SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1996
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 of (I.R.S. Employer
incorporation or organization) Identification No.)
Eleven Lloyd Avenue, Latrobe, PA 15650
------------------------------------------
(Address of principal executive offices, including zip code)
(412) 537-5380
--------------
(Registrant's telephone number, including area code)
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
------ ------
Number of shares of Common Stock, $.01 par value per share outstanding at
August 15, 1996: 4,363,991
<PAGE>
THE ITALIAN OVEN, Inc.
Index
Page
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 1996 and December 31, 1995
Consolidated Statements of Operations
Quarter and Six Months Ended June 30, 1996 and 1995
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1996 and 1995
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Part II OTHER INFORMATION
The Company's fiscal year is comprised of 52 or 53 weeks, divided into four
periods of 13 or 14 weeks, which ends on the last Sunday in December. For
convenience, the Company has indicated throughout this Report, including in the
financial statements, that the fiscal year end is December 31, and each of the
four periods are referred to as three-month or quarterly periods which end on
March 31, June 30, September 30 and December 31. References in this Report to
the "Company" or "The Italian Oven" mean the Company, its predecessors, and its
and their subsidiaries, unless the context otherwise requires.
<PAGE>
THE ITALIAN OVEN, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---------- ----------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 143,828 $11,425,916
Receivables, net of allowance of
$95,000 and $85,000 respectively 465,253 844,163
Notes receivable from related parties,
net of allowance of $732,450 in 1996 -0- 442,249
Inventories 311,033 286,427
Prepaid expenses and other current assets 117,225 51,479
---------- ----------
Total current assets 1,037,339 13,050,234
PROPERTY AND EQUIPMENT:
Restaurant equipment 3,955,163 2,010,179
Building and leasehold improvements 5,591,018 2,457,274
Office furniture and equipment 1,004,140 492,896
Construction-in-progress 3,605,811 1,238,814
---------- ----------
14,156,132 6,199,163
Less-accumulated depreciation 2,673,291 1,723,444
---------- ----------
Property and equipment, net 11,482,841 4,475,719
---------- ----------
INTANGIBLE ASSETS:
Preopening costs, net 962,793 179,415
Equity in and advances to joint venture 202,707 172,597
Liquor licenses, net 157,762 53,460
Other long-term assets 80,407 25,302
Goodwill, net 1,718,294 197,731
---------- ----------
3,121,963 628,505
---------- ----------
TOTAL ASSETS $15,642,143 $18,154,458
========== ==========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
<PAGE>
THE ITALIAN OVEN, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---------- ----------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 57,555 $ 176,962
Notes payable -0- 423,032
Accounts payable 3,470,603 1,586,940
Deferred franchise and development revenue 1,012,577 1,264,577
Reserve for store closing 444,057 464,143
Accrued payroll and other employee benefits 778,336 360,223
Accrual for gift certificates outstanding 250,105 559,002
Other accrued expenses 634,337 450,741
---------- ----------
Total current liabilities 6,647,570 5,285,620
LONG-TERM LIABILITIES:
Deferred franchise and development revenue 1,427,000 1,715,125
Long-term debt 147,553 180,437
Other long-term liabilities 421,841 342,273
---------- ----------
Total long-term liabilities 1,996,394 2,237,835
SHAREHOLDERS' EQUITY:
Common stock, par value $.01 per share-
Authorized, 20,000,000 shares
Issued, 4,386,912 shares 43,869 43,509
Additional paid-in-capital 22,186,204 22,006,566
Warrants outstanding 1,975,000 1,975,000
Accumulated deficit (16,975,526) (13,162,704)
---------- ----------
7,229,547 10,862,371
Less-cost of common stock in treasury-
22,921 shares (231,368) (231,368)
---------- ----------
Total shareholders' equity 6,998,179 10,631,003
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $15,642,143 $18,154,458
========== ==========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
<PAGE>
THE ITALIAN OVEN, Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
---------------------- -------------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUE:
Restaurant sales $ 4,752,965 $ 2,430,101 $ 7,848,484 $ 4,869,309
Franchise and development fees 237,000 232,832 756,125 883,832
Royalty fees 684,339 693,742 1,388,309 1,321,988
--------- --------- --------- ---------
Total revenue 5,674,304 3,356,675 9,992,918 7,075,129
COSTS AND EXPENSES
Costs of restaurant sales 1,315,957 644,767 2,132,132 1,309,897
Other restaurant expenses:
Restaurant labor expenses 1,986,545 858,023 3,321,045 1,764,159
Occupancy and other costs 1,362,289 598,241 2,135,638 1,236,646
General and administrative 2,881,737 1,486,387 4,349,618 2,996,953
Provision for employment agreements 445,000 -0- 445,000 -0-
Provision for losses on advances and loans
to related parties 732,450 -0- 732,450 -0-
Depreciation and amortization 494,242 157,005 760,945 318,998
--------- --------- --------- ---------
Total costs and expenses 9,218,220 3,744,423 13,876,828 7,626,653
--------- --------- ---------- ---------
Loss from operations (3,543,916) (387,748) (3,883,910) (551,524)
OTHER INCOME (EXPENSE):
Equity in loss of joint venture (8,525) (34,054) (28,933) (65,541)
Interest income 34,512 -0- 173,984 2,637
Interest expense (54,913) (34,840) (75,587) (66,299)
Other income (expense), net (3,478) 14,043 ( 2,885) 25,855
--------- --------- --------- ---------
Total other income (expense) (32,404) (54,851) 66,579 (103,348)
--------- --------- --------- ---------
Loss before taxes (3,567,320) (442,599) (3,817,331) (654,872)
PROVISION FOR INCOME TAXES (107,811) -0- (5,493) (375)
--------- --------- --------- ---------
Net loss (3,684,131) (442,599) (3,822,824) (655,247)
UNDECLARED DIVIDENDS ON
PREFERRED STOCK -0- (53,221) -0- (107,503)
ACCRETION OF DISCOUNT ON
PREFERRED STOCK -0- (1,139) -0- (2,279)
--------- --------- --------- ---------
NET LOSS APPLICABLE TO COMMON STOCK (3,684,131) $(496,959) $(3,822,824) $(765,029)
========= ========= ========= =========
NET LOSS PER COMMON SHARE $ (0.85) $ (0.21)* $ (0.88) $ (0.32)*
========= ========= ========= =========
SHARES USED IN COMPUTING PER SHARE
AMOUNTS 4,351,991 2,067,168* 4,339,991 2,067,166*
========= ========= ========= =========
<FN>
* 1995 per share and share amounts are computed on a pro forma basis
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
<PAGE>
THE ITALIAN OVEN, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,822,824) $ (655,247)
Adjustments required to reconcile net loss to
net cash used for operating activities-
Depreciation and amortization 760,945 318,998
Bad debt expense and provision for losses 742,450 -0-
Equity in loss of joint venture 28,933 65,541
----------- -----------
1,532,328 384,539
Cash provided by (used for) working capital items-
Receivables 368,910 93,843
Inventories (24,606) 46,445
Prepaid expenses and other current assets (65,746) (124,690)
Accounts payable 1,883,663 347,314
Deferred franchise and development fees (540,125) (390,832)
Accrued payroll and other employee benefits 418,113 (88,803)
Change in gift certificates outstanding (308,897) (236,180)
Other accrued expenses 183,596 115,888
Other long-term liabilities and other (83,979) 84,876
----------- -----------
Cash provided by (used for) working
capital items 1,830.929 (152,139)
----------- -----------
Net cash used for operating activities (459,567) (422,847)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net acquisitions of property, equipment
and liquor licenses (6,355,159) (650,166)
Acquisition of franchise restaurants (2,534,500) -0-
Preopening costs (1,008,295) (63,427)
Advances to joint venture (59,043) (34,995)
Net increase in notes receivable from related parties (290,201) -0-
----------- -----------
Net cash used for investing activities (10,247,198) (748,588)
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable borrowings -0- 1,721,975
Notes payable payments (423,032) (636,530)
Long-term debt payments (152,291) (147,220)
----------- -----------
Net cash (used for) provided by
financing activities (575,323) 938,225
----------- -----------
Net decrease in cash and cash equivalents (11,282,088) (233,210)
Cash and cash equivalents, beginning of period 11,425,916 349,711
----------- -----------
Cash and cash equivalents, end of period $ 143,828 $ 116,501
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 50,587 $ 33,408
=========== ===========
Income taxes paid $ 5,493 $ 375
=========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
<PAGE>
THE ITALIAN OVEN, Inc.
Notes to Consolidated Financial Statements
August 19, 1996
1. Basis of Presentation
In the opinion of management, the accompanying consolidated financial
statements contain all normal recurring adjustments necessary for a
fair presentation. The results of operations for the quarter and six
months ended June 30, 1996 are not necessarily indicative of the
results to be expected for the full year.
The interim consolidated financial statements have been prepared
without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain financial information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. These
consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto for the
year ended December 31, 1995 included on Form 10-K.
2. Legal Proceedings
In July and August 1996, the Company and certain of its current and
former officers and directors and the managing underwriters for the
Company's November 1995 initial public offering of common stock were
named as defendants in three complaints (the "Class Action Suits@)
filed in the United States District Court for the Western District of
Pennsylvania by stockholders who purport to represent a class of
stockholders who purchased shares of the Company's common stock during
the Company's initial public offering or thereafter on the secondary
market, all during the period from November 21, 1995 to June 24, 1996.
The complaints allege, among other things, that the defendants caused,
or controlled persons who caused, misrepresentations concerning the
Company's business and affairs to be made in, or materially adverse
information concerning the same to be omitted from, the Company's
registration statement and prospectus in violation of the anti-fraud
provisions of the Securities Act of 1933 and the Pennsylvania
Securities Act. The plaintiffs are demanding unspecified damages plus
interest, costs and attorney's fees. The Company believes that the
allegations in the Class Action Suits are without merit and intends to
vigorously defend the action.
In April 1996, the Company, James A. Frye, a Director and formerly the
Chairman and Chief Executive Officer of the Company, and his wife,
Janice M. Frye, formerly the Vice President of Design of the Company,
were named as defendants in a complaint filed in the United States
District Court for the Western District of Pennsylvania (under the
caption Bahl v. Frye) by four shareholders of the Company, Asish Bahl,
Yashmeen Vij Bahl, Mohinder Bahl and Jerome Scherer. These shareholders
<PAGE>
allegedly purchased 17,000 shares of the Company's common stock at $10
per share and 11,000 shares of the Company's common stock at $20 per
share from Mr. and Mrs. Frye prior to the Company's November 1995
initial public offering of Common Stock. The complaint alleges, among
other things, that the defendants violated the anti-fraud provisions of
the Securities Act of 1933, the Securities Exchange Act of 1934 and the
Pennsylvania Securities Act and made common law fraudulent
misrepresentations, all in connection with the sale to the plaintiffs
of the Company's Common Stock. The plaintiffs are demanding damages in
excess of $390,000, plus interest, costs and attorney's fees. The
Company believes that the allegations in the complaint are without
merit and intends to vigorously defend the action.
In June 1996, the Company and James A. Frye, a Director and formerly
the Chairman and Chief Executive Officer of the Company, were named as
defendants in a complaint filed in the United States District Court for
the Western District of Pennsylvania (under the caption Stein v. The
Italian Oven, Inc.) by Steven Stein and Neal Holmes. These shareholders
allegedly purchased 5,000 shares of the Company Common Stock from
unspecified shareholders at $20 per share prior to the Company's
November 1995 initial public offering of Common Stock. The complaint
alleges, among other things, that the defendants made false statements
and misrepresentations regarding the Company in violation of the
anti-fraud provisions of the Securities Exchange Act of 1934. The
plaintiffs are demanding unspecified damages plus interest, costs and
attorney's fees. The Company believes that the allegations in the
complaint are without merit and intends to vigorously defend the
action. The Company has filed a motion to dismiss the case which is
presently pending before the court.
The Company and Mr. Frye are parties to an indemnification agreement
under which Mr. Frye has agreed to indemnify the Company for claims
arising from his sale of shares of the Company's Common Stock owned by
him.
The Company maintains Directors, Officers and Corporate Liability
insurance coverage in the amount of $5 million with a deductible of
$100,000. The policy provides coverage for securities claims, including
defense costs, in excess of the deductible.
3. Acquisition
Effective April 29, 1996, the Company acquired the operating assets of
four franchised restaurants in the western Pennsylvania market. The
acquisition price was $2,534,500 in cash and 36,000 shares of the
Company's Common Stock. The acquisition was accounted for as a purchase
with the excess of the purchase price over fair market value of assets
acquired being amortized on a straight-line basis over five years. The
Company's consolidated results of operations include the operations of
the four restaurants since the acquisition date.
<PAGE>
The following unaudited pro forma consolidated results of operations
give effect to the above acquisition as though it had occurred on
January 1, 1995.
Six Months Ended June 30,
-------------------------
1995 1996
---- ----
Total Revenue $9,320,781 $11,282,513
Net Loss (648,364) (4,021,044)
Net Loss per common share $ (0.31) $ (0.93)
The unaudited pro forma information is not necessarily indicative
either of results of operations that would have occurred had the
purchase been made on January 1, 1995, or future results of operations
of the combined companies.
Effective as of July 29, 1996, the operating assets of two of these
restaurants were sold by the Company. (See Note 5).
4. Going Concern
During the first six months of 1996, the Company has suffered losses
from operations of $3,823,000. The Company has also utilized all of the
cash proceeds from the initial public offering in November, 1995
("IPO"), and has not been able to obtain alternate sources of financing
to cover immediate and future cash needs for general operating
purposes. At June 30, 1996, the current liabilities of the Company
exceeded the current assets by $5,610,231. Also, at June 30, 1996, the
Company had $3,606,000 in construction in progress for new restaurant
sites, one of which was subsequently opened in July, 1996. No assurance
can be given that the Company will obtain sufficient capital to
complete the construction of these restaurants. The first six months of
1996 has shown a decrease in cash and cash equivalents of $11,282,000.
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 operation
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.
5. Subsequent Event
Effective July 29, 1996, in order to obtain cash for immediate
operating needs, the Company sold the operating assets of the Company's
Erie and Cranberry, Pennsylvania restaurants. These restaurants had
been acquired by the Company in April 1996. The assets were sold
<PAGE>
pursuant to an Asset Purchase Agreement dated as of August 1, 1996 (the
AAsset Purchase Agreement@) to Armstrong Restaurants, L.P.
(AArmstrong@), a limited partnership affiliated with (i) a current
franchisee of the Company, The Armstrong Group of Companies, (ii) a
stockholder of the Company, Armstrong Holdings, Inc., and (iii) two of
the Company's directors, Kirby Campbell and Dru Sedwick. As a result of
the sale, the Company will record a loss from the transaction of
approximately $554,000 in the third quarter of 1996.
Under he terms of the Asset Purchase Agreement, Armstrong purchased
these restaurant assets for aggregate consideration of $970,000,
consisting of $800,000 in cash and the relinquishment of $170,000 in
prepaid franchise fees under Armstrong's northeastern Ohio franchise
development agreement. The selling price was determined on the basis of
arm's length negotiations between the parties. To assist the Company in
improving its cash position, the Asset Purchase Agreement required
Armstrong to prepay at closing $300,000 in franchise royalties for
these restaurants. The transaction was approved by the Board of
Directors at a special meeting at which Mr. Sedwick was not present and
Mr. Campbell abstained from voting due to his interest in the
transaction.
Under the terms of the Asset Purchase Agreement, Armstrong also agreed
to waive its development rights to northeastern Ohio, preserving only a
five year right of first refusal to match the terms of any development
proposed by any other persons in that territory and certain other areas
in Western Pennsylvania. Should Armstrong elect to develop a restaurant
in any of the locations included in the right of first refusal, the
Company must grant a credit or reduction of $10,000 toward the
franchise fees payable as to each restaurant which Armstrong agrees to
develop, such credit or reduction not to exceed $40,000 in the
aggregate.
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Recent Developments.
The Company began to experience liquidity problems in the second quarter of
1996, following the use of all of the proceeds of the Company's initial public
offering in November, 1995 (the "IPO") principally to acquire new restaurants
and for working capital purposes. The Company was negatively impacted by weaker
than projected sales in the first six months of 1996 due, in part, to adverse
weather conditions in the first quarter.
The Company's cash position was further impacted by net amounts advanced to
James A. Frye, a Director of the Company and formerly its Chairman and Chief
Executive Officer, of $435,000 at June 24, 1996. The Board has made demand of
Mr. Frye to repay all outstanding amounts. Since that date, Mr. Frye has repaid
$103,000 but has failed to repay the balance (as of August 19, 1996) of $332,000
despite the Company's demand for repayment in full. The Company has fully
reserved for this outstanding balance.
In addition, PNC Bank, National Association terminated its credit agreement (the
"Credit Agreement") with the Company in June 1996. The Credit Agreement had
provided for a line of credit to the Company up to $2,500,000. However, the
Company had never satisfied the requirements necessary to draw funds under the
Credit Agreement, and, consequently, no funds were outstanding under the Credit
Agreement when it was terminated.
On June 24, 1996, the Board engaged Cornerstone Capital Advisors, Ltd.
("Cornerstone") as the Company's interim manager to seek to improve the
Company's liquidity. Mr. Frye relinquished the day-to-day responsibilities of
his office to Cornerstone on that date. In addition, the Company promoted
Michael Understein, formerly the Company's Senior Vice President of Operations,
to Chief Operating Officer. Subsequently, on July 10, 1996, Mr. Frye was
terminated by the Board as the Company's Chairman and Chief Executive Officer.
Thereafter, J. Garvin Warden, a principal of Cornerstone, was appointed as the
Company's Interim Chief Executive Officer.
In an effort to reduce overhead costs, in July 1996, the Company terminated (or
suspended without pay) 10 employees at its Latrobe, Pennsylvania headquarters,
representing approximately 25% of the corporate staff of the Company immediately
prior to the reductions. In addition, the Company is seeking to improve its cash
position through the development and implementation of cost reduction plans. The
Company has also entered into agreements with various landlords to defer lease
rentals until September 1996, has obtained the assurances of certain contractors
to forbear in seeking to collect amounts due for the construction of restaurant
improvements and has entered into an agreement with its principal restaurant
supplier, as described below.
On July 30, 1996, the Company reached agreement with Mid-Central Sysco Food
Services, Inc. and Deaktor/Sysco Food Services Company (collectively, "Sysco")
to continue supplying food and restaurant supplies to the Company's restaurants,
to document the terms of repayment of existing and future payables and to
collateralize these obligations. In this connection, the Company delivered its
demand promissory note to Sysco in the original principal amount of $1,088,000
(the "Sysco Note"). The Sysco Note, which bears interest at the per annum rate
of 6% (subject to an 18% default rate), provides for five daily installment
payments per week of $30,000 through December 30, 1996, with all outstanding
indebtedness due and payable on December 31, 1996. The Sysco Note evidences
existing payables and will evidence future purchases by the Company from Sysco.
The Sysco Note is collateralized by a Security Agreement dated July 30, 1996
under which the Company granted to Sysco a security interest in substantially
all of the Company's assets. The Sysco Note is further collateralized by the
Collateral Assignment of Trademarks, Copyrights and Licenses dated July 30, 1996
under which the Company collaterally assigned to Sysco substantially all of its
intellectual property, including rights to the name "The Italian Oven."
In addition, effective July 29, 1996, in order to obtain cash for immediate
operating needs, the Company sold the operating assets of the Company's Erie and
Cranberry, Pennsylvania restaurants. These restaurants had been acquired by the
Company in April 1996. The assets were sold pursuant to an Asset Purchase
Agreement dated as of August 1, 1996 (the "Asset Purchase Agreement") to
Armstrong Restaurants, L.P. ("Armstrong"), a limited partnership affiliated with
(i) a current franchisee of the Company, The Armstrong Group of Companies, (ii)
a stockholder of the Company, Armstrong Holdings, Inc., and (iii) two of the
Company's directors, Kirby Campbell and Dru Sedwick. As a result of the sale,
the Company will record a loss from the transaction of approximately $554,000 in
the third quarter of 1996.
Under the terms of the Asset Purchase Agreement, Armstrong purchased these
restaurant assets for aggregate consideration of $970,000, consisting of
$800,000 in cash and the relinquishment of $170,000 in prepaid franchise fees
under Armstrong's northeastern Ohio franchise development agreement. The selling
price was determined on the basis of arm's length negotiations between the
parties. The transaction was approved by the Board of Directors at a special
meeting at which Mr. Sedwick was not present and at which Mr. Campbell abstained
from voting due to his interest in the transaction.
The Erie and Cranberry, Pennsylvania restaurants will be operated by Armstrong
as franchised restaurants. To assist the Company in improving its cash position,
the Asset Purchase Agreement required Armstrong to prepay at closing $300,000 in
franchise royalties for these restaurants.
Under the terms of the Asset Purchase Agreement, Armstrong also agreed to waive
its development rights to northeastern Ohio, preserving only a five year right
of first refusal to match the terms of any development proposed by any other
persons in that territory and certain other areas in Western Pennsylvania.
Should Armstrong elect to develop a restaurant in any of the locations included
in the right of first refusal, the Company must grant a credit or reduction of
$10,000 toward the franchise fees payable as to each restaurant which Armstrong
agrees to develop, such credit or reduction not to exceed $40,000 in the
aggregate.
Management believes that the funds made available through the sale of these
restaurant assets to Armstrong, together with revenues from operations, will
enable the Company to meet its cash requirements through the end of 1996 so long
as (i) trade and construction creditors continue to agree to the deferral of
certain trade and construction debt (currently aggregating approximately $1
million), or (ii) the Company is successful in obtaining alternate sources of
financing. The Company has engaged Wheat, First Securities, Inc. to assist and
advise the Company in seeking to obtain suitable financing of up to $4 million
and to explore potential strategic partnerships.
No assurance can be given that the Company's creditors will continue to forbear
in demanding payment or that Wheat, First Securities, Inc. will be successful in
obtaining suitable financing or partnership opportunities. Furthermore, the
statement that the Company expects to have sufficient funds to continue in
operation through the balance of 1996 (pending the satisfaction of either of the
stated conditions) is a forward looking statement. As described in Note 4 to the
consolidated financial statements, a substantial doubt exists as to the
Company's ability to continue as a going concern. Other factors which could
prevent the Company from being able to satisfy its cash requirements for the
balance of 1996 include (but are not limited to) the following:
<PAGE>
(i) Restaurant revenues and/or profits being lower than projected
by management for the balance of 1996 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, adverse publicity
concerning the Company's operations (which management
believes may have had an impact on sales in the Pittsburgh
metropolitan area market), or higher restaurant operating
costs due to factors such as labor shortages or increases in
food or supply costs;
(ii) There being fewer franchised store openings than projected by
management due to the inability of developers to obtain
needed financing, or due to the decisions of developers to
delay or terminate plans to open new restaurants as a result
of their incurring losses from existing franchised
restaurants (as has been the case with certain developers
during the first six months 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;
or
(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 and development fees
payable prior to the opening of new restaurants.
As reported in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995, the Company anticipated that it would open or acquire 20-28
restaurants with the net proceeds of the IPO and revenues from operations. The
Company will be opening or acquiring fewer restaurants than had been targeted.
During the first six months of 1996, the Company opened nine new Company-owned
restaurants, acquired the leasehold interests and operating assets of six
restaurants (three of which have been converted into The Italian Oven
restaurants, two of which are expected to be so converted subject to receipt of
necessary financing of approximately $650,000 and one of which is being held for
sale) and acquired the operating assets of four franchised restaurants currently
in operation (two of which were subsequently sold to meet the Company's
immediate cash needs (see Note 5 to the notes to the consolidated financial
statements)). One additional new Company-owned restaurant was opened in July
1996, and the Company expects to open another Company-owned restaurant in the
fourth quarter of 1996.
<PAGE>
Results of Operations
The following table sets forth the percentage relationship of certain income
statement data to total revenues, except as otherwise indicated:
Quarter ended Six Months ended
June 30, June 30,
---------------- ----------------
1996 1995 1996 1995
----- ----- ----- -----
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Revenue:
Restaurant sales 83.8% 72.4% 78.5% 68.8%
Franchise and development fees 4.2% 6.9% 7.6% 12.5%
Royalty fees 12.0% 20.7% 13.9% 18.7%
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
Costs and Expenses
Cost of restaurant sales (1) 27.7% 26.5% 27.2% 26.9%
Other restaurant expenses:
Restaurant labor expenses(1) 41.8% 35.3% 42.3% 36.2%
Occupancy and other costs(1) 28.7% 24.6% 27.2% 25.4%
General and administrative 50.8% 44.3% 43.5% 42.4%
Reserves 20.9% 0.0% 11.8% 0.0%
Depreciation and amortization 8.7% 4.7% 7.6% 4.5%
Total operating expenses 162.5% 111.6% 138.9% 107.8%
Loss from operations (62.5)% (11.5)% (38.9)% (7.8)%
Net interest income (expense) (.4)% (1.0)% 1.0% (1.0)%
Provision for income taxes (1.9)% 0.0% (.1)% 0.0%
Net loss (64.9)% (13.2)% (38.3)% (9.3)%
(1) As a percentage of restaurant sales.
Quarter Ended June 30, 1996 Compared to the Quarter Ended June 30, 1995.
Revenues. Total revenue increased by $2,318,000 to $5,674,000 or 69.0% for the
quarter ended June 30, 1996, compared to the quarter ended June 30, 1995.
Restaurant sales at Company-owned restaurants increased $2,323,000 to $4,753,000
or 95.6% for the quarter ended June 30, 1996, compared to the same period in
1995. These increases were largely the result of the addition of 14
Company-owned restaurants during 1996. Restaurant sales for same Company-owned
restaurants declined by 6.6% during the second quarter in 1996 compared to the
same quarter in 1995. Management believes that this decline is due to a number
of factors, including industry-wide declines in restaurant sales and price
increases implemented by the Company early in the second quarter of 1996.
Franchise and development fees increased by $4,000 or 1.8% for the quarter ended
June 30, 1996, compared to the quarter ended June 30, 1995. This increase was
primarily due to the opening of six franchised restaurants during the second
quarter of 1996 compared to three in the second quarter of 1995 and $65,000 in
revenues related to the termination of development agreements in 1995.
Royalties decreased by $9,000 to $684,000 or 1.4% for the quarter ended June 30,
1996, compared to the quarter ended June 30, 1995. This decrease was principally
due to same restaurant sales being down 5.9% for franchised restaurants of the
quarter ended June 30, 1996, compared to the second quarter of 1995.
Costs and expenses. Cost of restaurant sales at Company-owned restaurants
increased by $671,000 to $1,316,000 or 104.1% for the quarter ended June 30,
1996, compared to the quarter ended June 30, 1995, principally due to the
addition of fourteen Company-owned restaurants during 1996. Cost of restaurant
sales increased as a percentage of restaurant sales by 0.9% to 27.3% for the
same restaurants open during both periods due to a decrease in sales.
Labor expenses at Company-owned restaurants increased from 35.3% to 41.8% as a
percentage of restaurant sales for the quarter ended June 30, 1996, compared to
the quarter ended June 30, 1995, for the same restaurants open during both
periods. The percentage increase in labor costs is principally attributable to
lower restaurant sales for the quarter ended June 30, 1996, compared to the same
period in 1995, resulting in increased management labor costs as a percent of
restaurant sales. Occupancy and other costs at Company-owned restaurants
increased as a percentage of restaurant sales from 24.6% to 28.7% for the
quarter ended June 30, 1996, compared to the same period in 1995, principally
due to the start-up costs associated with the addition of 14 restaurants.
General and administrative. General and administrative expenses increased by
$1,395,000 to $2,882,000 or 93.9% for the quarter ended June 30, 1996, compared
to the quarter ended June 30, 1995. These increases were due primarily to the
opening of four Company-owned restaurants, the acquisition of four franchised
restaurants and the opening of six franchised restaurants during the second
quarter of 1996. During the second quarter, the Company also recorded
non-recurring charges of $100,000 related to the Class Action Suits (See Note 2
to the consolidated financial statements), non-recurring charges of $150,000 for
additional Workers Compensation accruals and charges of $483,000 for supplier
contracts the Company does not believe it can fulfill.
<PAGE>
Provisions for losses. The Company has recorded non-recurring charges during the
quarter ended June 30, 1996 of $777,000 to reserve for employment agreements
related to three Company officers that were terminated and for advances made to
the Company's former Chairman and Chief Executive Officer.
The Company also reserved $400,000 for a loan previously made to The Italian
Oven National Advertising Fund, Inc.
Depreciation and amortization. Depreciation and amortization expenses increased
by $337,000 to $494,000 or 214.8% for the quarter ended June 30, 1996, compared
to the quarter ended June 30, 1995. This increase was primarily due to the
addition of fourteen Company-owned restaurants during 1996.
Income Taxes. During the quarter ended March 31, 1996, the Company, under the
provisions of SFAS 109 recorded a tax benefit and related deferred tax asset of
$105,000. This amount was reversed in the quarter ended June 30, 1996, when it
was determined more likely than not that the asset would not be realizable.
Six Months Ended June 30, 1996 Compared to the Six Months Ended June 30, 1995.
Revenues. Total revenue increased by $2,918,000 to $9,993,000 or 41.2% for the
six months ended June 30, 1996, compared to the six months ended June 30, 1995.
Restaurant sales at Company-owned restaurants increased $2,979,000 to $7,848,000
or 61.2% for the six months ended June 30, 1996, compared to the same period in
1995. These increases were largely the result of the addition of fourteen
Company-owned restaurants during 1996. Restaurant sales for same Company-owned
restaurants declined by 7.8% during the period in 1996 compared to the same
period in 1995. Management believes that this decline is due to a number of
factors, including adverse weather conditions in the first quarter of 1996,
industry-wide declines in restaurant sales, and price increases implemented by
the Company early in the second quarter of 1996.
Franchise and development fees decreased by $128,000 or 14.4% for the six months
quarters ended June 30, 1996, compared to the six months ended June 30, 1995.
This decrease was primarily due to the opening of seven franchised restaurant
during 1996 compared to eleven in 1995.
Royalties increased by $66,000 to $1,388,000 or 5.0% for the six months ended
June 30, 1996, compared to the six months ended June 30, 1995. This increase was
principally due to 78 franchised restaurants being in operation at the end of
the second quarter of 1996 compared to 72 franchised restaurants at the end of
the second quarter of 1995.
Costs and expenses. Cost of restaurant sales at Company-owned restaurants
increased by $822,000 to $2,132,000 or 62.8% for the six months ended June 30,
1996, compared to the six months ended June 30, 1995, principally due to the
opening of fourteen additional Company-owned restaurants during 1996, and
increased as a percentage of restaurant sales by only .3% to 27.2% for the same
restaurants open during both periods, principally due to more favorable contract
terms and volume discounts on product purchases.
Labor expenses at Company-owned restaurants increased from 36.4% to 38.8% as a
percentage of restaurant sales for the six months ended June 30, 1996, compared
to the six months ended June 30, 1995, for the same restaurants open during both
periods. Occupancy and other costs at Company-owned restaurants increased as a
percentage of restaurant sales from 25.4% to 27.2% for the six months ended June
30, 1996, compared to the same period in 1995, principally due to the start-up
costs associated with the addition of 14 restaurants.
General and administrative. General and administrative expenses increased by
$1,353,000 to $4,350,000 for the six months ended June 30, 1996, compared to the
same period in 1995. These increases were due primarily to the opening of four
Company-owned restaurants, the acquisition of four franchised restaurants and
the opening of seven franchised restaurants in 1996. The Company, in 1996, also
recorded non-recurring charges of $100,000 related to the Class Action Suits
(See Note 2 to the consolidated financial statements), non-recurring charges of
$150,000 for additional Workers Compensation accruals and charges of $483,000
for supplier contracts the Company does not believe it can fulfill.
Provisions for losses. During the six months ended June 30, 1996, the Company
has recorded non-recurring charges to reserve for employment agreements related
to three Company officers that were terminated and for advances made to the
Company's former Chairman and Chief Executive Officer.
The Company also reserved $400,000 for a loan previously made to The Italian
Oven National Advertising Fund, Inc.
Depreciation and amortization. Depreciation and amortization expenses increased
by $442,000 to $761,000 or 138.5% for the six months ended June 30, 1996,
compared to the six months ended June 30, 1995. This increase was primarily due
to the addition of fourteen Company-owned restaurants during 1996.
Interest income. Interest income increased by $171,000 for the six months ended
June 30, 1996, compared to the six months ended June 30, 1995. This increase was
due to the investment income earned on the net proceeds of the Company's IPO in
November 1995.
<PAGE>
Liquidity and Capital Resources
The following table presents a summary of the Company's cash flows for the
periods:
Six Months ended June 30,
----------------------------
1996 1995
---- ----
Net cash used for operating activities $ (459,567) $ (422,847)
Net cash used for investing activities (10,247,198) (748,588)
Net cash (used for) provided by financing
activities (575,323) 938,225
------------ ------------
Net decrease in cash and cash equivalents $(11,282,088) $ (233,210)
============ ============
During the six months ended June 30, 1996, the Company has suffered losses from
operations of $3,823,000. The Company has also utilized all of the cash proceeds
from the IPO, and has not been able to obtain alternate sources of financing to
cover immediate and future cash needs for general operating purposes. The first
six months of 1996 have shown a decrease in cash and equivalents of
approximately $11,282,000. Also unpaid, professional bills total $300,000.
See also "Recent Developments" in this Item 2.
<PAGE>
PART II --OTHER INFORMATION
Item 1. Legal Proceedings
In July and August 1996, the Company and certain of its current and former
officers and directors and the managing underwriters for the Company's November
1995 initial public offering of common stock were named as defendants in three
complaints (the "Class Action Suits@) filed in the United States District Court
for the Western District of Pennsylvania by stockholders who purport to
represent a class of stockholders who purchased shares of the Company's common
stock during the Company's initial public offering or thereafter on the
secondary market, all during the period from November 21, 1995 to June 24, 1996.
The complaints allege, among other things, that the defendants caused, or
controlled persons who caused, misrepresentations concerning the Company's
business and affairs to be made in, or materially adverse information concerning
the same to be omitted from, the Company's registration statement and prospectus
in violation of the anti-fraud provisions of the Securities Act of 1933 and the
Pennsylvania Securities Act. The plaintiffs are demanding unspecified damages
plus interest, costs and attorney's fees. The Company believes that the
allegations in the Class Action Suits are without merit and intends to
vigorously defend the action.
In April 1996, the Company, James A. Frye, a Director and formerly the Chairman
and Chief Executive Officer of the Company, and his wife, Janice M. Frye,
formerly the Vice President of Design of the Company, were named as defendants
in a complaint filed in the United States District Court for the Western
District of Pennsylvania (under the caption Bahl v. Frye) by four shareholders
of the Company, Asish Bahl, Yashmeen Vij Bahl, Mohinder Bahl and Jerome Scherer.
These shareholders allegedly purchased 17,000 shares of the Company's common
stock at $10 per share and 11,000 shares of the Company's common stock at $20
per share from Mr. and Mrs. Frye prior to the Company's November 1995 initial
public offering of Common Stock. The complaint alleges, among other things, that
the defendants violated the anti-fraud provisions of the Securities Act of 1933,
the Securities Exchange Act of 1934 and the Pennsylvania Securities Act and made
common law fraudulent misrepresentations, all in connection with the sale to the
plaintiffs of the Company's Common Stock. The plaintiffs are demanding damages
in excess of $390,000, plus interest, costs and attorney's fees. The Company
believes that the allegations in the complaint are without merit and intends to
vigorously defend the action.
In June 1996, the Company and James A. Frye, a Director and formerly the
Chairman and Chief Executive Officer of the Company, were named as defendants in
a complaint filed in the United States District Court for the Western District
of Pennsylvania (under the caption Stein v. The Italian Oven, Inc.) by Steven
Stein and Neal Holmes. These shareholders allegedly purchased 5,000 shares of
the Company Common Stock from an unspecified shareholders at $20 per share prior
to the Company's November 1995 initial public offering of Common Stock. The
complaint alleges, among other things, that the defendants made false statements
and misrepresentations regarding the Company in violation of the anti-fraud
provisions of the Securities Exchange Act of 1934. The plaintiffs are demanding
unspecified damages plus interest, costs and attorney's fees. The Company
believes that the allegations in the complaint are without merit and intends to
vigorously defend the action. The Company has filed a motion to dismiss the case
which is presently pending before the court.
The Company and Mr. Frye are parties to an indemnification agreement under which
Mr. Frye has agreed to indemnify the Company for claims arising from his sale of
shares of the Company's Common Stock owned by him, as is the case in the Bahl
action.
The Company maintains Directors, Officers and Corporate Liability insurance
coverage in the amount of $5 million with a deductible of $100,000. The policy
provides coverage for securities claims, including defense costs, in excess of
the deductible.
The Company is a party to routine contract, negligence and employment-related
litigation matters in the ordinary course of its business. No such pending
matters, individually or in the aggregate, if adversely determined, are believed
by management to be material to the business, results of operations or financial
condition of the Company.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Asset Purchase Agreement dated as of August 1, 1996 by and
between the Company and Armstrong Restaurants, L.P. (included
as an exhibit to the Current Report on Form 8-K of the
Company dated August 16, 1996 and incorporated by reference
herein).
10.2 Demand Note dated July 30, 1996 from the Company to
Deaktor/Sysco Food Services Company and Mid-Central Sysco
Food Services, Inc. (collectively, "Sysco") in the original
principal amount of $1,088,000.
10.3 Security Agreement dated July 30, 1996 from the Company in
favor of Sysco.
10.4 Collateral Assignment of Trademarks, Copyrights and Licenses
dated July 30, 1996 from the Company in favor of Sysco.
10.5 Engagement letter dated June 21, 1996 between the Company and
Cornerstone Capital Advisors, Ltd.
10.6 Employment Agreement dated June 21,1996 between the Company
and Michael Understein.
11.1 Calculation of Net Loss Per Common Share.
99.1 Complaint captioned Smitzer v. The Italian Oven, Inc., et al.
filed July 2, 1996 in the U.S. District Court for the Western
District of Pennsylvania, Civil Action No. 961248.
(b) Reports on Form 8-K
During the quarter ended June 30, 1996, the Company filed a Current Report on
Form 8-K dated May 9, 1996 and Amendment No. 1 to Current Report on Form 8-K/A
dated May 16, 1996, each of which related to the Company's acquisition of the
operating assets of four franchised restaurants in Western Pennsylvania.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE ITALIAN OVEN, Inc.
By: /s/ Gary L. Steib
____________________________
Dated: August 19, 1996 Gary L. Steib
Vice President of Finance,
Chief Financial Officer
and Treasurer
EXHIBIT 10.2
DEMAND NOTE
$1,088,000.00 Dated: July 30, 1996
Due: December 31, 1996
Prior hereto, Mid-Central Sysco Food Services, Inc., a Missouri
corporation ("Mid-Central"), and Deaktor/Sysco Food Services Company, a
Pennsylvania corporation ("Deaktor") [Deaktor and Mid-Central are collectively
"Sysco"], provided certain sales on account and other financial accommodations
(the "Financial Accommodations") to The Italian Oven, Inc., a Pennsylvania
corporation ("Italian Oven"). As of July 26, 1996, theFinancial Accommodations
are past due and owing in the approximate principal amount of Ninety-Two
Thousand Nine Hundred Fifty-Eight and 39/100 Dollars ($92,958.39) owed to
Mid-Central and Eight Hundred Forty-Five Thousand and no/100 Dollars
($845,000.00) owed to Deaktor. This Demand Note (this "Note") evidences such
past due Financial Accomrnodations and the indebtedness arising from any future
sales on account from Sysco to Italian Oven.
For value received, the undersigned, Italian Oven promises to pay to
the order of Sysco, on or before December 31, 1996, the principal sum of One
Million Eighty-Eight Thousand and no/100 Dollars ($1,088,000.00), or such lesser
principal sum as Italian Oven may owe to Sysco pursuant to this Note and the
"Collateral Documents" (hereinafter defined), together with interest thereon
from the date hereof at the rate of six percent (6%) per annum. Interest shall
be calculated on the basis of a three hundred sixty (360) day year for the
actual number of days in which any principal, accrued interest or any other sum
due from Italian Oven to Sysco pursuant to this Note, the Collateral Documents
or otherwise (collectively the "Indebtedness") remains outstanding. Upon the
occurrence of an "Event of Default" (hereinafter defined) interest shall accrue
upon the outstanding Indebtedness at the rate of eighteen percent (18%) per
annum (the "Default Rate").
Italian Oven shall pay the Indebtedness evidenced by this Note to Sysco
in successive daily installments of Thirty Thousand and no/100 Dollars
($30,000.00) each, beginning on July 26, 1996, and continuing on each successive
Monday, Tuesday, Wednesday, Thursday and Friday thereafter until December 30,
1996, with a final payment of all outstanding Indebtedness on December 31, 1996.
Such daily installments and final payment will be made without demand therefor
or notice thereof from Sysco to Italian Oven or any other person or entity. The
Indebtedness shall be paid to Deaktor, for the benefit of Deaktor and
Mid-Central, by wire transfer pursuant to instructions given by, Sysco to
Italian Oven, from time to time, or at One Whytney Drive, Harmony, Pennsylvania
16037, or at such other location that Sysco may designate in writing from time
to time.
To the extent Italian Oven purchases more than One Hundred Fifty
Thousand and no/100 Dollars ($150,000.00) of goods and merchandise on account
from Sysco in any calendar week, Italian Oven shall pay to Sysco an amount equal
to such excess over One Hundred Fifty Thousand and no/100 Dollars ($150,000.00)
on or before the first Friday following such calendar week.
As of the date hereof, Sysco intends that all payments shall be applied
(1) first to invoices for products purchased by Italian Oven in the ordinary
course of business arising after July 26, 1996, in the inverse order of
issuance, (2) second, to Sysco's unpaid costs and expenses pursuant to the
"Collateral Documents" (hereinafter defined), (3) third, to accrued and unpaid
interest, and (4) fourth, to the remaining Indebtedness.
<PAGE>
The full and timely payment of the Indebtedness and Italian Oven's full
and timely performance of all of the covenants, agreements, terms, conditions
and obligations pursuant to this Note and the Collateral Documents (collectively
the "Covenants") are secured by security interests, liens and encumbrances
granted by Italian Oven to Sysco pursuant to that certain Security Agreement of
even date herewith, by and between Italian Oven and Sysco and the other
agreements, instruments, documents and guarantees as heretofore,
contemporaneously herewith or may hereafter be executed and delivered to Sysco
by Italian Oven and any other persons and entities, from time to time, as the
case may be, evidencing, securing or guaranteeing the Covenants (collectively
the "Collateral Documents"), including, but not limited to, those certain
Leasehold Mortgages now or hereafter executed and delivered by Italian Oven to
Sysco and that certain Collateral Assignment of Trademarks, Copyrights and
Licenses of even date herewith executed and delivered by Italian Oven to Sysco.
If (a) Italian Oven defaults in the full and timely payment of any of
the Indebtedness or the fall and timely performance of any of the Covenants, or
(b) a breach, default or event of default occurs under any of the Collateral
Documents (collectively an "Event of Default") at the option of Sysco or the
legal holder hereof, as the case may be, and without demand therefor or notice
thereof from Sysco to Italian Oven or any other person or entity, all of the
Indebtedness shall be immediately due and payable and shall be collectible
immediately or at any time after such Event of Default. The acceptance by Sysco
of any partial payment of the Indebtedness after an Event of Default will not
establish a custom, or waive any of Sysco's rights or remedies pursuant to this
Note, the Collateral Documents, at law, in equity or otherwise. Italian Oven,
every endorser of this Note and every guarantor of the Indebtedness and the
Covenants ("Guarantor") hereby each waive presentment, notice of presentment,
demand, protest non-payment, release, compromise, settlement, extension or
renewal of the Indebtedness or this Note, the Covenants, the Collateral
Documents or any collateral or security for the Indebtedness or the Covenants.
Any forbearance by Sysco or the legal holder hereof, as the case may
be, in exercising any right or remedy pursuant to this Note or the Collateral
Documents, at law, in equity or otherwise, shall not be or be deemed a waiver of
nor shall preclude the subsequent exercise of any such right or remedy.
If at any time or times before or after in Event of Default, Sysco:
A. employs an accountant. consultant, legal counsel or any other
representative or advisor:
1. with respect to the Indebtedness, this Note, the
Collateral Documents or otherwise,
2. to represent or consult with Sysco in connection with
any litigation, contest, dispute, suit or proceeding,
or to comrnence, defend, intervene or take any other
action in or with respect to any litigation, contest,
dispute, suit or proceeding, whether initiated by
Sysco, Italian Oven, a Guarantor or any other person
or entity, in any way or respect arising from,
relating to or in connection with the Indebtedness,
this Note, the Covenants, the Collateral Documents or
any collateral or security for the Indebtedness or
the Covenants, or
<PAGE>
3. to enforce any of Sysco's rights or remedies;
B. takes any action or initiates any proceeding to protect, collect,
sell, liquidate or otherwise dispose of any of the collateral or
security for the Indebtedness, the Covenants or the Collateral
Documents; or
C. attempts to or enforces any of Sysco's rights or remedies against
Italian Oven or any Guarantor,
then the costs and expenses so incurred by Sysco shall be part of the
Indebtedness payable by Italian Oven to Sysco upon demand with interest at the
Default Rate until actually paid. Without limiting the generality of the
foregoing, such costs and expenses shall include the fees, expenses and charges
of attorneys, paralegals, accountants, investment bankers, appraisers, valuation
and other specialists, experts, expert witnesses, auctioneers, court reporters,
telegram, telex and telefax charges, overnight delivery services, messenger
services and expenses for travel, lodging and meals.
Italian Oven hereby irrevocably authorize any attorney of any court of
record in any state or territory of the United States of America where the same
is allowed by law, in term time or vacation, at any time after in Event of
Default hereunder or under the Collateral Documents, to waive service of process
on Italian Oven and confess a judgment against Italian Oven to Sysco, whether
pursuant to this Note or otherwise under the collateral documents, including,
but not limited to, all costs, fees and expenses owed by Italian Oven to Sysco
or any other person or entity acting by or on behalf of Sysco. Italian Oven
hereby (1) authorizes such attorney to release all errors, waive all right of
appeal and consent to immediate execution upon such judgement, and (2) agrees
that no writ of error or appeal will be prosecuted from such judgment, nor any
bill in equity filed to restrain the operation of judgement, or any execution
thereof. Italian Oven hereby ratifies and confirms all that said attorney may do
by virtue hereof.
Italian Oven represents and warrants to Sysco that the Indebtedness and
Italian Oven's use of the principal portion of the Indebtedness is solely for
proper business purposes and consistent with all applicable laws.
This Note is executed and delivered by Italian Oven to Sysco in
Latrobe, Pennsylvania and shall be governed, controlled by and construed in
accordance with the laws and states of the State of Pennsylvania, as to
interpretation, enforcement, validity, construction, effect, choice of law and
in all other respects.
This Note shall inure to the benefit of Sysco, the legal holder hereof
and any of their respective successors and assigns, as the case may be, and
shall be binding upon Italian Oven, its respective legal representatives and
successors.
If any provision of this Note is held to be invalid or unenforceable by
a court of competent jurisdiction, such provision shall be severed herefrom and
such invalidity or unenforceability shall not affect any other provision of this
Note, the balance of which shall remain in and have its intended full force and
effect. However, if such invalid or unenforceable provision may be modified so
as to be valid and enforceable as a matter of law, such provision shall be
deemed to have been modified so as to be valid and enforceable to the maximum
extent permitted by law. If any rate of interest described in this Note is
greater than the rate of interest permitted to be charged or collected by
applicable law, as the case may be, such rate of interest shall be reduced to
the maximum rate of interest permitted to be charged or collected by applicable
law.
<PAGE>
All references to Sysco shall mean Mid-Central and Deaktor, both
individually and collectively, and jointly and severally, and all
representations, warranties, duties, covenants, agreements and obligations of
Italian Oven to Sysco shall inure to the benefit of Mid-Central and Deaktor,
both individually and collectively.
Italian Oven hereby irrevocably appoints and designates Jeffrey W.
Letwin, Esq., of Doepken, Keevican & Weiss, 600 Grant Street, 37th Floor USX
Tower, Pittsburgh, PA 15219 as Italian Oven's true and lawful attorney-in-fact
and duly authorized agent to accept any notice which, notwithstanding Italian
Oven's waiver of notice contained in this Note, Sysco desires or elects to
provide to Italian Oven and for service of legal process, and agrees that
service of process upon such attorney-in-fact shall constitute personal service
of process upon Italian Oven, and waives any objection to service of process
upon such attorney-in-fact in accordance with this Note. Italian Oven shall
direct such attorney-in-fact to forward any such notice or service of process to
Italian Oven at an address designated by Italian Oven. Italian Oven and Sysco
irrevocably agree, and hereby consent and submit to the non-exclusive
jurisdiction of the Court of Common Pleas of Allegheny County, Pennsylvania and
the United States District Court for the Western District of Pennsylvania, Civil
Division, with regard to any actions or proceedings arising from, relating to or
in connection with the Indebtedness, this Note or any of the Covenant the
Collateral Documents or any collateral or security for the Indebtedness or the
Covenants. Italian Oven hereby waives its right to transfer or change the venue
of any litigation filed in the Court of Common Pleas of Allegheny County,
Pennsylvania or the United States District Court for the Western District of
Pennsylvania, Civil Division. ITALIAN OVEN AND SYSCO EACH HEREBY WAIVE THEIR
RESPECTIVE RIGHT TO TRIAL BY JURY.
This Note has been executed and delivered by Italian Oven to Sysco as
of the date first set forth above, by Italian Oven's duly authorized corporate
officers, pursuant to resolutions duly adopted by Italian Oven's Board of
Directors and Italian Oven's shareholders, if and to the extent such
authorization is required by applicable law, Italian Oven's Articles or
Certificate of Incorporation, By-Laws or otherwise.
THE ITALIAN OVEN, INC.,
a Pennsylvania corporation
By: _________________________
Title: _________________________
ATTEST:
By: _________________________
Title: _________________________
EXHIBIT 10.3
SECURITY AGREEMENT
This Security Agreement is made and entered into this 30 day of July,
1996, by and between The Italian Oven, Inc., a Pennsylvania corporation
("Italian Oven"), and Mid-Central Sysco Food Services, Inc., a Missouri
corporation ("Mid-Central"), and Deaktor/Sysco Food Services Company, a
Pennsylvania corporation ("Deaktor")[Deaktor and Mid-Central are collectively
"Sysco"].
1. BACKGROUND.
A. Prior hereto, Sysco has provided certain extensions of credit, sales
on account and other financial accommodations to Italian Oven (collectively the
"Financial Accommodations"). The Financial Accommodations are past due and owing
and Italian Oven desires Sysco to presently forbear from immediately collecting
the past due Financial Accommodations and to continue selling to Italian Oven.
B. Sysco is willing to presently forbear from immediately collecting
the past due Financial Accommodations and sell to Italian Oven, but solely on
the terms and subject to the terms and conditions contained in this Security
Agreement, that certain Demand Note of even date herewith executed and delivered
by Italian Oven to Sysco in a maximum aggregate principal amount not to exceed
One Million Eighty-Eight Thousand and no/100 Dollars ($1,088,000.00)[the
"Note"], and the other agreements, documents and instruments executed and
delivered in connection with or pursuant to any of the foregoing (the "Other
Agreements"), including, but not limited to, all Leasehold Mortgages now or
hereafter executed and delivered by Sysco to Italian Oven.
C. In consideration of the foregoing, the mutual promises and
understandings of the parties hereto set forth herein, and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto hereby agree as set forth in this Security
Agreement.
II. DEFINITIONS.
A. When used herein. the following terms shall have the following
meanings:
1. "Assets" means all of Italian Oven's now existing or owned and
hereafter arising or acquired: (a) accounts, accounts receivable, any royalty
receivables and the "Franchise Income" (hereinafter defined); (b) contract
rights, documents, instruments. contracts, royalty agreements or other writings
executed in connection therewith, including, but not limited to, all real and
personal property lease rights, and all sums now due or which may become due
from Sysco to Italian Oven; (c) chattel paper, documents of title, instruments,
documents and general intangibles; (d) patents, trademarks, tradenames,
trademark registrations and copyrights, all applications therefor, service
marks, trade secrets, goodwill, processes, and other intellectual or proprietary
<PAGE>
rights or interests of any kind, nature or description, and registrations,
licenses, customer lists, tax refund claims, liquor licenses, claims against
carriers and shippers, insurance claims, guarantied claims, all other claims,
proof of claims filed in any bankruptcy, insolvency or other proceeding,
contract rights, chooses in action, security interests, security deposits and
rights to indemnification; (e) inventory; (f) equipment and fixtures; (g) cash
and cash equivalents, bank accounts and deposit accounts; (h) franchise
agreements, royalty agreements and development agreements (collectively the
"Franchise Agreements"), including, but not limited to, the Franchise Agreements
listed on Exhibit "A" attached hereto; and (i) Italian Oven's books and records
relating to any of the foregoing and to Italian Oven's business.
2. "Event of Default" means the occurrence of any one of the following
events: (a) Italian Oven fails to fully and timely perform any term, covenant,
provision, warranty or condition contained in this Security Agreement or in any
other agreement, instrument or document heretofore, now or at any time hereafter
executed by Italian Oven and delivered to Sysco, including, but not limited to,
the Note and the Other Agreements; (b) Italian Oven fails to fully and timely
pay all or any portion of the "Liabilities" (hereinafter defined); (c) any of
Italian Oven's assets are attached, seized. subjected to a writ or distress
warrant, or are levied upon, or come within the possession of any receiver,
trustee. custodian or assignee for the benefit of creditors; (d) a petition
under the United States Bankruptcy Code or any similar federal, state or local
law, statute or regulation shall be filed by Italian Oven; (e) a petition under
the United States Bankruptcy Code or any similar federal, state or local law,
statute or regulation shall be filed against Italian Oven and is not dismissed
within thirty (30) days thereof, (f) Italian Oven makes an assignment for the
benefit of creditors or an application is made by or against Italian Oven for
the appointment of a receiver, trustee, custodian or conservator for Italian
Oven or any of Italian Oven's assets; (g) Italian Oven is enjoined, restrained
or in any way prevented by court order from conducting any part of its business
affairs; (h) a lawsuit or other proceeding isfiled by Italian Oven to liquidate
any of Italian Oven's assets; (i) a lawsuit or other proceeding is filed against
Italian Oven to liquidate any of Italian Oven's assets and such lawsuit or other
proceeding is not dismissed within thirty (30) days of the filing thereof, (j) a
notice of lien, levy or assessment is filed of record with respect to any of
Italian Oven's assets by the United States of America, or any department, agency
or instrumentality thereof, or by arty state, county, municipal or other
governmental department, agency or instrumentality, and such notice is not
released within (30) days of the filing thereof; (k) Italian Oven defaults in
the payment of its other obligations or liabilities, and such default is not
cured within the time, if any, specified therefor; (1) Sysco, in good faith,
believes its prospect of payment of performance of the Liabilities is impaired
or it deems itself insecure for whatever reason; or (m) any (i) person or entity
or group of persons or entities acting in concert shall become the beneficial
owner of thirty percent (30%) or more of the voting shares of any class of
capital stock of Italian Oven, (ii) person or entity (other than a majority of
the Board of Directors of Italian Oven) shall solicit proxies with respect to
voting shares of any class of capital stock of Italian Oven for any "Election
Contest" (hereinafter defined) relating to the election of directors of Italian
Oven and as a result of such solicitation, at least thirty percent (30%) of the
composition of the Board of Directors is changed, or (iii) other event shall
occur which constitutes a "Change in Control" of Italian Oven. For purposes of
this subsection, beneficial ownership shall be determined in accordance with
Section 13 of the Securities Exchange Act, the term "Election Contest" shall
have the meaning ascribed to it in Rule 14a-11 of the Securities Exchange Act
and a "Change in Control" shall be deemed to have occurred if Italian Oven, in
any filing under the Securities Act or the Securities Exchange Act, discloses
that such a Change in Control has occurred.
3. "Hazardous Material" shall mean any hazardous, toxic or dangerous
waste, chemical, pollutant, substance or material described, defined or covered
by the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, 42 U.S.C. 9601, et seq., The Hazardous Materials
Transportation Act, as amended, 49 U.S.C. ss.1802, et seq., The Resource
Conservation and Recovery Act, as amended, 49 U.S.C. 6901, et seq. The Toxic
Substance Control Act of 1976, as amended, 15 U. S.C. ss. 2601, et seq., The
Clean Water Act, as amended, 33 U.S.C. ss. 1251, et seq., The Clean Air Act, as
amended, 42 U.S.C. ss. 7401, et seq., or other applicable federal, state or
local environmental, health or safety statutes, laws or regulations now or
hereafter enacted (collectively the "Hazardous Material Laws").
4. "Liabilities" means all indebtedness, obligations or liabilities of
Italian Oven to Sysco, whether primary, secondary, direct, indirect, fixed or
otherwise, heretofore, now or from time to time hereafter owing, due or payable,
howsoever arising, including, but not limited to, the indebtedness evidenced by
the Note, sales on account, any amounts advanced by Sysco to protect or preserve
the Collateral or to, or for the benefit of, Italian Oven pursuant to the terms
of this Security Agreement or any other agreement by and between Italian Oven
and Sysco, and all expenses of Sysco in administering, enforcing or exercising
its rights or privileges under this Security Agreement, including, but not
limited to, all attorneys' and paralegals' fees.
5. "Securities Act" shall mean the Securities Act of 1933, as amended
from time to time, and any successor statute of similar import, together with
the regulations thereunder as in effect from time to time.
6. "Securities Exchange Act" shall mean the Securities Exchange Act of
1934, as amended from time to time, and any successor statute of similar import,
together with the regulations thereunder, as in effect from time to time.
B. All other terms contained in this Security Agreement shall have the
meanings specifically set forth herein or as provided by the Uniform Commercial
Code as adopted by the State of Illinois to the extent the same are used or
defined therein.
111. COLLATERAL.
A. To secure the full and timely payment to Sysco of the Liabilities
and the full and timely performance of all covenants, duties, obligations and
agreements of Italian Oven to and with Sysco, whether pursuant to this Security
Agreement, the Note or otherwise, Italian Oven hereby grants to Sysco a first
position, priority, security interest and lien in and to: (1) the Assets; and
<PAGE>
(2) all additions and accessions to, parts, substitutions for and replacements,
products and-cash and non-cash proceeds of all of the Assets, including, but not
limited to, all accounts and all proceeds of all insurance policies insuring the
Assets (collectively the "Proceeds") [the Assets, together with the Proceeds are
collectively the "Collateral"]. Italian Oven shall make appropriate entries upon
its financial statements and books and records disclosing Sysco's perfected
first position, priority, security interest and lien in and to the Collateral.
B. Italian Oven shall execute and deliver to Sysco all financing
statements, instruments, documents and other agreements as Sysco may request to
fully consummate all of the transactions contemplated hereunder. Italian Oven
hereby appoints Sysco as Italian Oven's attomey-in-fact to execute and file
financing andcontinuation statements on Italian Oven's behalf. Italian Oven
shall, at its sole expense and at all times during the term of this Security
Agreement, maintain the Collateral in good and safe operating order and
condition, reasonable wear and tear excepted, and in accordance with the
requirements of any federal, state, county, municipal or other authority.
Italian Oven shall immediately notify Sysco in writing of any seizure of, levy
upon, loss of, possession of, destruction of or damage to the Collateral. If
Italian Oven fails to maintain the Collateral as required, then Sysco, without
waiving any Event of Default hereunder, may, but shall not be obligated to,
perform such maintenance with respect thereto. All sums paid by Sysco on account
of Italian Oven's failure to properly maintain the Collateral shall be
additional Liabilities of Italian Oven owing to Sysco, payable on demand, and
secured by the Collateral.
IV. FRANCHISE AGREEMENTS.
A. Italian Oven represents, warrants and covenants unto Sysco as
follows:
1. the Franchise Agreements and the Franchise Income are freely
assignable by Italian Oven to Sysco, and Italian Oven has full power and
authority to make the assignment described herein and such assignment is not in
violation of the terms of any agreements, documents or instruments, including
the Franchise Agreements, to which Italian Oven is a party;
2. all Franchise Income as of the date hereof has been fully and timely
paid. except as set forth on Exhibit "B", and Italian Oven is currently not in
possession of any pre-paid Franchise Income in connection therewith;
3. no Franchise Income arising or accruing after the date hereof will
be waived, released, reduced, discounted or otherwise discharged or compromised
by Italian Oven;
4. Italian Oven is and will continue to be the owner of the entire
interest as franchiser in any currently existing Franchise Agreements and in any
Franchise Agreements entered into after the date hereof, and the Franchise
Agreements are valid and enforceable in accordance with their terms and have not
been altered, modified or amended in any manner whatsoever;
<PAGE>
5. there are no claims or causes of action in connection with the
Franchise Agreements, whether by Italian Oven or any "Franchisee" (hereinafter
defined);
6. Italian Oven has not, and will not at any time hereafter, assign or
pledge to any person or entity, other than Sysco, any or all of the Franchise
Agreements or Franchise Income;
7. the only Franchise Agreements currently in effect are described on
Exhibit "A" attached hereto;
8. no defaults exist on the part of either Italian Oven or any
Franchisee, and there exists no fact which, with the giving of notice, lapse of
time or both, would constitute a default under the Franchise Agreements. Italian
Oven will promptly provide Sysco with copies of any notices of default sent or
received by Italian Oven in connection with any Franchise Agreement; and
9. Italian Oven hereby covenants unto Sysco that it shall:
a. observe and perform all the obligations imposed upon Italian Oven
under the Franchise Agreements and not do or permit to be done anything to
impair the Franchise Agreements;
b. not materially alter, modify or change the terms of the Franchise
Agreements or any guaranties thereof, cancel or terminate the Franchise
Agreements or any guaranties thereof or accept a surrender thereof without the
prior written consent of Sysco;
c. deliver to Sysco, within ten (10) days of the execution thereof,
copies of all Franchise Agreements executed after the date hereof;
d. promptly pay to any Franchisee any amounts owed by Italian Oven, and
not allow or permit any Franchisee to set-off any amounts owed by Italian Oven
to such Franchisee, whether such set-off is against the Franchise Income or
otherwise; and
10. All hereafter executed Franchise Agreements are and shall remain
part of the Collateral.
B. Italian Oven hereby irrevocably appoints Sysco as its true and
lawful attomey-in-fact to (a) after the occurrence of an Event of Default,
collect, sue for, settle and compromise all of the Franchise Agreements and all
royalty or other payments now due or which may at any time hereafter become due
from any franchisee (a "Franchisee") in connection with the Franchise Agreements
(collectively the "Franchise Income"), and (b) amend Exhibit "A" attached hereto
and to execute on behalf of Italian Oven UCC financing statement amendments to
include any and all Franchise Agreements entered into by Italian Oven after the
date hereof.
<PAGE>
C. Italian Oven agrees that Sysco shall have full power to use such
measures, legal or equitable, in its sole discretion or in the discretion of its
successors, divisions, parents, subsidiaries, affiliates or assigns, as may be
deemed proper or necessary to collect and enforce the payment of the Franchise
Income, including, but not limited to, actions for the recovery of royalty
payments. Italian Oven hereby grants to Sysco full power and authority to
exercise each and every of the rights, privileges and powers granted herein at
any and all times hereafter, without notice to Italian Oven, including, but not
limited to, the right to receive all Franchise Income.
D. Upon the occurrence of an Event of Default, Italian Oven hereby
authorizes and directs Sysco to notify any and all Franchisees under the
Franchise Agreements to pay Sysco directly all Franchise Income.
E. The relationship between Italian Oven and Sysco is solely that of
supplier/secured creditor and purchaser/debtor, and nothing contained herein
shall in any manner be construed as making the parties hereto partners, joint
venturers or any other relationship other than supplier/secured creditor and
purchaser/debtor.
V. ITALIAN OVEN'S PLACE OF BUSINESS. Italian Oven keeps and will
continue to keep the Collateral, all records relating to the Collateral and its
principal place of business at the locations listed on Exhibit "C" attached
hereto (collectively the "Collateral Locations"). Italian Oven will provide
Sysco with written notice prior to the opening or closing of any place of
business, office or other location, or prior to changing Italian Oven's name.
VI. PRIORITY OF SECURITY INTERESTS. Italian Oven represents, warrants
and covenants unto Sysco that the security interest and lien in and to the
Collateral which is granted to Sysco hereunder and by virtue of any other
agreements heretofore, now or at any time or times hereafter executed by Italian
Oven and delivered to Sysco shall constitute at all times a valid perfected,
first position, priority, security interest and lien in and to all of the
Collateral. All costs and expenses incurred by Sysco with respect to the
administration, enforcement, collection or protection of its security interest
and lien in and to the Collateral, the enforcement of any claims against Italian
Oven or the exercise of any of Sysco's rights, remedies or privileges granted in
this Security Agreement, at law, in equity or otherwise, including, but not
limited to, attorneys' and paralegals' fees, shall be additional Liabilities of
Italian Oven owing to Sysco, payable on demand and secured by the Collateral.
VII. TAXES. Italian Oven shall pay promptly when due all sales, use,
excise, personal property, income, withholding and other taxes, assessments and
governmental charges upon and relating to the ownership or use of the
Collateral, or its income, gross receipts or otherwise, for which Italian Oven
is or may be liable. Italian Ovenshall not permit or suffer to remain, and will
promptly discharge, any lien on any of the Collateral arising from any unpaid
tax, assessment, levy or governmental charge. If Italian Oven fails to pay any
such tax, assessment, levy or charge, or to discharge any such lien, then Sysco,
without waiving any Event of Default arising therefrom, may, but shall not be
obligated to, make such payment, settlement or compromise, or release or cause
<PAGE>
to be released any such lien. All sums paid by Sysco in satisfaction of, or on
account of any such taxes, levies, assessments or governmental charges, or to
discharge or release any such liens or expenses, including, but not limited to,
attorneys' fees, court costs and other charges relating thereto, shall be
additional Liabilities of Italian Oven owing to Sysco, payable on demand and
secured by the Collateral.
VIII. INSURANCE.
A. Italian Oven shall keep all of the Collateral insured, at its
expense, against loss or damage by fire, theft, explosion and such other risks
ordinarily insured against by other owners or users of property in similar
businesses for the full insurable value thereof, by policies of insurance in
such form, with such companies and in such amounts as may be satisfactory to
Sysco. All such insurance policies shall contain standard Lender's Loss Payable
clauses naming Sysco as sole loss payee and additional insured, and copies of
insurance certificates in compliance with the terms hereof shall be delivered to
Sysco contemporaneously herewith. All proceeds payable under any of said
policies shall be payable to Sysco and applied by Sysco to the Liabilities. Each
insurer shall agree by endorsement upon the policy or policies issued by it to
Italian Oven required above, or by independent instruments furnished to Sysco,
that it will give Sysco thirty (30) days notice before any policy or policies
shall be altered, modified or canceled.
B. If Italian Oven fails to obtain or maintain any of the policies of
insurance required above, or fails to pay any premiums in whole or in part
relating to any such policies, then Sysco, without waiving any Event of Default,
may, but shall not be obligated to, obtain and cause to be maintained any or all
of such policies and pay any part or all of the premiums due thereunder, and any
funds so disbursed by Sysco shall be additional Liabilities owing from Italian
Oven to Sysco, payable on demand and secured by the Collateral.
C. Italian Oven hereby irrevocably appoints Sysco, and all agents,
officers or employees designated by Sysco, as Italian Oven's attomey-in-fact to
make adjustments of all insurance losses, to sign all applications, receipts,
releases and other papers necessary for the collection of any such loss and any
unearned premium, to execute proofs of loss, to make settlements, to endorse and
collect any check or other item payable to Italian Oven issued in connection
therewith and to apply the same to any of the Liabilities.
IX. REPRESENTATIONS, WARRANTIES AND COVENANTS. Italian Oven represents warrants
and covenants as follows:
A. Italian Oven is a corporation, duly incorporated and organized,
validly existing, and in good standing under the laws of the state of
Pennsylvania.
B. This Security Agreement is duly authorized, executed and delivered
by Italian Oven, and constitutes a legal, valid and binding obligation of
Italian Oven enforceable in accordance with its terms.
C. The execution, delivery and performance by Italian Oven of this
Security Agreement shall not constitute a breach of any provision of applicable
law or any provision contained in any agreement to which Italian Oven is a
party.
D. Italian Oven shall promptly supply Sysco with such other information
as Sysco may reasonably request, and shall promptly notify Sysco of any default
in any agreement executed by Italian Oven and delivered to Sysco.
E. The Collateral will be used solely for commercial or business use.
F. Italian Oven shall not, without the prior written consent of Sysco,
(1) grant a security interest in, pledge, assign, mortgage, create, or permit a
lien or encumbrance upon any of the Collateral to anyone, except Sysco; (2)
permit any levy, attachment or restraint to be made affecting any of the
Collateral; (3) merge or consolidate with any other firm, dissolve, liquidate or
sell, transfer or otherwise dispose of all or any portion of the Collateral, or
enter into any transaction not in the ordinary course of its business: or (4)
change its name, form of ownership or location. or the location of the
Collateral.
G. Italian Oven will deliver to Sysco the following financial
information, all of which shall be prepared in accordance with generally
accepted accounting principles consistently applied from period to period: (i)
no later than thirty (30) days after each calendar month, copies of internally
prepared financial statements, including, without limitation, balance sheets and
statements of income, retained earnings and cash flow of Italian Oven, certified
by the Chief Financial Officer of Italian Oven as to accuracy and completeness
and otherwise in form and substance acceptable to Sysco; (ii) no later than
thirty (30) days after the end of each of the first three quarters of Italian
Oven's fiscal year, a balance sheet and statement of income and retained
earnings and cash flow of Italian Oven, which quarterly financial statements
shall be audited; (iii) no later than ninety (90) days after the end of each of
Italian Oven's fiscal years, audited annual financial statements with an
unqualified certification and opinion by independent certified public
accountants selected by Italian Oven and reasonably satisfactory to Sysco; and
(iv) together with the financial statements furnished above, a certificate from
Italian Oven's Chief Financial Officer, dated the date of such financial and
other statements, as the case may be, certifying that no Event of Default has
occurred and no event has occurred which with notice, lapse of time or both
would result in an Event of Default.
H. Immediately upon receipt, Italian Oven will deliver to Sysco copies
of any management letters sent to Italian Oven by their independent certified
public accountants.
I. Promptly upon the filing or making thereof, Italian Oven agrees to
deliver to Sysco copies of each filing or report made by Italian Oven with or to
the Securities and Exchange Commission or any similar commission or
organization.
<PAGE>
J. Italian Oven possesses, and shall continue to possess, adequate
licenses, patents. patent applications, copyrights, service marks, trademarks,
trademark applications, tradestyles and tradenames to continue to conduct its
business as heretofore conducted by it.
K. Italian Oven has filed and will continue to file with the Securities
and Exchange Commission in accordance with applicable law, all forms, reports,
documents, proxy statements and registration statements required to filed by
Italian Oven under the Securities Act or Securities Exchange Act, and none of
such forms, reports, documents, proxy statements or registration statements
contained or will contain any untrue statement of a material fact or omitted or
will omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the circumstances under
which such statements were made.
L. Italian Oven will not use, generate, manufacture, store, dispose or
transport Hazardous Material in violation of applicable law. Italian Oven have
and at all times hereafter will keep and maintain all Property in compliance
with. and will not cause or permit such Property, or any portion thereof, to be
in violation of any Hazardous Material Laws. Italian Oven has obtained all
environmental, health and safety permits necessary for its operations, all such
permits are in good standing and Italian Oven is in material compliance with all
terms and conditions of such permits.
M. Neither Italian Oven nor its past or present operations or real
property heretofore, now or hereafter leased or owned by Italian Oven
(collectively "Property") are subject to any order from or agreement with any
person or entity or any judicial or administrative proceeding or investigation
in connection with any Hazardous Material Laws, any remedial action or any
release or threatened release of any Hazardous Material. Italian Oven has not
filed a notice under any Hazardous Material Laws indicating past or present
"'treatment", "storage" or "disposal" of a "hazardous waste" as defined under
the Hazardous Material Laws, or any notice reporting a release of any
contaminant into the environment.
N. Except for certain janitorial supplies, which are stored and used in
accordance with Hazardous Material Laws, there is not presently on or in the
Property (i) any "treatment", "storage" or "disposal" of any Hazardous
Materials, (ii) more than one (1) underground storage tank, (iii) any surface
impoundments, or (iv) any polychlorinated biphenyls (PCB's) , whether used in
hydraulic oils, electrical transformers, other equipment or otherwise. Italian
Oven has not received any notice or claim indicating that it may be liable to
any other Person as a result of or in connection with any release or threatened
release into the environment. No lien has attached or has been recorded against
any of Italian Oven's property or assets in connection with (v) any liability
under any Hazardous Material Laws, or (vi) any damages arising from, or any
costs incurred by any Person in connection with, a release or threatened release
of a contaminant.
0. Italian Oven shall not declare or pay any dividend or other
distributor (whether in cash or in kind) on any class of its stock, or purchase
or redeem any partnership, equity, profit or other ownership interests held by
any Person in Italian Oven.
<PAGE>
P. Italian Oven agrees to defend, protect, indemnify and hold harmless
Sysco, each parent, affiliate or subsidiary of Sysco (with counsel satisfactory
to Sysco), and each of their respective officers, directors, employees,
attorneys and agents (each an "Indemnified Party") from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
claims, costs, expenses and disbursements of any kind or nature (including,
without limitation, the disbursements and the reasonable fees of counsel for
each Indemnified Party in connection with any investigative, administrative or
judicial proceeding, whether or not the Indemnified Party shall be designated a
party thereto), which may be imposed on, incurred by, or asserted against, any
Indemnified Party (whether direct, indirect or consequential and whether based
on any federal, state or local laws or regulations, including, without
limitation, securities, environmental and commercial laws and regulations, under
common law or in equity, or based on contract or otherwise) in any manner
relating to or arising out of this Security Agreement, the Note or the Other
Agreements, or any act, event or transaction related or attendant thereto. Any
liability, obligation, loss, damage, penalty, cost or expense covered by this
indemnity shall be paid to each Indemnified Party on demand, and, failing prompt
payment, shall, together with interest thereon at the "Default Rate" (as defined
in the Note) from the date incurred by each Indemnified Party until paid by
Italian Oven, be added to the Liabilities of Italian Oven and be secured by the
Collateral. The provisions of this Paragraph shall survive the satisfaction and
payment of the Liabilities and the termination of this Agreement.
Q. Italian Oven shall cause to be executed and delivered to Sysco
within thirty (30) days hereof a fully executed original of the Landiord's
Agreement for each Collateral Location in form and substance acceptable to Sysco
in its sole discretion; and
R. Contemporaneously herewith, Italian Oven shall execute and deliver
to Sysco a fully executed Leasehold Mortgage for each Collateral Location in
form and substance acceptable to Sysco in its sole discretion, together with a
list of the leases that require the landlord's consent prior to the execution of
the Leasehold Mortgages. Within thirty (30) days hereof, Italian Oven shall
cause to be executed and delivered to Sysco the necessary consent for each of
the Leasehold Mortgages requiring such consent. Sysco shall not record any
Leasehold Mortgage until the required landlord's consent is delivered to Sysco.
Sysco acknowledges and agrees that all Leasehold Mortgages requiring the consent
of the landlord shall not be effective until the required consent is obtained.
S. Italian Oven does not own any patents or patent applications.
Italian Oven agrees to give Sysco written notice prior to the development or
acquisition of any patents or patent applications and Italian Oven shall execute
and deliver to Sysco such documents and agreements, in form and substance
satisfactory to Sysco, as Sysco shall require in its sole discretion to grant
Sysco a first position priority security interest and lien in and to such
patents or patent applications as additional security for the Liabilities.
T. Contemporaneously herewith, Italian Oven shall pay to Sysco
Twenty-Five Thousand and no/100 Dollars ($25.000.00), which shall be applied to
reduce the principal balance of the Note. Within two (2) business days of the
<PAGE>
closing of the sale of the Erie, Pennsylvania and Cranberry, Pennsylvania
Collateral Locations, Italian Oven shall pay to Sysco an additional Twenty-Five
Thousand and no/ I 00 Dollars ($25,000.00), which shall be applied to reduce the
principal balance of the Note. Both payments required under this Paragraph IX.T
are in addition to the daily payments required pursuant to the terms of the Note
and under no circumstances shall the payments required pursuant to this
Paragraph IX.T modify or reduce such required daily payments.
U. Italian Oven shall cause Marine Bank to execute and delivered to
Sysco that certain letter agreement in the form attached hereto as Exhibit "D".
V. Italian Oven does not and shall not own any investment brokerage or
securities accounts.
X. REMEDIES.
A. Upon an Event of Default by Italian Oven, two (2) days after written
notice by Sysco to and demand upon Italian Oven, the Liabilities shall be
immediately due and payable at the sole discretion and option of Sysco, and
Sysco, as a "secured party" (as that term is defined in the Uniform Commercial
Code), may proceed to enforce the payment of same and to exercise any and all
rights afforded to a "secured party" under the Uniform Commercial Code,
including, without limitation, the right to sell, transfer, lease or otherwise
dispose of any or all of the Collateral or any part thereof at public auction or
private sale, for cash or on credit, as Sysco may elect at its option. Italian
Oven acknowledges and agrees that ten (10) days notice of such sale sent by
Sysco to Italian Oven is reasonable notice. Furthermore, Sysco shall have the
right to take immediate and exclusive possession of the Collateral, or any part
thereof, and for that purpose. Italian Oven hereby grants to Sysco the
unqualified right and license to enter upon any premises on which the Collateral
or any part thereof may be situated, and to take possession and remove the
Collateral therefrom. Italian Oven irrevocably waives any bonds, surety or other
security relating thereto required by any statute, court rules or otherwise as
an incident to taking such possession, and Italian Oven waives any demand for
possession prior to the commencement of any suit or action with respect thereto
and in any other action in which Sysco is a party.
B. After the occurrence of an Event of Default and Sysco giving notice
as required in Paragraph X.A, upon request by Sysco. Italian Oven shall assemble
the Collateral and make it available to Sysco, at a place to be designated by
Sysco. Sysco may apply the proceeds of any sale or other disposition of the
Collateral to the Liabilities in any order of priority. Italian Oven shall pay
to Sysco all fees, costs and expenses, including attorneys' fees, of or
incidental to retaking, holding, preparing for sale, selling and the like, and
in otherwise enforcing any term or provision of this Security Agreement.
C. During the time that Sysco is in the possession of the Collateral,
and to the extent permitted by law, Sysco shall have the right to (1) hold. use,
operate, manage and control all or any portion of the Collateral; (2) make any
<PAGE>
repairs, replacements, alterations, additions, and improvements to the
Collateral as it may deem proper; (3) demand, collect, and retain all earnings,
proceeds and other sums due or to become due with respect to the Collateral,
accounting only for the net earnings arising from such use and charging against
all other costs, expenses, charges, damage or loss by reason of such use; and
(4) exercise or continue to exercise all of the rights granted to Sysco.
Notwithstanding the foregoing, Sysco shall also be entitled to have a receiver
appointed to take charge of all or any portion of the Collateral and to exercise
all of the rights specified in this Paragraph X.C.
D. Italian Oven hereby waives presentment, protest, and notice of
presentment, demand, protest, non-payment, maturity, release. compromise,
settlement, extension or renewal of this Security Agreement, or any of the
Collateral or any other collateral or security for the Liabilities or the
covenants. Italian Oven also waives the benefit of all valuation, appraisement
and exemption laws and further waives all rights to notice and hearing of any
kind prior to the exercise by Sysco of its rights to repossess the Collateral
without judicial process or to replevy, attach or levy upon the Collateral
without prior notice or hearing.
XI. TERM. The term of this Security Agreement will commence as of the
date hereof and will continue in full force and effect until the indefeasible
payment and satisfaction in full of the Liabilities. The term of this Security
Agreement and the rights and privileges of Sysco set forth herein shall be
reinstated upon any requirement that Sysco return or reimburse Italian Oven, or
any trustee or a receiver, any of the Liabilities paid to Sysco. No termination
of the term of this Security Agreement shall in any way affect or impair the
rights and liabilities of the parties hereto relating to any transactions or
events prior to such termination or to any Collateral in which Sysco has a
security interest or lien.
XII. GENERAL.
A. Italian Oven will at all times keep accurate and complete records of
the Collateral, and Sysco, or any of their agents, shall have the right at all
reasonable times to examine and inspect the Collateral, all related records and
the premises upon which the Collateral is located; provided, however, prior to
the occurrence of an Event of Default, Sysco shall give Italian Oven two (2)
days notice prior to such examination and inspection.
B. Any and all notices, services of process, demands, requests,
consents, designations, waivers and other communications required or desired
hereunder shall be in writing and shall be deemed effective upon personal
delivery, upon receipted delivery by overnight carrier. or three (3) days after
mailing if mailed by registered or certified mail, return receipt requested,
postage prepaid, to Sysco or Italian Oven at the following addresses or such
other address as Sysco or Italian Oven specify in like manner; provided,
however, that notices of a change of address shall be effective only upon
receipt thereof:
<PAGE>
If to Sysco, then to:
Deaktor/Sysco Food and Mid-Central Sysco Food
Services Company Services, Inc.
One Whytney Drive 1915 Kansas City Road
Harmony, Pennsylvania 16037 Olathe, Kansas 66061
Attention: President Attention: President
with a copy to: Fagel & Haber
140 South Dearborn Street
Suite 1400
Chicago, Illinois 60603
Attention: Gina M. Gentili, Esq.
If to Italian Oven. then to: The Italian Oven. Inc.
Eleven Lloyd Avenue
Latrobe. Pennsylvania 15650
Attention: President
With a copy to: Doepken Keevican & Weiss
600 Grant Street, 37th Floor
USX Tower
Pittsburgh, Pennsylvania 15219
Attention: Jeffrey W. Letwin, Esq.
C. Wherever possible, each provision of this Security Agreement shall
be interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Security Agreement shall beprohibited by or invalid
under applicable law, such provision shall be severed herefrom and such
invalidity or unenforceability shall not affect any other provision of this
Security Agreement, the balance of which shall remain in and have its intended
full force and effect; provided, however, if such provision may be modified so
as to be valid and enforceable as a matter of law, such provision shall be
deemed to be modified so as to be valid and enforceable to the maximum extent
permitted by law.
D. All of the rights of Sysco under this Security Agreement shall be
cumulative and shall inure to the benefit of their successors and assigns. This
Security Agreement may be assigned or transferred by either Sysco at any time
and shall not be assigned in whole or in part by Italian Oven. All obligations
of Italian Oven hereunder shall be binding upon Italian Oven and its successors,
divisions, parents and affiliates.
E. All representations and warranties of Italian Oven contained herein,
and in any other agreement executed and delivered to Sysco by Italian Oven shall
be true and correct when delivered, and shall survive the consummation of the
transactions described herein. No delay on the part of Sysco in the exercise of
any right or remedy shall operate as a waiver thereof, and no single or partial
exercise by Sysco of any right or remedy shall preclude any other or future
exercise thereof or the exercise of any other right or remedy.
<PAGE>
F. This Security Agreement shall be interpreted, construed and governed
by and under the laws of the State of Pennsylvania without regard to choice of
law principles which would require the application of the law of a different
state or jurisdiction.
G. Notwithstanding any provision in this Security Agreement, the Note
or the Other Agreements to the contrary, Italian Oven acknowledges and agrees
that under no circumstances is Sysco obligated to sell merchandise to Italian
Oven, whether on account or otherwise, and any such sales are at the sole,
exclusive and absolute discretion of Sysco.
H. This Security Agreement contains the entire agreement between Sysco
and Italian Oven with regard to the subject matter hereof, and supersedes all
prior and contemporaneous communications, agreements and assurances, whether
verbal or written, and may not be modified, altered or amended except by an
agreement in writing signed by Italian Oven and Sysco.
I. If at any time or times before or after, an Event of Default, Sysco:
1. employs an accountant, consultant, legal counsel or any other
representative or advisor:
a. with respect to the Liabilities, this Security Agreement, the Note,
the Other Agreements, the Collateral or otherwise,
b. to represent or consult with Sysco in connection with any
litigation, contest, dispute, suit or proceeding, or to commence, defend,
intervene or take any other action in or with respect to any litigation,
contest, dispute, suit or proceeding, whether initiated by Sysco, Italian Oven,
a guarantor or any other person or entity, in any way or respect arising from,
relating to or in connection with the Liabilities, this Security Agreement, the
Note, the Other Agreements, or the Collateral, or
c. to enforce any of Sysco's rights or remedies;
2. takes any action or initiates any proceeding to protect, collect,
sell, liquidate or otherwise dispose of any of the Collateral or other security
for the Liabilities;
3. attempts to or enforces any of Sysco's rights or remedies against
Italian Oven or any guarantor of the Liabilities, then the costs and expenses so
incurred by Sysco shall be part of the Liabilities payable by Italian Oven to
Sysco upon demand with interest at the Default Rate until actually paid. Without
limiting the generality of the foregoing, such costs and expenses shall include
the fees, expenses and charges of attorneys, paralegals, accountants, investment
bankers, appraisers, valuation and other specialists, experts, expert witnesses,
auctioneers, court reporters, telegram, telex and telefax charges, overnight
delivery services, messenger services and expenses for travel, lodging and
meals. Contemporaneously with the execution hereof, Italian Oven shall pay to
Sysco all costs, fees and expenses incurred by Sysco in connection herewith,
including, but not limited to, costs, fees and expenses incurred by Sysco for
the preparation and negotiation of this Security Agreement, the Note and the
Other Agreements, and for uniform commercial code search charges.
<PAGE>
J. All references to Sysco shall mean Mid-Central and Deaktor, both
individually and collectively, and all representations, warranties, duties,
covenants, agreements and obligations of Italian Oven to Sysco shall inure to
the benefit of Mid-Central and Deaktor, both individually and collectively.
K. Italian Oven hereby irrevocably appoints and designates Jeffrey W.
Letwin. Esq., of Doepken, Keevican & Weiss, 600 Grant Street. 37th Floor USX
Tower, Pittsburgh, PA 15219 Pennsylvania, as Italian Oven's true and lawful
attomey-in-fact and duly authorized agent to accept any notice which,
notwithstanding Italian Oven's waiver of notice contained in this Security
Agreement, Sysco desires or elects to provide to Italian Oven and for service of
legal process, and agrees that service of process upon such attomey-in-fact
shall constitute personal service of process upon Italian Oven, and waives any
objection to service of process upon such attomey-in-fact in accordance with
this Security Agreement. Italian Oven and Sysco hereby irrevocably agree,
consent and submit to the non-exclusive jurisdiction of the Court of Common
Pleas of Allegheny County, Pennsylvania, and the United States District Court
for the Western District of Pennsylvania, Civil Division, with regard to any
actions or proceedings arising from, relating to or in connection with the
Liabilities, this Security Agreement or the Collateral. Italian Oven hereby
waives any right Italian Oven may have to transfer or change the venue of any
litigation filed in the Court of Common Pleas of Allegheny County, Pennsylvania,
or the United States District Court for the Western District of Pennsylvania,
Civil Division, and further waives any objection to service of process upon such
attorney-in-fact in accordance with this Security Agreement. SYSCO AND ITALIAN
OVEN HEREBY WAIVE THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY.
<PAGE>
IN WITNESS WHEREOF, this Security Agreement has been duly executed as
of the date first set forth above.
MID-CENTRAL SYSCO THE ITALIAN OVEN, INC., a
FOODS SERVICES, INC., a Pennsylvania corporation
Missouri corporation
By: ________________________ By: ________________________
Its: ________________________ Its: ________________________
DEAKTOR/SYSCO FOOD SERVICES
COMPANY, a Pennsylvania corporation ATTEST:
By: ________________________ By: ________________________
Its: ________________________ Its: ________________________
EXHIBIT 10.4
COLLATERAL ASSIGNMENT OF TRADEMARKS, COPYRIGHTS AND LICENSES
THIS COLLATERAL ASSIGNMENT OF TRADEMARKS, COPYRIGHTS AND LICENSES (this
"Assignment") is executed and delivered this 30th day of July, 1996, by The
Italian Oven, Inc., a Pennsylvania corporation ("Italian Oven") to Deaktor/Sysco
Food Services Company, a Pennsylvania corporation ("Deaktor") and Mid-Central
Sysco Food Services, Inc., a Missouri corporation ("Mid-Central") (Deaktor,
together with Mid-Central are collectively "Sysco").
WITNESSETH:
WHEREAS, prior hereto, Sysco has provided certain extensions of credit,
sales on account and other financial accommodations to Italian Oven
(collectively the "Financial Accommodations");
WHEREAS, the Financial Accommodations are past due and owing and
Italian Oven desires Sysco to presently forbear from immediately collecting the
past due Financial Accommodations and to continue selling to Italian Oven;
WHEREAS, pursuant to that certain Security Agreement of even date
herewith by and between Sysco and Italian Oven (the "Security Agreement"),
Italian Oven granted Sysco a security interest and lien in and to all of Italian
Oven's assets, including, without limitation, all trademarks, trademark
registrations, trade names, copyrights, all applications therefor and all other
intellectual or proprietary rights or interests, of any kind, nature or
description whatsoever; and
WHEREAS, Sysco is willing to presently forbear from immediately
collecting the past due Financial Accommodations and sell to Italian Oven, but
solely on the terms and subject to the terms and conditions contained in this
Assignment, the Security Agreement, that certain Demand Note of even date
herewith executed and delivered by Italian Oven to Sysco in a maximum aggregate
principal amount not to exceed One Million Eighty-Eight Thousand and no/100
Dollars ($1,088,000.00)[the "Note"], and the other agreements, documents and
instruments executed and delivered in connection with or pursuant to any of the
foregoing (the "Other Agreements"), including, but not limited to, all Leasehold
Mortgages now or hereafter executed and delivered by Sysco to Italian Oven.
NOW, THEREFORE, in consideration of the Financial Accommodations, the
mutual promises and understandings of Italian Oven and Sysco set forth herein,
and other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, Italian Oven covenants unto and agrees with Sysco as
follows:
1. Incorporation of Loan Documents. The Loan Documents and the terms
and provisions thereof are hereby incorporated herein in their entirety by this
reference thereto as if set forth again in full.
<PAGE>
2. Collateral Assignment of Trademarks, Copyrights and Licenses. To
secure the full and timely performance of all of Italian Oven's duties,
covenants, obligations and agreements with Sysco, whether pursuant to this
Assignment, the Security Agreement, the Note, the Other Agreements or otherwise
(the "Covenants") and the full and timely payment of the "Liabilities" (as
defined in the Security Agreement) to Sysco, Italian Oven hereby transfers,
assigns, grants and conveys to Sysco, as and by way of a first priority security
interest and lien, all of Italian Oven's right, title and interest in and to all
of its now owned or existing and hereafter acquired or arising:
(A) (i) trademarks, trademark registrations and applications therefor,
including, without limitation, the trademarks. trademark registrations and
applications listed on Exhibit "A", (ii) renewals thereof, (iii) all
income, royalties, damages and payments now and hereafter due or payable
under and with respect thereto, including, without limitation, damages and
payments for past or future infringements thereof, (iv) the right to sue
for past, present and future infringements thereof, and (v) all rights
corresponding thereto throughout the world (collectively the "Trademarks");
(B) (i) all copyrights and applications for registration, including, without
limitation, the copyrights and applications for registration listed on
Exhibit "B", (ii) renewals thereof, (iii) all income, royalties, damages
and payments now and hereafter due or payable under or with respect
thereto, including, without limitation, damages and payments for past or
future infringements thereof, (iv)the right to sue for past, present and
future infringements thereof, and (v) all rights corresponding thereto
throughout the world (collectively the "Copyrights");
(c) all license agreements, whether Italian Oven is a licensor or licensee
under any such license agreement, including, without limitation, the
licenses listed on Exhibit "C", and the right to prepare for sale, sell and
advertise for sale all of Italian Oven's inventory now or hereafter owned
by Italian Oven (collectively the "Inventory") and now or hereafter covered
by such licenses (collectively the "Licenses"); and
(D) the goodwill of Italian Oven's business connected with and symbolized by
the Trademarks, Copyrights and Licenses.
This Assignment is made for collateral purposes only. Subject to Section 3
below, Italian Oven acknowledges and agrees that upon (1) an "Event of Default"
(as defined in the Security Agreement), or (2) a breach or default by Italian
Oven of any of the terms and provisions contained in this Assignment ("Default
under this Assignment"; Default under this Assignment, together with an Event of
Default is collectively a "Default"), Sysco has the power to use and sell the
Trademarks, Copyrights and Licenses.
<PAGE>
3. Grant Of Rights, Licenses And Privileges. Sysco grants to Italian
Oven the following rights, licenses and privileges under the Trademarks,
Copyrights and Licenses:
a. prior to a Default, an exclusive, nonassignable, royalty-free
right and irrevocable license to use the Trademarks, Copyrights
and Licenses, and to make, use and sell the Inventory;
b. upon a Default, a non-exclusive, nonassignable, royalty-free
right and irrevocable license to use the Trademarks, Copyrights
and Licenses, and to make, use and sell the Inventory; and
c. in either case, a nonassignable, royalty-free right to bring suit
at the sole charge, cost and expense of Italian Oven, for
infringement against any and all past and future infringers of
the Trademarks, Copyrights and Licenses in the name of Italian
Oven as complainant; provided, however, that no such suit shall
be brought in the name of Sysco, unless Italian Oven first
receives the written consent of Sysco thereto, which consent
shall not be unreasonably withheld where the law requires
infringement suits to have the Trademark, Copyright or License
owner joined as a necessary party.
4. Restrictions on Future Agreements. Except as set forth in Paragraph
3 hereof, Italian Oven agrees that until the Liabilities shall have been
indefeasibly satisfied in full, Italian Oven will not, without Sysco's prior
written consent, enter into any document, instrument or agreement which is
inconsistent with Italian Oven's obligations under this Assignment. Italian Oven
further agrees that it will not take any action, or permit any action to be
taken by others subject to its control, including licensees, or fail to take any
action, which would affect the validity or enforcement of the rights transferred
to Sysco under this Assignment.
5. New Trademarks, Copyrights and Licenses. Italian Oven represents and
warrants that the Trademarks, Copyrights and Licenses listed on Exhibits "A",
"B" and "C" constitute all of the trademarks, trademark registrations,
copyrights, applications therefor and licenses now owned by Italian Oven. If,
prior to the indefeasible payment of the Liabilities in full, Italian Oven shall
(i) obtain rights to any new trademarks, trademark registrations, trademark
applications, copyrights, application for copyright registration or licenses, or
(ii) become entitled to the benefit of any trademark, trademark registration,
trademark application, copyright, application for copyright registration or
license renewal, the provisions of Paragraph 2 above shall automatically apply
thereto and Italian Oven shall provide Sysco with immediate notice thereof
Italian Oven hereby authorizes Sysco to modify this Assignment by amending
Exhibits "A", '(B"" and "C" to include any future trademarks, trademark
registrations, trademark applications, copyrights, applications for copyright
registration and licenses.
6. Royalties: Terms. Italian Oven hereby agrees that the use by Sysco
of all Trademarks, Copyrights and Licenses as described above shall be without
any liability for royalties or other related charges from Sysco to Italian Oven.
<PAGE>
The term of the assignments granted herein shall extend until the earlier of (i)
the expiration of each of the respective Trademarks, Copyrights and Licenses
assigned hereunder, or (ii) the indefeasible payment to Sysco of the Liabilities
in full.
7. Sysco's Right to Inspect. Sysco shall have the right at any time and
from time to time to inspect Italian Oyen's premises and to examine Italian
Oven's books, records and operations, including, without limitation, Italian
Oven's quality control processes. Upon a Default, Italian Oven agrees that Sysco
shall have the right to establish such additional product quality controls as
Sysco, in its sole discretion, may deem necessary to assure maintenance of the
quality of products sold by Italian Oven under the Trademarks, Copyrights or
Licenses. Italian Ovens agrees (i) not to sell or assign its interest in, or
grant any licenses under, the Trademarks, Copyrights or Licenses; (ii) to
maintain the quality of any and all products in connection with which the
Trademarks, Copyrights or Licenses are used, consistent with the quality of said
products as of the date hereof, and (iii) not to adversely change or alter the
quality of said products in any way without Sysco's written consent.
8. Nature and Termination of Sysco's Security Interest. This Assignment
is made for collateral purposes only. Except as otherwise provided in Paragraphs
3, 4, 7, 9 and 14 hereof, nothing contained herein shall be deemed to limit in
any way Italian Oven's right to use the Trademarks, Copyrights or Licenses or to
grant to, Sysco any right to use the Trademarks, Copyrights or Licenses prior to
a Default.
9. Duties of Italian Oven. Italian Oven shall have the duty (i) to
prosecute diligently any trademark application and application for copyright
registration pending as of the date hereof or at any time hereafter until the
Liabilities shall have been indefeasibly paid in full, (ii) to make application
for trademarks and copyrights, as appropriate, and (iii) to preserve and
maintain all rights in trademarks, trademark registrations, trademark
applications, Trademarks, copyrights, applications for copyright registration,
Copyrights and Licenses. Any expenses incurred in connection with such
applications shall be borne by Italian Oven. Italian Oven shall not abandon any
right to file any trademark application, pending trademark application,
trademark, copyright or application for copyright registration without the
consent of Sysco.
10. Sysco's Right to Sue. Upon a Default, Sysco shall have the right,
but shall in no way be obligated, to bring suit in its own name to enforce the
Trademarks, Copyrights and Licenses. If Sysco shall commence any such suit,
Italian Oven shall, at the request of Sysco, do any and all acts and execute any
and all instruments, documents and agreements required by Sysco to enforce such
Trademarks, Copyrights and Licenses, and Italian Oven shall promptly, upon
demand, reimburse and indemnify Sysco for all costs and expenses incurred by
Sysco in the exercise of its rights and remedies under this Paragraph 10.
11. Waivers. Sysco's failure at any time or times hereafter to require
strict performance by Italian Oven of any provision of this Assignment shall not
waive, affect or diminish any right of Sysco thereafter to demand strict
<PAGE>
compliance and performance therewith. Any suspension or waiver by Sysco of a
Default shall not suspend, waive or affect any other Default, whether same is
prior or subsequent thereto and whether of the same or a different type. None of
the undertakings, agreements, warranties, covenants aid representations of
Italian Oven contained in this Assignment and no Default by Italian Oven shall
be deemed to have been suspended or waived by Sysco unless such suspension or
waiver is in writing signed by an officer of Sysco and directed to Italian Oven
specifying such suspension or waiver.
12. Severability. If any provision contained herein is to be held
invalid or unenforceable by a court of competent jurisdiction, such provision
shall be severed herefrom and such invalidity or unenforceability shall not
affect any other provision of this Assignment, the balance of which shall remain
in and have its intended full force and effect; provided, however, if such
invalid or unenforceable provision shall be modified so as to be valid and
enforceable as a matter of law, such provision shall be deemed to have been
modified so as to be valid and enforceable to the maximum extent permitted by
law.
13. Modification. This Assignment cannot be altered, amended or
modified in any way, except as specifically provided in Paragraph 5 hereof or by
a writing signed by the parties hereto.
14. Cumulative Remedies: Power of Attorney: Effect on Security
Agreement. All of Sysco's rights and remedies with respect to the Trademarks,
Copyrights and Licenses, whether established hereby, by the Security Agreement,
the Note, the Other Agreements, by any other documents or by law shall be
cumulative and may be exercised singularly or concurrently. Italian Oven hereby
authorizes Sysco to make, constitute and appoint any officer or agent of Sysco
as Sysco may select, in its sole discretion, as Italian Oven's true and lawful
attorney-in-fact, with power, upon a Default and commencement by Sysco of any of
its rights and remedies whatsoever whether pursuant to this Assignment, the
Security Agreement, the Note, the Other Agreements, at law, in equity or
otherwise, to (a) endorse Italian Oven's name on all applications, documents,
papers and instruments necessary or desirable for Sysco in connection with
selling the Trademarks, Copyrights and Licenses, (b) take any other actions with
respect to the Trademarks, Copyrights and Licenses, as Sysco deems in the best
interest of Sysco, (c) assign, pledge, sell, convey or otherwise transfer title
in or dispose of the Trademarks, Copyrights and Licenses to any person or entity
as Sysco may determine in its discretion, and (d) grant or issue any
non-exclusive or exclusive license under the Trademarks, Copyrights and
Licenses, to any person or entity. Italian Oven will indemnify Sysco for any
infringement claims or other similar claims filed or asserted against Sysco from
the use of any of the Trademarks, Copyrights and Licenses by Sysco. Italian Oven
hereby ratifies all that such attorney shall lawfully do or cause to be done by
virtue hereof. This power of attorney shall be irrevocable until the Liabilities
shall have been paid in full and all arrangements between Italian Oven and Sysco
have been terminated. Italian Oven acknowledges and agrees that this Assignment
is not intended to limit or restrict in any way the rights and remedies of Sysco
under the Security Agreement, the Note, the Other Agreements, at law, in equity
or otherwise, but rather is in addition to and intended to facilitate the
exercise of such rights and remedies.
<PAGE>
15. Binding Effect: Benefits. This Assignment shall be binding upon
Italian Oven and its respective successors and assigns, and shall inure to the
benefit of Sysco, its nominees, successors and assigns.
16. Notice. Any and all notices, exercises, demands, requests,
consents, designations, waivers and other communications required or desired
hereunder shall be in writing and shall be deemed effective upon personal
delivery, upon receipted delivery by Federal Express or another overnight
carrier, or three (3) days after mailing if mailed by registered or certified
mail, return receipt requested, postage prepaid, to Italian Oven or Sysco at the
following address or such other address as Italian Oven or Sysco may specify in
like manner; provided, however, that notices of a change of address shall be
effective only upon receipt thereof.
If to Sysco, then to:
Deaktor/Sysco Food and Mid-Central Sysco Food
Services Company Services, Inc.
One Whytney Drive 1915 Kansas City Road
Harmony, Pennsylvania Olathe, Kansas
Attention: President Attention: President
with a copy to: Fagel & Haber
140 South Dearborn Street,
Ste. 1400
Chicago, Illinois 60603
Attention: Gina M. Gentille, Esq.
If to Italian Oven, then to: The Italian Oven, Inc.
Eleven Lloyd Avenue
Latrobe, Pennsylvania 15650
Attention: President
With a copy to: Doepken, Keevican & Weiss
600 Grant Street
37th Floor USX Tower
Pittsburgh, Pennsylvania 15219
Attention: Jeffrey W. Letwin, Esq.
17. Governing Law. This Assignment shall be deemed to have been
executed and delivered in Latrobe, Pennsylvania, and shall be governed by and
construed in accordance with the internal laws (as opposed to conflicts of law
provisions) of the State of Pennsylvania.
<PAGE>
IN WITNESS WHEREOF, Italian Oven's duly authorized officers have
executed this Assignment as of the date first set forth above.
DEAKTOR/SYSCO FOOD SERVICES THE ITALIAN OVEN, INC., a Pennsylvania
COMPANY, a Pennsylvania corporation corporation
By:_________________________________ By:________________________________
Its:_________________________________ Its:_______________________________
MID-CENTRAL SYSCO FOOD
SERVICES, INC., a Missouri corporation ATTEST:
By:__________________________________ By:_________________________________
Its:__________________________________ Its:________________________________
<PAGE>
STATE OF PENNSYLVANIA )
) S.S.
COUNTY OF ALLEGHENY )
The foregoing Collateral Assignment of Trademarks, Copyrights and
Licenses was executed and acknowledged before me this 30th day of July, 1996, by
Garvin Warden and Jeffrey W. Letwin personally known to me to be the Interim CEO
and Secretary of The Italian Oven, Inc., a Pennsylvania corporation, on behalf
of such corporation. Notary Public
----------------------------------
Notary Public
My Commission expires:
----------------------------------
<PAGE>
ACCEPTANCE
The undersigned, Deaktor/Sysco Food Services Company and Mid-Central
Sysco Food Services, Inc., accepts the foregoing Collateral Assignment of
Trademarks, Copyrights and Licenses.
DEAKTOR/SYSCO FOOD SERVICES
COMPANY
By:_________________________________
Its:________________________________
MID-CENTRAL SYSCO FOOD
SERVICES, INC.
By:_________________________________
Its:________________________________
<PAGE>
SCHEDULE A
TO
COLLATERAL ASSIGNMENT OF TRADEMARKS, COPYRIGHTS AND LICENSES
Dated July _, 1996
Trademarks and Trademark Registration
Trademark:
Docket No.:
Filing Date:
Serial No.:
Issue Date:
Reg. No.:
Trademark:
Docket No.:
Filing Date:
Serial No.:
Issue Date:
Reg. No.:
Trademark:
Docket No.:
Filing Date:
Serial No.:
Issue Date:
Reg. No.:
<PAGE>
<TABLE>
<CAPTION>
As of 01/23/96 TRADEMARK TICKLER Page 1
- -------------- ----------------- ------
Publication Reg Registration
Mark Filing Date Serial Number Statement of Use Date Date No. See 8 & 15
- ---- ----------- ------------- ---------------- ----------- --------- --------- ----------
Extension or Affidavit
------------ ---------
Amendment Date (5-6 years)
-------------- -----------
Applicant: THE ITALIAN OVEN, INC.
REGISTERED MARKS
<S> <C> <C> <C> <C> <C> <C>
Italian Survival Kit(R) 10/15/91 74/212,204 04/21/92 07/14/92 1,700,724 07/14/97 - 07/14/98
Pasta Match-Ups(R) 04/03/92 74/262,534 09/01/92 11/24/92 1,734,798 11/24/97 - 11/24/98
Pasta Wood Find 04/03/92 74/262,537 09/01/92 11/24/92 1,734,799 11/24/97 - 11/24/98
Game(R)
The Italian Oven 04/03/92 74/262,536 09/01/92 11/24/92 1,735,030 11/24/97 - 11/24/98
Funny Money(R)
Use Your Noodle(R) 04/03/92 74/262,538 09/08/92 12/01/92 1,736,536 12/01/97 - 12/01/98
Italian Chocoholic 04/03/92 74/262,535 09/22/92 12/15/92 1,740,058 12/15/97 - 12/15/98
Survival Kit(R)
*Will not be registered due to prior registration of the Swiss Colony's
"Chocoholic Survival Kit" which was registered approx. 12 years ago.
Breads from the Oven(R) 12/16/92 74/340,433 05/18/92 08/10/93 1,786,942 08/10/98 - 08/10/99
Hot Out of the Oven(R) 12/14/92 74/339,528 06/08/93 08/13/93 1,790,360 08/31/98 - 08/31/99
More Real Italian Food 05/14/93 74/391512 11/16/93 02/22/94 1,823,425 02/22/99 - 02/22/00
Les Lira.(R)
Give the Piemakers 07/26/93 74/416652 03/08/94 05/31/94 1,838,270 05/31/99 - 05/31/00
a hand(R)
Take a Little Italian 05/13/93 74/389646 12/07/93 06/14/94 1,839,719 06/14/99 - 06/14/00
Home(R)
Exhibit "A" (Page 1of 2)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Publication Reg Registration
Mark Filing Date Serial Number Statement of Use Date Date No. See 8 & 15
- ---- ----------- ------------- ---------------- ----------- --------- --------- ----------
Extension or Affidavit
------------ ---------
Amendment Date (5-6 years)
-------------- -----------
<S> <C> <C> <C> <C> <C> <C>
The Family Meal You're 05/13/93 74/389961 10/07/93 12/07/93 06/14/94 1,839,720 06/14/99 - 06/14/00
Looking For Is
In The Oven(R)
Oven-Fax(R) 08/11/93 74/423165 04/26/94 07/19/94 1,845,579 07/19/99 -07/19/2000
Italian Oven Pig 06/17/93 74/402516 01/25/94 090/20/94 1,854,969 09/20/99- 09/20/2000
Design(R)
Guinea Pig Graphic(R) 06/17/93 74/402517 01/25/94 09/20/94 1,854,970 09/20/99- 09/20/2000
Home Is Where The 05/13/93 74/389962 09/21/93 11/23/93 08/09/94 1,848,786 08/09/99- 08/09/2000
Hearth Is(R)
Pizza Man (Graphic)(R) 06/17/93 74/402542 02/22/94 01/03/95 1,871,683 01/08/00- 01/03/2001
Italian Take Away
Pronto!(R) 05/14/93 74/391526 01/20/95S 02/28/95 1,881,657 02/28/00- 02/28/2001
Vegezone(R) 05/26/94 74/529988 01/24/95 04/18/95 1,890,066 04/18/00 - 4/18/01
Vegetalian(R) 08/31/94 74/567972 07/11/95 10/03/95 1,923,930 10/03/00 - 10/03/01
Nibble Noodles(R) 12/19/94 74/612923 09/12/95 12/05/95 1,939,849 12/05/00 - 12/05/01
It Cannoli Be Love(R) 05/24/95 74/681269 02/06/96 04/30/96 1,971,395 04/30/01 - 04/30/02
PENDING APPLICATIONS
Vegeboli(TM) 12/19/94 74/614321 09/26/95 (12/19/95)
Extension of time to file opposition (expires 12/26/95)
</TABLE>
Exhibit "A" (Page 2 of 2)
<PAGE>
SCHEDULE B
TO
COLLATERAL ASSIGNMENT OF TRADEMARKS, COPYRIGHTS AND LICENSES
Dated July ____, 1996
Copyrights and Copyright Applications
Copyright Date Title
1. The Italian Oven Menu
2. All operations manuals
<PAGE>
SCHEDULE C
TO
COLLATERAL ASSIGNMENT OF TRADEMARKS, COPYRIGHTS AND LICENSES
Dated July _, 1996
License Agreements
Doc ID: 21283
License Agreement dated October 1. 1993 by and between Salvatore Esposito
("Licensor") and The Italian oven, Inc. ("Licensee")
EXHIBIT 10.5
June 21, 1996
THE ITALIAN OVEN, Inc.
c/o Mr. Michael Weiss
Doepken Keevican & Weiss
USX Tower - 600 Grant Street
Pittsburgh, PA 15219
Dear Mr. Weiss:
This letter will confirm the understanding and agreement between Cornerstone
Capital Advisors, Ltd. ("CCA") and THE ITALIAN OVEN, Inc. (the "Client") with
respect to the matters set forth below.
1. The Client hereby engages CCA for the purposes of:
A. Providing independent advice, including services as interim Chief
Executive Officer, to the Client regarding the management and
financial strategies pertinent to the Client's business, related
organizational matters, and negotiations with creditors;
B. As appropriate, participating in negotiations with current or
prospective lenders, creditors, franchisees, landlords, or
sources of capital to maintain adequate liquidity and financial
capacity in the Client's operations; and;
C. Participating in the execution of the orderly expansion,
downsizing, sale or liquidation of assets or sale of the business
in whole or part in order to preserve and protect shareholder
values.
These services described in paragraphs 1.A, 1.B and 1.C are identified herein as
the "Advisory Services".
2. CCA hereby accepts the engagement and agrees to dedicate its reasonable and
best efforts in rendering the Advisory Services in a proper and timely manner.
3. Subject to the provisions of paragraph 4, either party may terminate CCA's
engagement hereunder at any time with or without cause by giving the other at
least seven days' prior written notice of termination. Absent such notice of
termination this Agreement shall remain in full force and effect until December
31, 1996 (the "Expiration Date").
4. In consideration for the Advisory Services of CCA to be performed under this
Agreement, the Client agrees to pay CCA the following compensation:
(A) A monthly fee of $33,000, payable in advance.
(B) In addition, the Client will reimburse CCA for all reasonable
out-of-pocket expenses incurred by CCA in connection with the
performance of the Advisory Services:
(C) In the event of termination in accordance with paragraph 3 hereof, CCA
will submit an invoice to the Client indicating the total of unpaid
fees for Advisory Services rendered and unreimbursed expenses incurred
less any unused retainer which invoice the Client shall promptly pay
or Cornerstone shall promptly refund.
<PAGE>
5. The Client agrees that it will provide CCA with all documents and information
relating to its business which CCA reasonably considers necessary to perform the
Advisory Services. It is understood that all factual information provided to CCA
by officers of the Client may be used and relied upon by CCA without the need
for independent verification. CCA will treat all non-public information
furnished to it by the Client and the Company as confidential so long as such
information continues to be non-public.
6. The advice to be provided by CCA under this Agreement shall not be disclosed
publicly without CCA's prior approval.
7. The Client agrees to indemnify and hold CCA and its directors, officers,
shareholders, agents and employees harmless from and against any expenses
(including attorney's fees) actually and reasonably incurred by any such person
in connection with the defense or settlement of any action (other than an action
by or in the right of the Client) resulting or arising from the engagement
contemplated by this Agreement or CCA's rendering of services pursuant hereto,
provided that each such person to be indemnified shall have acted in good faith
and in a manner reasonably believed by such person to be in, or not opposed to,
the best interests of the Client.
8. This Agreement may not be amended or modified except in writing. This
Agreement represents the entire understanding between the parties, and all prior
discussions and negotiations are merged in it. This Agreement shall be governed
by and construed in accordance with the laws of the Commonwealth of
Pennsylvania.
9. This Agreement cannot be assigned by either party to any other person, firm
or corporation without the prior written consent of the other party.
If the foregoing correctly sets forth the understanding and agreement between
CCA and the Client, please so indicate by signing and dating the enclosed
duplicate of this letter and returning it with your check for the retainer,
whereupon this letter shall constitute a binding agreement.
Very truly yours,
s/ J. Garvin Warden
J. Garvin Warden
Managing Director
ACCEPTED AND AGREED for the Client this 24 day of June , 1996:
------ ------------
By: s/ Michael B. Understein
-------------------------------
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
THIS AGREEMENT made this 21st day of June 1996 by and between THE
ITALIAN OVEN,INC. ("EMPLOYER"), a Pennsylvania corporation having its principal
offices located in Latrobe, Pa.
AND
MICHAEL UNDERSTEIN ("EMPLOYEE").
WITNESSETH:
WHEREAS, EMPLOYER is engaged in the restaurant business ("EMPLOYER's
business"); and
WHEREAS, EMPLOYEE has, pursuant to an initial Employment Contract dated
July 20, 1995, has been employed by EMPLOYER as Senior Vice-President of
Operations; and
WHEREAS, in recognition of EMPLOYEE's valued service to EMPLOYER and in
order to induce EMPLOYEE to remain in the employ of EMPLOYER, EMPLOYER has
agreed to extend and revise the terms of the employment of EMPLOYEE and to
promote EMPLOYEE to the position of CHIEF OPERATING OFFICER; and
WHEREAS, EMPLOYEE desires to remain in the employ of EMPLOYER subject
to the terms and conditions herein contained; and
WHEREAS, EMPLOYER possesses certain confidential and proprietary
business information and trade secrets relating to EMPLOYER's business; and
WHEREAS, in connection with EMPLOYEE's duties as CHIEF OPERATING
OFFICER, EMPLOYEE has had and continues to have access to and/or be provided
with and, in some circumstances, will prepare and create confidential and
proprietary business information and trade secrets belonging to EMPLOYER,
including, but not limited to financial data, formulas, recipes, menus,
ingredients, secret processes, names of franchisees and prospective franchisees,
and compilations of information, records, and specifications that are owned by
EMPLOYER and/or its successor, related, affiliated or subsidiary entities; and
WHEREAS, as a condition to his continued employment, EMPLOYER has
required assurance by EMPLOYEE that EMPLOYER's confidential and proprietary
business information and trade secrets will be fully protected as hereinafter
provided and that both during and after
<PAGE>
EMPLOYEE's employment with EMPLOYER, EMPLOYEE will not compete against EMPLOYER
except as hereinafter permitted; and
WHEREAS, EMPLOYEE is desirous of continued employment with EMPLOYER as
provided herein and the benefits to EMPLOYEE flowing therefrom, and as a
condition thereof EMPLOYEE is willing and has agreed to continue to abide by and
faithfully observe the obligations of EMPLOYEE set forth herein.
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein, and intending to be legally bound hereby, EMPLOYER and EMPLOYEE hereby
covenant, promise and agree as follows:
1. EMPLOYMENT.
EMPLOYER hereby offers and EMPLOYEE hereby accepts employment in the
position of CHIEF OPERATING OFFICER with EMPLOYER. EMPLOYEE agrees to devote all
of his work time and best efforts to the performance of his duties as CHIEF
OPERATING OFFICER and to the performance of such other duties consistent with
his executive status, as may be determined and assigned to him by the Board of
Directors of EMPLOYER.
2. EMPLOYER WARRANTY.
EMPLOYER hereby represents and warrants that it owns and has the right
to disclose its confidential and proprietary business information and trade
secrets to EMPLOYEE under this Agreement.
3. ACKNOWLEDGEMENT OF EMPLOYEE.
EMPLOYEE acknowledges that, in connection with EMPLOYEE's employment as
CHIEF OPERATING OFFICER and in consideration of this Agreement, EMPLOYEE will
receive subject to the terms and conditions herein, including but not limited to
salary at the rate of ONE HUNDRED AND FORTY THOUSAND ($140,000 ) DOLLARS per
year, employee benefits, and yearly review for consideration of a raise and
bonus. EMPLOYEE further acknowledges that the position of CHIEF OPERATING
OFFICER and all benefits and potential benefits to EMPLOYEE from employment in
that capacity are conferred by EMPLOYER upon EMPLOYEE only because and on
condition of EMPLOYEE's willingness to commit EMPLOYEE's best efforts and
loyalty to EMPLOYER, including abiding by the confidentiality, non-competition
and other provisions hereof, and upon EMPLOYEE performing his duties to the
satisfaction of the Board of Directors of EMPLOYER, provided, however, that the
severance pay described herein is not within the Board's discretion.
<PAGE>
4. MISCELLANEOUS BENEFITS.
EMPLOYER agrees to continue to provide EMPLOYEE with the following
benefits at its sole expense, unless otherwise indicated:
(a) Health Insurance benefits, including major medical, dental, and
eye coverage for EMPLOYEE, EMPLOYEE's spouse and children;
(b) A car phone;
(c) Options to purchase 20,000 shares of stock in EMPLOYER with an
exercise price of $5.00 per share, pursuant and subject to the
terms and conditions of EMPLOYER's Incentive Stock Option Plan.In
exchange for this grant EMPLOYEE agrees to the cancellation, by
EMPLOYER, of an equal number of options previously granted with
higher exercise prices. All such options granted pursuant to this
subparagraph shall be deemed to be 20 % vested as of the dater
hereof, the balance shall vest in accordance with the terms of
the Incentive Stock Option Plan;
(d) Participation in all other benefit plans generally available to
Employees including, but not limited to, EMPLOYER's Incentive
Stock Option Plan and Executive Stock Option Plan.
(e) Term life insurance coverage with death benefits equal to two
times annual salary not to exceed $300,000.
5. TERMS OF EMPLOYMENT; SEVERANCE
(a) Except in the case of earlier termination, as hereinafter
specifically provided, the term of this contract shall be for one year,
commencing on the above date of this Agreement, and shall be renewable for one
year periods thereafter unless either party notifies the other party at least
thirty (30) days prior to expiration of intent to modify or terminate the
Agreement. EMPLOYER and/or EMPLOYEE may elect to not renew this Agreement for
any reason or no reason and without just cause by notifying the other party in
accordance with this paragraph.
(b) In the event that EMPLOYER notifies EMPLOYEE of its intent
to terminate the Agreement pursuant to Section 5(a) hereof, all of EMPLOYEE's
outstanding options shall become fully vested and EMPLOYEE shall receive, as
severance compensation, six months salary at the salary rate in effect at time
of termination plus medical benefits and any EMPLOYER provided insurance
coverage to continue forsix months or until EMPLOYEE receives similar benefits
from other employment. Such severance payment may be paid to EMPLOYEE by
EMPLOYER in six (6) equal monthly installments during the year of the
termination.
<PAGE>
(c) Employer may terminate EMPLOYEE for "just cause" at any
time during the term of the Agreement. "Just cause" is defined herein as gross,
willful misconduct, such as dishonesty, material breach of this contract, or
conduct damaging to the reputation of EMPLOYER. In such case, the Agreement will
terminate immediately and EMPLOYER will only be obligated to pay EMPLOYEE solely
the salary and benefits earned prior to termination.
(d) This Agreement may be terminated at any time by EMPLOYEE,
without cause, by giving thirty (30) days' notice to EMPLOYER.
(e) In the event EMPLOYEE is terminated as a result of a
transaction that results in the change of control of EMPLOYER, EMPLOYEE shall be
entitled to severance compensation equal to one (1) years salary, payable in one
lump sum payment on the date of EMPLOYEE's severance.
(f) For purposes of this section the term "Change in Control"
shall mean a sale of substantially all of the assets of EMPLOYER or the sale,
other than through a public registration of its securities, of at least
fifty-one (51%) percent of all classes of voting stock, whether for cash or for
securities in another entity pursuant to a merger or acquisition.
6. EMPLOYEE WARRANTY
Employee represents and warrants to EMPLOYER that he is not now under
any obligation of a contractual or other nature to any person, firm, or
corporation which is inconsistent or in conflict with this Agreement or which
could prevent him from performing his obligations hereunder.
7. CONFIDENTIALITY.
(a) Except as required by law, in consideration of EMPLOYEE's
employment by EMPLOYER and in furtherance of said employment, EMPLOYEE shall
receive and maintain all confidential and proprietary business information and
trade secrets of EMPLOYER in strict confidence. EMPLOYEE agrees to the secrecy
desired by EMPLOYER and further agrees not to use or cause to be used for
EMPLOYEE's own benefit or for the benefit of any third parties or to disclose to
any third party in any manner, directly or indirectly, any information of a
confidential or proprietary business nature, trade secrets, or any other
knowledge or information, except that which is public knowledge, of or relating
to the business of EMPLOYER or necessary and appropriate in the course of
transacting EMPLOYER's business at any time during or after EMPLOYEE's
employment with EMPLOYER without the express prior written consent of EMPLOYER.
<PAGE>
(b) Except as required by law or as may be necessary or appropriate to
the conduct of EMPLOYEE's duties, EMPLOYEE shall use proprietary and business
information and trade secrets disclosed by EMPLOYER only for the sole purpose of
performing duties prescribed by EMPLOYER, and EMPLOYEE shall not remove any
written proprietary and business information and trade secrets from the premises
of EMPLOYER without the express prior written consent of EMPLOYER.
(c) EMPLOYEE agrees to return to EMPLOYER either before or immediately
upon the termination of EMPLOYEE's employment with EMPLOYER, or resignation by
EMPLOYEE, any and all written information, materials or equipment which
constitutes, contains or relates in any way to confidential or proprietary
business information or trade secrets of EMPLOYER and any other documents,
equipment and materials of any kind relating in any way to the business of
EMPLOYER which are or may be in the possession, custody, or control of EMPLOYEE
and which are or may be the property of EMPLOYER, whether confidential or not,
including any and all copies thereof which may have been made by or for
EMPLOYEE.
(d) Except as required by law or as may be necessary or appropriate to
the conduct of EMPLOYEE's duties, EMPLOYEE agrees that, during the term of
employment with EMPLOYER and thereafter, and except as may be required in the
performance of the EMPLOYEE's duties with EMPLOYER the EMPLOYEE will not utilize
for the EMPLOYEE's own benefit or that of any third party and will not use or
disclose to any third party the EMPLOYEE's knowledge of or any information
concerning the internal organization or business structure of EMPLOYER or the
work assignments or capabilities of any officer and/or employee of EMPLOYER
without the express prior written consent of EMPLOYER.
8. NON-COMPETITION.
(a) EMPLOYEE agrees that during EMPLOYEE's employment with EMPLOYER,
the EMPLOYEE will not compete in any way with EMPLOYER directly or indirectly,
and will not consult with or have any interest in any business, firm, person,
partnership, corporation or other entity, whether as employee, officer,
director, agent, security holder, creditor, consultant or otherwise, which
engages in restaurant operations, or which competes with EMPLOYER directly or
indirectly, in any aspect of EMPLOYER's business.
(b) During the period of one year following the date of termination of
EMPLOYEE's employment with EMPLOYER, or resignation by EMPLOYEE, EMPLOYEE,
without the express prior written consent of EMPLOYER, will not consult with or
have any interest in any business, firm, person, partnership, corporation or
other entity, whether as employee, officer, director, agent, security holder,
creditor, consultant or otherwise, which engages in a business involving a pizza
and pasta restaurant, at any location then in operation within two hundred (200)
miles of any THE ITALIAN OVEN restaurant owned, franchised or joint-ventured by
EMPLOYER at the time of EMPLOYEE's termination or resignation.This covenant not
to compete shall be of no effect in the event that EMPLOYEE's termnation is a
result of a change of control transaction.
<PAGE>
9. REMEDIES.
The parties hereto acknowledge that any breach or threat of breach by
EMPLOYEE of this Agreement will constitute a violation of the terms and
conditions of the employment relationship between EMPLOYEE and EMPLOYER and may
cause irreparable injury to EMPLOYER. Accordingly, EMPLOYEE acknowledges that in
the event of a material violation of this Agreement by EMPLOYEE, monetary
damages alone will be inadequate to compensate EMPLOYER and EMPLOYER will be
entitled to injunctive relief against EMPLOYEE in addition to any other remedies
provided by law, in equity, or elsewhere in this Agreement.
10. REPRESENTATIONS BY EMPLOYEE.
EMPLOYEE is fully aware of EMPLOYEE's right to discuss any and all
aspects of this Agreement with an attorney chosen by EMPLOYEE. EMPLOYEE hereby
represents that EMPLOYEE has read and fully understands EMPLOYEE's duties and
obligations as set forth herein and that such duties and obligations would not
unduly restrict or curtail EMPLOYEE's legitimate efforts to earn a livelihood
following any termination of EMPLOYEE's employment with EMPLOYER or resignation.
11. SEVERABILITY.
If any term, provision or paragraph of this Agreement shall be
determined by a court of competent jurisdiction to be invalid or unenforceable
for any reason, such determination shall not affect the remaining terms,
provisions or paragraphs of this Agreement which shall continue to be given full
force and effect. If any term, provision or paragraph of this Agreement shall be
determined by a court of competent jurisdiction to be unenforceable because of
the duration thereof or the geographical area included therein, the parties
hereby expressly agree that the court making such determination shall have the
power to reduce the duration or scope and/or to delete such specific words or
phrases which the court shall deem necessary to permit enforcement of such term,
provision or paragraph in restricted form.
<PAGE>
12. SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns; provided, however,
that this Agreement and the rights, obligations and duties hereunder shall not
be assignable nor delegable by any of the parties to this Agreement without
prior written consent of the other party.
13. GOVERNING LAW.
This Agreement shall be in accordance with and governed by the laws of
the Commonwealth of Pennsylvania. EMPLOYEE agrees and does hereby consent to
confer jurisdiction upon any Court in the Commonwealth of Pennsylvania with
respect to any proceeding arising out of this Agreement, and further agrees that
mailing by registered mail of any process to the last known address of either
party shall constitute a lawful and valid service of process thereof. In the
event any such suit is filed, the EMPLOYEE shall not raise and hereby waives the
defense of jurisdiction over the person and jurisdiction for the subject matter,
including venue.
14. WAIVER OF BREACH.
The waiver by EMPLOYER of a breach by EMPLOYEE of any provision or
covenant of this Agreement shall not operate or be construed as a waiver of any
subsequent breach by EMPLOYEE.
15. CAPTIONS.
The captions of this Agreement are for convenience only and
shall not affect in any way the meaning or interpretation of this Agreement or
any of the provisions hereof.
16. COMPLETE AGREEMENT
This Agreement constitutes the entire and only understanding
and agreement between the parties hereto with respect to the subject matter
hereof and, except as expressly set forth herein, may be amended only by a
writing signed by each of the parties hereto. All prior
<PAGE>
or contemporaneous understandings, discussions or agreements with respect to
said subject matter are expressly superseded by this Agreement.
IN WITNESS WHEREOF, and intending to be legally bound hereby, the
parties hereto have executed this Agreement as of the day and year first above
written.
ATTEST: THE ITALIAN OVEN, INC.
_________________________ By________________________________________
________________, Secretary _________________________, Interim CEO
WITNESS: EMPLOYEE:
_________________________ __________________________________________
MICHAEL UNDERSTEIN
EXHIBIT 99.1
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENN
)
ELMER A. SCMITZER and FRANCIS J.
QUINN, on their behalf and on behalf )
of all others similarly situated, ) Civil Action No. 96-1248
)
Plaintiffs, )
)
vs. )
)
THE ITALIAN OVEN, INC.; JAMES ) COMPLAINT - CLASS ACTION
A. FRYE; RALPH GUARINO; )
GARY L. STEIB; MICHAEL B. ) JURY TRIAL DEMANDED
UNDERSTEIN; JEFFREY W. LETWIN; )
KIRBY CAMPBELL; JOHN E. HUGHES, )
JR.; JAMES A RUDOLPH; DRU )
SEDWICK; KATHLEEN SYNNOTT; )
WHEAT FIRST BUTCHER SINGER and )
WHEAT, FIRST SECURITIES, INC. )
)
Defendants. )
)
Plaintiffs, by their attorneys, make the following allegations
upon information and belief (except as to the allegations specifically
pertaining to the named plaintiffs and their counsel), based upon the facts
alleged below, which are predicated upon, inter alia, a review of relevant
filings made with the Securities and Exchange Commission ("SEC"), press
releases, news and analyst reports, and an investigation undertaken by
plaintiffs' counsel. Plaintiffs believe that further substantial evidentiary
support will exist for the allegations set forth below after a reasonable
opportunity for discovery.
<PAGE>
NATURE OF THE ACTION
1. This is a federal securities class action on behalf of a class (the
"Class") consisting of all persons other than defendants who purchased the
common stock of The Italian Oven, Inc. ("Italian Oven" or the "Company") between
November 21, 1995 and June 24, 1996 (the "Class Period"). Italian Oven shares
are listed on the NASDAQ National Market System. During the Class Period, and in
connection with the initial public offering (the "Offering") of its common
shares, Italian Oven issued a series of false statements about Italian Oven's
business and prospects for future results which were materially false and
misleading.
JURISDICTION AND VENUE 2. The claims asserted herein arise under and
pursuant to Sections 11, 12 (a) (2) and 15 of the Securities Act of 1933, as
amended (the "Securities Act") [15 U.S.C.ss.ss.77k, 77l (a) (2) and 77o].
3. This Court has jurisdiction of this action pursuant to Section 22 of
the Securities Act [115 U.S.C.ss.77v] and 28 U.S.C.ss.ss.1331 and 1337.
4. Venue is properly laid in this District pursuant to Section 22 of
the Securities Act and 28 U.S.C. ss. 1391(b) and (c). The acts and conduct
complained of herein, including the preparation, issuance and dissemination of
materially false and misleading information to the investing public, occurred in
substantial part in the Western District of Pennsylvania.
5. In connection with the acts and conduct alleged in this
Complaint, defendants, directly or indirectly, used the means and
instrumentalities of interstate commerce, including the mails and telephonic
communications and the facilities of the NASDAQ National Market System, a
national securities exchange.
<PAGE>
PARTIES
6. Plaintiff Elmer A. Schmitzer purchased 1,000 shares of Italian Oven
common stock on November 21, 1995, pursuant to the Prospectus (defined below),
and was damaged thereby.
7. Plaintiff Francis J. Quinn purchased 200 shares of Italian Oven
common stock on November 21, 1995, pursuant to the Prospectus (defined below),
and was damaged thereby.
8. Defendant Italian Oven owns, operates and franchises Italian-style
family restaurants in 17 states in the United States and in Australia. Italian
Oven maintains its principal executive offices at Eleven Lloyd Avenue, Latrobe,
Pennsylvania. As of October 30, 1995, there were 91 Italian Oven restaurants in
operation. on or about November 21, 1995, there was an initial public offering
of 2,700,000 shares of Italian Oven common stock (the offering").
9. The individuals named as defendants herein (the "Individual
Defendants") served, at times material to the claims set forth herein, as a
senior officers and/or directors of Italian Oven in the positions met forth
opposite their names as follows:
Name Position
---- --------
James A. Frye Chairman and Chief Executive Officer
Ralph J. Guarino President, Chief Operating Officer
and a Director
Gary L. Steib Vice President of Finance, Chief Financial
officer and Treasurer
Michael B. Tinderstein Senior Vice President of Operations
Jeffrey W. Letwin Secretary and a Director
Kirby Campbell Director
John E. Hughes, Jr. Director
James A. Rudolph Director
Dru Sedwick Director
Kathleen E. Synnott Director
<PAGE>
Each of the individual Defendants named herein signed, personally or by
attorney-in-fact, the Company's Registration Statement.
10. Defendants Wheat First Butcher Singer and Wheat, First Securities,
Inc. (collectively, "Wheat First" or the "Underwriter Defendants") substantially
participated in the commission of the wrongs alleged herein through their
involvement in the Offering of Italian oven's shares. The Underwriter Defendants
were at all times entities engaged in the business of investment banking,
underwriting and selling securities to the investing public. The Underwriter
Defendants were the lead underwriters of the offering, for which they received
substantial fees. Prior to the Offering, the Underwriter Defendants were
required to and did conduct an investigation into the business, operations,
prospects, financial condition and accounting and management control systems of
Italian Oven, known as a due diligence investigation". In the course of such
investigation, the Underwriter Defendants would have obtained knowledge of the
facts alleged herein if they had acted with reasonable care. At all relevant
times, defendants had a duty to promptly disseminate truthful and accurate
information with respect to Italian Oven and its affairs.
11. Plaintiffs bring this action as a class action pursuant to Federal
Rules of Civil procedure 23 (a) and 23 (b) (3) on behalf of themselves and on
behalf of a class (the "Class") of persons who purchased shares of Italian Oven
common stock on the Offering or between November 21, 1995 and June 24, 1996,
inclusive (the "Class Period"). Excluded from the Class are defendants herein,
members of the immediate family of each of the defendants, any person, firm,
trust, corporation, officer, director or other individual or entity in which any
defendant has a controlling interest or which is related to or affiliated with
any of the defendants, and the legal representatives, agents, affiliates, heirs,
successors-in-interest or assigns of any such excluded party.
<PAGE>
12. The members of the Class are so numerous that joinder of all
members is impracticable. Italian Oven and a certain "Selling Shareholder" of
Italian Oven sold 2,700,000 shares to members of the investing public on or
about November 21, 1995, at a price of $8.00 per share, and, throughout the
Class Period, the common shares of Italian Oven were actively traded on the
NASDAQ National Market System. The precise number of class members is unknown to
plaintiff at this time but class members are believed to number in the
thousands. In addition, the names and addresses of the class members can be
ascertained from the books and records of Italian oven or its agents.
13. Plaintiffs will fairly and adequately represent and protect the
interests of the members of the Class. Plaintiffs a have retained competent
counsel experienced in class action litigation under the federal securities laws
to further ensure such protection and intend to prosecute this action
vigorously.
14. Plaintiffs' claims are typical of the claims of the other members
of the Class because plaintiffs and all the class members' damages arise from
and were caused by the same false and misleading representations and omissions
made by or chargeable to defendants. Plaintiffs do not have interests
antagonistic to, or in conflict with, the Class.
15. A class action is superior to other available methods for the fair
and efficient adjudication of this controversy. Since the damages suffered by
individual class members may be relatively small, the expense and burden of
individual litigation make it virtually impossible for the class members to seek
redress for the wrongful conduct alleged. Plaintiffs know of no difficulty which
will be encountered in the management of this litigation which would preclude
its maintenance as a class action.
<PAGE>
16. Common questions of law and fact exist as to all members of the
Class and predominate over any questions affecting solely individual members of
the Class. Among the questions of law and fact common to the Class are:
(a) Whether the federal securities laws were violated by
defendants' acts as alleged herein;
(b) Whether the prospectus, registration statement, documents,
filings, releases and statements disseminated by defendants
to the investing public in connection with the Offering
omitted and/or misrepresented material facts about Italian
Oven and its business; and (c) The extent of injuries
sustained by members of the Class and the appropriate
measure of damages.
17. The names and addresses of the record owners of the shares of
Italian Oven common stock purchased during the Class Period are available from
Italian Oven's transfer agent and the underwriters to the Offering. Notice can
be provided to such record owners by a combination of published notice and first
class mail using techniques and a form of notice similar to those customarily
used in class actions arising under the federal securities laws.
SUBSTANTIVE ALLEGATIONS
18. Italian Oven, through the Underwriter Defendants, sold 2,214,885
Italian Oven common shares on or about November 21, 1995, in the Offering, at a
price of $8.00 per share. The Underwriter Defendants substantially participated
in and shared control over all aspects of the Offering.
<PAGE>
19. On or about November 22, 1995, defendants filed with the SEC a
final Form S-1 Registration Statement (the "Registration Statement") for the
Offering of the shares of Italian Oven common stock. On or about November 20,
1995, the prospectus (the "Prospectus") with respect to the Offering and which
forms part of the Registration Statement became effective and Italian Oven sold,
through the Underwriter Defendants, the common shares being offered commencing
November 21, 1995.
20. The Prospectus was materially false and misleading for several
reasons. Expansion Problems Before The Offering
21. (a) Among other things, the Prospectus portrayed the Company as a
rapidly expanding restaurant chain with a strategy for achieving sustained and
growing profitability. Thus, for instance, the Prospectus states in pertinent
part at pages 23-24:
Expansion. The Company has entered into development and
franchise agreements that provide for the opening of up to 372
additional restaurants in the United States and Australia, of
which 183 (49%) are scheduled to open by 1999. The Company's
goal is to have Company-owned restaurants represent
approximately 30% of system-wide restaurants. In 1996, the
Company plans to open a total of 28-32 restaurants and its
franchisees have contracted to open a total of 66 restaurants.
* * *
In February 1995, the Company entered into an agreement
pursuant to which Sizzler International, Inc., through a
wholly owned subsidiary ("Sizzler"), is scheduled to open 125
restaurants in Australia over a 25-year period. Under its
development agreement with the Company, Sizzler is scheduled
to open three restaurants by February 1996, four additional
restaurants by February 1997, six additional restaurants by
February 1998 and six additional restaurants by February 1999.
<PAGE>
(b) Similarly, the Prospectus states at page 16 that
"[m]anagement believes that the corporate infrastructure
which the Company has developed is substantially sufficient
to support its expansion plans."
(c) In an effort to portray the Company' s operations as rapidly
improving, the Prospectus states at page 16: Over the last
36 months, James A. Frye . . . has assembled a team of
professional senior managers experienced in multi-unit
restaurant operations . . . This team has improved the
results of restaurants by increasing sales, reducing the
cost of good sold and other operating costs, taking over
certain restaurants from franchisees which were not
fulfilling their contractual obligations and instituting
more rigorous financial and operational standards for
developers and franchisees.
(d) Importantly, the Prospectus also stated at page 4 that the
Company's near-term goal pursuant to its rapid expansion
strategy was that "[i]n 1996, the Company plans to open a
total of 28-32 restaurants and its franchisees have
contracted with the Company to open a total of 66
restaurants."
22. Although the Prospectus also stated (at page 25) that
"[n]o assurance can be given that the Company or its developers or franchisees
will be successful in opening the restaurants currently projected or schedule to
be open", this generalized, boilerplate disclaimer was materially insufficient
to apprise investors of various material factors which were severely impairing
the Company's expansion "strategy" at the time of the Offering and which
directly undermined any legitimate expectation of opening within the reasonably
near future "28-32 [company-owned] restaurants" and "66 (franchised]
restaurants" and any legitimate belief that the Company's infrastructure was
then "substantially sufficient to support its expansion plans".
<PAGE>
(a) The Prospectus failed to disclose that the Company could not
reasonably rely upon Sizzler to participate in any
significant expansion program of the Company inasmuch as
Sizzler was itself facing a severe liquidity crisis at the
time of the Offering which forced it to default on its
developmental agreements with the Company, which necessarily
would preclude its ability to contribute to the Company's
expansion, and which ultimately forced Sizzler into
bankruptcy, or, alternatively, that the Company's due
diligence with respect to its developmental relationship
with Sizzler was grossly inadequate to identify the
financial instability which undermined Sizzler's ability to
perform in accordance with its agreements with the Company.
(b) The Prospectus similarly failed to disclose that other
"developers" of Italian Oven restaurants were either
experiencing difficulties obtaining the requisite financing
to fulfill their obligations under their respective
development agreements with the Company, or that certain of
such developers had decided to delay or terminate plans to
open new restaurants in accordance with such agreements,
and/or that certain other developers had been terminated by
the Company for their own failures to adhere to their
respective development agreements, thus impeding the ability
of the Company to achieve expansion of the magnitude
necessary to enjoy economies of scale and other anticipated
benefits of the Company's stated expansion "strategy".
(c) The Prospectus also failed to disclose that the Company's
purported expectations of rapid expansion were undermined by
the Company's own liquidity crisis, its inability to
generate cash flow sufficient to sustain the expansion
"strategy" described in the Prospectus, its inability and/or
refusal to collect upon certain personal loans amounting to
approximately $100,000 at the time of the Offering and
increasing to $435,000 thereafter made by the Company to
defendant Frye, and, as described below, the increasing
pressure placed upon the Company by PNC Bank, which was one
of the Company's largest creditors -- which pressure
ultimately resulted in the Company being cut off from any
additional financing by PNC.
The Offering Was The Result Of PNC Bank Pressure
<PAGE>
23. The Prospectus failed to disclose in any way that the Offering was
necessitated by Italian Oven's troubled relations with its primary lending bank,
PNC Bank, which refused to grant it additional credit due to the Company's
highly leveraged condition and the decline in its business which had started by
the time of the Offering.
24. The Prospectus also failed to disclose that an Offering to raise
substantial additional equity capital was a condition of PNC Bank, which
condition it imposed because of the decline in Italian Oven's business which had
already begun by the time of the Offering and the Company's unfavorable
prospects for future earnings growth. Prior Efforts At Raising Capital Were
Fraudulent
25. The Prospectus also failed-to disclose that the Company's
previous efforts at raising capital -- primarily through various private
placements of shares of Italian Oven common stock were systematically effected
by fraudulent means, including repeated representations as to the ability of the
Company to achieve profitability in the then-near future in 1994 and early 1995,
all of which were materially false and misleading; and that such prior private
offerings were effected with a failure to disclose that many of the shares sold
in such prior private placements were the personal holdings of defendant Frye
and his wife, who were apparently seeking to "cash out" of the Company, rather
than being shares of Company stock from its treasury which might be utilized to
raise working capital for the Company's expansion and to enhance its working
cash position.
26. As a result of all of the foregoing, defendants' statements about
Italian Oven's future prospects were materially false and misleading and lacking
a reasonable basis, which defendants failed timely to correct.
<PAGE>
The Truth Begins To Emerge
27. Notwithstanding Wheat First's repeated "booster shots"
(i.e., well-timed and favorable analyst reports from an underwriter of the
offering) which attempted to bolster Italian Oven's stock with pronouncements of
Italian Oven's purportedly "strong unit expansion pace" which "should also fuel
a swing to net profitability in 1Q:96" [Wheat First report dated December 21,
1995 recommending that investors "BUY" Italian Oven shares], Italian Oven's
already poor financial condition was worsening.
28. On or about April 25, 1996, the Company announced its financial
results for the first quarter of fiscal year 1996. The Company reported a loss
for the quarter of $142,809.
29. On or about May 17, 1996, the Company announced that defendant
Guarino, then-President and Chief Operating Officer was leaving the Company "to
pursue other interests."
30. On or about June 24, 1996, the Company's Board of Directors
announced that "Cornerstone Capital Advisors, Ltd. has been engaged, effective
immediately, to serve as the company's interim manager to seek to improve the
company's liquidity." According to this press release, defendant Frye had
"relinquished the day-to-day responsibilities of his office" to Cornerstone
Capital Advisors. The press release also stated pertinently that:
The Board determined that these actions were necessary in
light of recent erosion in the company's cash position. The
company has been negatively impacted by weaker than projected
sales in 1996 due, in part, to, adverse weather condition in
the first quarter. In addition, PNC Bank terminated its line
of credit to the company. ... The company does not have
another credit facility outstanding or under commitment, and
is actively seeking a source of financing.
<PAGE>
The company's cash position has been further negatively
impacted by amounts outstanding from Mr. Frye of $435,000.
31. This shocking press release starkly contradicted the
Company's prior representations in the Prospectus, dated only seven months
earlier. Its prior representations concerning its strong financial condition and
its strategy for expansion and the future prospects of the Company were all
materially misstated by its failure to adequately and properly disclose the
numerous .problems confronting the Company, o expansion plan at the time of the
Offering and which were `Severely impairing the ability of the company to
maintain cash flow sufficient to continue the growth Of its operations. As at
November 21, 1995 -- the date of the Prospectus -- defendants knew or in the
exercise of reasonable diligence should have known that the Company's expansion
plan was experiencing these severe constraints.
32. As a result of the Company's declining position and poor
performance, the price of its shares -- which were offered to the public at
$8.00 per share in November 1995 -- has declined sharply to close at $2.00 per
share (on volume of 374,400 shares or approximately ten times its average daily
volume) on June 24, 1996, down $1.125 from the previous trading day, and a 75%
decline from the price of the stock in the Offering.
33. In wrongful disregard of the truth and/or as part of their
ongoing efforts to continue the illusion of Italian Oven, a profitability,
business success, expected substantial profitability and market leadership,
defendants made or participated in the making of materially false and misleading
statements to the investing public as particularized above. These
representations were materially false and misleading when made for the reasons
set forth above.
34. The June 24, 1996, announcement revealed problems relating
to Italian Oven's financial condition and prospects which by their nature were
ongoing and severe. These problems were operative through the relevant time
period and contradicted and discredited defendant's false statements of optimism
and outlook to the investing public.
<PAGE>
COUNT I
[Against All Defendants For Violations
Of Section 11 Of The Securities Act]
35. Plaintiffs repeat and reallege each and every allegation contained
above.
36. This Count is brought pursuant to Section 11 of the Securities Act,
15 U.S.C.ss.77k, on behalf of the Class, against all defendants.
37. The Registration Statement for the Offering was inaccurate
and misleading, contained untrue statements of material facts, omitted to state
other facts necessary to make the statements made not misleading, and concealed
and failed adequately to disclose material facts as described. above.
38. The Company is the registrant for the Offering. Wheat
First was the lead underwriter of the Italian Oven shares sold in the Offering
as defined in Section 11 (a) (5) of the Securities Act. The defendants named
herein were responsible for the contents and dissemination of the Registration
Statement and the Prospectus.
39. As issuer of the shares, Italian Oven is strictly liable
to plaintiffs and the Class for the misstatements and omissions. The Underwriter
Defendants are also strictly liable for their sale of Italian Oven shares
pursuant to the Offering.
40. As underwriters of the offering, each of the Underwriter
Defendants owed to the purchasers of the shares of Italian Oven, including
plaintiffs and the Class, the duty to make a reasonable and diligent
investigation of the statements contained in the Prospectus at the time it
<PAGE>
became effective, to ensure that said statements were true and that there was no
omission to state a material fact required to be stated in order to make the
statements contained therein not misleading. The Underwriter Defendants knew, or
in the exercise of reasonable care, should have known of the material
misstatements and omissions contained in the Prospectus as set forth herein. As
such, the Underwriter Defendants are liable to plaintiff s and the Class.
41. None of the defendants named herein made a reasonable
investigation or possessed reasonable grounds for the belief that the statements
contained in the Registration Statement and the Prospectus were true and without
omissions of any material facts and were not misleading.
42. Defendants issued, caused to be issued and participated in
the issuance of materially false and misleading written statements to the
investing public which were contained in the Prospectus, which misrepresented or
failed to disclose, inter alia, the facts set forth above. By reasons of the
conduct herein alleged, each defendant violated, and/or controlled a person who
violated, Section 11 of the Securities Act.
43. Plaintiffs acquired Italian Oven shares issued pursuant to, or
traceable to, and in reliance on, the Registration Statement.
44. Plaintiffs and the Class have sustained damages. The value of
Italian Oven shares has declined substantially subsequent to and due to
defendants' violations.
45. At the times they purchased Italian Oven shares,
plaintiffs and other members of the Class were without knowledge of the facts
concerning the wrongful conduct alleged herein and could not have reasonably
discovered those facts prior to June 24, 1994. Less than one year elapsed from
the time that plaintiffs discovered or reasonably could have discovered the
facts upon which this complaint is based to the time that plaintiffs filed their
Complaint. Less than three years elapsed from the time that the securities upon
which this Count is brought were bona fide offered to the public to the time
plaintiffs filed their Complaint.
COUNT II
[Against All Defendants For Violations Of
Section 12(a)(2) Of The Securities Act]
46. Plaintiffs repeat and reallege each and every allegation contained
above.
47. This Count is brought by plaintiffs pursuant to Section 12 (a) (2)
of the Securities Act on behalf of all purchasers of Italian oven shares in
connection with, and traceable to, the Offering.
48. Defendants were sellers, offerors, and/or solicitors of sales of
the shares offered pursuant to the November 21, 1995, Prospectus.
49. The Prospectus contained untrue statements of material facts,
omitted to state other facts necessary to make the statements made not
misleading, and concealed and failed to disclose material. facts. Defendants'
actions of solicitation included participating in the preparation of the false
and misleading Prospectus.
50. The defendants owed to the purchasers of Italian Oven shares,
including plaintiffs and other class member purchasers of Italian oven shares,
the duty to make a reasonable and diligent investigation of the statements
contained in the Offering materials, including the Prospectus contained therein,
to insure that such statements were true and that there was no omission to state
a material fact required to be stated in order to make the statements contained
therein not misleading. These defendants knew of, or in the exercise of
reasonable care should have known of, the misstatements and omissions contained
in the Offering materials as set forth above.
<PAGE>
51. Plaintiffs and other members of the Class purchased or otherwise
acquired Italian Oven shares pursuant to and traceable to the defective
Prospectus. Plaintiffs did not know, or in the exercise of reasonable diligence
could not have known, of the untruths and omissions contained in the Prospectus.
52. Plaintiffs, individually and representatively, hereby offer to
tender to defendants those securities which plaintiffs and other Class members
continue to own, on behalf of all members of the Class who continue to own such
securities, in return for the consideration paid for those securities together
with interest thereon.
53. By reason of the conduct alleged herein, these defendants violated,
and/or controlled a person who violated, ss. 12 (a) (2) of the Securities Act.
Accordingly, plaintiffs and members of the Class who hold Italian Oven shares
purchased in the Offering have the right to rescind and recover the
consideration paid for their Italian Oven shares and, hereby elect to rescind
and tender their Italian Oven shares to the defendants sued herein. Plaintiffs
and Class members who have sold their Italian Oven shares are entitled to
rescissory damages.
54. Less than three years elapsed from the time that the securities
upon which this Count is brought were sold to the Public to the time of the
filing of this action. Less than one year elapsed f rom the time when plaintiffs
discovered or reasonably could have discovered the facts upon which this Count
is based to the time of the filing of this action
<PAGE>
COUNT III
[Against The Individual Defendants For
Violations of Section 15 of the Securities Act]
55. Plaintiffs repeat and reallege each and every allegation contained
above.
56. This Count is brought pursuant to Section 15 of the Securities Act
against the Individual Defendants.
57. Each of the Individual Defendants was a control person of Italian
Oven by virtue of their positions as directors and/or as senior offices of
Italian Oven. The Individual Defendants also served on Italian Oven's Board of
Directors. Finally, the Individual Defendants each had a series of direct and/or
indirect business and/or personal relationships with other directors and/or
major shareholders of Italian Oven.
58. Each of the Individual Defendants was a culpable participant in the
violations of Sections 11 and 12 (a) (2) of the Securities Act alleged in Counts
I and II above, based on their having signed the Registration Statement and
having otherwise participated in the process which allowed the Offering to be
successfully completed.
COUNT IV
[Violation of Pennsylvania Blue Sky Law,
70 P.S. 1-406, 1-407, 1-501 and 1-503
Against All Defendants]
59. Plaintiffs repeat and reallege each and every allegation contained
above.
60. Defendants made untrue statements of material facts or omitted to
state material facts necessary in order to make the statements made, in the
light of the circumstances under which they were made, not misleading.
61. Defendants are an issuer (Italian Oven). officers and directors of
an issuer (the Individual Defendants) and any other person whose relationship to
the issuer gives him access, directly or indirectly, to material information
about the issuer not generally available to the public (the Underwriter
Defendants), who sold the security of an issuer in this State at a time when
each of them knew material information about the issuer gained from such
relationship, which information: (a) would significantly affect the market price
of Italian Oven stock; (b) is and was not generally available to the public; and
(c) said defendants knew was not intended to be so available.
62. By reason of the foregoing, defendants have violated 70 P.S. 1-406,
and 1-407, are liable to plaintiffs and the Class pursuant to 70 P.S. 1-501, and
are jointly and severally liable pursuant to 70 P.S. 1-503.
JURY TRIAL DEMANDED
Plaintiffs hereby demand a trial by Jury.
PRAYER FOR RELIEF
WHEREFORE, plaintiffs, on behalf of themselves and the Class, pray for
judgment as follows:
A. declaring this action to be a plaintiff class action
properly Maintained pursuant to Rule 23 (a) and (b) (3) of
the Federal Rules of Civil Procedure;
B. awarding plaintiffs and other members of the Class damages
together with interest thereon;
<PAGE>
C. awarding plaintiffs and the Class rescission on Count II to
the extent they still hold Italian Oven shares, or if sold,
awarding rescissory damages in accordance with Section 12
(a) (2) of the Securities Act;
D. awarding plaintiffs and other members of the Class their
costs and expenses of this litigation, including reasonable
attorneys' fees, accountants's fees and experts' fees and
other costs and disbursements; and
E. awarding plaintiffs and other members of the Class such
other and further relief as may be just and proper under the
circumstances.
Dated: July 2, 1996
LAW OFFICES OF
ALFRED G. YATES JR.
By:____________________________________
Alfred G. Yates, Jr.
(Pa. I.D. #17419)
519 Allegheny Building
429 Porbee Building
Pittsburgh, Pennsylvania
Phone: (412) 391-5164
Fax: (412) 471-1033
<PAGE>
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
By:____________________________________
David J. Bershad
Steven G. Schulman
Ralph M. Stone
One Penn Plaza
49th Floor
New York, New York l0119
Phone: (212) 594-5300
Fax: (212) 868-1229
- and -
SCHIFFRIN & CRAIG
By:____________________________________
Richard S. Schiffrin
(Pa. I.D. #61872)
Andrew L. Barroway
(Pa. I.D., #64477)
Three Bala Plaza East
Suite 400
Bala Cynwyd, PA 19004
Phone: (610) 667-7706
Fax: (610) 667-7056
Attorneys for Plaintiffs
EXHIBIT 11.1
THE ITALIAN OVEN, INC.
Calculation of Net Loss Per Common Share
(Unaudited)
Quarter Ended June 30
1996 1995*
---- ----
Net Loss $(3,684,131) $(442,599)
=========== =========
Weighted average common shares outstanding
during the period 4,351,991 1,516,727
Effect of shares issued upon conversion of
preferred stock, after exercise of
warrants, to common -- 550,441
----------- ---------
Shares used in calculating loss per common share 4,351,991 2,067,168
=========== =========
Net loss per common share $ (0.85) $ (0.21)
=========== =========
* 1995 per share and share amounts are computed on a pro forma basis.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-K FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<CIK> 0000933425
<NAME> THE ITALIAN OVEN, INC.
<MULTIPLIER> 1,000
<CURRENCY> dollars
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1.000
<CASH> 144
<SECURITIES> 0
<RECEIVABLES> 560
<ALLOWANCES> 95
<INVENTORY> 311
<CURRENT-ASSETS> 1,037
<PP&E> 14,156
<DEPRECIATION> 2,673
<TOTAL-ASSETS> 15,642
<CURRENT-LIABILITIES> 6,648
<BONDS> 0
0
0
<COMMON> 44
<OTHER-SE> 6,944
<TOTAL-LIABILITY-AND-EQUITY> 15,642
<SALES> 7,848
<TOTAL-REVENUES> 9,993
<CGS> 2,132
<TOTAL-COSTS> 7,589
<OTHER-EXPENSES> 6,145
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 76
<INCOME-PRETAX> (3,817)
<INCOME-TAX> (5)
<INCOME-CONTINUING> (3,822)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,822)
<EPS-PRIMARY> (.88)
<EPS-DILUTED> 0
</TABLE>
