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 March 31, 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 May
10, 1996: 4,363,991
<PAGE>
THE ITALIAN OVEN, Inc.
Index
Page
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 1996 and December 31, 1995 3
Consolidated Statements of Operations
Quarters Ended March 31, 1996 and 1995 5
Consolidated Statements of Cash Flows
Quarters Ended March 31, 1996 and 1995 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 9
Part II OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
Signature 14
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. The first
quarter of 1996 is the period from January 1, 1996 to March 31, 1996. 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 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
(Unaudited)
March 31, December 31,
1996 1995
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,339,661 $ 11,448,976
Receivables, net of allowance of
$95,000 and $85,000 respectively 652,754 844,016
Notes receivable from related parties 465,914 442,249
Inventories 330,289 305,988
Prepaid expenses and other current assets 381,818 51,479
------------ ------------
Total current assets 9,170,436 13,092,708
------------ ------------
PROPERTY AND EQUIPMENT:
Restaurant equipment 3,016,243 2,323,213
Building and leasehold improvements 4,118,842 2,598,320
Office furniture and equipment 869,397 529,199
Construction-in-progress 595,004 1,238,814
------------ ------------
8,599,486 6,689,546
Less-Accumulated depreciation 2,039,612 1,854,330
------------ ------------
Property and equipment, net 6,559,874 4,835,216
------------ ------------
INTANGIBLE ASSETS:
Preopening costs, net 601,593 179,415
Liquor licenses, net 89,443 53,460
Other long-term assets 30,897 32,397
Goodwill, net 184,573 197,731
------------ ------------
906,506 463,003
------------ ------------
TOTAL ASSETS $ 16,636,816 $ 18,390,927
============ ============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
<PAGE>
THE ITALIAN OVEN, Inc.
Consolidated Balance Sheets (Continued)
(Unaudited)
March 31, December 31,
1996 1995
------------ ------------
LIABILITIES, MINORITY INTEREST
AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 153,586 $ 190,924
Notes payable -0- 423,032
Accounts payable 1,532,545 1,665,061
Deferred franchise and development revenue 1,113,577 1,264,577
Reserve for store closing 457,448 464,143
Accrued payroll and other employee benefits 368,955 360,223
Accrual for gift certificates outstanding 290,845 559,002
Other accrued expenses 135,692 474,286
------------ ------------
Total current liabilities 4,052,648 5,401,248
LONG-TERM LIABILITIES:
Deferred franchise and development
fees revenue 1,427,000 1,715,125
Long-term debt 510,615 534,848
Other long-term liabilities 419,999 369,203
------------ ------------
Total long-term liabilities 2,357,614 2,619,176
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES -0- 1,140
SHAREHOLDERS' EQUITY:
Common stock, par value $.01 per share-
Authorized, 20,000,000 shares
Issued, 4,350,912 shares 43,509 43,509
Additional paid-in-capital 22,053,222 22,053,222
Warrants outstanding 1,975,000 1,975,000
Accumulated deficit (13,613,809) (13,471,000)
------------ ------------
10,457,922 10,600,731
Less-Cost of common stock in treasury-
22,921 shares (231,368) (231,368)
------------ ------------
Total shareholders' equity 10,226,554 10,369,363
------------ ------------
TOTAL LIABILITIES, MINORITY INTEREST AND
SHAREHOLDERS' EQUITY $ 16,636,816 $ 18,390,927
============ ============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
<PAGE>
THE ITALIAN OVEN, Inc.
Consolidated Statements of Operations
(Unaudited)
Quarter Ended March 31,
--------------------------
1996 1995
------------ -----------
REVENUE:
Restaurant sales $ 3,408,283 $ 2,820,464
Franchise and development fees 519,125 651,000
Royalty fees 703,970 628,246
----------- -----------
Total revenue 4,631,378 4,099,710
----------- -----------
COSTS AND EXPENSES:
Costs of restaurant sales 901,968 777,887
Other restaurant expenses:
Restaurant labor expenses 1,484,294 1,073,022
Occupancy and other costs 860,583 749,718
General and administrative 1,467,881 1,510,566
Depreciation and amortization 278,878 191,631
----------- -----------
Total costs and expenses 4,993,604 4,302,824
----------- -----------
Loss from operations (362,226) (203,114)
OTHER INCOME (EXPENSE):
Interest income 139,472 2,637
Interest expense (27,098) (39,865)
Other expense, net (11,567) (3,418)
----------- -----------
Total other income (expense) 100,807 (40,646)
----------- -----------
Loss before taxes and minority interest (261,419) (243,760)
PROVISION FOR INCOME TAXES 102,318 (375)
MINORITY INTEREST 16,292 27,013
----------- -----------
Net loss (142,809) (217,122)
UNDECLARED DIVIDENDS ON PREFERRED STOCK -0- (54,282)
ACCRETION OF DISCOUNT ON PREFERRED STOCK -0- (1,140)
----------- -----------
NET LOSS APPLICABLE TO COMMON STOCK $ (142,809) $ (272,544)
=========== ===========
PRO FORMA NET LOSS PER COMMON SHARE $ (0.03) $ (0.10)
=========== ===========
SHARES USED IN COMPUTING PRO FORMA
PER SHARE AMOUNTS 4,327,991 2,132,025
=========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
<PAGE>
THE ITALIAN OVEN, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Quarter Ended March 31,
-------------------------
1996 1995
----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (142,809) $ (217,122)
Adjustments required to reconcile net loss to
net cash used for operating activities-
Depreciation and amortization 278,878 191,631
Bad debt expense 10,000 -0-
Minority interests in loss (16,292) (27,013)
----------- ---------
272,586 164,618
Cash provided by (used for) working capital items
Receivables 181,262 72,161
Inventories (24,301) 39,802
Prepaid expenses and other current assets (330,339) (18,849)
Accounts payable (132,516) 278,738
Deferred franchise and development fees (439,125) (315,500)
Accrued payroll and other employee benefits 8,732 (104,828)
Change in gift certificates outstanding (268,157) (217,937)
Other accrued expenses (345,289) (95,095)
Other long-term liabilities 50,796 24,941
----------- ---------
Cash used for working capital items (1,298,937) (336,567)
----------- ---------
Net cash used for operating activities (1,169,160) (389,071)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net acquisitions of property, equipment
and liquor licenses (1,955,748) (213,799)
Preopening costs (491,291) (2,142)
Net increase in notes receivable
from related parties (23,665) -0-
----------- ---------
Net cash used for investing activities (2,470,704) (215,941)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable borrowings -0- 425,000
Notes payable payments (423,032) (50,000)
Long-term debt payments (46,419) (74,265)
----------- ---------
Net cash (used for)
provided by financing activities (469,451) 300,735
----------- ---------
Net decrease in cash and cash equivalents (4,109,315) (304,277)
Cash and cash equivalents, beginning of period 11,448,976 373,387
----------- ---------
Cash and cash equivalents, end of period $ 7,339,661 $ 69,110
=========== =========
Supplemental disclosure of cash flow information:
Interest paid $ 27,098 $ 23,180
=========== =========
Income taxes paid $ 2,250 $ 375
=========== =========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
<PAGE>
THE ITALIAN OVEN, Inc.
Notes to Consolidated Financial Statements
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 ended March 31, 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 April 1996, the Company, James A. Frye, the Chairman and Chief Executive
Officer of the Company, and his wife, Janice M. Frye, 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 by four
shareholders of the Company, Asish Bahl, Yashmeen Vij Bahl, Mohinder Bahl and
Jerome Scherer. These shareholders purchased shares 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 unspecified damages in
excess of $390,000, plus interest, costs and attorney's fees.
The defendants believe that by this filing the plaintiffs have evidenced their
intention to abandon an earlier action commenced against the defendants upon the
filing of a writ of summons (which did not specify a cause of action) in the
Court of Common Pleas of Westmoreland County, Pennsylvania in January 1996.
The Company and Mr. and Mrs. Frye believe that the allegations raised in the
complaint are without merit, and intend to vigorously defend themselves in the
case. 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
this action.
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.
3. Subsequent Events
The Mid America Transaction
Effective April 4, 1996, the Company acquired, pursuant to the Leasehold and
Asset Purchase and Sale Agreement with Mid America Restaurant Group, Inc. ("Mid
America"), all of the leasehold interests and operating assets
<PAGE>
of Mid America formerly used by Mid America in connection with the operation of
six Blackeyed Pea restaurants in the Kansas City metropolitan area. These
Blackeyed Pea restaurants were closed prior to the Company's acquisition of the
Mid America assets. The purchase price of the assets acquired was $3,000,000,
which was paid by the Company in cash. The purchase price of the assets was
determined by arm's length negotiations between the parties. The purchase price
was paid by the Company from capital reserves targeted for use for restaurant
development and acquisition. These reserves represent proceeds from the
Company's November 1995 initial public offering of its Common Stock. The Company
intends to remodel each of the restaurants so acquired and to operate them as
The Italian Oven restaurants.
The Western Pennsylvania Transaction
On April 29, 1996, the Company completed the acquisition of the operating assets
of four franchised restaurants of the Company, Ovens of Cranberry, Ltd., Ovens
of Monroeville, Ltd., Ovens of Erie One, Ltd. and Ovens of North Hills, Ltd.
("Sellers"), which owned four The Italian Oven restaurants in the Western
Pennsylvania market. The acquisition was completed pursuant to the terms of an
asset acquisition agreement dated February 22, 1996 between the Company, the
Sellers and the Sellers' shareholders, Marc B. Robertshaw, William J. Rosa and
David S. Gallatin. The operating assets acquired consist of all furniture,
fixtures, equipment, operating licenses, leasehold improvements and leasehold
interests necessary to operate the restaurants.
The purchase price for the acquired assets was $2,714,500, which was paid
$2,534,500 in cash and $180,000 through the issuance of 36,000 shares of the
Company's Common Stock (valued at the market price of $5.00 per share on the
last businees day prior to the acquisition). The purchase price was determined
by arm's length negotiations among the parties. The cash portion of purchase
price was paid by the Company from capital reserves targeted for use for
restaurant development and acquisition. These reserves represent proceeds from
the Company's November 1995 initial public offering of its Common Stock.
The assets acquired by the Company were used by the Sellers for the operation of
each of their respective The Italian Oven restaurants. The Company intends to
continue to operate the assets for the same purposes.
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
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 March 31,
-----------------------
1996 1995
------ ------
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Revenue:
Restaurant sales............................ 73.6% 68.8%
Franchise and development fees.............. 11.2% 15.9%
Royalty fees................................ 15.2% 15.3%
------ ------
100.0% 100.0%
Costs and Expenses:
Cost of restaurant sales (1) ............... 26.5% 27.6%
Other restaurant expenses:
Restaurant labor expenses (1)............... 43.5% 38.0%
Occupancy and other costs (1)............... 25.2% 26.6%
General and administrative.................. 31.7% 36.8%
Depreciation and amortization............... 6.0% 4.7%
Total operating expense..................... 107.8% 105.0%
Loss from operations............................. (7.8)% (5.0)%
Net interest income (expense).................... 2.4% (0.9)%
Provision for income taxes....................... 2.2% 0.0%
Net Loss.................................... (3.1%) (5.3%)
(1) As a percentage of restaurant sales.
Quarter ended March 31, 1996 compared to the quarter ended March 31, 1995
Revenues. Total revenue increased by $532,000 to $4,631,000 or 13.0% for the
quarter ended March 31, 1996 compared to the quarter ended March 31, 1995.
Restaurant sales at Company-owned restaurants increased by $588,000 to
$3,408,000 or 20.8% for the quarter ended March 31, 1996 compared to the same
period in 1995. These increases were largely the result of the opening of five
additional Company-owned restaurants during the first quarter of 1996.
Restaurant sales for same Company-owned restaurants declined by 7.9% during the
first quarter in 1996 compared to the same quarter in 1995. Management believes
that this decline was largely due to adverse weather conditions in the Northeast
United States.
Franchise and development fees decreased by $132,000 or 20.3% for the quarter
ended March 31, 1996 compared to the quarter ended March 31, 1995. This decrease
was primarily due to the opening of one franchised restaurant during the first
quarter of 1996 compared to eight in the first quarter of 1995.
Royalties increased by $76,000 to $704,000 or 12.1% for the quarter ended March
31, 1996 compared to the quarter ended March 31, 1995. This increase was
principally due to 78 franchised restaurants being in operation at the end of
the first quarter of 1996 compared to 69 at the end of the first quarter of
1995.
<PAGE>
Costs and expenses. Cost of restaurant sales at Company-owned restaurants
increased by $124,000 to $902,000 or 15.9% for the quarter ended March 31, 1996
compared to the quarter ended March 31, 1995, principally due to the opening of
five additional Company-owned restaurants during the first quarter of 1996, but
decreased as a percentage of restaurant sales by 0.6% to 26.7% 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 36.8% to 39.8% as a
percentage of restaurant sales for the quarter ended March 31, 1996 compared to
the quarter ended March 31, 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 March 31, 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
decreased as a percentage of restaurant sales to 25.2% for the quarter ended
March 31, 1996 from 26.6% for the quarter ended March 31, 1995, principally due
to increased efficiencies.
Depreciation and amortization expenses increased by $87,000 to $279,000 or 45.5%
for the quarter ended March 31, 1996 compared to the quarter ended March 31,
1995. This increase was primarily due to the opening of five additional
Company-owned restaurants during 1996.
Interest income. Interest income increased by $137,000 for the quarter ended
March 31, 1996 compared to the quarter ended March 31, 1995. This increase was
due to the investment income earned on the net proceeds of the Company's
November 1995 initial public offering of Common Stock (the "IPO").
Liquidity and Capital Resources.
The following table presents a summary of the Company's cash flows for the
periods:
<TABLE>
<CAPTION>
Quarter ended March 31,
------------------------
1996 1995
-------- --------
Revenue:
<S> <C> <C>
Net cash used for operating activities..................... $(1,169,160) $ (389,071)
Net cash used for investing activities..................... (2,470,704) (215,941)
Net cash (used for) provided by financing activities....... (469,451) 300,735
---------- ----------
Net decrease in cash and cash equivalents ................. $(4,109,315) $ (304,277)
========== ==========
</TABLE>
On November 27, 1995, the Company completed its IPO. The Company sold 2,700,000
shares of its Common Stock (including 485,115 shares sold by an existing
shareholder of the Company). The Company is utilizing the net proceeds of the
IPO (after the payment of offering expenses, the repayment of certain
indebtedness, the repurchase of certain stock held by one shareholder and the
reserve of certain funds for working capital purposes) to open additional
Company-owned restaurants.
Prior to the IPO, the Company's strategy was to seek growth principally though
the development of franchised restaurants. The Company had originally intended
to open 28-32 restaurants using the net proceeds of the IPO and operating
revenues from existing restaurants. However, as reported in the Company's Annual
Report on Form 10-K for the year ended December 31, 1995, due to revenues being
lower than anticipated during the first quarter of 1996 and the decision by
management to invest a portion of the net proceeds of the IPO in larger, free
standing restaurants (which have higher start-up costs than restaurants located
in strip shopping centers), the Company has revised its estimates to project
that it will open 20-28 restaurants with such proceeds and revenues. During the
first quarter of 1996, the Company opened five new Company-owned restaurants. In
addition, in April 1996, the Company acquired the leasehold interests and
<PAGE>
operating assets of six restaurants (which it is in the process of converting
into The Italian Oven restaurants) and the operating assets of four franchised
restaurants currently in operation. Accordingly, the Company expects to open
five-13 additional restaurants with such proceeds and revenues.
In 1995, the Company entered into a credit agreement with PNC Bank, National
Association (the "Credit Agreement") for a line of credit in the principal
amount of the lesser of $2,500,000 or the borrowing base. The borrowing base is
calculated on the basis of a percentage of certain current assets of the
Company, the aggregate of which is currently greater than $2,500,000. The Credit
Agreement provides that advances will bear interest at a rate the greater of the
prime rate or 1/2% in excess of the weighted average Federal funds rate. The
Company does not currently satisfy the financial conditions necessary to enable
it to draw funds under the Credit Agreement, although it anticipates that it
will meet such conditions in the third quarter of 1996. In order to draw funds
under the Credit Agreement, the Company must maintain net income plus income tax
expense and total interest expense ranging from $100,000 per month in March 1996
to $400,000 per month in September 1996. The Credit Agreement matures on
November 15, 1996. The lender has not agreed to an extension of the maturity,
and the Company has not identified an alternative source of financing.
The statements that the Company expects to (i) open or acquire from five-13
additional restaurants using the remaining net proceeds of the IPO, available
operating revenues and financing proceeds, and (ii) be able to draw funds under
the Credit Agreement is a forward looking statement. Factors which could prevent
the Company from realizing its objective of opening or acquiring such additional
restaurants include (i) restaurant revenues and/or profits being lower than
projected by management as a result of changes in consumer tastes, adverse
weather conditions (as has been the case during the first quarter of 1996),
increased competition in the casual dining sector or unfavorable economic
conditions generally, (ii) there being fewer franchised store openings than
projected by management due to the inability of developers to obtain needed
financing or the decisions of developers to delay or terminate plans to open new
restaurants as a result of poor sales, the failure to achieve profitability or
other factors (as has been the case with certain developers during the first
quarter of 1996), with the attendant loss to the Company of royalties from
franchised restaurant sales and of the ability to recognize income from
franchise fees, (iii) the Company being unable to sell the number of new
franchises projected by management, with the attendant loss to the Company of
cash flow from franchise fees payable prior to the opening of new restaurants,
(iv) restaurant opening costs being higher than projected by management due to
increased competition for new restaurant sites or higher than anticipated
construction costs, or (v) restaurant operating costs being higher than
projected by management due to factors such as labor shortages in particular
markets or increases in the cost of food or paper products.
In projecting that the Company will be able to open such number of restaurants,
management is assuming that the Company will be able to draw the full $2,500,000
potentially available under the Credit Agreement or to have available to it an
alternative source of financing. The Company does not currently meet the
financial conditions necessary to enable it to draw funds under the Credit
Agreement, and no assurance can be given that alternative sources of financing
will be available to it. Furthermore, even if the conditions for drawing funds
are met, unless the Credit Agreement is extended, it is not anticipated that
proceeds therefrom will be available for the development or acquisition of
additional Company-owned restaurants other than on an interim basis since it
matures on November 15, 1996. The Company could find alternative sources of
financing difficult or impossible to obtain if its operations are unsatisfactory
or if the credit markets tighten generally. If the Company is unable to obtain
any financing, it does not expect to acquire or open more than five additional
restaurants with the net proceeds of the IPO and available revenues from
operations, if any.
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
In April 1996, the Company, James A. Frye, the Chairman and Chief Executive
Officer of the Company, and his wife, Janice M. Frye, 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 by four
shareholders of the Company, Asish Bahl, Yashmeen Vij Bahl, Mohinder Bahl and
Jerome Scherer. These shareholders purchased shares from Mr. and Mrs. Frye prior
to the IPO. 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 unspecified damages
in excess of $390,000, plus interest, costs and attorney's fees.
The defendants believe that by this filing the plaintiffs have evidenced their
intention to abandon an earlier action commenced against the defendants upon the
filing of a writ of summons (which did not specify a cause of action) in the
Court of Common Pleas of Westmoreland County, Pennsylvania in January 1996.
The Company and Mr. and Mrs. Frye believe that the allegations raised in the
complaint are without merit, and intend to vigorously defend themselves in the
case. 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
this action.
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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Leasehold and Asset Purchase and Sale Agreement dated March 4, 1996 by
and between the Company and Mid America Restaurant Group, Inc.
(included as an exhibit to the Current Report on Form 8-K of the
Company dated May 9, 1996 and incorporated by reference herein).
10.2 First Amendment to Leasehold and Asset Purchase and Sale Agreement
dated March 22, 1996 by and among the Company, Mid America Restaurant
Group, Inc. and Mid America Restaurant Group of Kansas (included as an
exhibit to the Current Report on Form 8-K of the Company dated May 9,
1996 and incorporated by reference herein).
10.3 Second Amendment to Leasehold and Asset Purchase and Sale Agreement
dated March 29, 1996 by and among the Company, Mid America Restaurant
Group, Inc. and Mid America Restaurant Group of Kansas.
<PAGE>
10.4 Agreement dated February 22, 1996, by and among the Company, Ovens of
Cranberry, Ltd., Ovens of Erie One, Ltd., Ovens of Monroeville, Ltd.,
Ovens of North Hills, Ltd., David S. Gallatin, Marc B. Robertshaw and
William J. Rosa (included as an exhibit to the Current Report on Form
8-K of the Company dated May 9, 1996 and incorporated by reference
herein).
11.1 Calculation of Pro Forma Net Loss Per Common Share.
99.1 Complaint captioned Bahl, et al., vs. Frye, Frye and The Italian Oven,
Inc. filed April 11, 1996 in the U.S. District Court for the Western
District of Pennsylvania, Civil Action No. 96-667.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 1996.
<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: May 15, 1996 Gary L. Steib
Vice President of Finance,
Chief Financial Officer
and Treasurer
Exhibit 10.3
SECOND AMENDMENT
TO
LEASEHOLD AND ASSET PURCHASE AND SALE AGREEMENT
THIS SECOND AMENDMENT TO LEASEHOLD AND ASSET PURCHASE AND SALE
AGREEMENT (this "Second Amendment") is made and effective as of March 29, 1996,
and is by and among The Italian Oven, Inc., a Pennsylvania corporation
("Purchaser"), Mid America Restaurant Group, Inc., a Missouri corporation
("Seller"), and Mid America Restaurant Group of Kansas, a Kansas corporation
("Mid America of Kansas").
RECITALS
This Second Amendment is made on the basis of the following facts:
A. Purchaser and Seller entered into that certain Leasehold and Asset
Purchase and Sale Agreement, dated March 4, 1996, as amended by that certain
First Amendment to Leasehold and Asset Purchase and Sale Agreement, dated March
22, 1996 (collectively, the "Agreement").
B. Due to certain changed circumstances, Purchaser and Seller have
agreed to amend the Agreement all as more particularly set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are-hereby
confessed and acknowledged, Purchaser, Seller and Mid America of Kansas agree as
follows:
1. Purchaser consents to the execution by Seller of that certain Second
Lease Amendment, relating to the Benjamin Lease, which is attached hereto as
Exhibit B-l, and is incorporated herein by this reference. The definition of
"Benjamin Lease" as set forth in Recital B of the Agreement is amended by adding
as part of the Benjamin Lease the above referenced Second Lease Amendment, which
document shall be considered part of Exhibit B-1 of the Agreement for all
purposes.
2. Purchaser consents to the execution by Seller of (a) that certain
Second Amendment to Shopping Center Build-To-Suit Lease, relating to the
Creekwood Lease, and (b) that certain Estoppel Letter, dated February 19, 1996,
to Security Life of Denver Insurance Company, and (c) that certain
Subordination, Nondisturbance and Attornment Agreement, dated March 28, 1996.
Each of said documents are attached hereto as part of Exhibit E-1, and are
incorporated herein by this reference. The definition of "Creekwood Lease" as
set forth in Recital E of the Agreement is amended by adding as part of the
Creekwood Lease the above referenced
<PAGE>
documents, which documents shall be considered part of Exhibit E-1 of the
Agreement for all purposes.
3. Purchaser and Seller acknowledge and agree that the Conditions set
forth in subsections 3.1(a), (b), (e), (d), (f), (h), (i) and (j) are satisfied
or waived.
2. Section 7.1 is amended by deletion therefrom of "April 5, 1996," and
the substitution therefor
of "April 4, 1996."
3. Notwithstanding the provisions of subsections 7.2(b)(i) and 7.2(c)
separate Assignment and Assumption of Lease Agreements shall be used for the
assignment and assumption of the Benjamin, Overland and Creekwood Leases. The
Form of those documents is attached hereto as Exhibit G-1. At Closing Mid
America of Kansas shall execute the Assignment and Assumption of Lease relating
to the Overland Lease.
4. In the event of any inconsistencies between the terms and provisions
of this Second Amendment and those of the Agreement, the terms and provisions of
this Second Amendment shall control in all instances. Except as set forth above,
the parties ratify the Agreement and agree that the same is in full force and
affect. Capitalized terms not otherwise defined in this Second Amendment shall
have the meanings attributed to such terms in the Agreement. All Exhibits
attached to this Second Amendment are incorporated by the original reference
thereto.
IN WITNESS WHEREOF, the parties hereto have executed this Second
Amendment to be effective as of the date set forth above.
PURCHASER: THE ITALIAN OVEN, INC., a
Pennsylvania Corporation
By:_________________________________
Title:______________________________
SELLER: MID AMERICA RESTAURANT GROUP, INC.,
a Missouri corporation
By:_________________________________
Timothy J. Schmidt, President
AS TO PARAGRAPH 3 OF THIS SECOND AMENDMENT, MID AMERICA OF KANSAS AGREES AND
APPROVES:
MID AMERICA RESTAURANT GROUP OF KANSAS, INC.,
a Kansas corporation
By: ____________________________________
Timothy J. Schmidt, President
<PAGE>
SECOND LEASE AMENDMENT
THIS SECOND LEASE AMENDMENT ("Second Amendment") is made and
effective as of March 29, 1996, and is by and between AREA A PARTNERS, L.P., a
Missouri limited partnership ("Owner") and Mid America Restaurant Group, Inc., a
Missouri corporation ("Tenant").
RECITALS
A. Pursuant to Lease, dated December 18, 1991, as amended by First
Lease Amendment, dated April 1, 1994 (collectively, the "Lease"), Owner (as
successor in interest to Real Properties Holding, Inc.) leased to Tenant and
Tenant rented from Owner certain premises in Benjamin Plaza, Kansas City,
Missouri.
B. Owner and Tenant desire to modify the Lease in accordance with the
terms and conditions of this Second Amendment.
AGREEMENT
NOW, THEREFORE, in consideration of Ten Dollars and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged by Tenant Owner and Tenant agree as follows:
1. Construction Reimbursement. In consideration of payment from Tenant
to Owner on the date hereof of the sum of Eleven Thousand Nine Hundred Ninety
and NO/100 Dollars ($11,990.00), Owner acknowledges full and complete
satisfaction and payment of the Construction Reimbursement. For all purposes of
the Lease, Paragraph 2 of the above-referenced First Lease Amendment is hereby
deleted in its entirety.
2. Amendment. The Lease, as herein a amended, shall remain in full
force and effect in accordance with its terms.
3. Successors. This Second Amendment shall be binding upon and inure to
the benefit of the parties hereto, their successors and assigns.
<PAGE>
IN WITNESS WHEREOF, the parties hereof have executed this Second
Amendment as of the date first above written.
OWNER: AREA A PARTNERS, L.P., a Missouri
limited partnership
By: CWB Associates #3, Inc.,
general partner
By:____________________________
Irwin Blitt, Vice-President
TENANT: MID AMERICA RESTAURANT GROUP, INC.,
a Missouri corporation
By:______________________________
Timothy J. Schmidt, President
<PAGE>
SECOND AMENDMENT
TO
SHOPPING CENTER BUILD-TO-SUIT LEASE
THIS SECOND AMENDMENT TO SHOPPING CENTER BUILD-TO-SUIT LEASE (this
"Second Amendment"), is made and effective this 2nd day of April, 1996, and is
by and between J.A. Peterson Enterprises, Inc., a Missouri corporation
("Landlord") and Mid America Restaurant Group, Inc., a Missouri corporation
("Tenant" ).
RECITALS
This Second Amendment is made on the basis of the following facts:
A. North Oak Retail Partnership and Tenant entered into that certain
Shopping Center Build-To-Suit Lease, dated June 6, 1989, relating to certain
premises in Kansas City, Missouri. Landlord is the successor-in-interest to
North Oak Retail Partnership. Said Lease was amended, modified and supplemented
by the First Amendment to Shopping Center Build-To-Suit Lease, dated July 26,
1989 ( collectively, the "Lease" ).
B. Owner and Tenant desire to modify the Lease in accordance with the
terms and conditions of this Second Amendment.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing facts and other good
and valuable consideration, the receipt and sufficiency of which are hereby
confessed and acknowledged, Landlord and Tenant agree as follows:
1. Minimum Rent Primary Lease Term. Article Ill of the Lease is hereby
modified to provide:
(a) Minimum Rent for the period from April 5, 1996 through
April 30, 1996, shall be $7,222.22.
(b) For the period commencing May 1, 1996 through the
expiration of the initial Lease Term on November 30, 2004, Minimum Rent shall be
$8,333.33 per month.
(c) For all purposes of the Lease, the term "Lease Year" shall
mean each 12 consecutive month period starting May 1, 1996, and each anniversary
thereof, through the end of the Lease Term.
2. Minimum Rent Additional Periods: The Addendum to Lease - Option to
Extend is hereby modified by the deletion of the third full paragraph thereof,
and the insertion of the following in its place:
<PAGE>
"Minimum Rent for each Lease Year of the additional
periods shall be as follows:
Monthly Payment
Option of Monthly Rent
First $ 9,238.75
Second $ 9,718.25
Third $10,101.83
3. Percentage Rent. Article IV of the Lease is modified as follows:
(a) The first full sentence of Article IV is deleted, and
in its place the following shall be inserted:
"For each Lease Year, as defined in Article III,
Tenant shall pay to Landlord a sum equivalent to the
amount, if any, by which six percent (6%) of `Gross
Revenues' (as defined below) received by Tenant in
each Lease Year exceeds the Minimum Rent payable by
Tenant pursuant to Article III in such Lease Year
(the "Percentage Rent").
(b) the last sentence of Article IV is deleted, and in its
place the following shall be inserted: "The term `Percentage Rent Period' as
used in this Lease shall have the same meaning as the term `Lease Year' as
defined in Article III hereof."
4. Use of Leased Premises. Article XIII of the Lease is deleted, and in
its place the following shall be inserted:
ARTICLE XIII
USE OF LEASED PREMISES
The Leased Premises shall be used and occupied by
Tenant (and any subtenants and assignees of Tenant) only for
the retail operation of a sit-down, table-service "Italian"
restaurant operating as an "Italian Oven Restaurant" (which
shall include the right to sell pizza, provided such pizza
sales shall not be greater than or equal to 30% of Gross
Revenues in any full calendar year) with a maximum seating
capacity of 200 and ancillary bar facilities, and for no other
purpose, except such use shall not violate any restriction or
restrictive use theretofore granted by Landlord to any other
tenant, as such restrictions are set forth in Exhibit H,
attached hereto and incorporated herein by this referenced and
in no event shall the Leased Premises be used for the
operation of (i) a full-service pizzeria or (ii) a restaurant
<PAGE>
where pizza sales are greater than or equal to 30% of the
Gross Revenues in any full calendar year.
5. Contingencies. The terms and provisions of this Second Amendment are
expressly contingent upon the execution by Tenant and The Italian Oven, Inc., a
Pennsylvania corporation, of an Assignment and Assumption Agreement in form and
substance substantially identical to the Assignment and Assumption Agreement
attached hereto as Exhibit A, on or before April 5, 1996. In the event said
Assignment and Assumption Agreement is not executed on or before April 5, 1996,
this Second Amendment shall be null and void and of no further force or effect.
6. Miscellaneous. In the event of any inconsistencies between the terms
and provisions of this Second Amendment and those of the Lease, the terms and
provisions of this Second Amendment shall control in all instances. Except as
otherwise set forth in this Second Amendment, the Lease is ratified by the
parties and acknowledged by the parties to be in full force and effect.
Capitalized terms not otherwise defined in this Second Amendment shall have the
meanings attributed to such terms in the Lease.
7. Successors and Assigns. This Second Amendment shall inure to the
benefit of and bind the parties hereto and their respective successors and
assigns.
IN WITNESS WHEREOF, this Second Amendment is executed by Landlord
and Tenant to be effective as of the date first set forth above.
LANDLORD: J.A. PETERSON ENTERPRISES, INC., a
Missouri corporation
By:_______________________________
Kenneth L. Riedemann, President
TENANT: MID AMERICA RESTAURANT GROUP, INC.,
a Missouri Corporation
By:_______________________________
Timothy J. Schmidt, President
<PAGE>
ASSIGNMENT AND ASSUMPTION OF LEASE AGREEMENT
THIS ASSIGNMENT AND ASSUMPTION OF LEASE AGREEMENT (the "Agreement") is
made as of the 4th day of April, 1996, between J.A. PETERSON ENTERPRISES, INC.,
a Missouri corporation ("Owner"), MID AMERICA RESTAURANT GROUP, INC., a Missouri
corporation ("Assignor"), and THE ITALIAN OVEN, INC., a Pennsylvania
corporation, with an address at Eleven Lloyd Avenue, Latrobe, Pennsylvania
15650-1761 ("Assignee").
RECITALS
A. Pursuant to Shopping Center Build-To-Suit Lease, dated June __,
1989, as amended by that certain First Amendment to Shopping Center Lease, dated
July 26, 1989, between Assignor, as Tenant, and North Oak Retail Partnership, as
Landlord, and that certain Second Amendment to Shopping Center Build-To-Suit
Lease, dated April 2, 1996; as supplemented by that certain Tenant Notice, dated
December 15, 1995, from J .A. Peterson Enterprises, Inc.; that certain Tenant
Estoppel Certificate, dated December 6, 1995; that certain Estoppel Letter,
dated February 19, 1996, to Security Life of Denver Insurance Company; and that
certain Subordination, Nondisturbance and Attornment Agreement, dated March 28,
1996, (collectively, the "Lease"), Owner leased to Assignor and Assignor rented
from Owner certain premises (the "Leased Premises") described therein, in
Creekwood Commons Shopping Center, Kansas City, Missouri.
B. Assignor desires to assign to Assignee all of Assignor's leasehold
estate under the Lease. Assignee desires to accept such assignment and to assume
all of Assignor's obligations as tenant thereunder. Assignor desires to obtain
Owne's consent to such assignment because, by the terms of the Lease, such
assignment is of no force and effect without Owner's written consent thereto.
Owner desires to consent to such assignment, subject to the terms of this
Agreement.
TERMS
NOW, THEREFORE, in consideration of the Recitals and the mutual
covenants contained herein, the parties hereto agree as follows:
1. Effective Date of Agreement. This Agreement shall be effective as of
April 4, 1996 (the "Effective Date").
2. Assignment and Assumption. Assignor hereby assigns to Assignee all
of Assignor's right, title and interest under the Lease and Assignee hereby (i)
assumes and agrees to discharge all of Assignor's obligations as tenant under
the Lease, and (ii) agrees to be bound by all of the terms, covenants and
conditions of the Lease binding upon the tenant thereunder whether or not such
obligations have accrued prior to the Effective Date.
<PAGE>
3. Owner's Consent. In consideration of the assumption by Assignee of
all of Assignor's obligations as tenant under the Lease and subject to the other
terms of this Agreement, owner hereby consents to the within assignment, At
being understood that such consent shall not relieve Assignor of any obligations
under the lease and shall not be construed to authorize a further assignment of
the Lease without the prior consent of Owner.
4. Assignor's Liability. Notwithstanding the assignment of the Lease by
Assignor to Assignee, Assignor shall not be released from liability under the
Lease and Assignor shall remain fully liable fur the performance of all terms,
covenants and conditions of the Lease to be performed by the tenant thereunder.
5. Indemnity. Assignor covenants with Owner that Owner shall not be
liable for, and Assignor shall defend (with counsel satisfactory to Owner),
indemnify and protect Owner from any claim, demand, suit, judgment, award, fine,
mechanics' lien or other cost (including attorney fees and court costs) arising
directly or indirectly from this Agreement or the assignment of the Lease by
Assignor to Assignee.
6. Acceptance of Leased Premises. Assignee has inspected the Leased
Premises and Assignee agrees to accept possession of the Leased Premises on the
Effective Date in its then "as-is" condition.
7. Attorneys' Fees. If any party hereto commences an action against any
of the other parties arising out of or in connection with this Agreement, the
prevailing party or parties shall be entitled to recover from the losing party
or parties reasonable attorneys' fees and costs of suit.
8. Notices. As of the Effective Date, all notices to the tenant under
the Lease shall be sent to Assignee at the address listed above.
9. Acknowledgment. Assignor and Assignee hereby agree that:
a. Owner is not a party to, nor shall Owner under any
circumstances become obligated in any way under, any other agreements between
Assignor and Assignee related to this Agreement or the assignment of the Lease
by Assignor to Assignee.
b. No amendment or modification of this Agreement shall be
binding upon Owner unless Owner has given is prior written consent thereto which
Owner may choose to withhold in its sole, absolute and arbitrary discretion.
c. Except as otherwise specifically set forth in this
Agreement, neither Owner nor any of its employees or agents have made any
promises, agreements, warranties or representations which have induced either
Assignor or Assignee to enter into this Agreement.
10. Estoppel. Assignor hereby represents and warrants to Owner that
the Lease is in full force and effect, Owner is not in default or breach of any
<PAGE>
of Owner's obligations under the Lease, and Assignor has no claims against Owner
under the Lease or in connection with Assignor's use and occupancy of the Lease
Premises.
11. Successors and Governing Law. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto, their successors and
assigns. This Agreement shall be governed by the laws of the State in which the
Leased Premises are located.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date and year first above written.
OWNER: J.A. PETERSON ENTERPRISES, INC., a
Missouri corporation
By:_________________________________
Kenneth L. Riedemann, President
ASSIGNOR: MID AMERICA RESTAURANT GROUP, INC.,
a Missouri corporation
By:_________________________________
Timothy J. Schmidt, President
ASSIGNEE: THE ITALIAN OVEN, INC., \
a Pennsylvania corporation
By:_________________________________
Ralph J. Guarino, President
EXHIBIT 99.1
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
ASHISH BAHL, YASHMEEN VIJ ) CIVIL DIVISION
BAHL, MOHINDER BAHL, and )
JEROME SCHERER, )
Individuals )
)
Plaintiffs ) CIVIL ACTION NUMBER
)
vs. ) COMPLAINT
)
JAMES A. FRYE and JANICE FRYE )
individually and as husband and wife )
and THE ITALIAN OVEN, INC. )
A PENNSYLVANIA CORPORATION )
)
Defendants )
)
)
) Filed on Behalf of:
) Plaintiffs
)
) Counsel of Record for this Party:
)
) Carl B. Zacharia, Esquire
) Pa. I.D. No. 70516
)
) 4304 Walnut Street
) Suite 2
) McKeesport, PA 15132
)
) (412) 751-5670
JURY TRIAL DEMANDED
<PAGE>
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
ASHISH BAHL, YASHMEEN VIJ ) CIVIL DIVISION
BAHL, MOHINDER BAHL, and )
JEROME SCHERER, )
Individuals )
)
Plaintiffs ) CIVIL ACTION NUMBER
)
vs. )
)
JAMES A. FRYE and JANICE FRYE )
individually and as husband and wife )
and THE ITALIAN OVEN, INC. )
A PENNSYLVANIA CORPORATION )
)
Defendants )
COMPLAINT
---------
AND NOW comes the Plaintiffs, Ashish Bahl, Yashmeen Bahl, Mohinder
Bahl, and Jerome Scherer by and through their attorney, Carl B. Zacharia,
Esquire, and files the following Complaint.
JURISDICTION & VENUE
1. This action is brought under Section 22 of the Securities Act of
1933, as amended, 15 U.S.C. ss. 77v (The "1933 Act"); Section 27 of the
Securities Exchange Act of 1934, as amended, 15 U.S.C. ss. 78aa (The "1934
Act"); and under principles of supplemental jurisdiction. The amount in
controversy exceeds, exclusive of interests and costs, the sum of $50,000.00.
2. This action states claims pursuant to Sections 10 and 20 of the 1934
Act, and the rules and regulations promulgated thereunder; Sections 12 and 15 of
the 1933 Act; Sections 401
<PAGE>
and 503 of the Pennsylvania Securities Act; and common law claims of fraudulent
misrepresentation.
3. Certain of the acts and transactions constituting the violations of
the Federal Securities Laws alleged herein or constituting the offer or sale of
securities described herein have occurred within the Western District of
Pennsylvania. This action is commenced within the time prescribed by the
applicable statutes of limitations.
THE PARTIES
4. Plaintiff Ashish Bahl is an adult individual whose present residence
is 2690 Dellwood Drive, Atlanta, Georgia, 30305. Prior to February 1995,
Plaintiff Ashish Bahl was a resident of the Commonwealth of Pennsylvania
residing at 711 Windvue Drive, Pittsburgh, PA.
5. Plaintiff Yashmeen Vij Bahl is an adult individual whose residence
is 2690 Dellwood Drive, Atlanta, Georgia, 30305. Prior to February 1995,
Plaintiff Yashmeen Vij Bahl was a resident of the Commonwealth of Pennsylvania
residing at 711 Windvue Drive, Pittsburgh, PA.
6. Plaintiff Mohinder Bahl is an adult individual whose residence is 17
Oak Glen Drive, Oakmont,
PA 15139.
7. Plaintiff Dr. Jerome Scherer is an adult individual whose residence
is 4236 Wembleton Drive, Allison Park, PA 15101.
8. Defendant The Italian Oven, Inc. (hereinafter "Company"), was
formerly known as Fornello, USA, Incorporated (hereinafter "Fornello"), is a
Pennsylvania Corporation that has as its principal place of business, 11 Lloyd
Avenue, Latrobe, Pennsylvania 15650.
<PAGE>
9. Defendants James A. Frye (hereinafter "Frye") and Janice M. Frye,
his wife, are an adult individuals whose residence is R.D. #1, Old Franklin
Road, Stahlstown, PA 15687. At all times relevant hereto, James A. Frye was the
Chairman of the Board, Chief Executive Officer and Director of the Company. At
all times relevant hereto, Janice M. Frye was the wife of Defendant Frye and at
some point in time became the Vice President of Design. Where relevant,
Defendant Janice M. Frye will be referenced herein together with her husband
Defendant James A. Frye as "Defendant Frye and his wife".
Plaintiff Purchases
10. Plaintiff Ashish Bahl purchased common shares in the Company on the
dates and in the amounts shown hereinbelow. All checks were made payable to The
Italian Oven, Inc.
Date Shares Price Amount
---- ------ ----- ------
10/19/93 10,000 $10.00 $100,000.00
11/04/93 3,000 $10.00 30,000.00
02/11/94 1,000 $20.00 20,000.00
06/30/94 2,000 $20.00 40,000.00
08/04/94 3,000 $20.00 60,000.00
10/18/94 1,000 $20.00 20,000.00
Total $ 270,000.00
11. Plaintiff Yashmeen Vij Bahl purchased common shares in the Company
on the dates and in the amounts shown hereinbelow. All checks were made payable
to The Italian Oven, Inc.
Date Shares Price Amount
---- ------ ----- ------
11/01/94 2,000 $20.00 $40,000.00
12. Plaintiff Mohinder Bahl purchased common shares in the Company on
the dates and in the amounts shown hereinbelow. All checks were made payable to
The Italian Oven, Inc.
<PAGE>
Date Shares Price Amount
---- ------ ----- ------
10/19/93 2,000 $10.00 $20,000.00
13. Plaintiff Jerome Scherer purchased common shares in the Company on
the dates and in the amounts shown hereinbelow. All checks were made payable to
The Italian Oven, Inc.
Date Shares Price Amount
---- ------ ----- ------
12/22/92 2,000 $10.00 $20,000.00
05/26/94 2,000 $20.00 $40,000.00
Total $60,000.00
Factual Overview
14. This case involves a series of violations of the anti-fraud
provisions of the 1933 Act, 1934 Act, the Pennsylvania Securities Act and common
law fraudulent misrepresentation all in connection with the purchase and sale of
securities. Defendant Company produced a document entitled "Private Placement
Memorandum" (hereinafter "PPM"). Defendant James A. Frye and his wife, used this
false and fraudulent PPM to sell their own personal holdings of securities in
The Italian Oven, Inc. This PPM fraudulently states that the Company was issuing
and selling 400,000 new shares of common shares in the Company and will receive
therefrom $4,000,000 in new working capital to be used to expand and grow the
company. Plaintiffs purchased a substantial number of shares in the Company
relying upon the PPM as well as oral communications resulting from face to face
and telephonic dealings with Defendant Frye regarding, inter alia, the high
value of the company, strong demand for shares, a promised stock split when the
Company went public, investment banker interest in the Company, and statements
that a well known corporation had purchased common shares in the Company. The
Company, Defendant Frye and his wife fraudulently misled Plaintiffs and failed
to disclose the fact that, there
<PAGE>
never was any new issuance of shares, that Defendant Frye and his wife sold
their own personal holdings to Plaintiffs and a large number of others, that
Defendant Frye and his wife misappropriated the proceeds of Plaintiffs' purchase
to their own personal benefit, and that the true nature of the transactions with
this well known corporation were for preferred convertible shares as well as
options and warrants which were sold to such corporation for substantially less
than the price Plaintiffs had paid for their shares and caused a serious
dilution in Plaintiffs holdings. In addition, Defendant Company and Defendant
Frye and his wife continued to make false statements and failed to disclose
statements of material fact to Plaintiffs as they continued to perpetuate an
ongoing fraud upon Plaintiffs as stated further herein.
Exhibits
15. Defendant Company prepared and provided Plaintiffs with the PPM
dated in June 1993. A true and correct copy of which is attached hereto, marked
as Exhibit "A," and incorporated by reference.
16. On September 28, 1995, Defendant Company filed a Form S 1
(hereinafter "Registration Statement") with the United States Securities and
Exchange Commission. A true and correct copy of the documents accompanying this
filing are attached hereto, marked as Exhibit "B," and incorporated by
reference.
17. On November 29,1 994, Defendant Company filed a Form 1-A with the
United States Securities and Exchange Commission. Included with this Form 1-A
was an Offering Circular that was to be used as part of a rescission offer. A
true and correct copy of both documents is attached hereto, marked as Exhibit
"C," and incorporated by reference.
<PAGE>
Plaintiff's were not aware of and did not
receive a copy of the Form 1-A until Plaintiffs' counsel obtained a copy from
the Pennsylvania Securities Commission.
18. On June 1995, Ralph Guarino, President and Chief Operating Officer
of the Company, sent a letter to Plaintiffs stating that an engagement letter
with prospective underwriters has been signed and that 2,300,000 shares would be
offered at a price of between $10 and $12 per share after a stock split to be
determined. A true and correct copy of this letter is attached hereto, marked as
Exhibit "D," and incorporated by reference.
The Private Placement Memorandum and Misappropriation of Proceeds
19. As shown below, the PPM was a false and misleading document and
stated, inter alia, the following representations that:
a) the offering was a new issue of 400,000 common shares for
$4,000,000 (first page);
b) all of the proceeds would go to Company (first page);
c) $3.6 million of the proceeds would be used for working
capital, to grow the company and add 8 new restaurants (page
10);
d) the pro forma cash flow statement showed $4,000,000 as cash
coming from the issuance of common stock (page 49);
e) the pro forma balance sheet showed cash growing from the
actual amount of $103,000 in September 1992 to $2,817,000 in
September of 1993 due to the cash from the proceeds of the
issuance (page 48); f) the pro forma balance sheet also shows
property & equipment grow from an actual amount of $2,689,000
in September of 1992 to $6,626,000 in September of 1994 (page
48);
g) at various places throughout the PPM, it states that the
projections are based on the sufficiency of capital being
available.
20. Plaintiffs believe and therefor aver that the Defendant Company and
Defendant Frye and his wife knew that the PPM contained untrue statements of
material facts upon which
<PAGE>
the Plaintiff relied, and did omit to state material facts necessary to make the
statements made in the light of the circumstances under which they were made not
misleading.
21. There was no new issuance of common shares in the Company. This is
evidenced by the Company's Registration Statement (page F-7), which shows that
the number of shares from 1992 to 1994 grew from 1,434,600 shares at the end of
1992 to 1,581,614 shares at the end of 1994. None of the increase was due to any
new issuance of shares. Furthermore, the Statements of Cash Flows shows no cash
coming from the issuance of common stock throughout the period Plaintiffs made
their purchases.
22. None of the proceeds went into the Company as was stated in the
PPM. Plaintiffs believe and therefor aver that Defendant Frye and his wife
misappropriated the proceeds of Plaintiffs' purchases in that all or most all of
the proceeds from Plaintiffs' as well as the investment of others went either
directly or indirectly to Defendant Frye and his wife personally.
23. Pages I-7 through I-9 of the Form 1 A evidences that Defendant Frye
and his wife sold $1,212,680.00 of their personal holdings in the Company to a
listing of over 40 individuals from November 1993 through November 1994.
24. Plaintiffs believed, based upon the financial situation and
projections of the PPM, as well as the statements therein that there would be
additional capital coming into the Company from Plaintiffs' as well as others'
investments, that they were investing in a Company that had high potential.
Plaintiffs believed that they and others were providing much needed new capital
to grow the Company, and that each and every purchaser was paying the same price
for the same class of shares. The Plaintiffs were led to believe and did in fact
believe, based upon the PPM and oral communications made to them by Defendant
Frye that there was a strong demand for
<PAGE>
shares in the Company and that each new investor was contributing his or her
capital into the Company in order to expand and grow the Company.
25. The only purchases that occurred previous to the PPM was Plaintiff
Jerome Scherer's initial purchase which occurred on December of 1992. However,
prior to his second purchase in May of 1994, Plaintiff Scherer did receive a
copy of the PPM from Defendant Company and/or Defendant Frye and made his second
purchase based upon the representations therein. Plaintiff Scherer was not
informed that he was purchasing the personal share holdings of Defendant Frye
and his wife at any time prior to his purchases and always believed that the
proceeds from his as well as others' investment went into the Company.
The Armstrong Transactions
26. In September of 1993, the Company entered into a Stock, Debenture
and Warrant Purchase Agreement with Armstrong Holdings, Inc. (hereinafter
"Armstrong") whereby the Company issued to Armstrong 353,229 shares of Series A
Preferred Sock, a subordinated debenture in the principal amount of $500,000.00,
a common stock purchase warrant to purchase up to 100,000 shares of common stock
at an exercise price of $5.00 per share, and a Preferred Stock Purchase Warrant
to purchase up to 50,000 shares of Series A Preferred Stock for an exercise
price of $10.00 per share.
27. The preferred shares referred to in the preceding paragraph
received dividends in the amount of $.60 per year and were convertible into
common shares at a ratio 1.25 common shares for every preferred share. On an
undisclosed date Armstrong converted 403,229 issuer preferred shares into
504,036 issuer common shares, receiving 1.25 issuer common shares for
<PAGE>
each share of the Company preferred stock. Armstrong also converted a total of
$371,000 of accumulated unpaid dividends on its shares of preferred stock into
46,375 issuer common shares at a conversion price of $8.00 per share.
28. While Plaintiffs purchased a total of 28,000 common shares for
$390,000.00, or $13.93 per share on average, Armstrong received, through
convertible preferred shares and warrants, beneficial ownership of 650,411
common shares for $4,903.290.00 or $7.54 per share on average. Plaintiffs were
charged approximately 84.7% more for their shares than Armstrong. In addition to
or in the alternative, if the Company's transactions with Armstrong versus the
Company's transactions with Plaintiffs are viewed without the inclusion of the
dividends Armstrong received, Armstrong acquired beneficial ownership of 650,411
common shares for $4,532,290 or $6.97 per share on average. When viewed this way
Plaintiffs paid nearly double the amount paid by Armstrong. In addition,
Plaintiffs incurred extensive dilution in their security interests in the
Company due to these transactions with Armstrong and the Defendant Company as
well as Defendant Frye had a duty to disclose the existence of these
transactions to Plaintiffs prior to their purchases.
29. Defendant Frye intentionally and wilfully misled Plaintiffs into
believing that Armstrong had purchased the same type and class of shares
Plaintiffs did for the same price. Defendant Frye falsely stated to Plaintiffs
that Armstrong had purchased common shares based upon the information contained
in the PPM and failed to disclose the truth of the transactions to Plaintiffs.
Plaintiffs. did not know, nor could they have reasonably known the truth of the
Armstrong transactions.
<PAGE>
30. At a face to face meeting on or about the week of Thanksgiving in
1994, between Defendant Frye and Plaintiff Ashish Bahl, at Station Square in
Pittsburgh, Defendant Frye disclosed the transactions with Armstrong. At this
meeting, Defendant Frye knowingly, wilfully, and/or recklessly misrepresented
that Armstrong had purchased the same class of stock as Plaintiffs.
31. Plaintiffs, being knowledgeable of the reputation of Armstrong as a
large, reputable, financially savvy corporation, relied on the false and
misleading oral statements by Defendant Frye that Armstrong made its purchases
pursuant to the PPM and purchased common shares in the Company.
Additional False Statements and Omissions of Material Fact
32. In early 1994, Defendant Frye informed Plaintiffs that the price of
common shares in the Company had now doubled to $20.00 per share, and falsely
and fraudulently communicated to Plaintiffs that demand was great, the private
placement had been over subscribed, that the price was soon heading to $100.00
share, and that Plaintiffs were fortunate" to be able to purchase shares at
$20.00 per share.
33. Throughout 1994, in telephone conversations and face to face
meetings with Plaintiffs, Defendant Frye made continuous, on-going, false
statements and misrepresentations as follows:
a) that the valuation of the Company was high;
b) that there would be a stock split prior to an initial public
offering;
c) that when the initial public offering occurred the shares would be
valued at up to ten (10) times the price Plaintiffs paid for their
shares;
d) that the Company was or was about to become profitable;
<PAGE>
e) that other companies, including Appleby's, were interested in
purchasing the Company;
f) that Investment bankers, including Merrill Lynch and Goldman Sachs,
were 'courting' the Company;
g) that the Company would be profitable by the second quarter of 1995;
h) that demand for shares in the Company was high and that the price
was heading towards $100.00 per share
34. Sometime in 1995, Defendant Company held a rescission offer
claiming that there may or may not have been a valid exemption for certain of
their sales of securities. As part of this rescission offer, Defendant Company
created an Offering Circular which is attached hereto. In violation of the
anti-fraud provisions of the federal and state securities statutes as referenced
in this claim, Defendants failed to provide a copy of this Offering Circular to
Plaintiffs. Additionally, this document in and of itself is a violation of these
securities statutes in that nowhere does it state; that the new issuance as
referenced in the PPM never took place, that the shares purchased by the
Plaintiffs as well as other investors were shares owned by Defendant Frye and
his wife, that the proceeds from the sale of these shares went to Defendant Frye
and his wife, or the true and complete nature of the Armstrong transactions.
35. Plaintiffs believe and therefor aver that Defendant Company
intentionally, wilfully and/or recklessly failed to deliver a copy of the
Offering Circular because they did not have the funds to pay the rescission
amount and realized that had Plaintiffs known the truth of the use of the
proceeds from their investments, that there never was a new issuance and
infusion of new capital therefrom, the true financial situation of the Company,
and the true nature of the transactions with Armstrong they would have not have
purchased the shares to begin with and would have readily taken the rescission
offer.
<PAGE>
36. Plaintiffs believe and therefore aver that Defendant Company and
Defendant Frye and his wife continued an on-going fraud against Plaintiffs by
not providing an Offering Circular as well as by making a number of fraudulent
statements to Plaintiffs that if Plaintiffs took the rescission offer they
would; "miss out, " that the public offering was coming soon, that no one else
had taken the rescission offer, and that Plaintiffs' current share holdings
would be worth close to $100 per share at the time of the impending initial
public offering.
37. It was not until they obtained and read a copy of the Registration
Statement that Plaintiffs had realized they had been defrauded. At that time
Plaintiffs realized that there was not going to be a stock split, that the value
of their shares in the Company was substantially less than they were purported
to be, that Armstrong had been given preferred, convertible shares at a lower
price, with options and dividends and not the common stock that Plaintiffs had
been told Armstrong had received.
38. In November of 1995, the Company had its initial public offering.
The stock opened at a little over $8.00 per share and has never gone higher than
$8.375 per share.
39. On March 4, 1996 Plaintiffs, through their attorney, sent a letter,
certified mail, to Defendant Company and Defendant Frye demanding rescission.
This demand was rejected.
40. Defendant Frye together with his wife Janice Frye, used his special
status as Chief Executive Officer, Chairman of the Board, and as founders and
controlling shareholders of the Company, provided the fraudulent PPM to
Plaintiffs, made oral misrepresentations of fact, and failed to disclose
material facts, knowingly, intentionally, and/or recklessly in order to receive
immense personal profit to the detriment of Plaintiffs as well as other
shareholders.
<PAGE>
COUNT I
41. Paragraphs 1 through 40 are incorporated by reference as if set
forth in full herein.
42. Plaintiffs purchases in the Company were securities under the 1993
Act.
43. The misrepresentations, omissions and the misleading disclosures of
material facts described above were made in violation of Section 12(2) of the
1993 Act.
44. This action is brought within the time period specified in Section
13 of the 1933 Act and the federal doctrine of equitable tolling is applicable
in that Defendant Company and/or Defendant Frye and his wife acted to
fraudulently conceal the facts and actively misled Plaintiffs. In addition,
Plaintiffs were not reasonably able to ascertain the truth until the
Registration Statement had been filed.
45. As a result of the above violations of law described in this claim,
Defendant Company and Defendant Frye and his wife are jointly and severally
liable to Plaintiffs as sellers and/or controlling persons. Plaintiffs seek to
recover the consideration paid for their securities, plus interest, less the
amount of income received upon tender of their share, or for damages in an
amount in excess of $390,000.00.
COUNT II
46. Paragraphs 1 through 45 are incorporated by reference as if set
forth in full herein.
47. As described above, Defendants, and each of them, separately and in
concert, directly and indirectly, conspired to, aided and abetted each other to,
and did through the use of the mails and other means and instrumentalities of
interstate commerce, and in connection with the purchase of securities,
knowingly, willfully and recklessly:
<PAGE>
a) Make untrue statements of material facts upon which the plaintiffs
relied and did omit to state material facts necessary to make the
statements made in the light of the circumstances under which they were
made, not misleading,
b) Employ manipulative, deceptive, and fraudulent devices, schemes and
artifices to defraud plaintiffs, and
c) Engage in acts, practices, and a course of conduct which operated as
a fraud and deceit upon the plaintiffs, all in violation of Section
10(b) of the Securities Exchange Act of 1934, and the rules and
regulations of the Securities and Exchange Commission promulgated
thereunder.
48. As a result of the above violations of law described in this claim,
Plaintiffs have been damaged in the amount of their investment and seek to
recover, upon tender of their securities back to Defendants, the consideration
paid for their securities, plus lost use of the money Plaintiffs invested and
other damages.
49. This action is brought within the time period specified applicable
statute of limitations and the federal doctrine of equitable tolling is
applicable in that Defendant Company and/or Defendant Frye and his wife's acts
of fraudulent concealment as stated herein actively misled Plaintiffs. In
addition, Plaintiffs were not reasonably able to ascertain the truth until the
Registration Statement had been filed.
COUNT III
50. Paragraphs 1 through 49 are incorporated by reference as if set
forth in full herein.
51. This Court has jurisdiction over the claims and allegations set
forth in this Third Count because they are pendent to the federal claims alleged
in the First and Second Counts as they derive from a common nucleus of operative
facts.
<PAGE>
52. The claims of Plaintiffs in this Third Count arise under the
Securities Laws of the Commonwealth of Pennsylvania (70 P.S. ss. 1-101 et.
seq.).
53. As described above, Defendants, and each of them, separately and in
concert, directly and indirectly, conspired to, aided and abetted each other to,
and did through the use of the mails and other means and instrumentalities of
interstate commerce, and in connection with the purchase of securities,
knowingly, willfully and recklessly:
a) Makes untrue statements of material facts upon which the plaintiffs
relied and did omit to state material facts necessary to make the
statements made in the light of the circumstances under which they were
made, not misleading,
b) Employ manipulative, deceptive, and fraudulent devices, schemes and
artifices to defraud plaintiffs, and
c) Engage in acts, practices, and a course of conduct which operated as
a fraud and deceit upon the plaintiffs,
all in violation of Section 401 of the Securities Exchange Act of 1934, and the
rules of the Securities and Exchange Commission promulgated thereunder.
54. The rescission offer made by the Company is not a defense available
to either Defendant in that the rescission offer failed to state the fraudulent
statements and omissions as the respect in which liability the Pennsylvania Act
may have arisen.
55. As a result of the above violations of law described in this claim,
Plaintiffs have been damaged in the amount of their investment and seek to
recover, upon tender of their securities back to Defendants, the consideration
paid for their securities, plus lost use of the money Plaintiffs invested and
other damages.
COUNT IV
56. Paragraphs 1 through 55 are incorporated by reference as if set
forth in full herein.
<PAGE>
57. Pursuant to Section 15 of the 1933 Act, Section 20 of the 1934 Act,
and Section 503 of the Pennsylvania Securities Act, Defendant Frye and his wife,
as stock owners and as directors controlled the Company and are jointly and
severally liable as controlling persons to the same extent as the Company is as
the controlled person for violations of Section 12 of the 1933 Act, Section 10b
of the 1934 Act, and Section 401 of the Pennsylvania Securities Act.
COUNT V
58. Paragraphs 1 through 57 are incorporated by reference as if set
forth in full herein.
59. This Court has jurisdictions over the claims and allegations set
forth in this Fifth Count because they are pendent to the federal claims alleged
in the First and Second Counts as they derive from a common nucleus of operative
facts.
60. As set forth hereinabove, Defendant Frye and/or Defendant Company
made fraudulent misrepresentations to Plaintiffs both orally and in writing, and
intentionally failed to disclose and thereby concealed material facts.
61. As set forth in the preceding paragraphs, Defendant Frye and
Defendant Company made these fraudulent misrepresentations to and intentionally
withheld critical, material facts from Plaintiffs with the intention that
Plaintiffs be induced to purchase securities in the Company.
62. Plaintiffs relied upon the oral and written communications made and
provided to them and as a proximate result of these, suffered losses in their
investment.
63. Punitive damages are allowable in the Commonwealth of Pennsylvania
for both the intentional withholding of critical information and fraudulent
misrepresentation.
<PAGE>
64. As a result of the above violations of law described in this claim,
Plaintiffs have been damaged in the amount of their investment and seek to
recover, either rescission of the securities in the Company or damages in an
amount determined to have been sustained by each Plaintiff.
Jury Demand
65. Plaintiffs demand a jury trial on all issues so triable.
WHEREFORE, the Plaintiffs demand judgment against Defendants and each
of them as follows:
a) Rescission of the investments with damages in the sum of their
investments, plus lost use of the money invested, less cash
distributions received,
b) Lost use of Plaintiffs investment;
c) Punitive damages as allowable;
d) Costs and Attorneys' fees;
e) Such other and further relief as this Court may deem just and
proper.
Respectfully submitted,
Date:_______________________ ______________________________
Carl B. Zacharia, Esq.
Attorneys for Plaintiffs
4304 Walnut Street - Suite 2
McKeesport, PA 15132
(412) 751-5670
Pa. I.D. No. 70516
EXHIBIT 11
THE ITALIAN OVEN, Inc.
Calculation of Pro Forma Net Loss Per Common Share
(Unaudited)
<TABLE>
<CAPTION>
Quarter ended March 31,
-----------------------------------
1996 1995
-------------- -------------
<S> <C> <C>
Net Loss $ (142,809) $ (217,122)
-------------- -------------
Weighted average common shares outstanding during the period 4,327,991 1,581,614
Effect of shares issued upon conversion of preferred stock, after
exercise of warrants, to common - 550,441
-------------- ------------
Shares used in calculating pro forma earnings per share amounts 4,327,991 2,132,025
============== =============
Pro forma net loss per common share $ (0.03) $ (0.10)
============== =============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-K FOR THE
QUARTERLY PERIOD ENDED MARCH 31, 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> 3-mos
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1.000
<CASH> 7,340
<SECURITIES> 0
<RECEIVABLES> 1,214
<ALLOWANCES> 95
<INVENTORY> 330
<CURRENT-ASSETS> 9,170
<PP&E> 8,599
<DEPRECIATION> 2,039
<TOTAL-ASSETS> 16,637
<CURRENT-LIABILITIES> 4,053
<BONDS> 0
0
0
<COMMON> 44
<OTHER-SE> 10,183
<TOTAL-LIABILITY-AND-EQUITY> 16,637
<SALES> 3,408
<TOTAL-REVENUES> 4,631
<CGS> 902
<TOTAL-COSTS> 4,993
<OTHER-EXPENSES> (144)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27
<INCOME-PRETAX> (245)
<INCOME-TAX> (102)
<INCOME-CONTINUING> (143)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (143)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> 0
</TABLE>
