SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Amendment No. 1
on
FORM 10-K/A
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the fiscal year ended December 31, 1995, or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the transition period from _________ to ___________
Commission file number 0-27182
The Italian Oven, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1624305
---------------------------- ---------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
Eleven Lloyd Avenue, Latrobe, PA 15650
-------------------------------------- --------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (412) 537-5380
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class
- ----------------------------
Common stock, $.01 par value
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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. Yes X No
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant at March 28, 1996: $21,905,401.25
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 28, 1996
- ---------------------------- -----------------------------
Common stock, $.01 par value 4,327,991
Documents Incorporated by Reference: None
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information presented in this Item 7 is as set forth in the
original Form 10-K of the Company filed with the Securities and Exchange
Commission on March 30, 1996, except for such changes as required by the
Securities and Exchange Committee, principally relating to the disconsolidation
of the results of operations in connection with the Company's 50% investment in
joint ventures, and, accordingly, this information speaks as of such date.
Subsequent developments in the Company's financial condition have, in the
opinion of the Company's independent accountants, created a substantial doubt
about the Company's ability to continue as a growing concern. See Note 19 to the
Consolidated Financial Statements.
Overview and Business Strategy
The Italian Oven owns, operates and franchises Italian-style
family-oriented casual dining restaurants in 16 states in the Mid-Atlantic,
Midwest, Southeast and Southwest Regions of the United States and in Australia.
The first Company-owned restaurant opened in 1989, and the first franchised
restaurant opened in 1991. As of March 28, 1996, there were 95 The Italian Oven
restaurants in operation, consisting of 16 Company-owned and 78 franchised
restaurants.
On November 27, 1995, the Company completed its initial public offering
(the "IPO") of 2,700,000 shares of its Common Stock, of which 485,115 shares
were sold by an existing shareholder. The Company intends to utilize the net
proceeds of the IPO (after the payment of offering expenses, the repayment of
certain indebtedness, the repurchase of certain stock held by one shareholder
and the reserve of certain funds for working capital purposes) to open
additional Company-owned restaurants. Prior to the IPO, the Company's strategy
was to seek growth principally though the development of franchised restaurants.
The Company had originally intended to open 28-32 restaurants using the net
proceeds of the IPO and operating revenues from existing restaurants; however,
revenues during the first quarter of 1996 were lower than anticipated.
Consequently, management has revised its business strategy to include the
opening of larger, free standing restaurants. Accordingly, the Company now
anticipates that it will open or acquire 20-28 restaurants using the net
proceeds of the IPO, available operating revenues and financing proceeds.
In respect of the free standing restaurants, the Company entered into
an agreement, subject to certain conditions, to acquire six Black-eyed Pea
restaurants in the Kansas City metropolitan area, which are to be converted into
Company-owned The Italian Oven restaurants if this transaction is consummated.
Five of these restaurants are free standing. The larger restaurants are expected
to cost approximately $800,000 per restaurant to open, as compared to
approximately $500,000 previously budgeted for smaller strip center locations
(excluding pre-opening expenditures and landlord contributions, if any).
Management estimates that the average investment for Company-owned restaurants
opened or acquired in 1996 will be approximately $625,000 per restaurant.
The Company capitalizes restaurant pre-opening expenditures for
Company-owned restaurants and amortizes such costs over a 12-month period
following the restaurant's opening. Pre-opening expenditures consist of direct
costs related to hiring and training the initial workforce and
<PAGE>
other direct costs associated with opening new restaurants. These costs have
averaged approximately $68,000 per restaurant opened during the past two years.
The Company has also entered into an agreement, subject to certain
conditions , to acquire four existing franchised restaurants in Pennsylvania
(three in the Pittsburgh metropolitan area and one in Erie) from the operator of
these restaurants. The Company has also entered into a non-binding letter of
intent to acquire another franchised restaurant in the Pittsburgh metropolitan
area along with a liquor license for neighboring Beaver County, Pennsylvania, in
which the Company plans to develop one or more additional restaurants if the
transaction is consummated.
The Company's revenues are derived from (i) sales from Company-owned
restaurants; (ii) royalties from franchised restaurants; and (iii) franchise and
development fees. Revenues derived from franchise and development fees are
recognized when the franchised restaurant commences operations or upon partial
or complete cancellation of the development agreement. If a development
agreement is terminated, any remaining deferred revenue is recognized as income.
Generally, the Company receives development fees for each restaurant
subject to development at the time of the execution of new development
agreements and, upon receipt, such fees are initially classified as deferred
revenues. Revenues derived from initial franchise fees and area development fees
are not recognized by the Company until the franchised restaurant commences
operations or the development agreement is terminated, in whole or in part. If a
development agreement is terminated, any remaining deferred revenue is
recognized as income by the Company. As a result, a comparison of the results of
operations for certain quarterly and annual periods may not be meaningful.
Costs of restaurant sales include food, paper and beverage costs. Other
restaurant expenses consist primarily of costs of labor, maintenance, utilities,
direct advertising, rent, real estate taxes and insurance. Many of these costs
have fluctuated in recent years and can be expected to fluctuate in the future,
and certain costs, particularly paper costs, have increased. However,
competitive pressures may prevent the Company from raising its menu prices to
recover increased costs. All costs associated with selling franchise and
development rights to an exclusive area and opening franchised restaurants are
expensed as incurred and are included in general and administrative expenses.
Revenues generated by the restaurant associated with The Italian Oven
University and Continuing Education Center, which are not significant in
relation to total revenues, are not included in restaurant sales or total
revenue, and are not used for the purpose of comparing results of Company-owned
restaurants from period to period. Such revenues are netted against the costs
associated with such operations and are recorded as general and administrative
expenses.
<PAGE>
Results of Operations
The following table sets forth the percentage relationship of certain
income statement data to total revenues, except as otherwise indicated.
Year Ended December 31,
----------------------------
1993 1994 1995
------ ------ ------
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Revenue:
Restaurant sales ....................... 71.9% 74.4% 71.3%
Franchise and development fees ......... 10.9% 7.7% 9.6%
Royalty fees ........................... 17.2% 17.9% 19.1%
----- ----- -----
100.0% 100.0% 100.0%
Costs and Expenses:
Cost of restaurant sales(1) ............ 30.3% 27.1% 26.5%
Other restaurant expenses:
Restaurant labor expenses(1) ....... 34.8% 37.2% 37.7%
Occupancy and other costs(1) ....... 24.9% 25.0% 24.4%
General and administrative ............. 52.1% 51.7% 48.6%
Depreciation and amortization .......... 4.0% 5.3% 5.0%
Total operating expenses ................... 120.7% 123.3% 116.8%
Loss from operations ....................... (20.7%) (23.3%) (16.8%)
Net interest expense ....................... (2.7%) (1.3%) (1.2%)
Net loss ............................... (23.2%) (25.5%) (36.4%)
(1) As a percentage of restaurant sales.
1995 Compared to 1994
Revenues. Total revenue increased by $2,890,000 to $14,386,000 or 25.1%
for 1995 compared to 1994, primarily due to an increase in the number of
Company-owned and franchised restaurants open. Restaurant sales at Company-owned
restaurants increased $1,709,000 to $10,260,000 or 20.0% for 1995 compared to
1994. This increase was largely the result of the opening of two additional
Company-owned restaurants during 1994 and 1995 and the acquisition of two
franchised restaurants by the Company in the second quarter of 1994. Restaurant
sales for same Company-owned restaurants increased by $117,000 to $7,810,000 or
15.2% for 1995 compared to 1994.
Franchise and development fees increased by $499,000 to $1,381,000 or
56.6% for 1995 compared 1994. This increase was primarily due to the recognition
of deferred revenues as income due to the termination of development agreements
<PAGE>
and prepaid franchise fees totaling $540,000 during 1995 compared to $240,000
during 1994, and to the opening of five more franchised restaurants during 1995
than were opened during 1994.
Royalties increased by $683,000 to $2,745,000 or 33.1% for 1995
compared to 1994. This increase was due to 81 franchised restaurants being in
operation at the end of 1995 compared to 61 franchised restaurants in operation
at the end of 1994.
Costs and expenses. Cost of restaurant sales at Company-owned
restaurants increased by $407,000 to $2,727,000 or 17.5% for 1995 compared to
1994, principally due to the opening of two additional Company-owned restaurants
during 1994 and 1995 and the acquisition of two franchised restaurants by the
Company in the second quarter of 1994, but decreased as a percentage of
restaurant sales by 0.5% to 26.6% for the same restaurants open during both
periods, due to more favorable contract terms and volume discounts on food.
Labor expenses at Company-owned restaurants increased from 35.4% to
36.0% as a percentage of restaurant sales for 1995 compared to 1994 for the same
restaurants open during both periods. Occupancy and other costs at same
Company-owned restaurants decreased as a percentage of restaurant sales for same
restaurants open during both periods from 24.3% to 23.9% for 1995 compared to
1994.
General and administrative expenses increased by $1,050,000 to
$6,989,000 or 17.7% for 1995 compared to 1994 due to the addition of senior
management, the expansion of corporate headquarters and the reserve for a store
closing and other nonrecurring items. Excluding the reserve for store closing
and other nonrecurring items, general and administrative expenses declined as a
percent of total revenue to 44.1% for 1995 from 51.7% in 1994.
Depreciation and amortization expenses increased by $116,000 to
$720,000 or 19.2% for 1995 compared to 1994. This increase was due to the
opening of two additional Company-owned restaurants during 1994 and 1995 and the
acquisition of two franchised restaurants by the Company in the second quarter
of 1994.
Net interest expense increased by $31,000 to $176,000 for 1995 compared
to 1994. This expense is expected to decrease further in the short term as the
Company is using a portion of the net proceeds of the IPO to prepay existing
indebtedness, but may increase in the future if the Company borrows under its
revolving line of credit.
Net Operating Loss Carryforwards. At December 31, 1995, the Company had
available net operating loss carryforwards for Federal income tax purposes of
approximately $6.2 million. These loss carryforwards expire at various dates
through 2010. Ownership changes that have occurred, including those in
connection with the IPO, limit the utilization of the net operating loss
carryforward in any year. Based upon a preliminary estimate, the net operating
loss that can be utilized in any year will not exceed $980,000. See Note 14 of
the Notes to the Consolidated Financial Statements of the Company.
<PAGE>
1994 Compared to 1993
Revenues. Total revenue increased by $2,790,000 to $11,496,000 or 32.0%
for 1994 compared to 1993, primarily due to an increase in the number of
Company-owned and franchised restaurants. Restaurant sales at Company-owned
restaurants increased $2,293,000 to $8,551,000 or 36.6% for 1994 compared to
1993. This increase was largely the result of the opening of one additional
Company-owned restaurant and the acquisition of two franchised restaurants by
the Company during 1994. Restaurant sales for same Company-owned restaurants
increased by $241,000 to $7,692,000 or 3.2% for 1994 compared to 1993.
Franchise and development fees decreased by $68,000 to $882,000 or 7.2%
for 1994 compared to 1993. This decrease was primarily due to the recognition as
income of deferred revenues due to the termination of development agreements and
prepaid franchise fees totaling $240,000 in 1994 compared to $253,000 in 1993,
and to the opening of 17 franchised restaurants in 1994 compared to the opening
of 22 franchised restaurants in 1993.
Royalties increased by $565,000 to $2,062,000 or 37.7% for 1994
compared to 1993. This increase was due to there being 61 franchised restaurants
in operation at the end of 1994 compared to 46 franchised restaurants in
operation at the end of 1993 and a 1.0% increase in restaurant sales for
franchised restaurants open during both periods.
Costs and expenses. Cost of restaurant sales at Company-owned
restaurants increased by $425,000 to $2,320,000 or 22.4% for 1994 compared to
1993 due to the opening of one additional Company-owned restaurant and two
franchised restaurants acquired by the Company, but decreased as a percentage of
restaurant sales to 27.1% in 1994 from 30.0% in 1993 for the same restaurants
open during both periods due to more favorable contract terms and volume
discounts on food and paper products. Food and beverage costs increased at
Company-owned restaurants from $1,619,000 to $1,980,000 for 1994 compared to
1993.
Labor expenses at Company-owned restaurants increased from 31.7% to
34.1% as a percentage of restaurant sales for 1994 compared to 1993 for the same
restaurants open during both periods, principally due to increased worker's
compensation costs. Occupancy and other costs at same Company-owned restaurants
open during both periods increased as a percentage of restaurant sales from
24.1% to 24.3% for 1994 compared to 1993.
General and administrative expenses increased by $1,405,000 to
$5,939,000 or 31.0% for 1994 compared to 1993 due to the addition of senior
management and the expansion of corporate headquarters and represented a 4.2%
increase as a percentage of total revenue for 1994 compared to 1993.
Depreciation and amortization expenses increased by $263,000 to
$604,000 or 77.2% for 1994 compared to 1993. This increase was due to the
opening of one additional Company-owned restaurant and two franchised
restaurants acquired by the Company.
<PAGE>
Net interest expense decreased by $102,000 to $145,000 for 1994 and
declined as a percentage of total revenue to 1.3% for 1994 from 2.8% for 1993
due primarily to the Company's receipt of proceeds from the sale of stock to
Armstrong.
Liquidity and Capital Resources
The following table presents a summary of the Company's cash flows for
the periods presented in thousands:
Year Ended December 31,
------------------------------
1993 1994 1995
-------- -------- --------
Net cash used for operating activities ...... $ (1,034) $ (217) $ (1,061)
Net cash used for investing activities ...... (784) (1,773) (2,809)
Net cash provided by financing activities ... 1,438 2,229 14,946
-------- -------- --------
Net (decrease) increase in cash ............. $ (380) $ 239 $ 11,076
======== ======== ========
On November 27, 1995, the Company completed its IPO. The Company sold
2,700,000 shares of its Common Stock (including 485,115 shares sold by an
existing shareholder of the Company). The Company intends to utilize the net
proceeds of the IPO (after the payment of offering expenses, the repayment of
certain indebtedness, the repurchase of certain stock held by one shareholder
and the reserve of certain funds for working capital purposes) to open
additional Company-owned restaurants. Prior to the IPO, the Company's strategy
was to seek growth principally though the development of franchised restaurants.
The Company had originally intended to open 28-32 restaurants using the net
proceeds of the IPO and operating revenues from existing restaurants; however,
revenues during the first quarter of 1996 were lower than anticipated.
Consequently, management has revised its business strategy to include the
opening of larger, free standing restaurants. Accordingly, the Company now
anticipates that it will open or acquire 20-28 restaurants using the net
proceeds of the IPO, available operating revenues and financing proceeds. See
"Overview and Business Strategy" in this Item 7.
The cash investment for the one new restaurant opened by the Company
during 1995 was $492,000, with a cost for leasehold improvements of $69 per
square foot and for equipment of $181,000. The Company expects that restaurants
opening in 1996 will have an average cost of $600,000, with a cost for leasehold
improvements of $65 per square foot and for equipment of $175,000 per
restaurant.
In 1995, the Company entered into a credit agreement with PNC Bank,
National Association ("Credit Agreement") for a line of credit in the principal
amount of the lesser of $2,500,000 or the borrowing base. The borrowing base is
calculated on the basis of a percentage of certain current assets of the
Company, the aggregate of which is currently greater than $2,500,000. The Credit
Agreement provides that advances will bear interest at a rate the greater of the
prime rate or 1/2% in excess of the weighted average Federal funds rate. The
Company does not currently satisfy the financial conditions necessary to enable
it to draw funds under the Credit Agreement, although it anticipates that it
<PAGE>
will do so beginning in the third quarter. In order to draw funds under the
Credit Agreement, the Company must maintain net income plus income tax expense
and total interest expense ranging from $100,000 per month in March 1996 to
$400,000 per month in September 1996. The Credit Agreement matures on November
15, 1996. The lender has not agreed to an extension of the maturity and the
Company has not identified an alternative source of financing.
The statements, and like statements elsewhere in this Report, that the
Company expects to open or acquire 20-28 restaurants using the net proceeds of
the IPO, available operating revenues and financing proceeds, and to be able to
draw funds under the Credit Agreement are forward looking statements. Factors
which could prevent the Company from realizing its objective of opening or
acquiring 20-28 restaurants include (i) restaurant revenues and/or profits being
lower than projected by management as a result of changes in consumer tastes,
adverse weather conditions (as has been the case during the first quarter of
1996), increased competition in the casual dining sector or unfavorable economic
conditions generally, (ii) there being fewer franchised store openings than
projected by management due to the inability of developers to obtain needed
financing or the decisions of developers to delay or terminate plans to open new
restaurants as a result of poor sales, the failure to achieve profitability or
other factors (as has been the case with certain developers during the first
quarter of 1996), with the attendant loss to the Company of royalties from
franchised restaurant sales and of the ability to recognize income from
franchise fees, (iii) the Company being unable to sell the number of new
franchises projected by management, with the attendant loss to the Company of
cash flow from franchise fees payable prior to the opening of new restaurants,
(iv) restaurant opening costs being higher than projected by management due to
increased competition for new restaurant sites or higher than anticipated
construction costs, or (v) restaurant operating costs being higher than
projected by management due to factors such as labor shortages in particular
markets or increases in the cost of food or paper products.
In projecting that the Company will be able to open such number of
restaurants, management is assuming that the Company will be able to draw the
full $2,500,000 potentially available under the Credit Agreement or to have
available to it an alternative source of financing. The Company does not
currently meet the financial conditions necessary to enable it to draw funds
under the Credit Agreement, and no assurance can be given that alternative
sources of financing will be available to it. The Company could find alternative
sources of financing difficult or impossible to obtain if its operations are
unsatisfactory or if the credit markets tighten generally.
Seasonality
Although the Company's limited operating history makes predicting
future trends difficult, The Italian Oven restaurants have generally experienced
slightly lower net sales in the fourth quarter.
<PAGE>
Inflation
The Company does not believe that inflation has materially
affected earnings. Substantial increases in costs, particularly labor, employee
benefits or food costs which the Company cannot pass along in increased prices,
could have a significant impact on the Company.
Accounting Pronouncements
In March 1995, the Financial Accounting Standard Board ("FASB") issued
SFAS No. 121 - "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". SFAS No. 121 requires that the carrying
value of long-lived operating assets, when determined to be impaired, be
adjusted so as not to exceed the estimated undiscounted cash flows provided by
such asset. SFAS No. 121 also addresses the accounting for long-lived assets
that are expected to be disposed of in future periods. In October 1995, the FASB
issued SFAS No. 123- "Accounting for Stock-Based Compensation". SFAS No. 123
recommends, but does not require, that companies change their method of
accounting for stock-based compensation plans to one that attributes
compensation costs equal to the fair value of a stock-based compensation
arrangement over the periods service is rendered that qualifies an employee to
receive such compensation. Companies not electing to change their method of
accounting are required, among other things, to provide additional disclosures
which in effect restate a company's results for comparative periods as if the
new method of accounting had been adopted. The Company will be subject to the
provisions of SFAS No. 121 and SFAS No. 123 in 1996, however, the Company does
not believe that the adoption of either of the new accounting pronouncements
will have a material effect on its financial condition or results of its
operations.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Index to Financial Statements
The Italian Oven, Inc. Page
Report of Independent Public Accountants 12
Consolidated Balance Sheets
December 31, 1994 and 1995 ........................ 13
Consolidated Statements of Operations
for the years ended December 31, 1993,
1994 and 1995 ..................................... 16
Consolidated Statements of Mandatory
Redeemable Equity and Shareholders'
Equity (Deficit) for the years ended
December 31, 1993, 1994 and 1995 .................. 18
Consolidated Statements of Cash Flows
for the years ended December 31, 1993,
1994 and 1995 ..................................... 22
Notes to Consolidated Financial Statements ........... 24
<PAGE>
THE ITALIAN OVEN, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders,
The Italian Oven, Inc.:
We have audited the accompanying consolidated balance sheets of The Italian
Oven, Inc. (a Pennsylvania corporation) as of December 31, 1994 and 1995, and
the related consolidated statements of operations, mandatory redeemable equity
and shareholders' (deficit) equity and cash flows for each of the three years in
the period ended December 31, 1995. These consolidated financial statements and
the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Italian Oven, Inc. as of
December 31, 1994 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
As discussed further in Note 19, subsequent to February 6, 1996, the date of our
original report, the Company has incurred a loss from operations during the six
months ended June 30, 1996, and utilized funds available for acquisitions,
building Company-owned stores and loans to its Chairman. As of June 30, 1996,
based on unaudited financial statements, the Company's current liabilities
exceeded its current assets by $5,610,000. These factors, among others, as
described in Note 19, create a substantial doubt about the Company's ability to
continue as a going concern and an uncertainty as to the recoverability and
classification of recorded asset amounts and the amounts and classification of
liabilities. The accompanying financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedule for each
of the three years in the period ended December 31, 1995, listed in Item 14.(d),
is presented for purposes of complying with the Securities and Exchange
Commission's rules and regulations under the Securities Exchange Act of 1934 and
is not otherwise a required part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in our audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania,
February 6, 1996
<PAGE>
THE ITALIAN OVEN, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
1994 1995
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 349,620 $11,425,916
Receivables, net of allowance
of $35,000 and $85,000, respectively 528,469 844,163
Notes receivable from related parties -- 442,249
Inventories 165,800 286,427
Prepaid expenses and other current assets 34,911 51,479
----------- -----------
Total current assets 1,078,800 13,050,234
PROPERTY AND EQUIPMENT:
Restaurant equipment 1,774,348 2,010,179
Building and leasehold improvements 1,979,704 2,357,273
Office furniture and equipment 398,830 492,896
Construction-in-progress -- 1,238,814
----------- -----------
4,152,882 6,099,162
Less- Accumulated depreciation 1,208,783 1,723,444
----------- -----------
Property and equipment, net 2,944,099 4,375,718
INTANGIBLE ASSETS:
Preopening costs, net 76,658 179,415
Equity in/advances to joint venture 304,729 10,958
Liquor licenses, net 29,361 53,460
Other long-term assets 39,464 25,302
Goodwill, net 260,506 197,731
----------- -----------
710,718 466,866
----------- -----------
TOTAL ASSETS $ 4,733,617 $17,892,818
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
THE ITALIAN OVEN, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
DECEMBER 31, 1994 AND 1995
1994 1995
----------- -----------
LIABILITIES, MANDATORY REDEEMABLE EQUITY
AND SHAREHOLDERS'(DEFICIT) EQUITY
- ----------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 274,007 $ 176,962
Notes payable -- 423,032
Accounts payable 633,856 1,586,940
Deferred franchise and development fees
and other deferred revenue 1,112,077 1,264,577
Reserve for store closing -- 464,143
Accrued payroll and other employee benefits 501,019 360,223
Accrual for gift certificates outstanding 453,241 559,002
Other accrued expenses 202,942 450,741
----------- -----------
Total current liabilities 3,177,142 5,285,620
LONG-TERM LIABILITIES:
Deferred franchise and development fees revenue 2,421,957 1,715,125
Long-term debt 392,717 180,437
Subordinated debt 500,000 --
Other long-term liabilities 209,506 342,273
----------- -----------
Total long-term liabilities 3,524,180 2,237,835
----------- -----------
Total liabilities 6,701,322 7,523,455
COMMITMENTS AND CONTINGENCIES
MANDATORY REDEEMABLE EQUITY:
Mandatory redeemable 6% preferred stock,
par value $10 per share-
Authorized, 500,000 shares at
December 31, 1994, and 96,771
shares at December 31, 1995
Issued and outstanding, 353,229 shares
at December 31, 1994 3,675,999 --
Common stock subject to rescission -
50,000 shares at December 31, 1994 500,000 --
----------- -----------
Total mandatory redeemable equity 4,175,999 --
SHAREHOLDERS' (DEFICIT) EQUITY:
Common stock, par value $.01 per share-
Authorized, 20,000,000 shares
Issued, 1,581,614 shares at
December 31, 1994, and 4,350,912 shares
at December 31, 1995 15,816 43,509
Additional paid-in capital 2,342,430 22,053,222
Warrants outstanding -- 1,975,000
Accumulated deficit (8,001,950) (13,471,000)
----------- -----------
(5,643,704) 10,600,731
Less - Common stock subject to rescission (500,000) --
Less - Cost of common stock in treasury-
No shares at December 31, 1994, and
22,921 shares at December 31, 1995 -- (231,368)
----------- -----------
Total shareholders' (deficit) equity (6,143,704) 10,369,363
----------- -----------
TOTAL LIABILITIES, MANDATORY REDEEMABLE EQUITY
AND SHAREHOLDERS' (DEFICIT)EQUITY $ 4,733,617 $ 17,892,818
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
THE ITALIAN OVEN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
REVENUE:
Restaurant sales $ 6,258,508 $ 8,551,277 $ 10,260,296
Franchise and development fees 949,584 881,965 1,380,757
Royalty fees 1,497,469 2,062,353 2,744,572
------------ ------------ ------------
Total revenue 8,705,561 11,495,595 14,385,625
COSTS AND EXPENSES:
Costs of restaurant sales 1,895,510 2,320,327 2,726,963
Other restaurant expenses -
Restaurant labor expenses 2,179,018 3,181,629 3,865,014
Occupancy and other costs 1,555,806 2,133,142 2,499,678
------------ ------------ ------------
3,734,824 5,314,771 6,364,692
General and administrative -
Administrative labor expenses 2,238,352 3,014,879 3,292,971
Other general and administrative 2,135,677 2,619,364 2,818,848
Professional fees to a related party 160,375 304,837 236,301
Provision for store closing and other
nonrecurring items -- -- 640,548
------------ ------------ ------------
4,534,404 5,939,080 6,988,668
Depreciation and amortization 340,906 604,009 719,741
------------ ------------ ------------
Total costs and expenses 10,505,644 14,178,187 16,800,064
------------ ------------ ------------
Loss from operations (1,800,083) (2,682,592) (2,414,439)
OTHER INCOME (EXPENSE):
Equity in loss of joint venture (130,769) (135,995) (454,866)
Interest income 6,266 29,697 76,135
Interest expense (253,066) (174,643) (252,058)
Inducement to convert preferred stock
to common stock -- -- (2,246,664)
Other income (expense), net 162,990 44,076 51,324
------------ ------------ ------------
Total other income (expense) (214,579) (236,865) (2,826,129)
------------ ------------ ------------
Loss before taxes (2,014,662) (2,919,457) (5,240,568)
PROVISION FOR INCOME TAXES (1,410) (10,727) (1,191)
------------ ------------ ------------
Net loss (2,016,072) (2,930,184) (5,241,759)
UNDECLARED DIVIDENDS ON PREFERRED STOCK (7,984) (161,937) (201,079)
ACCRETION OF DISCOUNT ON PREFERRED STOCK (1,520) (4,558) (26,212)
------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON STOCK $ (2,025,576) $ (3,096,679) $ (5,469,050)
============ ============ ============
PRO FORMA NET LOSS PER COMMON SHARE $ (1.42) $ (2.24)
============ ============
SHARES USED IN COMPUTING PRO FORMA
PER SHARE AMOUNTS 2,065,923 2,336,048
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
THE ITALIAN OVEN, INC.
CONSOLIDATED STATEMENTS OF MANDATORY REDEEMABLE EQUITY
AND SHAREHOLDERS' (DEFICIT) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
Mandatory Redeemable Equity
---------------------------------------------------------------------------
Total
Shares Amount Shares Amount Stock Common Stock Mandatory
Subscription Subject to Redeemable
Receivable Rescission Equity
-------- ---------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992 -- $ -- $ -- -- $ -- $ -- $ --
Common stock issued as compensation -- -- -- -- -- -- --
Preferred stock issued 53,229 500,000 -- -- -- -- 500,000
Preferred stock subscription -- -- 300,000 3,000,000 (3,000,000) -- --
Accretion of discount on preferred stock -- 1,520 -- -- -- -- 1,520
Subordinated debt converted to common stock -- -- -- -- -- -- --
Investment by co-venturer in
The Italian Oven of Charlotte -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- --
Cumulative dividends on preferred stock -- 7,984 -- -- -- -- 7,984
-------- ---------- --------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1993 53,229 509,504 300,000 3,000,000 (3,000,000) -- 509,504
Common stock issued as compensation -- -- -- -- -- -- --
Preferred stock subscription 300,000 3,000,000 (300,000) (3,000,000) 3,000,000 -- 3,000,000
Accretion of discount on preferred stock -- 4,558 -- -- -- -- 4,558
Subordinated debt converted to
common stock subject to rescission -- -- -- -- -- 500,000 500,000
Common stock issued in acquisition
of co-venturer's interest -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- --
Cumulative dividends on preferred stock -- 161,937 -- -- -- -- 161,937
-------- ---------- --------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1994 353,229 3,675,999 -- -- -- 500,000 4,175,999
Common stock issued -- -- -- -- -- -- --
Conversion of preferred stock to common stock (403,229) (4,403,290) -- -- -- -- (4,403,290)
Reacquisition of outstanding shares -- -- -- -- -- -- --
Accretion of discount on preferred stock -- 26,212 -- -- -- -- 26,212
Conversion of common stock subject to rescission -- -- -- -- -- (500,000) (500,000)
Subordinated debt converted to preferred stock 50,000 500,000 -- -- -- -- 500,000
Common stock issued in initial public offering -- -- -- -- -- -- --
Warrants issued -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- --
Cumulative dividends on preferred stock -- 201,079 -- -- -- -- 201,079
-------- ---------- --------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1995 -- $ -- $ -- $ -- $ -- $ -- $ --
======== ========== ========= ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
THE ITALIAN OVEN, INC.
CONSOLIDATED STATEMENTS OF MANDATORY REDEEMABLE EQUITY
AND SHAREHOLDERS' (DEFICIT) EQUITY (Continued)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
Shareholders' (Deficit) Equity
------------------------------------------------------------------------------------------------------
Shares Amount Additional Warrants Accumulated Common Total
Paid-in Outstanding Deficit Stock Treasury Stock Shareholders'
Capital Subject to ---------------- (Deficit)
Rescission Shares Amount Equity
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992 1,434,600 $ 14,346 $ 835,845 $ -- $ (2,879,695) $ -- -- $ -- (2,029,504)
Common stock issued
as compensation 5,100 51 25,449 -- -- -- -- -- 25,500
Preferred stock issued -- -- -- -- -- -- -- -- --
Preferred stock subscription -- -- -- -- -- -- -- -- --
Accretion of discount
on preferred stock -- -- -- -- (1,520) -- -- -- (1,520)
Subordinated debt converted
to common stock 63,427 634 499,366 -- -- -- -- -- 500,000
Investment by co-venturer
in The Italian Oven
of Charlotte -- -- 55,250 -- -- -- -- -- 55,250
Net loss -- -- -- -- (2,016,072) -- -- -- (2,016,072)
Cumulative dividends
on preferred stock -- -- -- -- (7,984) -- -- -- (7,984)
-----------------------------------------------------------------------------------------------------
BALANCE, December 31, 1993 1,503,127 15,031 1,415,910 -- (4,905,271) -- -- -- (3,474,330)
Common stock issued
as compensation 10,000 100 149,900 -- -- -- -- -- 150,000
Preferred stock subscription -- -- -- -- -- -- -- -- --
Accretion of discount
on preferred stock -- -- -- -- (4,558) -- -- -- (4,558)
Subordinated debt
converted to common stock
subject to rescission 50,000 500 499,500 -- -- (500,000) -- -- --
Common stock issued in
acquisition of
co-venturer's interest in
The Italian Oven of Raceway 18,487 185 277,120 -- -- -- -- -- 277,305
Net loss -- -- -- -- (2,930,184) -- -- -- (2,930,184)
Cumulative dividends
on preferred stock -- -- -- -- (161,937) -- -- -- (161,937)
-----------------------------------------------------------------------------------------------------
BALANCE, December 31, 1994 1,581,614 15,816 2,342,430 -- (8,001,950) (500,000) -- -- (6,143,704)
Common stock issued 4,002 40 79,960 -- -- -- -- -- 80,000
Conversion of preferred
stock to common stock 550,411 5,504 4,397,786 -- -- -- -- -- 4,403,290
Reacquisition of
outstanding shares -- -- -- -- -- -- (22,921) (231,368) (231,368)
Accretion of discount
on preferred stock -- -- -- -- (26,212) -- -- -- (26,212)
Conversion of common stock
subject to rescission -- -- -- -- -- 500,000 -- -- 500,000
Subordinated debt converted
to preferred stock -- -- -- -- -- -- -- -- --
Common stock issued in
initial public offering 2,214,885 22,149 15,233,046 -- -- -- -- -- 15,255,195
Warrants issued -- -- -- 1,975,000 -- -- -- -- 1,975,000
Net loss -- -- -- -- (5,241,759) -- -- -- (5,241,759)
Cumulative dividends
on preferred stock -- -- -- -- (201,079) -- -- -- (201,079)
-----------------------------------------------------------------------------------------------------
BALANCE, December 31, 1995 4,350,912 $ 43,509 $22,053,222 $1,975,000 $(13,471,000) $ -- (22,921) $(231,368) $10,369,363
=====================================================================================================
</TABLE>
Accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
THE ITALIAN OVEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $ (2,016,072) $ (2,930,184) $ (5,241,759)
Adjustments required to reconcile net loss to
net cash used for operating activities -
Depreciation and amortization 340,906 604,009 719,741
Bad debt expense 7,000 25,000 50,000
Equity in loss of joint venture 130,769 135,995 454,866
Common stock issued as compensation 25,500 150,000 --
Loss on sale of property and equipment 13,497 -- --
Provision for store closing -- -- 464,146
Inducement to convert preferred stock to
common stock -- -- 2,246,664
------------ ------------ ------------
517,672 915,004 3,935,417
Cash provided by (used for) working capital items-
Receivables (141,145) 251,564 (365,694)
Inventories (40,343) 7,309 (120,627)
Prepaid expenses and other current assets 45,584 1,244 (16,568)
Other long-term assets 606 (14,648) 4,422
Accounts payable (361,461) (20,313) 953,084
Deferred franchise and development fees and
other deferred revenue 533,166 1,095,035 (554,332)
Accrued payroll and other employee benefits 71,934 277,295 (140,796)
Change in gift certificates outstanding 197,294 141,054 105,761
Other accrued expenses 128,457 (14,455) 247,799
Other long-term liabilities 30,303 74,442 132,767
------------ ------------ ------------
Cash provided by working capital items 464,395 1,798,527 245,816
------------ ------------ ------------
Net cash used for operating activities (1,034,005) (216,653) (1,060,526)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net acquisitions of property, equipment,
liquor licenses and license agreement (517,500) (1,285,543) (1,991,296)
Preopening costs (104,014) (189,040) (214,408)
Advances to joint venture (162,431) (249,978) (161,095)
Acquisition of joint venture -- (139,435) --
Investment by co-venturer -- 90,655 --
Net increase in notes receivable
from related parties -- -- (442,249)
------------ ------------ ------------
Net cash used for investing activities (783,945) (1,773,341) (2,809,048)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from initial public offering -- -- 15,255,195
Collection of subscription receivable -- 3,000,000 --
Issuance of redeemable preferred stock 500,000 -- --
Issuance of common stock -- -- 80,000
Subordinated debt borrowings 500,000 -- --
Notes payable borrowings 809,500 819,754 1,661,452
Notes payable payments (579,138) (1,330,000) (1,741,452)
Note payable borrowings from related parties 215,262 1,258,246 241,650
Note payable payments to related parties (11,904) (1,409,055) (241,650)
Long-term debt borrowings 311,891 215,000 --
Long-term debt payments (307,530) (324,638) (309,325)
------------ ------------ ------------
Net cash provided by financing activities 1,438,081 2,229,307 14,945,870
------------ ------------ ------------
<PAGE>
Net (decrease) increase in cash and cash (379,869) 239,313 11,076,296
equivalents
CASH AND CASH EQUIVALENTS, beginning of year 490,176 110,307 349,620
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 110,307 $ 349,620 $ 11,425,916
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $ 239,268 $ 137,007 $ 310,866
============ ============ ============
Income taxes paid $ 1,410 $ 10,727 $ 1,191
============ ============ ============
Noncash financing activities-
Purchase of treasury stock
with notes payable $ -- $ -- $ 231,368
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
THE ITALIAN OVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION:
Nature of Business
The Italian Oven, Inc. (the Company) owns, operates and franchises
Italian-style, family-oriented casual dining restaurants in 17 states (at
year-end) in the Mid-Atlantic, Midwest, Southeast and Southwest Regions of the
United States and in Australia.
1994 1995
------ ------
Number of unopened restaurants
covered by executed development
or franchise agreements 336 361
========== ===========
Number of restaurants open -
Franchised 61 81
Company owned 11 11
Joint ventures 2 2
---------- -----------
Total 74 94
========== ===========
During 1994, the Company exercised its option to purchase the rights, title and
interest of the co-venturer in The Italian Oven of Dublin for cash consideration
of $139,425.
In August 1994, the Company purchased all of the rights, title and interest of
the co-venturer in The Italian Oven of Raceway in exchange for 18,487 shares of
stock valued at $277,305.
These transactions resulted in consideration paid in excess of the fair value of
assets acquired of $188,805. Such excess is classified as goodwill in the
accompanying consolidated balance sheets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The consolidated financial statements are prepared in conformity with generally
accepted accounting principles.
Principles of Consolidation
The consolidated financial statements include the accounts of The Italian Oven,
Inc. The Company operates on a 52-53 week fiscal year ending the last Sunday in
December. This report reflects the Company's year-end as of December 31 for
consistency of reference. The Company's 1993 fiscal year ended on December 26,
1993, its 1994 fiscal year ended on December 25, 1994, and its 1995 fiscal year
ended on December 31, 1995. These fiscal periods were comprised of 52, 52 and 53
weeks, respectively.
Investments in other than wholly-owned and majority owned subsidiaries include
one 50% owned subsidiary in 1995 and two 50% owned subsidiaries in 1994, all of
which are carried at equity.
<PAGE>
Franchising Operations - Domestic
The Company grants franchising rights under a development agreement to open and
operate a specified number of restaurants in an exclusive geographic area. An
initial development fee of $10,000 for each planned restaurant site within the
geographic area is payable in full upon execution of the agreement. Each
franchised restaurant opened under a development agreement requires an initial
franchise fee of $29,500.
Franchised restaurants opened which are not part of a development agreement
require an initial franchise fee of $39,500.
The Company is obligated, in accordance with the terms of the franchise
agreement, to provide the following supervision, assistance and services:
prototype store design, training and preopening assistance, site location, an
operations manual, continuing assistance and initial advertising, promotion and
materials.
A monthly royalty of 4% and a National Advertising Fund contribution of 1% (see
Note 4) are payable based upon franchise restaurant sales.
Franchising Operations - International
The Company grants franchising rights under a development agreement to open and
operate a specified number of restaurants in an exclusive geographic area.
Franchise and development fees totaling $39,500 are required for each franchised
restaurant opened.
The Company is obligated in accordance with the terms of the franchise
agreement, to provide the following supervision, assistance and services:
prototype store design, initial training and preopening assistance, site review,
an operations manual and continuing assistance.
A monthly royalty of 2% is payable to the Company based upon franchise
restaurant sales. No contribution to the National Advertising Fund is required.
Franchise and Development Costs and Revenue Recognition
All costs associated with selling an exclusive area and a franchise are expensed
as incurred. Revenue derived from initial franchise fees and area development
fees is recognized when the franchise store commences operations or upon partial
or complete cancellation of the agreement. If a development agreement is
terminated, any remaining deferred revenue is recognized as income. Royalties
are recognized in the period when related franchisee revenue is generated.
Revenue from Company-operated restaurants is recognized in the period of the
related restaurant sales.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The majority of cash and
cash equivalents is on deposit at one bank.
Inventories
Inventories, which consist of food and beverages, retail gift items and paper
supplies, are stated at the lower of cost (first-in, first-out method) or
market.
<PAGE>
Property, Equipment and Leasehold Improvements
Purchased property, equipment and leasehold improvements are recorded at cost
and include expenditures for additions and major improvements. Leased equipment
is stated at the present value of the minimum lease payments required during the
lease period, less accumulated depreciation. Maintenance and repairs which are
not considered to extend the useful lives of assets are charged to operations as
incurred.
Depreciation is computed using accelerated and straight-line methods over
estimated useful lives of five to 31.5 years for leasehold improvements and
three to seven years for furniture and office and restaurant equipment. Upon
disposition, the cost and related accumulated depreciation are removed from the
accounts and the resulting gain or loss is reflected in income (loss) for the
period.
Amortization
Liquor licenses and goodwill arising from the acquisition of joint ventures are
being amortized on a straight-line basis over five years.
Preopening costs, which consist primarily of salaries, rent and other direct
expenses relating to the setup, training and general management activities
incurred prior to the opening of new Company owned stores, are amortized on a
straight-line basis over one year, beginning when the new store commences
operations.
Income Taxes
Income taxes are provided on the basis of items included in the income
statements and thus include the effects of temporary differences between
reported and taxable earnings.
The Company follows Statement of Financial Accounting Standards No. 109 (SFAS
109), "Accounting for Income Taxes." SFAS 109 requires the use of an asset and
liability method of accounting for current and expected future tax consequences
of events that have been recognized in the financial statements or tax returns
(see Note 14).
<PAGE>
Pro Forma Net Loss Per Share
Pro forma net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding during the respective periods after
giving retroactive adjustment for the conversion of all of the Company's
preferred stock (including that acquired through the exercise of the preferred
stock warrant), accretion and cumulative unpaid dividends to common stock.
Historical earnings per share are not deemed meaningful due to the significant
change in the Company's capital structure which occurred in connection with the
initial public offering (see Note 17). Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletin No. 83 (Bulletin No. 83), common stock and
common stock equivalent shares which were issued or became issuable during the
12 months immediately preceding the initial public offering have been included
in the calculation as if they were outstanding for all periods presented using
the treasury stock method and the initial public offering price per share (see
Note 17). The weighted average computation does not include the effect of common
stock equivalents issued more than one year prior to the initial public
offering, as these are antidilutive during periods of losses and are not subject
to inclusion per Bulletin No. 83.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Prior Year Presentation
Certain prior year amounts have been reclassified where necessary to conform to
the current year presentation.
3. INTANGIBLE ASSETS:
Intangible assets and related accumulated amortization are as follows:
1994
---------------------------------------------------
Accumulated
Cost Amortization Net Balance
---------------- ------------------ ---------------
Goodwill $ 319,504 $ 58,998 $ 260,506
Preopening costs 189,040 112,382 76,658
Liquor licenses 77,604 48,243 29,361
<PAGE>
1995
--------------------------------------------------
Accumulated Net Balance
Cost Amortization
---------------- ------------------ ---------------
Goodwill $ 319,504 $ 121,773 $ 197,731
Preopening costs 214,408 34,993 179,415
Liquor licenses 114,354 60,894 53,460
The Company evaluates the recoverability of intangible assets, including
goodwill, at each balance sheet date based on forecasted future operations and
undiscounted cash flows exclusive of capital investments and other subjective
criteria. Based upon this information, management believes that the carrying
amount of these intangible assets will be realizable over the respective
amortization periods.
4. NATIONAL ADVERTISING FUND:
The Company administers a National Advertising Fund (the Fund) to which both
Company owned and franchised restaurants make contributions based on individual
franchise agreements (currently 1% of revenues). Collected amounts are spent
primarily on developing marketing and advertising materials for use systemwide.
Such amounts are segregated from the cash resources of the Company, and the
activity of the Fund is accounted for separately and not included in the
accompanying consolidated financial statements.
During 1994, the Company borrowed a total of $69,000 from the Fund. All such
borrowings were repaid by the Company in the same year.
During 1995, the Company loaned $589,012 to the Fund. As of December 31, 1995,
the unpaid balance on these borrowings was $404,012. The Company has expensed
$56,562 of this amount, which represents the estimated portion of the unpaid
balance to be contributed by the Company in the future (see Note 15).
5. NOTES PAYABLE:
The Company issued a promissory note for $423,032 in conjunction with its
initial public offering, which was repaid by the Company in January 1996 (see
Note 17).
The Company maintained various lines of credit throughout 1995, with interest
rates ranging from prime rate to prime rate plus 2.5%. The maximum borrowings
outstanding at any month-end during 1995 were $1,000,000.
As of December 31, 1995, the Company had $2,500,000 available under a line of
credit which expires November 15, 1996. This line of credit became available to
the Company after its initial public offering. Interest is payable on any
borrowings at the greater of the weighted average federal funds rate plus .5% or
prime rate. There were no outstanding borrowings under this line of credit as of
December 31, 1995. As of December 31, 1995, the Company was not in compliance
with certain financial covenants (including those related to maintaining minimum
levels of earnings and tangible net worth, as defined) as required under the
terms of this line of credit. The Company has obtained waivers of these events
of default through February 29, 1996; however, until the Company complies with
these covenants or obtains additional waivers beyond February 29, 1996,
borrowings under this line of credit are not permitted.
<PAGE>
6. LONG-TERM DEBT:
Long-term debt consisted of the following:
1994 1995
------------ ------------
Various capital lease obligations and
installment notes payable, which
were repaid in 1995. $ 123,898 $ -
Various capital lease obligations due
to a shareholder in varying monthly
installments, interest ranging from
8% to 20.01% through 1996. The
obligations are collateralized by
the property obtained under the leases. 217,327 98,343
Note payable - due in equal monthly
installments, including interest at
the U.S. Treasury Bill June auction
average rate plus 4.5% (9.53% at
December 31, 1994, and 9.88% at
December 31, 1995). The note is guaranteed
by a principal shareholder.
213,566 199,723
Note payable - due in minimum
monthly payments of $2,500. 111,933 59,333
------------ ------------
666,724 357,399
Less - Current portion 274,007 176,962
------------ ------------
$ 392,717 $ 180,437
============ ============
The prime rate was 8.5% at December 31, 1994 and 1995. The weighted average
federal funds rate was 4.73% at December 31, 1995.
Substantially all of the Company's assets, including franchise agreements and
fees, are pledged as collateral on the Company's various debts.
<PAGE>
Maturities of long-term debt and capital lease obligations as of December 31,
1995, are as follows:
Year Ending December -
1996 $ 177,000
1997 28,000
1998 17,000
1999 19,000
2000 21,000
Thereafter 95,000
------------
$ 357,000
============
Notes payable incurred to purchase equipment total $215,000 in 1994. The Company
entered into capital lease obligations totaling $142,000 in 1994 to finance the
purchase of equipment.
7. SUBORDINATED DEBT:
On November 25, 1992, the Company borrowed $1,000,000 under a 10% Subordinated
Convertible Note Agreement. The note was subordinated to all senior
indebtedness. Interest was payable quarterly. The note was convertible into
fully paid and nonassessable shares of common stock. On September 24, 1993, the
holder converted $500,000 of the note into 63,427 shares of common stock. The
remaining $500,000 balance was converted by the holder into 50,000 shares of
common stock on December 1, 1994.
The Company also issued a $500,000 subordinated debenture in September 1993,
which bore interest at the prime rate. The debenture was to mature on September
15, 2000. The debenture was issued with detachable preferred and common stock
warrants. The initial holder of the warrants could elect to satisfy its
obligation to pay the purchase price upon exercise of the warrant by reducing
the principal amount due on the debenture.
The common stock warrant expires September 24, 2002. The warrant entitles the
holder to purchase up to 100,000 shares of common stock at a purchase price of
$5.00 per share, the fair value at the warrant issue date. The purchase price is
subject to adjustment to prevent dilution.
The preferred stock warrant entitled the holder to purchase up to 50,000 shares
of Series A Convertible Preferred Stock at $10.00 per share (the fair value of
the warrant at the warrant issue date) and was exercised in conjunction with the
initial public offering by discharging the $500,000 subordinated debenture (see
Note 17).
8. MANDATORY REDEEMABLE PREFERRED STOCK:
The Company had authorized 500,000 shares and 96,771 shares of preferred stock,
par value $10.00 per share, as of December 31, 1994 and 1995, respectively.
Series A Convertible Preferred Stock (Series A)
As of December 31, 1993, 300,000 shares of Series A stock had been subscribed at
$10.00 per share. The $3,000,000 stock subscription receivable was presented as
a reduction (contra account) to preferred stock at December 31, 1993. During
1994, the Company collected the $3,000,000 preferred stock subscription
receivable and issued 300,000 shares of Series A stock in return.
<PAGE>
The holders of Series A stock were entitled to cumulative cash dividends at the
rate of $.60 per share per year. The balance at December 31, 1994, included
undeclared dividends of $169,921. Each share of Series A stock could be
converted in whole or in part, at the option of the holder, into common stock of
the Company at a rate equal to $10.00 per share divided by the conversion price
in effect at the conversion date. Cumulative unpaid dividends could be converted
at an initial conversion price of $10.00 per share. The holders of Series A
stock could compel the Company to redeem all of the outstanding shares under the
same terms as the optional redemption.
In conjunction with the initial public offering, the sole preferred shareholder,
Armstrong Holdings, Inc. (Armstrong), converted all of the Company's preferred
stock (including that acquired through the exercise of the preferred stock
warrant), accretion and cumulative unpaid dividends into common stock (see Note
17).
9. TREASURY STOCK:
In 1995, the Company purchased 4,000 shares of its common stock at a cost of
$20.00 per share.
In addition, the Company purchased 18,921 shares of common stock from Armstrong
at $8.00 per share through the issuance of a promissory note (see Notes 5 and
17).
10. STOCK OPTIONS AND AWARDS:
The Company has an Employee Stock Option Plan (Employee Plan) under which
options to purchase up to 559,715 shares of common stock may be granted. Under
the terms of the Employee Plan, the Company may grant options to certain
employees, officers and consultants of the Company.
Eligibility of employees is based upon employment status in the Company and a
minimum salary requirement. Options granted under the Employee Plan expire 10
years after the grant date. In the event that an individual owns greater than
10% of the combined voting power of the Company, the option price is equal to
110% of the fair market value at the date of grant, and each option has a term
of five years. The options granted vest at a rate of 25% per year.
The Company also maintains an Executive Stock Option Plan (Executive Plan) under
which options to purchase up to 90,000 shares of common stock may be granted.
Under the terms of the Executive Plan, the Company may grant options to key
employees, officers and consultants of the Company. Each option has a term of 10
years. The options vest at a rate of 10% in the first year, an additional 20% at
the end of the second year and an additional 30% at the end of the third year,
with the balance vesting at the end of the fourth year from the date of grant.
The Company has also made special stock option grants in addition to those
granted through the Employee Plan and the Executive Plan.
The Company granted stock options to purchase 440,000 shares of stock at an
exercise price of $5.00 per share (expiring December 17, 2002) and 60,000 shares
at $15.00 per share (expiring July 21, 2004) to the Chairman and Chief Executive
Officer of the Company. In conjunction with the initial public offering, this
individual surrendered for cancellation options to purchase 170,000 shares of
stock at an exercise price of $5.00 per share (see Note 17).
The Company's Board of Directors (with the exception of the Chairman of the
Board and President) was granted options to purchase 16,000 shares of stock at
an exercise price of $10.00 (expiring December 15, 2003) and 35,000 shares at
$15.00 per share (expiring July 2004).
The President was granted options to purchase 10,000 shares at $15.00 per share
(expiring July 21, 2004).
<PAGE>
During 1995, the Company instituted a Nonemployee Director Option Plan under
which options to purchase up to 240,000 shares of common stock may be granted.
As of December 31, 1995, no options to purchase shares have been issued under
this plan.
The Company awarded a total of 15,000 shares of common stock to its President in
accordance with an employment agreement, with a charge to operations of $25,000
(5,000 shares) in 1993 and $150,000 (10,000 shares) in 1994.
The following is a summary of the Company's stock option activity for the years
ended December 31, 1993, 1994 and 1995:
Number of Option Price
Options Per Share
-------------------------------
Outstanding, December 31, 1992 440,000 $ 5.00
Granted 126,611 5.00 - 10.00
Exercised - -
Canceled (6,675) 5.00
-------------------------------
Outstanding, December 31, 1993 559,936 5.00 - 10.00
Granted 338,756 10.00 - 15.00
Exercised - -
Canceled (3,721) 5.00 - 10.00
-------------------------------
Outstanding, December 31, 1994 894,971 5.00 - 15.00
Granted 35,000 15.00 - 20.00
Exercised - -
Canceled (193,325) 5.00 - 15.00
-------------------------------
Outstanding, December 31, 1995 736,646 $5.00 - 20.00
===============================
11. PROFIT SHARING PLAN:
During 1995, the Company implemented a 401(k) profit sharing plan (the Plan).
Substantially all employees are eligible to participate in the Plan once they
have reached the age of 21 and have completed one year of service with the
Company, as defined. Participants may contribute a percentage of their
compensation to the Plan, but not in excess of the maximum allowed by law. The
Plan also provides for matching and other additional contributions by the
Company at its discretion. No discretionary contributions were made by the
Company in 1995.
<PAGE>
12. LICENSE AGREEMENT:
The Company has entered into a license agreement (Agreement) which grants the
Company the exclusive right to the name and marks of "The Italian Oven." Terms
of the Agreement require the Company to pay the licensor $500 per annum for each
Company owned and franchised location in operation through 2008. The royalty
payment will be higher for some locations if the Company expands to areas
protected by the Agreement. The Agreement guarantees royalties paid to the
licensor will increase at least $5,000 per year through September 30, 2005. Upon
expiration of the term of the Agreement, the right, title and interest in the
marks will remain with the Company. Amounts due under these provisions of the
Agreement are expensed when payable. Total payments under these provisions of
the Agreement were $37,000 in 1994 and $47,500 in 1995. Additional payments of
$30,000 were made to the licensor under other provisions of the Agreement and
have been capitalized as other long-term assets. This amount is being amortized
over five years.
13. COMMITMENTS AND CONTINGENT LIABILITIES:
The Company leases office facilities and restaurant space under noncancelable
operating leases. The restaurant leases contain options to renew for terms of
three to 10 years with changes per renewal period ranging from (5)% to 73%.
Several of the lease agreements contain provisions which require additional
rents based upon gross sales. Following are the future minimum lease payments
relating to these lease obligations:
Year Ending December -
1996 $ 973,000
1997 890,000
1998 901,000
1999 883,000
2000 872,000
Thereafter 3,667,000
-----------
$8,186,000
===========
Rent expense, consisting solely of minimum rents, charged to operations was
$664,000 in 1993, $867,000 in 1994 and $1,160,000 in 1995.
Generally, all franchise agreements entered into before March 24, 1994, require
the Company to lease to the franchisee two ovens per restaurant for a fee of
$1.00 each per year. As of March 24, 1994, the Company amended the franchise
agreements to require each franchisee to purchase its own ovens rather than
obtaining the ovens from the Company. However, certain agreements continue to
require the Company to provide ovens. If development of franchise locations
occurs as scheduled, the Company is committed to provide 50 ovens at an
estimated cost of $150,000 during the period 1996 through 2000.
In addition, certain claims, suits and complaints have been filed or are pending
against the Company from the ordinary course of its business. In the opinion of
management, all matters are adequately covered by insurance or if not covered,
are without merit or are of such kind, or involve such amounts, as would not
have a material adverse effect on the financial position or operating results of
the Company.
<PAGE>
14. INCOME TAXES:
The Company adopted SFAS 109, "Accounting for Income Taxes," in 1990. There was
no cumulative effect on the Company's financial statements at the time of
adoption, because the Company's deferred tax assets exceeded deferred tax
liabilities, and a valuation allowance was recorded against the net assets due
to uncertainty regarding realization of the tax benefits.
The provision for income taxes consists of the following:
1993 1994 1995
----------- ----------- -----------
Current taxes -
Federal $ - $ - $ -
State 1,410 10,727 1,191
----------- ----------- -----------
1,410 10,727 1,191
Deferred taxes -
Federal - - -
State - - -
----------- ----------- -----------
Total $ 1,410 $ 10,727 $ 1,191
=========== =========== ===========
The provision for income taxes differs from the amounts computed by applying the
federal statutory rate as follows (in percentages):
1993 1994 1995
-----------------------------
Income tax at federal statutory rate (34.0)% (34.0)% (34.0)%
State income taxes,
net of federal benefit (8.0) (8.0) (6.6)
Book expenses not deductible
for tax purposes - - 17.0
Other 2.3 1.5 (5.4)
Net operating loss 39.7 40.9 29.0
-----------------------------
Effective tax rate - % 0.4% - %
=============================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of
significant items comprising the Company's deferred tax asset and liability are
as follows (in thousands):
<PAGE>
1994 1995
-------------- --------------
Deferred tax liabilities -
Tax basis depreciation $ - $ (36)
-------------- --------------
Total deferred tax liability - (36)
Deferred tax assets-
Deferred revenue 1,414 1,230
Net operating loss carryforward 1,493 2,955
Tax basis depreciation 62 -
Reserve for store closing - 188
Other - 46
Valuation allowance (2,969) (4,383)
-------------- --------------
Total deferred tax asset - 36
-------------- --------------
Net deferred tax liability (asset) $ - $ -
============== ==============
The Company has recorded a valuation allowance for the net potential deferred
tax asset at December 31, 1994 and 1995, since realization is not considered
more likely than not.
At December 31, 1995, the Company had approximately $6,159,000 in net operating
loss carryforwards to offset future federal taxable income through December
2010. Ownership changes that have occurred, including those in connection with
the initial public offering, limit the utilization of the net operating loss
carryforward in any year. Based upon a preliminary estimate, the net operating
loss that can be utilized in any year will not exceed $980,000. The Company
anticipates that this limitation will not prevent the utilization of a
substantial portion of its net operating loss carryforwards; however, there is
no assurance that the Company will generate future taxable income sufficient to
allow for such utilization.
15. RELATED PARTY TRANSACTIONS:
One of the principal shareholders of the Company provided advances to the
Company throughout 1994 and 1995. The Company pays interest on these advances at
a rate of prime plus 2%. As of December 31, 1995, these advances had been repaid
by the Company.
During 1995, this shareholder periodically borrowed from the Company. The
Company receives interest on these borrowings by the shareholder at a rate of
prime plus 2%. As of December 31, 1995, the shareholder owed $94,799 to the
Company.
These borrowings by the shareholder and the loans to the Fund (net of the
portion expensed by the Company) are reflected as notes receivable from related
parties in the accompanying consolidated balance sheets (see Note 4).
16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 1994 and 1995. Statement of
Financial Accounting Standards No. 107, "Disclosure About Fair Value of
Financial Instruments," defines the fair value of a financial instrument as the
amount at which the instrument could be exchanged in a current transaction
between willing parties.
<PAGE>
<TABLE>
<CAPTION>
1994 1995
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
Financial assets -
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 349,620 $ 349,620 $11,425,916 $11,425,916
Notes receivable from related
parties -- -- 442,249 442,249
Financial liabilities -
Notes payable -- -- 423,032 423,032
Long-term debt 666,724 627,819 357,399 360,493
Subordinated debt 500,000 476,664 -- --
Mandatory redeemable preferred
stock 3,675,999 3,675,999 -- --
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each financial instrument:
Cash and Cash Equivalents and Notes Payable
The carrying amounts approximate fair value because of the short maturity of
these instruments.
Notes Receivable from Related Parties
The fair value of notes receivable from related parties is based upon the
Company's estimate of the net realizable value of the investment.
Long-Term and Subordinated Debt
The fair value of the Company's long-term and subordinated debt is estimated
using discounted cash flow analysis, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
Mandatory Redeemable Preferred Stock
The fair value of the Series A preferred stock outstanding at December 31, 1994,
was estimated at carrying value as such stock was not traded in the open market
and a market price was not readily available.
17. INITIAL PUBLIC OFFERING:
In November 1995, the Company completed an initial public offering (the
Offering) of its common stock at a price of $8.00 per share. Of the 2,700,000
shares of common stock sold as a part of the Offering, 2,214,885 shares were
sold by the Company and 485,115 shares were sold by Armstrong. The resulting net
proceeds to the Company (after deducting issuance costs) were $15,255,195. The
Company used a portion of the proceeds to repay a $1,000,000 line of credit,
which expired upon the Company's receipt of the proceeds from the Offering. The
Company intends to use the remaining proceeds from the Offering to finance the
development of additional Company owned restaurants and for working capital
purposes.
<PAGE>
In connection with the Offering by the Company, the following transactions
occurred:
(i) The preferred stock warrant for 50,000 preferred shares of Series A
stock was exercised at $10.00 per share by discharging the $500,000
subordinated debenture (see Note 7).
(ii) Pursuant to an agreement with the Company, all of the Company's
preferred stock (including that acquired through the exercise of
the preferred stock warrant), accretion and cumulative unpaid
dividends at the date of conversion was converted by Armstrong to
common stock at the Offering price. The agreement also provided
Armstrong with four warrants to purchase additional shares of
common stock:
Shares Exercise Price Expiration Date
------------- --------------- -------------------
100,000 $10.50 November 27, 1997
100,000 13.00 November 27, 1998
110,000 9.00 November 27, 2005
170,000 5.00 December 31, 2002
In connection with this agreement, the Chairman and Chief Executive
Officer surrendered for cancellation options to purchase 170,000
shares at an exercise price of $5.00 per share expiring December
17, 2002. The Company and Armstrong had agreed that Armstrong would
receive $4,032,288 in net proceeds from the sale of a portion of
its shares in connection with the Offering. This agreement required
a cash payment of $271,664 and the purchase of 18,921 shares of
common stock from Armstrong at $8.00 (see Note 9). The Company
financed these payments through the issuance of a promissory note
in the amount of $423,032 (see Note 5). The fair value of these
inducements was $2,008,664, which was expensed in the fourth
quarter of 1995 when the conversion occurred. In addition, an
underwriter was issued a warrant to purchase 75,000 shares of
common stock at $9.60 per share expiring December 30, 2000. The
fair value of this warrant of $238,000 was also expensed in the
fourth quarter of 1995 and is included in inducement expense.
(iii) An employment agreement was signed by the Chief Executive Officer.
The agreement provides for annual compensation of $175,000 for a
term of one year subject to automatic one-year renewals, unless
either the Chief Executive Officer or the Company elects to
terminate the agreement. If the Company terminates the agreement,
other than for "just cause" or fails to renew the agreement, or if
the Chief Executive Officer terminates the agreement for "good
reason," the Chief Executive Officer is entitled to receive salary
for the balance of the current term, a severance payment equal to
2.99 year's salary and bonus, and medical benefits for three years
(or until he receives similar benefits from other employment).
"Just cause" includes willful misconduct and conduct damaging to
the Company's reputation. "Good reason" includes a change in
control of the Company and the Company's breach of the terms of the
agreement, including any purported termination of the Chief
Executive Officer's employment other than in accordance with the
agreement.
18. RESTAURANT CLOSING:
As of December 31, 1995, it was determined that one joint venture owned
restaurant would be closed or sold in early 1996. As such, a charge to
operations of $464,143 was recorded by the Company to accrue for costs
associated with the closing.
<PAGE>
19. SUBSEQUENT EVENTS:
During the first six months of 1996, the Company has suffered losses from
operations of $1,982,000, (unaudited). The Company has also utilized all of the
cash proceeds from the Initial Public Offering in November 1995, and have not
been able to obtain alternate sources of financing to cover immediate and future
needs for general operating purposes. The first six months of 1996 has shown a
decrease in cash and cash equivalents of approximately $11,500,000 (unaudited).
The significant uses of cash in the six months ended June 30, 1996, included:
o The opening of seven Company-owned stores (four of which were in
process at December 31, 1995) at a cost of approximately
$4,746,000; this includes preopening expenditures and costs
incurred for restaurants still under construction;
o The purchase of Blackeyed Pea restaurants in the Kansas City area
for $3,069,000;
o The acquisition of the operating assets of four franchised
restaurants in the Western Pennsylvania market for $2,524,000
(cash portion of acquisition price); and
o An increase in loans to the Company's Chairman of approximately
$236,000.
These factors, among others, create a substantial doubt about the Company's
ability to continue as a going concern.
Management is attempting to resolve the current shortage of operating capital by
selling certain assets, seeking alternate sources of financing and by
restructuring the corporate functions in an effort to reduce general and
administrative costs. There can be no assurance that the Company's efforts will
be sufficient to enable the Company to continue as a going concern.
<PAGE>
THE ITALIAN OVEN, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
Balance at Additions Deductions Balance
Beginning Charged to from at End
Description of Year Earnings Reserves of Year
----------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Reserves deducted from
assets to which they apply-
Allowance for doubtful
accounts receivable-
1995 $ 35 $ 50 $ - $ 85
======== ========= ========= =======
1994 $ 10 $ 25 $ - $ 35
======== ========= ========= =======
1993 $ 3 $ 7 $ - $ 10
======== ========= ========= =======
Other reserves-
Reserve for store closing-
1995 $ - $ 464 $ - $ 464
======== ======== ======== =======
</TABLE>
<PAGE>
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this Report:
(1) A list of the financial statements filed as a part of this Report
on Form 10-K/A is set forth on page 10 hereof.
(2) See Item 14(d) below, for a description of the financial
statement schedule filed as a part of this Report on Form 10-K/A.
(3) The following Exhibits are included as a part of the Annual
Report on Form 10-K or are incorporated herein by reference:
3.1 Articles of Incorporation of the Registrant, as amended, filed as an
exhibit to Registrant's Regulation A Offering Statement on Form 1-A
(Commission File No. 24-3506-HQ) filed November 30, 1994 and
incorporated herein by reference.
3.2 Certificate of Designation of Rights and Preferences of Series A
Convertible Preferred Stock of the Registrant, filed as an exhibit to
Registrant's Regulation A Offering Statement of Form 1-A (Commission
File No. 24-3506-HQ) filed November 30, 1994 and incorporated herein
by reference.
3.3 By-laws of the Registrant, filed as an exhibit to Registrant's
Regulation A Offering Statement on Form 1-A (Commission File No.
24-3506-HQ) filed November 30, 1994 and incorporated herein by
reference.
4.1 Stock, Debenture and Warrant Purchase Agreement dated September 24,
1993 between the Registrant and Armstrong Holdings, Inc., filed as an
exhibit to Registrant's Regulation A Offering Statement on Form 1-A
(Commission File No. 24-3506-HQ) filed November 30, 1994 and
incorporated herein by reference.
4.2 $500,000 Debenture dated September 24, 1993 from the Registrant in
favor of Armstrong Holdings, Inc., filed as an exhibit to Registrant's
Regulation A Offering Statement on Form 1-A (Commission File No.
24-3506-HQ) filed November 30, 1994 and incorporated herein by
reference.
4.3 Registration Rights Agreement dated September 24, 1993 Agreement
between the Registrant and Armstrong Holdings, Inc., filed as an
exhibit to Registrant's Regulation A Offering Statement on Form 1-A
(Commission File No. 24-3506-HQ) filed November 30, 1994 and
incorporated herein by reference.
<PAGE>
4.4 Stock Option Plan dated March 11, 1993 filed as an exhibit to
Registrant's original Form 10-K on March 30, 1996 and incorporated by
reference herein.
4.5 1993 Executive Stock Option Plan dated February 11, 1993 filed as an
exhibit to Registrant's original Form 10-K on March 30, 1996 and
incorporated by reference herein.
10.1 Form of the Registrant's Franchise Agreement, filed as an exhibit to
Registrant's Regulation A Offering Statement on Form 1-A (Commission
File No. 24-3506-HQ) filed November 30, 1994 and incorporated herein
by reference.
10.2 Form of the Registrant's Development Agreement, filed as an exhibit to
Registrant's Regulation A Offering Statement on Form 1-A (Commission
File No. 24-3506-HQ) filed November 30, 1994 and incorporated herein
by reference.
10.3 Security Agreement dated September 24, 1993 from the Registrant in
favor of Armstrong Holdings, Inc., filed as an exhibit to Registrant's
Regulation A Offering Statement on Form 1-A (Commission File No.
24-3506-HQ) filed November 30, 1994 and incorporated herein by
reference.
10.4 Preferred Stock Purchase Warrant dated September 24, 1993 from the
Registrant in favor of Armstrong Holdings, Inc., filed as an exhibit
to Registrant's Regulation A Offering Statement on Form 1-A
(Commission File No. 24-3506-HQ) filed November 30, 1994 and
incorporated herein by reference.
10.5 Common Stock Purchase Warrant dated September 24, 1993 from the
Registrant in favor of Armstrong Holdings, Inc., filed as an exhibit
to Registrant's Regulation A Offering Statement on Form 1-A
(Commission File No. 24-3506-HQ) filed November 30, 1994 and
incorporated herein by reference.
10.6 Assignment and Assumption of Lease between South Italian, Inc.
Pembroke Pines, as assignor, and the Registrant, as assignee,
respecting the assignment of Lease dated May 7, 1992 between assignor,
as tenant, and University Marketplace, Ltd., as landlord, regarding
premises located in Pembroke Pines, Florida, filed as an exhibit to
Registrant's Regulation A Offering Statement on Form 1-A (Commission
File No. 24-3506-HQ) filed November 301, 1994 and incorporated herein
by reference.
<PAGE>
10.7 Lease Agreement dated as of September 29, 1992 between Charter-Miller
Limited Partnership #1, as landlord, and The Italian Oven of
Charlotte, a Pennsylvania Joint Venture, as tenant, regarding premises
located in Pineville, North Carolina, filed as an exhibit to
Registrant's Regulation A Offering Statement on Form 1-A (Commission
File No. 24-3506-HQ) filed November 30, 1994 and incorporated herein
by reference.
10.8 Shopping Center Lease dated September 27, 1993 between LPZ Limited
Partnership, as landlord, and The Italian Oven of Charlotte, a
Pennsylvania Joint Venture, as tenant, regarding premises located in
Charlotte, North Carolina, filed as an exhibit to Registrant's
Regulation A Offering Statement on Form 1-A (Commission File No.
24-3506-HQ) filed November 30, 1994 and incorporated herein by
reference.
10.9 Lease dated May 11, 1991 between S&R Sunseri, as landlord, and The
Italian Ovens of the Strip, Inc., as tenant, regarding premises
located at 1700 Penn Avenue, Pittsburgh, Pennsylvania, filed as an
exhibit to Registrant's Regulation A Offering Statement on Form 1-A
(Commission File No. 24-3506-HQ) filed November 30, 1994 and
incorporated herein by reference.
10.10 Lease Agreement dated February 1, 1989 between Paul E. Gary, as
landlord, and Somerset-BFF, Inc., James A. Frye and Janice M. Frye,
collectively as tenant, regarding premises located in Somerset,
Pennsylvania, filed as an exhibit to Registrant's Regulation A
Offering Statement on Form 1-A (Commission File No. 24-3506-HQ) filed
November 30, 1994 and incorporated herein by reference.
10.11 Lease Agreement dated August 3, 1991 between Ellsworth Plaza
Associates, as landlord, and Ellsworth Ovens, Inc., as tenant,
regarding premises located at 5859 Ellsworth Avenue (Shadyside),
Pittsburgh, Pennsylvania, filed as an exhibit to Registrant's
Regulation A Offering Statement on Form 1-A (Commission File No.
24-3506-HQ) filed November 30, 1994 and incorporated herein by
reference.
10.12 Lease dated December 19, 1990 between RAK Enterprises, as landlord,
and The Italian Oven of Steubenville, Inc., as tenant, regarding
premises located in Steubenville, Ohio, filed as an exhibit to
Registrant's Regulation A Offering Statement on Form 1-A (Commission
File No. 24-3506-HQ) filed November 30, 1994 and incorporated herein
by reference.
<PAGE>
10.13 Lease dated June 26, 1991 between Raceway Plaza 1989 Limited
Partnership, as landlord, and The Italian Oven of Heidelberg, a
Pennsylvania Joint Venture, as tenant, regarding premises located in
Heidelberg, Pennsylvania, filed as an exhibit to Registrant's
Regulation A Offering Statement on Form 1-A (Commission File No.
24-3506-HQ) filed November 30, 1994 and incorporated herein by
reference.
10.14 Lease Agreement dated May 16, 1991 between Armstrong Developers &
Associates, as landlord, and The Italian Oven of Station Square, Inc.,
as tenant, regarding premises located at Station Square in Pittsburgh,
Pennsylvania, filed as an exhibit to Registrant's Regulation A
Offering Statement on Form 1-A (Commission File No. 24-3506-HQ) filed
November 30, 1994 and incorporated herein by reference.
10.15 Assignment of Lease between The Italian Oven of Westmoreland County,
Inc., as assignor, and the Registrant, as assignee, respecting the
assignment of Lease Agreement dated May 1, 1990 between Peter S.
Piazza, Jr., Betty Piazza and James A Piazza, as landlord, and The
Italian Oven of Westmoreland County, Inc., as tenant, regarding
premises located in Greensburg, Pennsylvania, filed as an exhibit to
Registrant's Regulation A Offering Statement on Form 1-A (Commission
File No. 24-3506-HQ) filed November 30, 1994 and incorporated herein
by reference.
10.16 Ground Lease dated October 10, 1991 between Parkway Union Development
Corp., as landlord, and Edgewood Towne Center Italian Oven, as tenant,
regarding premises located in Edgewood, Pennsylvania, filed as an
exhibit to Registrant's Regulation A Offering Statement on Form 1-A
(Commission File No. 24-3506-HQ) filed November 30, 1994 and
incorporated herein by reference.
10.17 Lease Agreement dated September 26, 1991 between Continental Sawmill
Limited Partnership, as landlord, and Fornello U.S.A., Inc., as
tenant, regarding premises located in Dublin, Ohio, filed as an
exhibit to Registrant's Regulation A Offering Statement on Form 1-A
(Commission File No. 24-3506-HQ) filed November 30, 1994 and
incorporated herein by reference.
10.18 Lease Agreement dated May 5, 1994 between Derby Square Limited
Partnership, as landlord, and the Registrant, as tenant, regarding
premises located in Grove City, Ohio, filed as an exhibit to
Registrant's Regulation A Offering Statement on Form 1-A (Commission
File No. 24-3506-HQ) filed November 30, 1994 and incorporated herein
by reference.
<PAGE>
10.19 Employment Agreement dated October 10, 1994 between the Registrant and
Janice Frye, filed as an exhibit to Registrant's Regulation A Offering
Statement on Form 1-A (Commission File No. 24-3506-HQ) filed November
30, 1994 and incorporated herein by reference.
10.20 Employment Agreement dated July 23, 1993 between the Registrant and
Ralph J. Guarino, filed as an exhibit to Registrant's Regulation A
Offering Statement on Form 1-A (Commission File No. 24-3506-HQ) filed
November 30, 1994 and incorporated herein by reference.
10.21 Employment Agreement dated October 8, 1994 between the Registrant and
Jeffrey Fields, filed as an exhibit to Registrant's Regulation A
Offering Statement on Form 1-A (Commission File No. 24-3506-HQ) filed
November 30, 1994 and incorporated herein by reference.
10.22 Employment Agreement dated October 13, 1994 between the Registrant and
Alex Gionta, filed as an exhibit to Registrant's Regulation A Offering
Statement on Form 1-A (Commission File No. 24-3506-HQ) filed November
30, 1994 and incorporated herein by reference.
10.23 Employment Agreement dated October 10, 1994 between the Registrant and
Richard Kessler, filed as an exhibit to Registrant's Regulation A
Offering Statement on Form 1-A (Commission File No. 24-3506-HQ) filed
November 30, 1994 and incorporated herein by reference.
10.24 Employment Agreement dated October 10, 1994 between the Registrant and
Gary Steib, filed as an exhibit to Registrant's Regulation A Offering
Statement on Form 1-A (Commission File No. 24-3506-HQ) filed November
30, 1994 and incorporated herein by reference.
10.25 Shareholders Agreement dated September 24, 1993 among the Registrant,
Armstrong Holdings, Inc., James A. Frye and Janice M. Frye, filed as
an exhibit to Registrant's Regulation A Offering Statement on Form 1-A
(Commission File No. 24-3506-HQ) filed November 30, 1994 and
incorporated herein by reference.
10.26 Employment Agreement dated July 1, 1995 between the Registrant and
James A. Frye, filed as an exhibit to Registrant's Regulation A
Offering Statement on Form 1-A (Commission File No. 33-97496) filed
September 28, 1995 and incorporated herein by reference.
<PAGE>
10.27 Employment Agreement dated February 20, 1995 between the Registrant
and Stephen Wayhart, filed as an exhibit to Registrant's Regulation A
Offering Statement on Form 1-A (Commission File No. 33-97496) filed
September 28, 1995 and incorporated herein by reference.
10.28 Employment Agreement dated July 20, 1995 between the Registrant and
Thomas P. McMullan, filed as an exhibit to Registrant's Regulation A
Offering Statement on Form 1-A (Commission File No. 33-97496) filed
September 28, 1995 and incorporated herein by reference.
10.29 Employment Agreement dated July 20, 1995 between the Registrant and
Michael B. Understein, filed as an exhibit to Registrant's Regulation
A Offering Statement on Form 1-A (Commission File No. 33-97496) filed
September 28, 1995 and incorporated herein by reference.
10.30 Agreement dated September 28, 1995 among the Registrant, Armstrong
Holdings, Inc. and James A. Frye, filed as an exhibit to Amendment No.
1 to Registrant's Registration statement on Form S-1 (Commission Filed
No. 33-97496) filed November 2, 1995 and incorporated herein by
reference.
10.31 Amendment to Credit Facility dated October 31, 1995 between Registrant
and PNC Bank, National Association, filed as an exhibit to Amendment
No. 1 to Registrant's Registration statement on Form S-1 (Commission
Filed No. 33-97496) filed November 2, 1995 and incorporated herein by
reference.
10.32 Agreement dated February 22, 1996 by and among the Company, Ovens of
Cranberry, Ltd., Ovens of Erie One, Ltd., Ovens of Monroeville, Ltd.,
Ovens of North Hills, Ltd., David S. Gallatin, Marc B. Robertshaw and
William J. Rosa filed as an exhibit to the Registrant's original Form
1-K and incorporated by reference herein.
10.33 Leasehold and Asset Purchase and Sale Agreement, as amended by First
Amendment dated March 22, 1996, by and among the Company, Mid America
Restaurant Group, Inc. and Mid America Restaurant Group of Kansas
filed as an exhibit to the Registrant's original Form 1-K and
incorporated by reference herein.
11.1 Calculation of Pro Forma Net Income Per Common Share filed as an
exhibit to the Registrant's original Form 1-K and incorporated by
reference herein.
16.1 Letter from Alpern Rosenthal & Company, filed as an exhibit to
Amendment No. 1 to Registrant's Registration Statement on Form S-1
(Commission File No. 33-97496) filed November 2, 1995 and incorporated
herein by reference.
27.1* Financial Data Schedule.
*Filed herewith
<PAGE>
(b) Reports on Form 8-K
None.
(c) Exhibits
The exhibits listed under Item 14(a)(3) are filed herewith or are
incorporated by reference herein.
(d) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts is filed herewith.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
THE ITALIAN OVEN, INC.
By: /s/ Gary L. Steib
_________________
Gary L. Steib
Chief Financial Officer
Date: October 11 , 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FORM 10-K.
</LEGEND>
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