an amount equal to
four percent (4%) of the Gross Sales of each Bakery; and
(4) For the Gross Sales generated during the period commencing on
January 1, 1999, and continuing thereafter, the Developer shall
pay the Franchisor a weekly royalty fee in the amount set forth
in the particular Existing Franchise Agreements or New Franchise
Agreements pertaining to each Bakery.
Developer and Franchisor understand, acknowledge and agree that the amount
of the weekly royalty fee paid or to be paid by Developer to Franchisor under
the Existing Franchise Agreements for Gross Sales generated during the period
prior to the date of this Agreement and Release shall remain as set forth in the
Existing Franchise Agreements and shall not be affected in any manner by this
Agreement and Release.
3. FUND CONTRIBUTIONS. Notwithstanding anything to the contrary
contained in the Existing Franchise Agreements or New Franchise Agreements:
For the Gross Sales generated during the Initial Period, Developer
shall contribute weekly to an advertising fund established by
Franchisor 0.5% of the Gross Sales of each Bakery, rather than the
2.0% set forth in the Franchise Agreements; provided, however, that
Developer shall spend an additional 1.5% of the weekly Gross Sales of
each Bakery on local advertising
1
<PAGE>
and promotion. Such expenditure for local advertising and promotion
shall be in addition to Developer's obligation under the Existing
Franchise Agreements and New Franchise Agreements to spend monthly for
local advertising and promotion two percent (2%) of the Gross Sales of
each Bakery. Within five (5) days after the end of each quarter of
each calendar year during the Initial Period, Developer shall submit
to Franchisor a certificate executed by an officer of Developer
certifying that all sums that Developer is required to spend on local
advertising and promotion under this Agreement and Release and the
Existing Franchise Agreements or New Franchise Agreements for the
quarter just then ended have been spent; such certificate to identify
the nature and the amount of each expenditure. Franchisor shall have
the right to examine and audit the books and records of Developer
pertaining to the expenditures on local advertising and promotion that
Developer is required to make under this Agreement and Release and the
Existing Franchise Agreements and New Franchise Agreements (the
"Advertising Books and Records"). Developer covenants and agrees to
retain the Advertising Books and Records pertaining to a particular
quarter for a period of one (1) year from the end of said quarter.
4. AMENDMENT TO DEVELOPMENT SCHEDULE. Section 1.3 of the Development
Agreement shall be deleted in its entirety and replaced with the following:
1.3 Developer shall develop Bakeries in accordance with the following
schedule (the "Development Schedule"):
<TABLE>
<CAPTION>
Deadline: Minimum Cumulative Number
of Bakeries Developer Must
Have in Operation By Deadline:
--------------- ------------------------------
<S> <C>
July 1, 1996 4
July 1, 1998 9
July 1, 1999 14
July 1, 2000 19
July 1, 2001 24
July 1, 2002 30
</TABLE>
5. INTENTIONALLY OMITTED.
6. RELEASE.
2
<PAGE>
(a) RELEASE OF FRANCHISOR. Developer, on behalf of itself and on
behalf of all of Developer's past, present and future parents, subsidiaries,
members, partners, managers, directors, officers, assigns, successors, agents
and legal representatives, and any of the aforementioned persons' heirs,
executors or administrators (collectively the "Developer Releasors") and
Ciatti's, Inc., a ______________ corporation ("Ciatti's"), hereby release, waive
and discharge, forever and unconditionally, Franchisor, Bruegger's Corporation,
Quality Dining, Inc., Nordahl L. Brue and Michael J. Dressell, as well as each
of their respective past, present and future parents, subsidiaries, affiliates,
shareholders, members, partners, managers, directors, officers, employees,
assigns, successors, agents, legal representatives, attorneys, insurers and
employee benefit programs (and the trustees, administrators, fiduciaries and
insurers of such programs), and any of the aforementioned persons' heirs,
executors, administrators or any other person or entity acting by, through,
with, or under any of the aforementioned persons or entities (collectively the
"Franchisor Releasees"), from any and all charges, complaints, claims,
liabilities, obligations, promises, agreements, controversies, judgments,
damages, actions, causes of action, suits, rights, demands, costs, sums of
money, losses, debts and expenses (including attorneys' fees and costs actually
incurred) of any nature whatsoever, known or unknown, vested or contingent,
suspected or unsuspected, that the Developer Releasors and/or Ciatti's now have,
ever had, or, but for this release, hereafter would or could have had against
each or any of the Franchisor Releasees, and which arose or arise, directly or
indirectly, out of any act, occurrence or omission prior to the date of this
Agreement and Release. Developer Releasors and Ciatti's covenant and agree not
to file any claim or complaint or institute or instigate any investigation,
lawsuit, arbitration proceeding, or other legal action against Franchisor
Releasees for claims released herein.
(b) RELEASE OF DEVELOPER. Franchisor, on behalf of itself and on
behalf of all of Franchisor's past, present and future parents, subsidiaries,
shareholders, members, partners, managers, directors, officers, employees,
assigns, successors, agents and legal representatives, and any of the
aforementioned persons' heirs, executors or administrators (collectively the
"Franchisor Releasors"), hereby releases, waives and discharges, forever and
unconditionally, Developer as well as each of their respective past, present and
future parents, subsidiaries, affiliates, shareholders, members, partners,
managers, directors, officers, employees, assigns, successors, agents, legal
representatives, attorneys, insurers and employee benefit programs (and the
trustees, administrators, fiduciaries and insurers of such programs), and any of
the aforementioned persons' heirs, executors, administrators or any other person
or entity acting by, through, with, or under any of the aforementioned persons
or entities (collectively the "Developer Releasees"), from any and all charges,
complaints, claims,
3
<PAGE>
liabilities, obligations, promises, agreements, controversies, judgments,
damages, actions, causes of action, suits, rights, demands, costs, sums of
money, losses, debts and expenses (including attorneys' fees and costs actually
incurred) of any nature whatsoever, known or unknown, vested or contingent,
suspected or unsuspected, that the Franchisor Releasors now have, ever had, or,
but for this release, hereafter would or could have had against each or any of
the Developer Releasees, and which arose or arise, directly or indirectly, out
of any act, occurrence or omission prior to the date of this Agreement and
Release. Franchisor Releasors covenant and agree not to file any claim or
complaint or institute or instigate any investigation, lawsuit, arbitration
proceeding, or other legal action against Developer Releasees for claims
released herein.
(c) Notwithstanding subparagraphs (a) and (b) above, nothing in this
paragraph 6 shall release, or be deemed to release, any party from (i) any
obligations or claims arising out of this Agreement and Release, (ii) any
amounts due for sales of products from the commissary operations of Franchisor,
(iii) any amounts currently due (but not past due) under the Existing Franchise
Agreements or (iv) any obligations or claims arising after the date of this
Agreement and Release under the Development Agreement, the Existing Franchise
Agreements and New Franchise Agreements or any other written agreement between
the Developer and/or the Franchisor and/or Franchisor's present and former
parents, subsidiaries and affiliates.
(d) The releasing parties under subparagraphs (a) and (b) above
represent and warrant that they have not heretofore assigned or transferred, or
purported to assign or transfer, any claim released herein to any person, firm
or other entity. If any suit, claim, demand, action or cause of action shall be
made or asserted based on, arising out of, or in connection with any such
transfer or assignment or purported transfer or assignment, the person or entity
which made or purported to make such transfer or assignment shall indemnify and
hold the other party harmless against any such suit, claim, demand, action or
cause of action, including reasonable attorneys' fees and costs incurred in
connection therewith.
(e) The parties expressly accept and assume the risk that the facts
and/or law pertaining to the claims released herein may change, or that the
facts pertaining to the claims released herein may later be found to be
different from that which is now known or believed by the parties or their
counsel to be true. This Agreement and Release shall be and remain effective
notwithstanding any such change or difference.
7. BAKERIES TO BE CLOSED. Franchisor hereby consents to Developer
closing the Bakeries listed on Exhibit B (the "Closed Bakeries"). Upon the
closure of the Closed Bakeries, Developer and Franchisor shall terminate the
Existing Franchise Agreements for the Closed Bakeries by executing a Franchise
Termination
4
<PAGE>
Agreement in the same form and substance as Exhibit C attached hereto.
8. BAGELNET SOFTWARE SYSTEM. Upon Developer's written request therefor,
Franchisor shall cause Champlain Management Services, Inc. ("CMS") to license
Developer to use CMS's proprietary software known as the BagelNet Software
System (the "BagelNet System") for use at the Bakeries or any other Bruegger's
Bagels bakeries developed by Developer (the "New Bakeries") pursuant to the
terms of a software license agreement(s) to be executed by Developer. The fee
for such license shall be equal to the cost to CMS, to install the BagelNet
System at Developer's Bakeries.
9. CONSULTATION SERVICES. At Developer's request, during the Initial
Period, Franchisor shall furnish personnel selected by Franchisor to consult
with Developer concerning operational issues related to the Bakeries, New
Bakeries or Commissaries. Such consultation services shall be available to
Developer upon reasonable notice to Franchisor, at reasonable times and upon the
availability of the personnel to be selected by Franchisor. All such
consultation services may be provided by telephone, in writing, or by on-site
visitation, as determined by Franchisor in its sole discretion. All such
consultation services shall be provided without charge to Developer.
10. SUCCESSORS AND ASSIGNS. This Agreement and Release shall be binding
upon and inure to the benefit of all parties and their respective agents, legal
representatives, predecessors, successors, heirs and assigns.
11. DEFAULTS UNDER FRANCHISE AGREEMENTS. Any default of Developer under
any of the Existing Franchise Agreements or New Franchise Agreements shall, upon
written notice to Developer, constitute a default of Developer under this
Agreement and Release and such default shall result in termination, as of the
date of such written notice, of Developer's rights under Sections 1,2 and 3 of
this Agreement and Release.
12. ENTIRE AGREEMENT. This Agreement and Release sets forth the entire
understanding of the parties with respect to the subject matter of this
Agreement, and may not be amended or terminated except by an instrument executed
by all parties. This Agreement and Release supersedes all prior agreements,
understandings, or representations, oral or written, between the parties
concerning the same subject matter. The parties agree and acknowledge that they
were not induced to enter into this Agreement and Release as a result of, or in
reliance upon, any agreement, understanding, or representation other than those
contained herein.
13. EXHIBITS. All exhibits referred to in this Agreement and Release are
attached hereto and incorporated herein by reference.
5
<PAGE>
14. WAIVER. No delay or failure by any party to exercise any right
hereunder, and no partial or single exercise of any such right, shall constitute
a waiver of that or any other right, unless otherwise expressly provided herein.
15. COUNTERPARTS. This Agreement and Release may be executed in one or
more counterparts and all such counterparts so delivered and executed shall
constitute one and the same instrument.
16. APPLICABLE LAW AND DISPUTE RESOLUTION. All terms contained in the
Franchise Agreements relating to applicable law and dispute resolution shall
govern this Agreement and Release and such terms are incorporated in and made a
part of this Agreement and Release.
17. FURTHER ASSURANCE. The parties hereto agree that they shall execute,
acknowledge and deliver or cause to be executed, acknowledged and delivered, any
and all such further instruments and documents as may be necessary, expedient or
proper in order to complete any and all transactions provided for herein, and to
do any and all other acts as are reasonably requested by the other party in
order to carry out the intent and purpose of this Agreement and Release.
18. ASSIGNMENT. Neither party may assign this Agreement and Release
except in conjunction with a contemporaneous assignment of the Development
Agreement and Franchise Agreements to the same assignee, which assignment will
be subject to the applicable provisions of the Development Agreement and
Franchise Agreements.
19. NOTICES. Any notices required to be given hereunder shall be in
writing and shall be deemed given when deposited in the United States mail,
postage prepaid, via registered mail or certified mail, with return receipt
requested, addressed as follows:
If to Developer: DFW Bagels, Inc.
d/b/a Bruegger's Bagel Bakery
5555 West 78th Street
Edina, MN 55439-2702
If to Franchisor: Bruegger's Franchise Corporation
159 Bank Street
P.O. Box 374
Burlington, VT 05402
Attn: David T. Austin
With a copy to: Mark A. Crow
SHEEHEY BRUE GRAY & FURLONG P.C.
119 South Winooski Avenue
P.O. Box 66
6
<PAGE>
Burlington, VT 05402
or to such other person or address as the parties entitled to receive notice
shall have specified by written notice to the other party given in accordance
with the provisions of this Section.
20. SEVERABILITY. If any one or more of the provisions of this Agreement
and Release shall be held invalid, illegal, or unenforceable in any respect,
such provision shall not effect any other provision of this Agreement, and each
provision of this Agreement and Release shall be enforced to the full extent
permitted by laws.
21. CONFIDENTIALITY. Except as required to be disclosed by law or a
governmental agency, the parties shall keep confidential the existence of this
Agreement and Release and the provisions described herein.
22. HEADINGS. The Section headings contained in this Agreement and
Release are for reference purposes only and will not affect in any way the
meaning or interpretation of this Agreement and Release.
23. STATUS OF DEVELOPMENT AGREEMENT AND EXISTING FRANCHISE AGREEMENTS.
All of the terms and conditions of the Development Agreement and the Existing
Franchise Agreements shall continue in full force and effect except as expressly
modified by this Agreement and Release. In the event of any inconsistency or
conflict between the provisions of this Agreement and Release and the provisions
contained in the Development Agreement and Existing Franchise Agreements, the
provisions of this Agreement and Release shall control in all respects.
24. ADVICE OF COUNSEL; VOLUNTARY ACCEPTANCE. The parties represent and
acknowledge that in negotiating this Agreement and Release they have either
received advice from counsel of their choosing or have been advised by the other
party hereto to seek such counsel and that they have read all of the terms of,
and that they fully understand and voluntarily accept the terms of, this
Agreement and Release.
IN WITNESS WHEREOF, the parties have executed this Agreement and Release as
of the day, month and year first above written.
BRUEGGER'S FRANCHISE CORPORATION
By:
-----------------------------
Duly Authorized Agent
DFW BAGELS, INC. d/b/a Bruegger's
Bagel Bakery
7
<PAGE>
By:
----------------------------------
Duly Authorized Agent
CIATTI'S, INC.
By:
----------------------------------
Duly Authorized Agent
8
<PAGE>
EXHIBIT A
FRANCHISE AGREEMENTS AND BAKERY AND COMMISSARY LOCATIONS
FRANCHISE AGREEMENTS AND BAKERY LOCATIONS.
1. Franchise Agreement dated ___________, 199_, by and between Bruegger's
Franchise Corporation and Big D Bagels, Inc. (now known as DFW Bagels, Inc.),
for a Bruegger's Bagels bakery located at Lancer's Square Shopping Center, 3291
Independence Park, Suite 400, Plano, TX 75075-9146.
2. Franchise Agreement dated ___________, 199_, by and between Bruegger's
Franchise Corporation and Big D Bagels, Inc. (now known as DFW Bagels, Inc.),
for a Bruegger's Bagels bakery located at 1709 Preston Road, #B, Plano, TX
75093-5101.
3. Franchise Agreement dated ___________, 199_, by and between Bruegger's
Franchise Corporation and Big D Bagels, Inc. (now known as DFW Bagels, Inc.),
for a Bruegger's Bagels bakery located at Preston Center, 5938 West Northwest
Highway, Dallas, TX 75225.
4. Franchise Agreement dated ___________, 199_, by and between Bruegger's
Franchise Corporation and Big D Bagels, Inc. (now known as DFW Bagels, Inc.),
for a Bruegger's Bagels bakery located at 5637 Camp Bowie Boulevard, Fort Worth,
TX 76107.
5. Franchise Agreement dated ___________, 199_, by and between Bruegger's
Franchise Corporation and Big D Bagels, Inc. (now known as DFW Bagels, Inc.),
for a Bruegger's Bagels bakery located at Preston Campbell Center, 17062 Preston
Road # 100, Dallas, TX 75248.
6. Franchise Agreement dated ___________, 199_, by and between Bruegger's
Franchise Corporation and Big D Bagels, Inc. (now known as DFW Bagels, Inc.),
for a Bruegger's Bagels bakery located at 8580 North MacArthur Boulevard,
Irving, TX 75063.
7. Franchise Agreement dated ___________, 199_, by and between Bruegger's
Franchise Corporation and Big D Bagels, Inc. (now known as DFW Bagels, Inc.),
for a Bruegger's Bagels bakery located at 6405 B North Beach Street, Fossil
Creek, Fort Worth, TX 76137.
8. Franchise Agreement dated ___________, 199_, by and between Bruegger's
Franchise Corporation and Big D Bagels, Inc. (now known as DFW Bagels, Inc.),
for a Bruegger's Bagels bakery located at 6307 Hillcrest Avenue, University
Park, TX 75205.
COMMISSARIES.
9
<PAGE>
None
10
<PAGE>
EXHIBIT B
BAKERIES TO BE CLOSED
1. Bakery located at 8580 North MacArthur Boulevard, Irving, TX 75063.
11
<PAGE>
EXHIBIT C
FRANCHISE TERMINATION AGREEMENT
THIS FRANCHISE TERMINATION AGREEMENT ("Agreement") is entered into this __
day of November, 1997, by and among BRUEGGER'S FRANCHISE CORPORATION, a
Delaware corporation ("Franchisor"), and DFW BAGELS, INC., formerly known as Big
D Bagels, Inc., a Minnesota corporation, d/b/a Bruegger's Bagel Bakery ("DFW").
RECITALS
WHEREAS, Franchisor and DFW entered into that certain Bruegger's Fresh
Bagel Bakery Shareholder Franchise Agreement (the "Franchise Agreement") for a
Bruegger's Bagels bakery at the location set forth on Exhibit A (the "Franchise
Location").
WHEREAS, DFW desires to close the Franchise Location and terminate the
obligations provided in the Franchise Agreement.
WHEREAS, Franchisor is willing to allow a termination of certain
obligations under the Franchise Agreement on the terms and conditions set forth
herein.
NOW, THEREFORE, in consideration of the foregoing premises, the covenants
set forth below and other good and valuable consideration, the parties hereby
agree as follows:
1. TERMINATION OF THE FRANCHISE AGREEMENT. Subject to the satisfaction
of the conditions set forth in Section 2 of this Agreement, the Franchise
Agreement shall be terminated effective as of date of the closing of the
Franchise Location and shall be of no further force and effect, except with
respect to provisions or covenants of DFW and its employees, officers,
directors, shareholders and agents that, by their terms, were intended, either
expressly or by reasonable implication, to survive termination of the Franchise
Agreement. The closing of the Franchise Location shall occur on ______________,
1997 (the "Date of Closure").
2. CONDITIONS PRECEDENT TO THIS AGREEMENT. The obligations and
agreements of the parties hereto are contingent upon Franchisor having received,
on or before the Date of Closure, all royalties and advertising fund
contributions based upon Gross Sales, as defined in the Franchise Agreement,
that are due and owing from DFW through the date of termination of the Franchise
Agreement for the Franchise Location.
3. RELEASE. DFW does for itself and its successors and assigns hereby
release and forever discharge Franchisor and its officers, directors,
shareholders, employees and agents and the heirs, successors and assigns of
each, of and from any and all causes of action, claims and demands of every kind
and
12
<PAGE>
description, including, but not limited to, claims that DFW or its successors or
assigns, has had, now has or may hereafter have related in any way to the
Franchise Location or Franchise Agreement.
4. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of all parties and their respective legal representatives,
successors, and assigns.
5. ENTIRE AGREEMENT. This Agreement sets forth the entire understanding
of the parties with respect to termination of the Franchise Agreement. It may
not be amended or terminated except by an instrument executed by all parties.
7. EXHIBITS. All exhibits referred to in this Agreement are attached
hereto and incorporated herein by reference.
8. WAIVER. No delay or failure by any party to exercise any right
hereunder, and no partial or single exercise of any such right, shall constitute
a waiver of that or any other right, unless otherwise expressly provided herein.
9. COUNTERPARTS. This Agreement may be executed in one or more
counterparts and all such counterparts so delivered and executed shall
constitute one and the same instrument.
10. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of Vermont. Any action brought to interpret construe or enforce this
Agreement shall be brought in the Superior Court of the State of Vermont, County
of Chittenden, or the United States District Court for the District of Vermont,
which fora shall be the exclusive venues for any such controversy or action.
Each party hereto consents to the jurisdiction of such courts.
11. FURTHER ASSURANCE. The parties hereto agree that they shall execute,
acknowledge and deliver or cause to be executed, acknowledged and delivered, any
and all such further instruments and documents as may be necessary, expedient or
proper in order to complete any and all transactions provided for herein, and to
do any and all other acts as are reasonably requested by the other party in
order to carry out the intent and purpose of this Agreement.
13
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day,
month and year first above written.
BRUEGGER'S FRANCHISE CORPORATION
By: ___________________________
Duly Authorized Agent
DFW BAGELS, INC. d/b/a
Bruegger's Bagel Bakery
By: ___________________________
Duly Authorized Agent
STATE OF VERMONT
COUNTY OF CHITTENDEN, SS.
At Burlington, this ___ day of ________, 1997, personally appeared
____________________, duly authorized agent of BRUEGGER'S FRANCHISE CORPORATION,
and he/she acknowledged the foregoing instrument by him/her sealed and
subscribed to be his/her free act and deed and the free act and deed of
BRUEGGER'S FRANCHISE CORPORATION.
Before me,
My commission expires: -------------------------
Notary Public
- ----------------------
STATE OF __________________
COUNTY OF ________________, SS.
At ________________, this ___ day of _____________, 1997, personally
appeared ____________________, duly authorized agent of DFW BAGELS, INC. d/b/a
Bruegger's Bagel Bakery, and he/she acknowledged the foregoing instrument by
him/her sealed and subscribed to be his/her free act and deed and the free act
and deed of DFW BAGELS, INC.
Before me,
My commission expires: -------------------------
Notary Public
- ----------------------
14
<PAGE>
EXHIBIT A
Franchise Termination Agreement
DFW Bagels, Inc.
1. Franchise Agreement dated ___________, 199_, by and between Bruegger's
Franchise Corporation and Big D Bagels, Inc. (now known as DFW Bagels, Inc.) for
a Bruegger's Bagels bakery located at 8580 North MacArthur Boulevard, Irving, TX
75063.
15
<PAGE>
ARTICLES OF INCORPORATION
OF
PREMIUM RESTAURANT COMPANY
A MINNESOTA CORPORATION
Adopted 29 Dec 92, filed with the Minnesota Secretary of State 04 Jan 93
(N DEG 7Q 803, pp. 1325/1326) First Amendment (Section 1.) 13 Nov 97, filed
with the Minnesota Secretary of State 19 Nov 97 (N DEG 7Q 803, p. 5625)
The undersigned, for the purpose of organizing a corporation to conduct
business and promote the purpose hereafter stated and in accordance with
Minnesota Statutes, Chapter 302A (the MINNESOTA BUSINESS CORPORATION ACT),
hereby certifies that:
1. NAME OF COMPANY: The name of the Company is Premium Restaurant Company
(the "Company"). (Amended by Shareholder Meeting, 13 Nov 97)
2. REGISTERED OFFICE OF COMPANY: The address of the registered office of
the Company in the State of Minnesota is 5555 West 78th Street, Edina, MN
55439-2702 or such other location as determined from time to time by the board
of directors and filed with the Minnesota secretary of state.
3. PURPOSE OF COMPANY: The business purpose of the Company is to engage
in any lawful act or activity for which corporations may be organized under the
provisions of Minnesota Statutes, Chapter 302A.
4. STOCK OF COMPANY:
4.1. TYPE OF SHARES: The Company shall have the authority to issue a
total of twenty million (20,000,000) shares of stock, consisting of ten million
(10,000,000) shares of common stock, par value $0.01 per share, and ten million
(10,000,000) shares of preferred stock, par value $0.01 per share.
4.2. COMMON STOCK: Shares of common stock of the Company may be
issued as determined from time to time by the board of directors as provided for
in the Company's Bylaws and in accordance with the laws of the State of
Minnesota.
4.3. PREFERRED STOCK: Shares of the preferred stock of the Company
may be issued as determined from time to time by the board of directors in one
or more classes or series, each of which class or series shall have such
distinctive designation or title as shall be fixed by the board of directors
prior to the issuance of any shares thereof. Each such class or series of
preferred stock shall have such voting powers, full or limited, or no voting
powers, and such preferences and relative, participating, optional, or other
special rights and such qualifications, limitations, or restrictions thereof, as
shall be stated in a resolution of the board providing for the issue of such
class or series of preferred stock as may be adopted from time to time by the
board
<PAGE>
of directors prior to the issuance of any shares thereof, all in accordance with
the laws of the State of Minnesota.
4.4. CUMULATIVE VOTING PROHIBITED: There shall be no cumulative
voting of shares.
4.5. NO PREEMPTIVE RIGHTS: Shareholders shall not have preemptive,
preferential, or other similar rights to subscribe for, purchase, or acquire any
of the Company's shares of any class, whether unissued or now or hereafter
authorized, or any obligations or other securities convertible into, or
exchangeable for any such shares.
5. INCORPORATOR: The name and mailing address of the incorporator are
Barney U. Uhlig, 16370 North Hillcrest Court, Eden Prairie, MN 55346.
6. BOARD OF DIRECTORS: The Company shall be managed by the board of
directors, which shall exercise all powers conferred under the laws of the State
of Minnesota, including, without limitation, the power to amend or repeal the
Bylaws as provided therein.
7. NUMBER OF DIRECTORS: The number of directors of the Company shall be
at least one (1) and may be increased or otherwise decreased as provided in the
Bylaws.
8. INDEMNIFICATION: The Company shall indemnify to the full extent
permitted by law any person made, or threatened to be made, a party to any
action or proceeding (whether civil, criminal, or otherwise) by reason of the
fact that he, his testator or intestate, is or was a director or officer of the
Company, or by reason of the fact that such director or officer, at the request
of the Company, is or was serving any other corporation, partnership, joint
venture, trust, employee benefit plan, or other enterprise, in any capacity.
Nothing contained herein shall affect any rights to indemnification to which
employees other than directors and officers may be entitled by law.
9. DIRECTORS' LIABILITY: No officer or director of the Company shall be
personally liable to the Company or its shareholders for monetary damages for
any breach of fiduciary duty by such an officer or director as an officer or
director. Despite the foregoing sentence, an officer or director shall be
liable to the extent provided by applicable law (i) for any breach of an
officer's or director's duty of loyalty to the Company or its shareholders, (ii)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) pursuant to Minnesota Statutes, Sections
302A.559 or 80A.23, (iv) for any transaction from which such officer or director
derived an improper personal benefit. No amendment or repeal of this _9. shall
apply to, or have any effect on, the liability or alleged liability of any
officer or director of the Company for, or with respect to, any acts or
omissions of such officer or director occurring prior to such amendment.
10. EXEMPTION FROM CERTAIN PROVISIONS OF M.S., CH. 302A: As permitted by
Minnesota Statutes, Chapter 302A, the Company shall be exempted from the
provisions of Minnesota Statutes, Sections 302A.671 and 302A.673, pertaining,
respectively, to control share acquisitions and to certain business
combinations.
<PAGE>
11. AMENDMENTS OF ARTICLES: These Articles of Incorporation may be
amended or repealed by a majority of the holders of all shares entitled to vote,
and present in person or by proxy at any shareholder meeting where such vote is
properly taken.
IN WITNESS WHEREOF, the undersigned, being the sole incorporator of
Ciatti's, Inc., made and signed these Articles on this 29th day of December,
1992.
/s/ Barney U. Uhlig
- ------------------------
Barney U. Uhlig
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-28-1998
<PERIOD-START> JUN-30-1997
<PERIOD-END> DEC-28-1997
<CASH> 576,851
<SECURITIES> 0
<RECEIVABLES> 402,280
<ALLOWANCES> 0
<INVENTORY> 100,017
<CURRENT-ASSETS> 870,141
<PP&E> 5,516,369
<DEPRECIATION> 2,790,541
<TOTAL-ASSETS> 3,878,448
<CURRENT-LIABILITIES> 3,215,994
<BONDS> 0
0
0
<COMMON> 7,428
<OTHER-SE> (33,387)
<TOTAL-LIABILITY-AND-EQUITY> 3,878,448
<SALES> 7,282,598
<TOTAL-REVENUES> 7,282,598
<CGS> 2,264,556
<TOTAL-COSTS> 7,819,000
<OTHER-EXPENSES> (10,049)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 113,143
<INCOME-PRETAX> (639,496)
<INCOME-TAX> 0
<INCOME-CONTINUING> (639,496)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (639,496)
<EPS-PRIMARY> (0.86)
<EPS-DILUTED> 0
</TABLE>
