<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 18, 1996.
REGISTRATION NO. 333-5674
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------
CIAO CUCINA CORPORATION
(FORMERLY, CIAO LIMITED, INC.)
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
OHIO 5812 31-1357862
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation) Classification Code Number) Identification Number)
700 WALNUT STREET, SUITE 300
CINCINNATI, OHIO 45202
(513) 241-9161
(Address and telephone number of principal executive offices
and principal place of business)
CARL A. BRUGGEMEIER
CIAO LIMITED, INC.
700 WALNUT STREET, SUITE 300
CINCINNATI, OHIO 45202
(513) 241-9161
(Name, address and telephone number of agent for service)
COPIES TO:
TIMOTHY E. HOBERG, ESQ. CHARLES F. HERTLEIN, JR., ESQ. SCOTT P. KADISH, ESQ.
Taft, Stettinius & Hollister Dinsmore & Shohl Katz, Greenberger & Norton
1800 Star Bank Center 1900 Chemed Center 105 East Fourth Street
425 Walnut Street 255 East Fifth Street 9th Floor
Cincinnati, Ohio 45202 Cincinnati, Ohio 45202 Cincinnati, Ohio 45202
(513) 381-2838 (513) 977-8315 (513) 721-5151
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
------------------
</TABLE>
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
------------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
------------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
------------------
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE> 2
EXPLANATORY NOTE
The Registration Statement as originally filed covered 1,000,000 shares of
Common Stock to be issued by the Company, 200,000 shares of Common Stock to be
sold by a selling shareholder and up to 180,000 shares of Common Stock which
might have been sold by additional selling shareholders pursuant to an over-
allotment option. By this Amendment No. 2, the 200,000 shares of Common Stock to
be sold by the selling shareholder have been eliminated; pursuant to the
Underwriters' over-allotment option, up to 150,000 shares may be sold by the
selling shareholders identified in this Amendment. Accordingly, the Registration
Statement now relates to 1,150,000 shares of Common Stock in addition to 100,000
Common Stock Purchase Warrants and 100,000 shares of Common Stock that may be
issued upon exercise of the Common Stock Purchase Warrants.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED NOVEMBER 18, 1996
CIAO CUCINA CORPORATION
LOGO
1,000,000 SHARES OF COMMON STOCK
All of the 1,000,000 shares of Common Stock, no par value (the "Common
Stock"), offered hereby (the "Offering") are being offered by Ciao Cucina
Corporation ("Ciao" or the "Company"). Prior to the Offering, there has not been
any public market for the Common Stock of the Company. It is currently estimated
that the initial public offering price will be $7.00 per share. For factors
considered in determining the initial public offering price, see "Underwriting."
Application has been made for approval of the Common Stock for quotation on the
Nasdaq SmallCap Market under the symbol "CIAO."
------------------------------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. PURCHASERS WILL
EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION FROM THE INITIAL PUBLIC OFFERING
PRICE. AT DECEMBER 31, 1995 AND JULY 14, 1996, THE COMPANY HAD ACCUMULATED
SHAREHOLDERS' DEFICITS OF APPROXIMATELY $2.6 MILLION AND $3.4 MILLION,
RESPECTIVELY. SEE "RISK FACTORS" BEGINNING ON PAGE 8 AND "DILUTION" ON PAGE 17.
------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
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<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT(1) COMPANY(2)
- ----------------------------------------------------------------------------------------------
Per Share $ $
- ----------------------------------------------------------------------------------------------
Total(3) $ $
==============================================================================================
</TABLE>
(1) Does not include additional underwriting compensation payable to Glaser
Capital Corporation (the "Managing Underwriter") comprised of (a) a
nonaccountable expense allowance equal to 1% of the total Offering proceeds,
including proceeds from any sale of shares pursuant to the Underwriters'
over-allotment option, and (b) warrants to purchase 100,000 shares of Common
Stock at an exercise price of $8.40 per share. The Company has agreed to
indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses of the Offering, estimated at $262,500 (including
the nonaccountable expense allowance).
(3) Certain shareholders of the Company (the "Selling Shareholders") have
granted to the Underwriters a 30-day option to purchase up to an additional
150,000 shares of Common Stock, solely to cover over-allotments, if any. The
Company will not receive any of the proceeds from the sale of shares by the
Selling Shareholders. If such option is exercised in full, the total Price
to Public, Underwriting Discount, Proceeds to Company and Proceeds to
Selling Shareholders will be $ , $ , $ and
$ , respectively. In such an event, the Selling Shareholders will
bear their proportionate share of the expenses of the Offering. See
"Underwriting." The Selling Shareholders may be deemed to be statutory
underwriters with respect to the shares to be sold by them. See "Selling
Shareholders."
------------------------------------
The shares of Common Stock are offered by the several Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that certificates
for the shares will be available for delivery in Cincinnati, Ohio, on or about
, 1996.
GLASER CAPITAL CORPORATION
, 1996
<PAGE> 4
[Picture of store-front style specialty gourmet coffee operations]
[Picture of interior of restaurant]
Downtown Cincinnati Main Dining Room
[Picture of food item]
Carpaccio
[Picture of food item]
Sundried Tomato & Artichoke Pizza
[Picture of food item]
Tiramisu
[Picture of food items]
Grilled Atlantic Halibut
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety and should be read in
conjunction with the more detailed information and Financial Statements and the
Notes thereto appearing elsewhere in this Prospectus. Unless otherwise
indicated, the information in this Prospectus gives effect to a 345.3:1 split of
the Company's Common Stock (in the form of a stock dividend) and assumes that
the Underwriters' over-allotment option will not be exercised. As used in this
Prospectus, the terms "Ciao" and the "Company" mean Ciao Cucina Corporation
unless the context indicates otherwise. The Company's fiscal year generally is
divided into 13 four-week periods. The Company's 1991 through 1995 fiscal years
ended on December 29, December 27, December 26, December 25 and December 31,
respectively, and its fiscal 1995 and 1996 first two quarters (twenty-eight
weeks) ended on July 9 and July 14, respectively.
THE COMPANY
The Company owns and operates five restaurants under the name "Ciao Baby
Cucina," with locations in Washington, D.C., Hackensack, New Jersey, Cincinnati,
Ohio (two restaurants) and Memphis, Tennessee. The restaurants serve authentic
Mediterranean cuisine, primarily Northern Italian, with Greek, Spanish and
French influences. Annual revenues for the Company have grown from $957,000 in
1991 to $4.8 million in 1995. For further information concerning the history of
the Company, see "History of the Company."
The Company seeks to differentiate its concept by creating restaurants that
couple the ambience, food quality and personal service associated with an
individual upscale, "white tablecloth" restaurant with the efficiencies and cost
effective management techniques of a centrally managed restaurant chain. The
Company's management believes that its restaurants represent the "next
generation" of restaurant chains which will be demanded by, and will be
necessary to satisfy, the discriminating dining public in the twenty-first
century. In this regard, the Company's strategy is to emulate privately-held
restaurant chains such as Il Fornaio and Houston's. The Company's operating and
development strategies include orienting Company restaurants to the casual
sophistication favored by the growing "baby boom" customer market and locating
restaurants in proximity to arts and entertainment facilities, convention
centers or other high traffic generators which are frequented by these targeted
customers.
OPERATING STRATEGY
The Company's operating strategy is to combine successfully the "art and
science" aspects of restaurant operations. The key elements of this strategy,
which have been successfully developed and implemented in the Company's existing
restaurants, are as follows:
- Dining Ambience. The Company intends to have its restaurants share a
common contemporary decor which is sophisticated but warm. The use of
stone, marble, unique ceiling treatments, lighting, white tablecloths, an
open display kitchen and a personal style of service are combined to
provide the feeling of a fine dining restaurant experience in a casual
medium-priced restaurant atmosphere. Each restaurant strives to become a
place "to see and be seen" in its market area.
- Corporate-Controlled Menus Enhanced By Local Chef Creativity. Each
restaurant's kitchen is managed by a full-time chef who has received
culinary training and who is well-versed in the art of food preparation. In
addition, all dishes are prepared in accordance with exact recipes that
have been tested, approved and carefully documented at the corporate level
as to ingredients, cost and presentation. Chefs are encouraged to develop
dishes with a local flair or taste, and approximately 20% of the items on
each restaurant's menu fall into this category. Before these items achieve
a place on the restaurant's menu, they are presented as "specials" to the
Company's customers to determine public acceptance and profitability.
Senior executives work directly with restaurant general managers and
executive chefs on a daily basis to emphasize menu development, control of
food, beverage and labor costs, marketing, special promotions and revenue
enhancement.
- Financial Controls. The Company utilizes its "By the Numbers"(C)
reporting system which incorporates both proprietary and industry standard
elements. Management believes that the breadth of
3
<PAGE> 6
its generation of key operating indices on a daily basis is unusual in the
restaurant industry and allows the Company's management to promote its
sales efforts and control its costs, including food, beverage and labor, on
a more immediate basis to better ensure profitable operations at each
location. The Company's point-of-sale systems are all completely
computerized. All of the accounting systems, including accounts payable,
accounts receivable, payroll and generation of financial statements, are
centralized at the corporate headquarters, thereby ensuring greater
accuracy and limiting the Company's potential for loss.
- Value-Added Services. The Company's newest restaurants include
store-front style specialty gourmet coffee operations that are also open
during breakfast hours and feature house-made pastries and European-style
breads, cappuccino and espresso and carry-out items from the restaurant's
regular menu, as well as Ciao Espresso logo merchandise. This feature will
be incorporated in all future Ciao Baby restaurants.
- Key Customer Marketing. Both the Company's top management and the
unit manager of each restaurant strive to develop personal relationships
with the Company's most faithful and significant customers. This is
accomplished by various programs, including the "red phone," an unlisted
telephone number for use by approximately the most frequent 500 customers
of each restaurant; personalized thank-you notes; the establishment of an
extensive data base of customers in each restaurant who receive periodic
personal mailings; and a dining room system referred to as "table touch,"
which means the Company's restaurant managers attempt to communicate with
each table in their restaurant at every meal period on a personal basis.
This special treatment is designed to build a sense of loyalty and to
ensure both repeat business and referrals.
EXPANSION STRATEGY; RECENT DEVELOPMENTS
Two of the Company's five restaurants opened during the first quarter of
1996. The Company plans to open two more restaurants in early 1997, three
additional restaurants later in 1997 and five in 1998, with a goal of expanding
to a total of 30 restaurants by year-end 2000. The Company's expansion strategy
is to establish restaurants in medium-sized cities within two hours' travel time
from the Company's headquarters. Management believes that the casual atmosphere,
food quality and moderate prices offered by the restaurants appeal to a growing
customer market.
On July 1, 1996, the Company entered into a lease for a 6,755 square foot
restaurant in Ft. Lauderdale, Florida. The restaurant will be located in
Northport Marketplace Center, in close proximity to the Broward County
Convention Center and the Port Everglades Cruise Port. Costs to open the
restaurant are expected to be approximately $1.35 million, of which the landlord
will contribute approximately $675,500 in tenant improvements. The landlord also
will lend the Company approximately $169,000 toward the total costs. The Company
currently expects the facility to open prior to March 1, 1997.
The Company is engaged in negotiations to lease space from the Playhouse
Square Foundation of Cleveland, Ohio, a nonprofit entity, or an affiliate
(together, "PSF"), to develop an approximately 5,700 square foot restaurant and
11,500 square foot banquet facility at Cleveland's Playhouse Square Center, the
heart of the redeveloped theater district. The currently projected opening
budget is approximately $3.2 million. It is anticipated that the Company will be
responsible for $400,000 of the opening costs. It also is anticipated that PSF
will contribute $300,000 as a tenant improvement allowance and obtain the
remaining $2.5 million through one or more loans and tax credits, which $2.5
million also will be advanced as an additional tenant improvement allowance.
Ciao Playhouse, Inc., a wholly-owned subsidiary of the Company ("Ciao
Playhouse"), will be the tenant and will pay base rent in an amount necessary to
amortize the portion of the $2.5 million tenant improvement allowance that was a
loan to PSF. Ciao Playhouse also will pay PSF percentage rent equal to 50% of
Ciao Playhouse's net income, after deducting base rent and a management fee
payable to the Company equal to 5% of gross sales. During 1995 Cleveland
Playhouse Square attracted over 1 million patrons to its four theaters. A fifth
theater is scheduled to open in late 1997. The Company currently anticipates
that, assuming consummation of a definitive lease agreement (as to which there
can be no assurance), both the restaurant and the banquet facility will open in
April 1997.
4
<PAGE> 7
The Company is evaluating a proposal from a developer to lease space for a
7,515 square foot restaurant in Baton Rouge, Louisiana. If a definitive
agreement is reached, the restaurant will be located in the Mall of Louisiana, a
comprehensive shopping facility currently under construction which is modeled
after the Mall of America. Costs to open the restaurant are expected to be
approximately $1.3 million of which, under the proposal, the landlord would
contribute approximately $750,000 in tenant improvements. The proposal provides
for a lease term of 20 years. Rent would be computed by adding a base rent,
which would increase during the term of the lease, to a percentage rent
determined by the amount of gross sales in excess of certain break point
figures. The Company currently expects the restaurant would open by November 1,
1997.
Other locations under active consideration for future Company restaurants
include Birmingham, Alabama; Ft. Myers, Florida; Hilton Head, South Carolina;
and Kansas City, Missouri. The Company does not expect to enter into future
restaurant leases with related parties. See "Business -- Expansion Strategy."
DEVELOPMENT STRATEGY
The Company's development strategy is to locate its restaurants in close
proximity to arts and entertainment facilities, convention centers or other high
traffic generators, which provide a readily accessible customer base, and to
utilize existing buildings for new units in lieu of free-standing construction.
To date, the Company has been successful in negotiating favorable lease
arrangements and significant tenant improvement allowances from its landlords
which, as shown below, have substantially limited Company capital commitments
for each restaurant. For further information concerning leases, see
"Business -- Properties."
<TABLE>
<CAPTION>
COST PER RESTAURANT(1)
------------------------------ TRAILING TRAILING
COMPANY DEVELOPER 3-PERIOD 13-PERIOD
CONTRIBUTION CONTRIBUTION REVENUES(2) REVENUES(2)
------------ ------------ -------- ----------
<S> <C> <C> <C> <C>
EXISTING RESTAURANTS:
Cincinnati, Ohio........................ $ 528,000 $ 84,600 $336,602 $1,295,630
(Harper's Point)
Washington, D.C......................... $ 646,500 (3) $743,869 $2,069,193
Hackensack, New Jersey.................. $ 597,000 $ 1,138,000 $514,868 $1,798,348
Memphis, Tennessee...................... $ 785,000 $ 705,000 $569,168 n/a
Cincinnati, Ohio........................ $ 1,240,000(4) $ 550,000 $705,111 n/a
(downtown)
PROPOSED RESTAURANTS:
Cleveland, Ohio(5)...................... $ 400,000 $ 2,800,000 n/a n/a
Ft. Lauderdale, Florida(5).............. $ 539,500(6) $ 675,500 n/a n/a
</TABLE>
- ---------------
(1) Consists of leasehold improvements, restaurant equipment, computer
equipment, furniture and fixtures, china, flatware and glassware and
pre-opening expenses. See Notes 1 and 4 to Financial Statements.
(2) "Trailing 3-Period Revenues" and "Trailing 13-Period Revenues" consist of
revenues for an individual restaurant for the three four-week periods and 13
four-week periods, respectively, immediately following the opening of that
particular restaurant.
(3) The Company took over a fully-equipped restaurant location in Washington,
D.C., with no "key-money." Therefore, total developer costs are not
quantifiable in this instance.
(4) Includes $150,000 of developer-provided financing.
(5) The Company has entered into a lease for the Ft. Lauderdale restaurant. The
Cleveland restaurant is contingent upon successful lease negotiations, which
may not occur. Projected costs are based upon management's best current
estimates; actual costs could vary significantly. See "Risk
Factors -- Adverse Effect of Unanticipated Costs of Expansion."
(6) Includes $169,000 of developer-provided financing.
5
<PAGE> 8
THE OFFERING
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Common Stock Offered by the Company............. 1,000,000 Shares
Common Stock to be Outstanding after the 3,149,766 Shares(1)
Offering......................................
Use of Proceeds................................. To repay outstanding indebtedness of the
Company, to finance the development of new
restaurants and for working capital
purposes.
Proposed Nasdaq SmallCap Market Symbol.......... CIAO
</TABLE>
- ---------------
(1) Excludes 249,990 shares of Common Stock issuable upon exercise of warrants
held by persons who have provided certain debt financing to the Company (the
"Bridge Financing Warrants") and 100,000 shares issuable upon exercise of
warrants to purchase Common Stock to be granted to Glaser Capital
Corporation at the time of the closing of the Offering (the "Underwriter's
Warrants") (see "Underwriting"). Includes 1,365,799 shares of Common Stock
issuable upon the conversion, at the time of the closing of the Offering, of
all outstanding shares of the Company's Series A Convertible Preferred Stock
(the "Series A Preferred Stock") and Series B Convertible Preferred Stock
(the "Series B Preferred Stock") (together, the "Preferred Stock"), 53,866
shares issuable upon conversion of $100,000 principal amount of the
Company's Series A and B Convertible Subordinated Participating Income Notes
(the "Series A/B Notes"), 81,352 shares issuable upon conversion of a note
payable to Towne Investment Company, a Limited Partnership (the "Towne
Note") and 78,839 shares (based upon amounts outstanding at September 30,
1996) of Common Stock issuable at the time of the closing of the Offering in
payment of certain deferred consulting fees and Preferred Stock dividends.
See "Certain Transactions." Also excludes outstanding options to purchase
21,645 shares of Common Stock at the initial public offering price held by
the Company's Chief Executive Officer, its Vice President -- Finance and one
other employee. The Company will not grant options or other rights to
purchase or acquire shares for a period of one year after the Offering if,
as a result, all outstanding options or rights would entitle their holders
to acquire in excess of 12% of the shares outstanding upon completion of the
Offering.
6
<PAGE> 9
SUMMARY FINANCIAL DATA
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FIRST TWO
FISCAL YEAR QUARTERS
----------------------------------------- ---------------
STATEMENT OF OPERATIONS DATA: 1991 1992 1993 1994 1995 1995 1996
----- ------ ------ ------ ------ ------ ------
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Revenues............................... $ 957 $1,080 $1,870 $3,273 $4,779 $2,555 $4,130
Loss from operations................... (147) (32) (334) (359) (833) (448) (528)
Interest expense, net.................. (43) (54) (102) (259) (72) (30) (177)
Other income (expense)................. 0 (23) 0 (52) 3 (28) (11)
Net loss............................... (190) (109) (436) (670) (903) (507) (716)
Net loss per share..................... (0.24) (0.14) (0.55) (1.16) (1.94) (1.02) (1.51)
Weighted average common and common
equivalent shares (1)................ 794 794 794 576 570 570 570
OPERATING DATA:
Number of restaurants open at period
end.................................. 1 1 2 3 3 3 5
Number of mature restaurants(2)........ 0 1 1 1 2 2 3
Average revenue per mature
restaurant(3)........................ n/a $1,080 $1,071 $1,139 $1,462 $ 747 $ 772
</TABLE>
<TABLE>
<CAPTION>
JULY 14, 1996
--------------------------
ACTUAL AS ADJUSTED(4)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital..................................................... $ (903) $3,191
Total assets........................................................ 5,585 8,554
Long-term obligations, including current portion.................... 2,604 10
Shareholders' equity (deficit)...................................... (3,429) 5,649
</TABLE>
- ---------------
(1) See Note 1 to Financial Statements for an explanation of the method used to
determine the number of shares used to compute per share amounts.
(2) A mature restaurant is one which has been open at least 18 months.
(3) Includes the Company's first, and smallest, restaurant which opened in April
1991. The Company's mature restaurants do not include the value-added
features incorporated in the Company's two newest restaurants. See
"Business" and "Business -- Operating Strategy."
(4) Adjusted to give effect to the sale of 1,000,000 shares of Common Stock
offered by the Company hereby, the conversion of all outstanding shares of
Preferred Stock into 1,365,799 shares of Common Stock, the conversion of the
Series A/B Notes into 53,866 shares of Common Stock, the conversion of the
Towne Note into 81,352 shares of Common Stock, the issuance of 78,839 shares
(based on amounts outstanding at September 30, 1996) of Common Stock in
payment of certain deferred consulting fees and Preferred Stock dividends
and the application of the estimated net proceeds of the Offering as
described under "Use of Proceeds." See also "Capitalization," "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "Certain Transactions."
7
<PAGE> 10
RISK FACTORS
An investment in the shares of Common Stock being offered by this
Prospectus involves a high degree of risk. Accordingly, prospective investors
should consider carefully the following risk factors, in addition to other
information concerning the Company and its business contained in this
Prospectus, before purchasing the shares of Common Stock offered hereby.
HISTORY OF LOSSES; WORKING CAPITAL DEFICIT; ACCUMULATED DEFICIT;
INDEPENDENT AUDITORS' "GOING CONCERN" OPINION. For fiscal 1995 and for the
first two quarters of 1996, the Company reported operating losses of
approximately $833,000 and $528,000, respectively. To date, the Company has not
achieved company-wide profitability on a quarterly basis, and there can be no
assurance that the Company's operations will be profitable in the future. The
Company will recognize certain substantial one-time restructuring and financing
fees, estimated at $245,000 and $325,000, respectively, during the last two
quarters of 1996, and the Company expects to report a loss for the last two
quarters of 1996 greater than that reported for the first two quarters of 1996.
The Company's operating expenses have increased and can be expected to increase
significantly in connection with the Company's proposed expansion. The Company's
future profitability will depend upon, among other things, corresponding
increases in revenues from operations. In addition, unfavorable economic
conditions, including downturns in the economy, resulting in decreased
restaurant dining, could adversely affect the Company's future operating
results. There can be no assurance that the Company's rate of revenue growth
will continue in the future or that the Company's operations will be profitable.
At July 14, 1996, the Company had a working capital deficit of approximately
$0.9 million and an accumulated shareholders' deficit of approximately $3.4
million. The Company's independent auditors have included an explanatory
paragraph in their report on the Company's financial statements, stating that
they have been prepared assuming that the Company will continue as a going
concern and that the Company's recurring losses from operations, net working
capital deficiency, and total shareholders' deficiency raise substantial doubt
about the Company's ability to continue as a going concern. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operation -- Liquidity and Capital Resources" and the Financial Statements and
Notes thereto included herein.
LIMITED OPERATING HISTORY AND RESTAURANT BASE. The Company has a limited
operating history upon which investors may evaluate its performance. The Company
has only five restaurants, the first of which opened in 1991 and two of which
opened in 1996. In view of its limited operating history, the Company remains
vulnerable to a variety of business risks associated with young, growing
companies. The results achieved to date by the Company's relatively small
restaurant base may not be indicative of the prospects or market acceptance of a
larger number of restaurants. Consequently, operating results achieved to date
by the Company's existing restaurants may not be indicative of the results that
may be achieved by existing or new restaurants in the future. In the event of
prolonged periods of unfavorable operating results at existing or future
restaurants, the Company may be required to close or relocate restaurants. In
light of the Company's small restaurant base, the lack of success of any of its
restaurants, or the unsuccessful operation of a new restaurant, could have a
material adverse effect on the Company's financial condition, results of
operations and cash flows.
REQUIREMENTS FOR ADDITIONAL CAPITAL TO COMPLETE EXPANSION PROGRAM;
DEPENDENCE ON PROCEEDS OF OFFERING. The Company's capital requirements have
been and will continue to be significant. The Company is dependent upon the
proceeds of this Offering to repay outstanding indebtedness and to finance new
restaurants. The Company has entered into a ten-year lease, requiring minimum
annual rental payments of $202,650, for the Ft. Lauderdale facility in the
expectation that sufficient Offering proceeds will be available to complete and
open this restaurant. The Company's goal is to expand to 30 restaurants by
year-end 2000. A portion of the expenditures budgeted for this expansion program
will be satisfied by the net proceeds from this Offering and projected cash flow
from operations. However, to complete its expansion program the Company will
need to arrange for additional bank or other financing and obtain developer
contributions for new restaurants comparable to those obtained in the past.
While the Company believes that, following this Offering, such financing will be
available and such developer contributions can be obtained, there can be no
assurance that the Company will be able to obtain additional capital or
developer contributions when needed on satisfactory terms or at all. Any
inability to obtain additional financing or developer contributions when
8
<PAGE> 11
required is likely to result in the Company having to curtail its expansion
efforts and could have a material adverse effect on the Company's financial
condition, results of operations and cash flows. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Business -- Expansion Strategy."
IMPORTANCE OF EXPANSION STRATEGY TO COMPANY SUCCESS. At December 31, 1995
and July 14, 1996, the Company owned and operated three and five restaurants,
respectively. The Company plans to increase significantly the number of
Company-owned restaurants to as many as 30 by year-end 2000. In addition to the
capital requirements which will need to be met, the opening and success of
restaurants will depend on various factors, including availability of suitable
sites; the negotiation of acceptable leases for new locations; regulatory
compliance; the ability to meet construction schedules; the ability of the
Company to manage successfully its anticipated expansion and hire and train
personnel; interest rates; real estate markets; competition; and general
economic and business conditions. Many of the foregoing factors are not within
the control of the Company. There can be no assurance that the Company will be
able to achieve its expansion goals. Furthermore, concept restaurants, such as
those of the Company, may prove successful in one geographical or socio-economic
area and unsuccessful in another. At present, the Company has no specific plans,
proposals, arrangements or understandings with respect to future additional
restaurants, except for the proposed Cleveland, Ohio and Baton Rouge, Louisiana
locations. See "Business -- Expansion Strategy."
ADVERSE EFFECT OF UNANTICIPATED COSTS OF EXPANSION. The opening of a new
restaurant involves substantial work to prepare the facility after a lease has
been entered into and certain fixed expenditures (primarily lease payments) have
begun. During the preparation phase, unanticipated costs and/or delays may be
encountered due to construction, regulatory or other problems. These problems
may result in either or both additional out-of-pocket expenditures and the loss
of profits which would have been realized had the facility opened as scheduled.
Construction delays sometimes may be alleviated by overtime hours involving
additional costs, which must be offset against potential lost revenue. Any of
these factors could have a material adverse effect on the Company's financial
condition, results of operations and cash flows.
SERVICE MARK PROTECTION AND PROPRIETARY INFORMATION. The Company believes
that its service marks have significant value and are important to its ability
to create demand for and awareness of its restaurants. The Company has
registered the trade name "CIAO BABY" with the Ohio Secretary of State and has
acquired the registered service mark "CIAO!" in the State of Tennessee. The
Company has not obtained federal registration of any name or mark. The Company's
registrations in Ohio and Tennessee place on record the Company's claimed dates
of first use of the marks registered in those states. The Company may bring an
action against a third party using a confusingly similar mark for restaurant
services in the geographic area served by the Company and, assuming the third
party cannot establish superior rights pursuant to federal registration or prior
use, enjoin such third party from using the mark. However, Hampden, Inc., a
Colorado corporation unaffiliated with the Company, operates a restaurant in
Denver, Colorado using the "Ciao! baby" name and registered the servicemark
"Ciao! baby" with the U.S. Patent and Trademark Office on November 10, 1992. As
a result, and assuming the validity of its registration, under federal law
Hampden possesses the right to enjoin the Company's use of "Ciao! baby" in any
geographical market where the Company operates a restaurant if and when Hampden
enters that market. Currently, Hampden has not entered a geographical market in
which the Company presently operates or plans to open a restaurant.
Any entity that can demonstrate the use of "Ciao! baby" in interstate
commerce prior to Hampden's first use may petition the U.S. Patent and Trademark
Office to cancel Hampden's federal registration of the "Ciao! baby" service
mark. Under federal law, any such petition to cancel Hampden's registration
based on prior use must be filed on or before November 10, 1997. The Company is
attempting to determine if it can demonstrate that it used "CIAO BABY" in
interstate commerce prior to Hampden's first use. Based upon the results of this
review, the Company may file a petition seeking to cancel Hampden's federal
registration. There can be no assurance, however, that the Company will be
successful in these efforts or that Hampden will not attempt to enjoin the
Company's use of "CIAO BABY" in existing or future markets in which the Company
operates. If the Company were prevented from using the "CIAO BABY" mark, it
could have a material adverse effect on the Company's financial condition,
results of operations and cash flows.
9
<PAGE> 12
The Company also relies on trade secrets and proprietary know-how and
employs various methods to protect its concepts and recipes. However, such
methods may not afford complete protection and there can be no assurance that
others will not independently develop similar know-how or obtain access to the
Company's know-how, concepts and recipes. See "Business -- Service Marks and
Proprietary Information."
POSSIBLE ADVERSE EFFECTS IF GROWTH IS NOT MANAGED PROPERLY. The Company's
operational strategy is heavily dependent upon daily review of information from,
and discussions with, its restaurant managers. While the Company has designed
its corporate operations to support expansion, the Company's proposed growth
strategy may require expansion of both the restaurant management staff and
corporate office support staff beyond that currently contemplated, as well as
the enhancement of operational and financial systems. Failure to implement these
systems and add these resources could have a material adverse effect on the
Company's financial condition, results of operations and cash flows. There can
be no assurance that the Company will be able to manage its expanding operations
effectively or that it will be able to maintain or accelerate its growth.
EXPOSURE TO COST FLUCTUATIONS. An increase in operating costs could have a
material adverse effect on the Company's financial condition, results of
operations and cash flows. Factors such as inflation, increased food costs,
increased labor and employee benefit costs, labor conflicts and the availability
of qualified management and hourly employees may adversely affect operating
costs as a percentage of restaurant sales. Many of these costs are beyond the
control of the Company. Dependence on frequent deliveries of fresh food products
also subjects restaurant businesses such as the Company to the risk that
shortages or interruptions in supply caused by adverse weather or other
conditions could adversely affect the availability, quality and cost of
ingredients. The Company's results of operations are highly sensitive to
increases in operating costs that cannot always be passed on to its customers in
the form of higher prices. The Company generally has been able to anticipate and
react to fluctuations in food costs through selected menu price adjustments and
promoting certain alternative menu selections (in response to price and
availability of supply). However, there can be no assurance that the Company
will be able to continue to anticipate and respond to such supply and price
fluctuations in the future or that the Company will not be subject to
significantly increased costs in the future.
ADVERSE EFFECTS OF POSSIBLE LABOR SHORTAGES. The possibility of labor
shortages, particularly of hourly workers available to work at or near the
minimum wage, exists in virtually all of the geographical areas where the
Company has opened or plans to open restaurants. The Company may be required to
(i) delay the opening of restaurants, which could negatively impact the
Company's financial condition, results of operations and cash flows and delay
its expansion plans, (ii) offer higher wages and benefits to attract qualified
workers, which could negatively impact profit margins or necessitate charging
higher prices, which could in turn negatively impact sales, or (iii) operate
with fewer employees, which could adversely impact the quality of service and,
ultimately, sales. There can be no assurance that the Company will be able to
attract the hourly workers necessary to open restaurants when scheduled or to
operate such restaurants in the manner desired.
DEPENDENCE UPON KEY PERSONNEL. The loss of the services of Carl A.
Bruggemeier, the founder, Chairman and Chief Executive Officer of the Company,
would have a significant adverse effect on the Company. There can be no
assurance that an adequate replacement could be found for Mr. Bruggemeier in the
event of his unavailability. Although Mr. Bruggemeier has entered into an
employment agreement with the Company, there can be no assurance that he will
continue in his present capacity with the Company for any specified period of
time. The Company is the beneficiary of life insurance in the amount of $3
million on the life of Mr. Bruggemeier, but there can be no assurance that such
insurance will be available in the future or that such insurance would be
adequate to compensate the Company for the loss of his services. As the Company
expands its operations, the success of its business will increasingly depend
upon the Company's ability to attract and retain skilled restaurant managers and
other management personnel. See "Business -- Employees."
COMPETITION FROM OTHER RESTAURANTS. The restaurant business is highly
competitive with respect to price, service, location and food quality and is
often affected by changes in consumer taste, economic conditions and travel
patterns. The Company competes in the casual dining segment for (i) customers,
10
<PAGE> 13
(ii) management personnel and labor and (iii) restaurant sites. A number of
competitors operate or franchise more restaurants, have significantly greater
resources and have a longer operating history than the Company. No assurance can
be given that the restaurants owned by the Company will be positioned to compete
successfully in any or all of the markets in which they now operate or may
operate in the future. Existing competitors may expand or modify operations to
compete successfully in the same market targeted by the Company. In addition, if
the Company's restaurants are perceived as being successful or its concept is
received favorably in the industry, new competitors, including national food
service chains with significantly greater resources than the Company, may be
formed to operate restaurants similar in concept to those of the Company.
Potential employees may desire to seek employment from competitors of the
Company that have a more established market presence than the Company. See
"Business -- Competition."
EVENTS WHICH MAY AFFECT THE RESTAURANT INDUSTRY: CHANGING TRENDS AND OTHER
FACTORS AFFECTING MULTI-UNIT RESTAURANT BUSINESSES. Multi-unit restaurant
businesses such as the Company can be substantially adversely affected by
publicity resulting from food quality, illness, injury or other health concerns
or operating issues attributable to one restaurant or a limited number of
restaurants. In addition, public tastes can often change dramatically,
particularly with regard to restaurant selection. Concept restaurants or
restaurant chains may achieve initial success but thereafter suffer declines as
public tastes change. Restaurant customers are often attracted to new
restaurants and new restaurant concepts and abandon older restaurants. No
assurance can be given that the Company's restaurants will achieve long-term
success, even if initial profitability is achieved.
RISK RELATED TO RESTAURANT LOCATIONS. The Company's strategy is to locate
its restaurants in proximity to arts and entertainment facilities, convention
centers and other high traffic generators. Although the restaurant industry in
general is seasonal, this strategy may result in variations to normal
seasonality patterns based on the schedules of such facilities. If the
facilities are not well "booked" or do not offer events or attractions which
draw large audiences, the Company's financial condition, results of operation
and cash flows could be materially and adversely affected.
POTENTIAL CONFLICTS OF INTEREST. Two of the Company's nominees for
director after the Offering are principals or officers of entities which,
respectively, lease space and sell beverages to the Company. To date, all
transactions with these entities have been arms length, third-party
transactions. Subsequent to the Offering, however, it is possible that conflicts
of interest could arise as a result of these persons' dual capacities as
directors of the Company and as principals or officers of entities having
significant business relationships with the Company. See "Certain Transactions."
CONTROL BY MANAGEMENT. After the Offering, the Company's executive
officers and directors will control approximately 49.2% of the Company's
outstanding Common Stock and will be able to significantly influence most
matters requiring approval by shareholders, including the election of directors.
This could have the effect of delaying or preventing a change in control of the
Company and, accordingly, could limit the price that investors might be willing
to pay for the Common Stock. See "Description of Capital Stock" and "Holdings of
Management and Principal Shareholders."
POSSIBLE ADVERSE EFFECTS OF GOVERNMENT REGULATION. The restaurant industry
is subject to numerous Federal, state and local government regulations,
including those relating to the preparation and sale of food, the sale of
alcoholic beverages and building and zoning requirements. Additionally, the
Company is subject to laws governing its relationship with employees, including
minimum wage requirements, overtime, working conditions and citizenship
requirements. The failure to obtain or retain food licenses or alcoholic
beverage licenses could adversely affect the Company. Also, although to date the
majority of the Company's employees either are not subject to or are paid at
levels above the minimum wage, the future enactment, adoption or amendment of
laws or regulations, such as a further increase in the minimum wage, mandatory
health insurance coverages for employees or other costs associated with
employees, could adversely affect the restaurant industry in general and could
have a material adverse effect on the Company's financial condition, results of
operations and cash flows.
11
<PAGE> 14
PRODUCT AND OTHER LIABILITY. The preparation and serving of food
necessarily involves the risk that harmful micro-organisms may be transferred to
the Company's customers. These micro-organisms may be present in the raw
materials purchased by the Company or transmitted by employees of the Company.
Resulting illness of a customer may subject the Company to monetary liability
and may also damage the reputation of the Company's restaurants. In addition,
customers may suffer other injuries on the Company's premises. The Company
carries general liability policies in the amount of $1,000,000 per occurrence
and $4,000,000 in the aggregate. Although the Company has not yet incurred any
liability as a result of customer illness, there can be no guarantee that such
an event will not occur in the future.
PRODUCT LIABILITY FOR SALE OF ALCOHOLIC BEVERAGES. The Company is subject
to "dram-shop" statutes, which generally provide a person injured by an
intoxicated person with the right to recover damages from an establishment that
wrongfully served alcoholic beverages to the intoxicated person. The laws of
many states provide that a vendor of alcoholic beverages may be held liable in a
civil cause of action for injury or damage caused by or resulting from the
intoxication of a minor (under 21 years of age) if the vendor willfully,
knowingly and unlawfully sells or furnishes alcoholic beverages to the minor and
knows that the minor will soon thereafter be driving a motor vehicle. A vendor
can be similarly held liable if it knowingly provides alcoholic beverages to a
person who is in a noticeable state of intoxication, knows that the person will
soon thereafter be driving a motor vehicle and injury or damage is caused by
that person. In addition, significant national attention is focused on the
problem of drunk driving, which could result in the adoption of additional
legislation and increased potential liability of the Company for damage or
injury caused by its customers. See "Business -- Governmental Regulation."
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of the Common Stock offered
hereby will experience immediate and substantial dilution of $5.24
(approximately 75%) per share in the net tangible book value from the initial
public offering price per share. See "Dilution."
NO ASSURANCE OF PUBLIC MARKET; DETERMINATION OF PUBLIC OFFERING PRICE;
POSSIBLE VOLATILITY OF COMMON STOCK PRICE; UNDERWRITERS' POTENTIAL INFLUENCE ON
THE MARKET. Prior to this Offering, there has been no public trading market for
the Common Stock. Consequently, the initial public offering price of the Common
Stock has been determined by negotiations between the Company and the Managing
Underwriter and does not necessarily reflect the Company's book value or other
established criteria of value. Moreover, the initial public offering price may
bear no relationship to the price at which the Common Stock will trade after the
completion of the Offering (which price could be lower than the initial public
offering price). The market price of the Common Stock following the consummation
of this Offering may be highly volatile as has been the case with the securities
of many emerging companies. Factors such as the Company's financial results,
quarter-to-quarter variations in operating results, announcements by the Company
or its competitors, general market trends and various factors affecting the
restaurant industry generally may have a significant impact on the market price
of the Common Stock. In addition, in recent years, the stock market has
experienced a high level of price and volume volatility and market prices for
the stock of many companies have experienced wide price fluctuations which have
not necessarily been related to the operating performances of such companies.
Although application has been made for listing of the Common Stock on the Nasdaq
SmallCap Market, no assurance can be given that an active market for the Common
Stock will develop or, if developed, will continue. The Managing Underwriter has
advised the Company that it intends to make a market in the Common Stock and may
otherwise effect transactions in these securities, although it has no obligation
to do so. As a result, the Managing Underwriter may exert a dominating influence
on the market for the Common Stock. There also can be no assurance that the
Managing Underwriter will be willing or able to continue its market making
activities and these activities may be discontinued at any time. The price and
liquidity of the Common Stock may be significantly affected by the degree, if
any, of the Managing Underwriter participation in the market for the Common
Stock. See "Underwriting."
POSSIBLE DELISTING OF SECURITIES FROM NASDAQ; DISCLOSURE RELATING TO
LOW-PRICED STOCKS. It is currently anticipated that the Common Stock will be
eligible for listing on the Nasdaq SmallCap Market ("Nasdaq") upon the
consummation of this Offering. However, in order to continue to be included on
Nasdaq, a company must maintain $2,000,000 in total assets, a $200,000 market
value of the public float and
12
<PAGE> 15
$1,000,000 in total capital and surplus. In addition, continued inclusion
requires two market makers and a minimum bid price of $1.00 per share; except
that if a company falls below this minimum bid price, the company will remain
eligible for continued inclusion on Nasdaq if the market value of the public
float is at least $1,000,000 and the company has $2,000,000 in capital and
surplus. Failure to meet these maintenance criteria in the future may result in
the delisting of the Common Stock from Nasdaq. Thereafter, trading, if any, in
the Common Stock would be conducted outside Nasdaq in the over-the-counter
market. As a result, an investor might find it more difficult to dispose of, or
to obtain accurate quotations as to the market value of, the Company's
securities. In addition, if the Common Stock were delisted from trading on
Nasdaq and the trading price of the Common Stock were less than $5.00 per share,
trading in the Common Stock would also be subject to certain rules promulgated
under the Securities Exchange Act of 1934, which require additional disclosure
by broker-dealers in connection with any trades involving a stock defined as a
penny stock (generally, any equity security outside Nasdaq that has a market
price of less than $5.00 per share). Such rules require the delivery, prior to
any penny stock transaction, of a disclosure schedule explaining the penny stock
market and the risks associated therewith, and impose various sales practice
requirements on broker-dealers who sell penny stock to persons other than
established customers and accredited investors (generally institutions). For
these types of transactions, the broker-dealer must make a special suitability
determination for the purchaser and have received the purchaser's written
consent to the transactions prior to sale. The additional burdens imposed upon
broker-dealers by such requirements may discourage them from effecting
transactions in the Common Stock, thereby severely limiting the market liquidity
of the Common Stock and the ability of purchasers in this offering to sell the
Common Stock in the secondary market.
SHARES ELIGIBLE FOR FUTURE SALE. Future sales pursuant to Rule 144 under
the Securities Act of 1933 (the "Securities Act") of the shares of Common Stock
held by existing shareholders of the Company could have an adverse effect on the
price of the Common Stock. After the Offering, approximately 1,176,000 shares of
Common Stock will be eligible for sale under Rule 144 commencing 90 days after
the date of this Prospectus; however, each of the Company's officers and
directors and certain other shareholders, who together will hold an aggregate of
1,645,665 shares of Common Stock, have agreed not to offer or otherwise dispose
of such shares for 180 days after the date of this Prospectus without the
consent of the Managing Underwriter. Additionally, outstanding warrants to
purchase 249,990 shares of Common Stock become immediately exercisable upon the
closing of the Offering, and the holders of these warrants have registration
rights which will be exercisable after the expiration of the 180-day "lock-up"
period. Registration and sale of these shares also could effect adversely the
price of the Common Stock. See "Certain Transactions" and "Shares Eligible for
Future Sale."
BENEFITS OF THE OFFERING TO CURRENT SHAREHOLDERS, DIRECTORS AND OFFICERS OF
THE COMPANY. The Company intends to use a portion of the net proceeds of the
Offering to pay approximately $2.7 million in outstanding indebtedness held by
Blue Chip Capital Fund Limited Partnership, one of the Selling Shareholders, and
certain other persons who provided bridge financing. Approximately $202,000 of
the Offering proceeds will be used to repay bank debt which is personally
guaranteed by Mr. Bruggemeier. If the over-allotment option is exercised, the
Selling Shareholders (including Mr. Roger Lipton, a director of the Company)
will receive the net proceeds of any shares of Common Stock sold by them. The
Offering also may provide existing shareholders with liquidity through the
creation of a public market. See "Use of Proceeds" and "Underwriting."
ABSENCE OF DIVIDENDS. The Company has never paid dividends on its Common
Stock and does not anticipate paying any dividends in the foreseeable future.
See "Dividend Policy."
POTENTIAL ANTI-TAKEOVER EFFECT AND POTENTIAL ADVERSE IMPACT ON MARKET PRICE
OF CERTAIN CHARTER PROVISIONS AND THE OHIO GENERAL CORPORATION LAW. Certain
provisions of the Company's Restated Articles of Incorporation and of the Ohio
Revised Code (the "Ohio GCL"), together or separately, could discourage
potential acquisition proposals, delay or prevent a change in control of the
Company and limit the price that certain investors might be willing to pay in
the future for the Common Stock.
13
<PAGE> 16
Pursuant to the Company's Restated Articles of Incorporation, upon the
closing of the Offering, the Board of Directors of the Company will have the
authority to issue up to 100,000 preferred shares without further shareholder
approval. Such preferred shares could have dividend, liquidation, conversion,
voting and other rights and privileges that are superior or senior to the Common
Stock. Issuance of preferred shares could result in the dilution of the voting
power of the Common Stock, adversely affect holders of the Common Stock in the
event of liquidation of the Company or delay, defer or prevent a change in
control of the Company.
In addition, Sections 1701.01 and 1701.831 of the Ohio GCL contains
provisions that require shareholder approval of any proposed "control share
acquisition" of any Ohio corporation at any of three ownership thresholds: 20%,
33 1/3% and 50%; and Chapter 1704 of the Ohio GCL contains provisions that
restrict certain business combinations and other transactions between an Ohio
corporation and interested shareholders. See "Description of Capital
Stock -- Provisions Affecting Business Combinations and Changes in Control."
14
<PAGE> 17
HISTORY OF THE COMPANY
Ciao Cucina Corporation is an Ohio corporation formed by Carl A.
Bruggemeier and others to develop and own moderately-priced, contemporary
restaurants serving Mediterranean cuisine. The Company's original name was Don
Carlo Inc. In late 1993, Fire In The Kitchen, Inc. ("FITK"), an Ohio corporation
controlled by Mr. Bruggemeier, was merged into the Company, with the FITK
shareholders receiving an aggregate of 103,762.7 shares of the Company's Common
Stock in exchange for all outstanding shares of FITK common stock. FITK owned
and operated the Cincinnati, Ohio, Harper's Point restaurant, which was acquired
by the Company in the merger.
In March 1995, the Company issued 15,000 shares of Series A Preferred Stock
to Blue Chip Capital Fund Limited Partnership ("Blue Chip LP") in exchange for
cancellation of $350,000 of outstanding indebtedness and an additional
investment of $1,150,000 by Blue Chip LP. At the same time, the holders of
$1,100,000 aggregate principal amount of other outstanding indebtedness
exchanged notes held by them for 1,584 shares of the Company's Series B
Preferred Stock. The conversion ratios were determined by arms length
negotiations among Blue Chip LP, the Company and certain representatives of the
outstanding noteholders and were agreed to by the Company and by all but two
noteholders (the notes issued to such noteholders are still outstanding). All
outstanding shares of Preferred Stock will convert automatically to shares of
Common Stock at the closing of the Offering on the basis of 54.235 and 348.7
shares of Common Stock, respectively, for each outstanding share of Series A and
Series B Preferred Stock, or approximately $1.84 and $1.99 per share of Common
Stock, respectively. During 1996 Blue Chip LP and other investors loaned the
Company an aggregate of an additional $2,300,000 to finance the Company's
expansion and operations in contemplation of the Offering and received five-year
warrants to purchase 249,990 shares of Common Stock at a price of $7.00 per
share (the "Bridge Financing Warrants"). See "Certain Transactions."
The Company was incorporated on August 5, 1992. The Company's executive
offices are located at 700 Walnut Street, Suite 300, Cincinnati, Ohio 45202, and
its telephone number is (513) 241-9161.
15
<PAGE> 18
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock in the
Offering, at the assumed initial public offering price of $7.00 per share and
after deducting the underwriting discount and estimated offering expenses, are
estimated to be approximately $6.1 million. The following table sets forth the
expected use of the net proceeds of the Offering, based upon amounts of
indebtedness outstanding at October 8, 1996:
<TABLE>
<CAPTION>
USE PROCEEDS
--- --------
<S> <C>
Repayment of 12% bridge loans............................................ $1,115,000(1)
Repayment of 10.35% bridge loans (held by Blue Chip LP).................. 1,525,000(1)(2)
Repayment of indebtedness to The Provident Bank bearing interest from 9%
to prime plus 2%....................................................... 202,000(3)
Development and opening of new restaurants............................... 2,620,000(4)
Balance to be used for working capital................................... 638,000
</TABLE>
- ---------------
(1) Represents principal and accrued interest. Amounts outstanding at July 14,
1996 were approximately $1,079,000 of 12% loans and $1,135,000 of 10.35%
loans. These obligations mature on the earlier of March 8, 1998 or within
ten days of closing of this Offering. Proceeds from these loans were used
for working capital and to help fund the opening of the Company's two newest
restaurants.
(2) The principal amount of the loan represents $1,250,000 of funds loaned to
the Company by Blue Chip LP and a $200,000 financing fee payable to Blue
Chip LP.
(3) Represents principal and accrued interest. The amount outstanding at July
14, 1996 was approximately $212,000. These obligations mature through May
1997 and are personally guaranteed by Mr. Bruggemeier.
(4) Estimated based upon the assumed opening of five additional restaurants
during 1997. The Company estimates that approximately $370,000 of proceeds
will be used to develop and open the Ft. Lauderdale, Florida restaurant,
$400,000 to develop and open the Cleveland, Ohio restaurant and $550,000 to
open the Baton Rouge, Louisiana restaurant (assuming a lease is signed). The
two remaining restaurants have not been finally identified, but the Company
estimates that $650,000 in proceeds will be used to develop and open each of
these restaurants.
There can be no assurance that such allocations will not be changed to
respond to changes in the Company's business or future conditions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." Pending such uses, the Company
intends to invest the net proceeds from this Offering in short-term investment
grade instruments.
DIVIDEND POLICY
The Company presently intends to retain any earnings for use in its
business and does not anticipate paying cash dividends in the foreseeable
future.
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<PAGE> 19
CAPITALIZATION
The following table sets forth the pro forma capitalization of the Company
as of July 14, 1996, and as adjusted to reflect (i) the sale of 1,000,000 shares
of Common Stock offered by the Company hereby at the assumed initial public
offering price of $7.00 per share and the application of the estimated net
proceeds as set forth under "Use of Proceeds," (ii) the conversion at the
closing of the Offering of all outstanding shares of Preferred Stock into Common
Stock on the basis of 54.235 shares of Common Stock for each share of Series A
Preferred Stock and 348.7 shares of Common Stock for each share of Series B
Preferred Stock (and the elimination of fractional shares), and (iii) the
issuance of 53,866 shares of Common Stock upon conversion of the Series A/B
Notes, 81,352 shares of Common Stock upon conversion of the Towne Note and
78,839 shares (based upon amounts outstanding at September 30, 1996) of Common
Stock issuable at the closing of the Offering in payment of certain deferred
consulting fees and preferred stock dividends. See "Certain Transactions."
<TABLE>
<CAPTION>
JULY 14, 1996
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(in thousands)
<S> <C> <C>
Short-term obligations:
Current maturities of long-term obligations.......................... $ 342 $ 4
======= =======
Long-term obligations:
Long-term debt....................................................... $ 2,262 $ 6
------- -------
Redeemable equity:
10% Series A Convertible Preferred Stock -- $100 par value, 15,000
shares authorized; 15,000 shares outstanding; no shares
outstanding, as adjusted.......................................... 1,647 0
10% Series B Convertible Preferred Stock -- $690 par value, 1,740
shares authorized; 1,584 shares outstanding; no shares
outstanding, as adjusted.......................................... 1,234 0
------- -------
Total redeemable equity........................................... 2,881 0
------- -------
Shareholders' equity (deficit):
Common Stock -- no par value, 10,000,000 shares authorized, 794,355
shares outstanding; 3,149,766 shares outstanding as adjusted(1)... 1 9,375
Treasury stock -- 224,445 shares, stated at cost..................... (135) (135)
Accumulated and paid-in deficit...................................... (3,295) (3,591)
------- -------
Total shareholders' equity (deficit).............................. (3,429) 5,649
------- -------
Total capitalization................................................... $ 1,714 $ 5,655
======= =======
</TABLE>
- ---------------
(1) Excludes 21,645 shares issuable at the initial public offering price upon
exercise of outstanding stock options, 249,990 shares issuable upon exercise
of the Bridge Financing Warrants and 100,000 shares issuable upon exercise
of the Underwriter's Warrants.
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<PAGE> 20
DILUTION
The net tangible book value of the Company's Common Stock as of July 14,
1996, giving effect to the transactions described in Note (1) below, was
$(570,263), or $(0.27) per share. Net tangible book value per share is equal to
the Company's total tangible assets less total liabilities, divided by the total
number of shares of Common Stock outstanding. After giving effect to the sale of
the 1,000,000 shares of Common Stock offered by the Company hereby at the
assumed initial public offering price of $7.00 per share (and deducting the
underwriting discount and estimated offering expenses), the net tangible book
value of the Company as of July 14, 1996 would have been $5,537,237, or $1.76
per share. This represents an immediate dilution of $5.24 per share to new
investors purchasing shares in the Offering. The following table illustrates
this per share dilution in net tangible book value per share to new investors at
July 14, 1996:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $7.00
Net tangible book value per share before this Offering(1)....... $(0.27)
Increase in net tangible book value per share attributable to
new investors................................................ 2.03
------
Pro forma net tangible book value per share after this Offering... 1.76
-----
$5.24
Dilution of net tangible book value per share to new investors.... =====
</TABLE>
The following table sets forth on a pro forma basis as of July 14, 1996,
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by the existing
shareholders and by the purchasers of the shares of Common Stock in this
Offering (at the assumed initial public offering price of $7.00 per share and
before deduction of the estimated underwriting discount and offering expenses
payable by the Company):
<TABLE>
<CAPTION>
TOTAL CASH
SHARES PURCHASED CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing
Shareholders(1)................... 2,149,766 68.3% $ 3,267,720 31.8% $1.52
New Investors..................... 1,000,000 31.7 7,000,000 68.2 $7.00
--------- ------- ----------- -------
Total............................. 3,149,766 100.0% $10,267,720 100.0%
========= ===== =========== =====
</TABLE>
- ---------------
(1) Assumes that all outstanding shares of Preferred Stock have been converted
into 1,365,799 shares of Common Stock, 53,866 shares of Common Stock have
been issued upon conversion of the Series A/B Notes, 81,352 shares of Common
Stock have been issued upon conversion of the Towne Note and 78,839 shares
(based on amounts outstanding at September 30, 1996) of Common Stock have
been issued in payment of certain deferred consulting fees and preferred
stock dividends. Does not include 21,645 shares issuable at the initial
public offering price upon exercise of outstanding stock options, 249,990
shares issuable upon the exercise of the Bridge Financing Warrants at an
exercise price of $7.00 per share and 100,000 shares issuable upon exercise,
at $8.40 per share, of the Underwriter's Warrants. See "Certain
Transactions."
18
<PAGE> 21
SELECTED FINANCIAL DATA
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected historical financial data presented below as of December 31,
1995 and for fiscal years 1994 and 1995 are derived from the financial
statements of the Company which have been audited by Joseph Decosimo and
Company, PLL, independent certified public accountants. The financial data as of
December 29, 1991, December 27, 1992, December 26, 1993 and July 14, 1996, and
for fiscal years 1991 through 1993 and the first two quarters of fiscal 1995 and
1996, are derived from the Company's unaudited financial statements. In the
opinion of management, the financial data reflect all adjustments, consisting
only of normal recurring adjustments, necessary for a fair statement of such
data and are not necessarily indicative of results to be expected for the full
year. The selected financial data should be read in conjunction with the
Financial Statements and Notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
FIRST TWO
FISCAL YEAR QUARTERS
-------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
----- ------ ------ ------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Restaurant revenues................ $ 957 $1,080 $ 1,870 $ 3,273 $ 4,779 $2,555 $ 4,130
Restaurant costs and expenses...... (854) (935) (1,737) (3,008) (4,548) (2,445) (3,631)
General and administrative......... (112) (91) (377) (365) (604) (318) (641)
Depreciation and amortization...... (138) (86) (90) (259) (460) (241) (386)
Loss from operations............... (147) (32) (334) (359) (833) (448) (528)
Interest expense................... (43) (54) (102) (259) (72) (30) (177)
Other income (expense)............. 0 (23) 0 (52) 3 (28) (11)
Net loss........................... (190) (109) (436) (670) (903) (507) (716)
Net loss per common and equivalent
share............................ (0.24) (0.14) (0.55) (1.16) (1.94) (1.02) (1.51)
Weighted average number of common
and equivalent shares
outstanding...................... 794 794 794 576 570 570 570
OPERATING DATA:
Number of restaurants open at
period end....................... 1 1 2 3 3 3 5
Number of mature restaurants(1).... 0 1 1 1 2 2 3
Average revenue per mature restau-
rant(2).......................... n/a $1,080 $1,071 $ 1,139 $1,462 $ 747 $ 772
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF FISCAL YEAR END JULY 14,
-------------------------------------------------- --------
1991 1992 1993 1994 1995 1996
----- ------ ------ ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital...................... $(85) $(165) $ (406) $(2,387) $ (850) $ (903)
Total assets......................... 585 594 1,728 2,818 3,886 5,585
Long-term obligations, including
current portion.................... 529 457 1,985 2,131 634 2,604
Shareholders' equity (deficit)....... (42) (116) (832) (1,508) (2,616) (3,429)
</TABLE>
- ---------------
(1) A mature restaurant is one which has been open at least 18 months.
(2) Includes the Company's first, and smallest, restaurant which opened in April
1991. The Company's mature restaurants do not include the value-added
features incorporated in the Company's two newest restaurants. See
"Business" and "Business -- Operating Strategy."
19
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company opened its first restaurant in April 1991. Three of the
Company's five restaurants have been in operation for at least one year while
two restaurants were opened in February and March 1996. As a result, the Company
has a limited operating history and the results achieved to date by the
Company's restaurants may not be indicative of actual future results. This
discussion should be read in conjunction with the selected financial information
of the Company and the Financial Statements and Notes thereto of the Company
included elsewhere in this Prospectus.
RESULTS OF OPERATIONS
The following table shows selected components of the Company's operating
income as a percentage of revenues:
<TABLE>
<CAPTION>
FIRST TWO
FISCAL YEAR QUARTERS
--------------------------------------------- ---------------
1991 1992 1993 1994 1995 1995 1996
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Restaurant Revenues (1)..................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses
Food and beverage costs................... 33.6 33.6 31.9 28.9 29.5 28.6 30.9
Restaurant labor costs (2)................ 35.5 31.2 31.7 32.1 32.4 28.1 33.4
Occupancy and other restaurant expenses
(3)..................................... 20.2 21.8 29.9 31.0 33.3 39.0 23.6
General and administrative expenses (4)... 11.7 8.5 20.2 11.1 12.6 12.4 15.5
Depreciation and amortization............. 14.4 7.9 4.8 7.9 9.6 9.4 9.4
----- ----- ----- ----- ----- ----- -----
Total operating expenses.............. 115.4 103.0 118.5 111.0 117.4 117.5 112.8
----- ----- ----- ----- ----- ----- -----
Loss from operations........................ (15.4) (3.0) (18.5) (11.0) (17.4) (17.5) (12.8)
Interest expense, net and other............. (4.5) (7.1) (5.4) (9.5) (1.5) (2.3) (4.5)
----- ----- ----- ----- ----- ----- -----
Net loss.................................. (19.9)% (10.1)% (23.9)% (20.5)% (18.9)% (19.8)% (17.3)%
===== ===== ===== ===== ===== ===== =====
Number of restaurants open at period end.... 1 1 2 3 3 3 5
Number of mature restaurants (5)............ 0 1 1 1 2 2 3
</TABLE>
- ---------------
(1) Revenues consist of restaurant food and beverage sales.
(2) Restaurant labor consists of hourly and management payroll, benefits and
taxes.
(3) Occupancy and other restaurant expenses include rent, utilities,
advertising, repair and maintenance and operating supplies.
(4) General and administrative expenses include corporate salaries, benefits and
taxes, rent, insurance, professional services and other expenses.
(5) A mature restaurant is one which has been open at least 18 months.
TWO QUARTERS ENDED JULY 14, 1996 COMPARED TO TWO QUARTERS ENDED JULY 9, 1995
Restaurant revenue increased to $4,130,369 in the two quarters ended July
14, 1996 from $2,554,841 in the two quarters ended July 9, 1995, an increase of
$1,575,528 or 61.7%. The addition of two restaurants during the first quarter of
fiscal 1996 accounted for the majority of this increase. The Company believes
that these restaurants are the prototype restaurants for future expansion as
they embody all of the concepts that the Company has explained elsewhere in this
Prospectus.
During the two quarters ended July 14, 1996, food and beverage costs
increased 2.3% as a percentage of restaurant revenue from 28.6% in the two
quarters ended July 9, 1995 to 30.9% in the two quarters ended July 14, 1996.
The increase was lower than inflation due mainly to the Company implementing
more efficient cost containment procedures on a per restaurant basis and
achieving economies of scale that allow for cost effective purchases of
non-perishable items on a corporate-wide basis.
20
<PAGE> 23
Restaurant labor increased $661,016, or 92.2%, as a result of opening two
new restaurants. As a percentage of restaurant revenue, restaurant labor
increased from 28.1% in the two quarters ended July 9, 1995 to 33.4% in the two
quarters ended July 14, 1996 primarily as the result of additional work hours
incurred due to training and labor inefficiencies of newly hired personnel
during the initial 120 days of operations of the two newly opened restaurants in
Cincinnati, Ohio and Memphis, Tennessee.
Occupancy and other operating expenses declined from 39.0% of revenue in
the two quarters ended July 9, 1995 to 23.6% in the two quarters ended July 14,
1996, due to higher monthly sales volumes as compared to monthly rents at the
two newly opened restaurants. Occupancy and other operating expenses were
$977,887 in the two quarters ended July 14, 1996 and $997,798 in the two
quarters ended July 9, 1995, a decrease of $19,911 or 2.0%. This decrease was
primarily due to reductions in advertising and relocation expenses for mature
restaurants.
General and administrative expenses increased 101.9% from $317,599 in the
two quarters ended July 9, 1995 to $641,155 in the two quarters ended July 14,
1996. This increase reflects the addition of personnel and related costs needed
to support the Company's expansion. As a percentage of revenue, general and
administrative expenses increased from 12.4% for the two quarters ended July 9,
1995 to 15.5% for the two quarters ended July 14, 1996. Except as noted
elsewhere in this Prospectus relating to the hiring of a Chief Operating
Officer, a Director of Human Resources and a Director of Purchasing, management
believes that the infrastructure, in terms of corporate overhead, is in place to
support a substantial increase in the number of locations and expects that such
expenses, as a percentage of revenue, will decline as new locations are opened.
Depreciation and amortization increased $145,721 or 60.6%, from $240,510 in
the two quarters ended July 9, 1995 to $386,231 in the two quarters ended July
14, 1996. This increase was primarily due to the addition of the two restaurants
during the first quarter of fiscal 1996, offset by lower amortization of pre-
opening costs in the two quarters ended July 14, 1996. Depreciation and
amortization were flat as a percent of revenue at 9.4%.
Losses from operations increased 17.7% to $527,558 in the two quarters
ended July 14, 1996 from $448,125 in the two quarters ended July 9, 1995. As a
percentage of revenue, the loss from operations decreased from 17.5% in two
quarters ended July 9, 1995 to 12.8% in the two quarters ended July 14, 1996.
This improvement, as a percent of revenue, resulted from strong sales at the
Washington, D.C. location and the opening of the two new restaurants. However,
this improvement was materially and adversely affected by the straight-line
accounting treatment of lease expenses as discussed in the Notes to Financial
Statements. Cash flows used by operating activities decreased from $530,078 to
$516,531 primarily due to increases in accounts payable, accrued expenses, and
accrued rentals totaling $396,478 as opposed to decreases in accounts receivable
and inventories of $93,753. These relationships reflect management's ability to
enter into relationships with vendors that provide favorable payment terms.
There can be no assurance that management will be able to negotiate such
favorable arrangements in the future.
Interest expense increased $148,586 from the two quarters ended July 9,
1995 to the two quarters ended July 14, 1996 mainly as a result of the issuance
of $2,050,000 in bridge financing during the two quarters ended July 14, 1996.
Net loss for the two quarters ended July 14, 1996 of $716,048 represent an
increase of $209,053, or 41.2%, over the net loss of $506,995 in the two
quarters ended July 9, 1995.
The Company has incurred substantial one-time fees and expenses in
connection with the obtaining of bridge financing. See "Certain Transactions."
These fees and expenses (equal to approximately $325,000), along with additional
restructuring expenses (equal to approximately $245,000) incurred in
contemplation of this Offering, will be recognized primarily in the last quarter
of 1996 and will affect adversely the Company's reported results of operations
for that period. The Company expects to report a loss for the last two quarters
of 1996 greater than that reported for the first two quarters of 1996.
21
<PAGE> 24
FISCAL 1995 COMPARED TO FISCAL 1994
Restaurant revenues increased to $4,778,742 in fiscal 1995 from $3,273,083
in fiscal 1994, an increase of $1,505,659, or 46.0%. This increase reflects the
fact that fiscal 1995 includes a full year of revenues for three restaurants
while 1994 reflects a full year of revenues for only two restaurants and one and
one-half months of the New Jersey restaurant.
Food and beverage expenses increased $464,829, or 49.2% from $944,593 in
fiscal 1994 to $1,409,422 in fiscal 1995. This increase is due to a full year of
operations in fiscal 1995 for the New Jersey restaurant versus one and one-half
months in fiscal 1994. As a percentage of revenues, food and beverage costs
increased from 28.9% in fiscal 1994 to 29.5% in fiscal 1995 which is due to
normal economic forces in food and beverage prices from vendors while the
Company held the line on its menu pricing.
Restaurant labor increased to $1,548,678 in fiscal 1995 from $1,049,802 in
fiscal 1994, an increase of $498,876, or 47.5%. As a percentage of restaurant
revenue, restaurant labor increased from 32.1% in fiscal 1994 to 32.4% in fiscal
1995. The Company believes that it achieved its goals in managing restaurant
labor costs while opening a new restaurant and holding menu pricing.
Occupancy and other operating expenses increased to $1,589,833 in fiscal
1995 from $1,013,734 in fiscal 1994, an increase of $576,099 or 56.8%. As a
percentage of restaurant revenues, the increase approximated 2.3% and was
attributable to the New Jersey restaurant, increased advertising and promotional
activities and contract maintenance. As further discussed in the Notes to
Financial Statements, generally accepted accounting principles require that
minimum lease payments be charged to expense on a straight-line basis over the
term of the lease. The straight-line averaging accounted for rent expenses in
excess of base amounts required to be paid per the lease agreements of $172,678
in fiscal 1995 and $69,158 in fiscal 1994. The straight-line accounting
treatment of the leases in effect at July 14, 1996 will record base rent expense
for fiscal 1996 of $563,000 which is $145,595 above the base rents required to
be paid by the lease agreements and will result in lower base rent expense than
base rent payments contractually required in years 1997 through 2006 as they
relate to these leases. Management does not currently intend to enter into
future leases that will require straight-line accounting treatment.
General and administrative expenses increased $239,641, or 65.7%, from
$364,849 in fiscal 1994 to $604,490 in fiscal 1995, due mainly to the additional
internal infrastructure needed to support the expansion. As a percentage of
restaurant revenues, these expenses increased slightly to 12.6% in fiscal 1995
from 11.2% in fiscal 1994. The Company intends to add a Chief Operating Officer,
a Director of Human Resources and a Director of Purchasing in order to
facilitate its expansion strategy and enhance operating efficiencies. Management
believes that this corporate infrastructure will support its growth plans
through the year 2000 with only the addition of lower level clerical and
accounting personnel. Accordingly, management expects that general and
administrative expenses will decrease as a percentage of revenue as more
restaurants are opened.
Depreciation and amortization increased to $459,549 in fiscal 1995 from
$259,044 in fiscal 1994. As a percentage of restaurant revenues, these expenses
increased from 7.9% in fiscal 1994 to 9.6% in fiscal 1995. This is primarily due
to the accounting treatment the Company has elected for leasehold incentives.
Management has been successful in negotiating significant leasehold incentives
from landlords. The Company has elected to record these incentives in equipment
and improvements, net, and to recognize an offsetting deferred leasehold
incentive liability.
Loss from operations increased to $833,230 in fiscal 1995 from $358,939 in
fiscal 1994, an increase of $474,291 or 132.1%. As a percentage of restaurant
revenue, loss from operations increased to 17.5% in fiscal 1995 from 11.0% in
fiscal 1994. This was mainly due to the amortization of pre-opening expenses for
the New Jersey location (the Company amortized pre-opening costs over 12
months), the expansion of the corporate management team to accommodate and
support future growth, and impact of the straight-line lease accounting for the
New Jersey restaurant.
Interest expense decreased $173,675, or 64.8%, from $268,134 in fiscal 1994
to $94,459 in fiscal 1995. This decrease is a result of using the proceeds from
the March 1995 issuance of preferred stock to retire indebtedness.
22
<PAGE> 25
As a result of the above, the net loss increased to $902,657 in fiscal 1995
from $670,290 in fiscal 1994, an increase of $232,367, or 34.7%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements are for restaurant development
and operations. Each of the Company's restaurants operates in leased premises.
For information concerning leases, see "Business--Properties." To date, the
Company has been dependent primarily on the sale of equity and borrowings from
third parties and shareholders to fund capital requirements.
The Company historically has working capital deficiencies, which it
believes are typical in the restaurant industry. As of July 14, 1996, the
Company's current liabilities of $1,292,863 exceeded its current assets of
$390,276, resulting in a working capital deficiency of $902,587. These
deficiencies are due primarily to the Company's practice of using vendors which
provide favorable terms and its aggressive growth strategy.
Net cash used by operating activities was $638,833 in 1995, an increase of
$440,678 from $198,155 in 1994. This increase was primarily due to an increase
of $232,367 in net loss for the year, along with an increase of $121,060 in
pre-opening costs, and decreases totaling $176,360 in accounts payable and
accrued expenses, offset by increased depreciation and amortization and accrued
rentals.
Net cash used by operating activities was $532,156 in the two quarters
ended July 14, 1996, as compared to $530,078 for the two quarters ended July 9,
1995. The $209,053 increase in net loss for the period was substantially offset
by increased depreciation and amortization and other changes in operating assets
and liabilities.
Purchases of equipment and improvements, intangible assets and security
deposits resulted in cash used by investing activities of $273,567 in 1995 as
compared to $394,581 during 1994, when the Company opened one new restaurant.
Purchases of equipment and improvements related to two restaurants opened
during the two quarters ended July 14, 1996 primarily resulted in cash used by
operations of $1,483,927 for the period, as compared to $232,031 for the two
quarters ended July 9, 1995 during which no restaurants were opened.
Financing activities provided cash of $1,016,196 for 1995, primarily
through the issuance of $1,150,000 in redeemable preferred stock, as compared
with cash provided by financing activities of $168,579 for 1994.
Financing activities provided cash of $1,913,390 for the two quarters ended
July 14, 1996, primarily from $2,007,200 proceeds of notes payable offset by the
payment of notes payable.
The Company opened one restaurant during the year ended December 25, 1994
and two restaurants during the two quarters ended July 14, 1996, resulting in
capital expenditures and cash paid for security deposits of $292,447 for 1994
and $1,460,317 for 1996. Additionally, the Company received lease incentives
from landlords for $1,128,618 for 1994, $1,079,506 for 1995 and $169,972 and
$90,087 for the two quarters ended July 9, 1995 and July 14, 1996, respectively,
which were used for leasehold improvements and to purchase restaurant furniture
and equipment.
The Company's operating cash flow losses and investing activities have been
financed by the issuance of bridge notes, preferred stock, bank notes,
convertible subordinated notes, common stock warrants and a bank overdraft.
During the two quarters ended July 14, 1996, the Company issued $2,150,000 in
face amount 10.35% to 12% bridge notes which mature on March 8, 1998 or within
ten days of closing of the Company's initial public offering. During 1995, the
Company issued $1,150,000 in Series A Preferred Stock, $350,000 in short-term
notes subsequently converted to Series A Preferred Stock, $150,000 in a 10%
convertible subordinated note to a landlord and related party, $125,000 in 9% to
prime plus 2% bank notes, $175,000 in Series A Participating Income Notes,
$104,391 in prime rate interest note to an officer and shareholder and $2,576 in
equipment notes. The Company's payments on bank notes and equipment notes
totalled $231,148 for 1994, $151,879 for 1995 and $88,811 for the two quarters
ended July 14, 1996. Additionally, the Company repaid $425,000 in short-term
notes for 1995, $98,407 to an officer and shareholder in 1995 and $54,459 for
the two quarters ended July 14, 1996, and $343,403 in equipment and subordinated
notes for 1994.
23
<PAGE> 26
The Company expects to open five restaurants during fiscal 1997 and
estimates that approximately $2,620,000 will be needed for the opening of these
restaurants. The Company also expects that through the end of 1997 it will spend
approximately $200,000 for capital improvements to its existing restaurants. The
Company believes its net proceeds from this Offering, along with cash flow from
operations, and developer allowances, will be sufficient both to meet operating
expenses and capital expenditures for the rest of 1996 and for 1997 and to fund
the costs associated with the opening of these five restaurants.
In the longer term, the Company's goal is to expand to 30 restaurants by
year-end 2000. The Company anticipates that additional bank or other financing
will be needed to fund the costs associated with the opening of these
restaurants. The Company believes it will be able to obtain such financing in
view of its improved financial condition following this Offering. If such
financing is not available, or if the Company's assumptions regarding cash flow
or developer contributions prove incorrect, the Company would be required to
curtail its expansion plans.
The Company has incurred substantial net losses during its operating
history, due in part to the costs of developing the prototype restaurant design,
plans and operating strategies and developing the management infrastructure that
will allow for the Company's planned expansion. During 1996, the Company opened
two additional restaurants, which have been operating profitably since their
opening. As previously discussed, the Company plans to open an additional five
restaurants during 1997; the lease for one restaurant has been signed and the
lease agreements for two locations are in the negotiation process. Upon the
conclusion of the Company's initial public offering, interest-bearing debt is
expected to be less than $10,000, preferred stock will be converted into common
equity, and the consulting agreements with directors will be terminated. Based
on the opening of additional restaurants in 1996 and 1997, the working capital
provided by the initial public offering and the elimination of interest expense
and consulting fees upon closing of the initial public offering, management
believes that positive cash flows from operations in 1997 and subsequent years
will allow for continued growth and expansion.
SEASONALITY
The restaurant industry in general is seasonal. The Company's strategy of
locating its restaurants in proximity to arts and entertainment facilities,
convention centers or other high traffic generators may vary normal seasonality
based on the schedules of such facilities.
INFLATION
The Company believes that inflation has not had a material impact on its
operations to date. Substantial increases in labor, employee benefits, food and
beverage and other operating expenses could adversely affect the operations of
the Company.
24
<PAGE> 27
BUSINESS
The Company has developed the "Ciao Baby Cucina" restaurant concept. Ciao
Baby Cucinas serve authentic Mediterranean cuisine, primarily Northern Italian,
with Greek, Spanish and French influences. The Company distinguishes itself by
coupling the ambience, food quality and personal service associated with an
individual upscale, "white tablecloth" restaurant with the efficiencies and cost
effective management techniques of a centrally-managed restaurant chain. In this
regard, the Company's goal is to emulate privately-held restaurant chains such
as Il Fornaio and Houston's. The Company's operating and development strategies
include orienting Company restaurants to the casual sophistication favored by
the growing "baby boom" customer market and locating restaurants in proximity to
arts and entertainment facilities, convention centers or other high traffic
generators which are frequented by these target customers.
Five Ciao Baby Cucina restaurants are now open. The Company plans to
develop additional Ciao Baby Cucina restaurants with a portion of the proceeds
from the sale of this Offering.
The following table provides information about the Company's current
restaurants:
<TABLE>
<CAPTION>
SQUARE RESTAURANT
LOCATION FOOTAGE SEATS DATE OPENED
-------------------------- ------- ---------- ------------------
<S> <C> <C> <C>
Cincinnati, Ohio.......... 3,869 132 April 15, 1991
(Harper's Point)
Washington, D.C........... 7,147 165 August 30, 1993
Hackensack, New Jersey.... 8,074 206 November 16, 1994
Memphis, Tennessee........ 6,448 208 February 29, 1996
Cincinnati, Ohio.......... 7,925 212 March 19, 1996
(downtown)
</TABLE>
Ciao Baby Cucinas are moderately priced full-service restaurants. All
restaurants are open six or seven days a week for dinner and Monday through
Friday for lunch. The Company's newest, prototype restaurants in downtown
Cincinnati and Memphis feature store-front style gourmet coffee shops and
bakeries which are open during breakfast hours.
Ciao Baby Cucinas feature a wide array of appetizers, salads, pizzas,
pastas, entrees and other dishes. The Company offers its patrons high quality
food consistently prepared, generous portions and a level of service typical of
much higher priced fine dining restaurants. Gourmet pizzas, available with a
variety of toppings including veal sausage, proscuitto, wild mushrooms, goat
cheese, grilled radicchio, sun dried tomatoes, grilled eggplant, pine nuts and
fresh basil, and homemade pasta dishes are the signature items of the Ciao Baby
Cucina restaurants.
Ciao Baby Cucina ambience equates to casual comfort with understated
sophistication. Its focal point is the exhibition kitchen, readily visible from
the dining areas to allow patrons to watch the chefs at work. This decor offers
a blend of classic and modern features, incorporating cypress wood and tiled
floors, granite-topped bars, copper and mosaics and soft green and terra-cotta
colors, to provide a contemporary Mediterranean atmosphere. Bottles of infused
olive oil form centerpieces for the tables and a variety of freshly baked breads
is furnished shortly after a customer is seated.
Freshness, quality and creativity are emphasized. Menu modifications are
made as new dishes are added to pique customers' interest. Entree prices
typically range from $6.95 to $11.95 for lunch and $8.95 to $18.95 for dinner
(with the exception of somewhat higher prices in the Washington, D.C. market).
The Company's restaurants offer an extensive variety of premium American and
Italian wines both by the bottle and by the glass. Each restaurant offers a
minimum of 40 premium wines by the glass, which is highly unusual for similar
restaurant operations and is a cornerstone of the Company's concept. This
substantial variety of wines by the glass has significant customer appeal. Each
restaurant also offers an extensive array of premium alcoholic and non-alcoholic
beverages.
25
<PAGE> 28
OPERATING STRATEGY
The Company's operating strategy is to combine successfully the "art and
science" aspects of restaurant operations. The key elements of this strategy,
which have been successfully developed and implemented in the Company's existing
restaurants, are as follows:
Dining Ambience. Over the past five years, the Company has refined its
decor. The Company's newest restaurants (in downtown Cincinnati and in Memphis)
share a common decor, inspired by the newest trattorias of Milan, Italy, which
the Company intends to replicate in its future restaurants. Lighting, white
tablecloths and unobtrusive but personal service are combined to provide the
feeling of a fine dining, upscale restaurant. Each restaurant strives to become
a place "to see and be seen" in its market area. The decor is designed to
reflect the sophistication and excitement that might typically be encountered in
a restaurant in one of the "trendier" areas of New York City, Los Angeles or San
Francisco.
Corporate-Controlled Menus Enhanced By Local Chef Creativity. The Company
recognizes that, in essence, restaurants are about food. With that in mind, each
restaurant's kitchen is managed by a full-time chef who has received culinary
training and who is experienced in the art of food preparation. At the same
time, the Company is focused on the importance of reliability and consistency in
the quality of foods presented in its restaurants. To this end, before it is
offered, each dish has been tested and evaluated at the corporate level, an
exact recipe has been prepared, cost has been calculated, a plate design made
and a photograph taken. Chefs are responsible both for preparation of dishes
according to the corporate format and for the development of new dishes which
may be added to the menus. All suggested new dishes also are evaluated by
corporate management for taste, attractiveness and potential profitability. A
new dish which passes this evaluation typically is offered as a special item and
then, if successful, may be incorporated as a regular menu item. Chefs are
encouraged to propose dishes with a local flair or taste, and approximately 20%
of the items on each restaurant's menu fall into this category.
Financial Controls. The Company utilizes its "By the Numbers"(C) reporting
system, developed by its President Carl A. Bruggemeier, which requires each
restaurant manager to calculate, on a daily basis, such factors as daily sales,
weekly sales to date, comparable sales in prior periods, food costs as a
percentage of food sales and labor costs as a percentage of sales, etc. In
addition, the profit contribution of each of the various dishes served in the
restaurant is calculated on a regular basis. This data is compared daily with
weekly projected numbers and allows management to determine immediately whether
expectations are being met. Management believes that the breadth of its
generation of key operating indices on a daily basis is unusual in the
restaurant industry and allows the Company's management to evaluate and, if
necessary, adjust operations on an immediate basis to better ensure
profitability.
Value-Added Services. In recent years, fresh bakery and gourmet coffee
shops have been among the fastest growing segments of the restaurant industry.
The Company also believes that significant potential exists to capitalize on the
growth in demand for carry-out, "home meal replacement" foods. The Company's two
newest restaurants in downtown Cincinnati and Memphis include store-front style
specialty gourmet coffee operations that feature house-made pastries and
European-style breads, cappuccino and espresso and carry-out items from the
restaurant's regular menu, as well as Ciao Espresso logo merchandise. This
feature will be incorporated in all future Ciao Baby restaurants.
Key Customer Marketing. Both the Company's top management and the unit
manager of each restaurant strive to develop personal relationships with the
Company's most faithful and significant customers. Selected customers are given
a "red phone card" which provides an unlisted restaurant telephone number. By
calling this number, the customer is provided with preferred seating at the
restaurant and receives the personal attention of restaurant management. The
Company also provides informal concierge services to "red phone card" customers,
such as finding tickets to entertainment or sporting events or making
reservations at late night entertainment clubs. This special treatment is
designed to build a sense of loyalty and to ensure both repeat business and
referrals. The thank you note, "table touch" system and customer data bases in
each
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<PAGE> 29
restaurant allow the Company to establish personal relationships with its
customers and track customer frequency and dining habits to better ensure repeat
business and customer loyalty.
EXPANSION STRATEGY
The Company believes that the casual, contemporary atmosphere, food quality
and moderate prices offered by its restaurants appeal to the growing customer
market for this niche and are, therefore, suitable for replication at additional
locations.
The Company plans to open two additional restaurants, in Ft. Lauderdale,
Florida and, contingent upon successful completion of lease negotiations, in
Cleveland, Ohio, in early 1997. While there can be no guarantees, an additional
three restaurants are planned later in 1997, five in 1998, six in 1999 and nine
in 2000. At present, the Company intends that all of its restaurants will be
located east of the Mississippi River and effectively within two hours' travel
time from the Company's headquarters in Cincinnati, Ohio. This proximity is
central to the Company's management philosophy which requires that the Company's
top management visit the Company's restaurants on a regular basis and, indeed,
even work at various jobs in those restaurants to ensure that the Company's
standards are being met.
On July 1, 1996, the Company entered into a lease for a 6,755 square foot
restaurant facility in Ft. Lauderdale, Florida. The restaurant will be located
in Northport Marketplace Center. The lease is for a ten year term with two
five-year renewal terms. Costs to open the restaurant are expected to be
approximately $1.35 million, of which the landlord will contribute approximately
$675,500 in tenant improvements. The landlord also will lend the Company
approximately $169,000 toward the total costs. Rent is to be computed by adding
a base rent of $202,650 per year to a percentage rent determined by the amount
of gross sales in excess of certain break point figures. The Company currently
expects the restaurant to open prior to March 1, 1997.
The Company is engaged in negotiations to lease space from the Playhouse
Square Foundation of Cleveland, Ohio, a nonprofit entity, or an affiliate
(together, "PSF"), and, to develop an approximately 5,700 square foot restaurant
and 11,500 square foot banquet facility at Cleveland's Playhouse Square Center,
the heart of the redeveloped theater district. These are the only restaurant
facilities currently planned for Playhouse Square Center. The currently
projected opening budget is approximately $3.2 million. It is anticipated that
the Company will be responsible for $400,000 of the opening costs. It also is
anticipated that PSF will contribute $300,000 as a tenant improvement allowance
and obtain the remaining $2.5 million through one or more loans and tax credits,
which $2.5 million also will be advanced as an additional tenant improvement
allowance. Ciao Playhouse will be the tenant and will pay base rent in an amount
necessary to amortize the portion of the $2.5 million tenant improvement
allowance that was a loan to PSF. Ciao Playhouse also will pay PSF percentage
rent equal to 50% of Ciao Playhouses net income, after deducting base rent and a
management fee payable to the Company equal to 5% of gross sales. During 1995
Cleveland Playhouse Square attracted over 1 million patrons to its four
theaters. A fifth theater is scheduled to open in late 1997. The Company
currently anticipates that, assuming consummation of a definitive lease
agreement (as to which there can be no assurance), both the restaurant and the
banquet facility will open in April 1997.
The Company is evaluating a proposal from a developer to lease space for a
7,515 square foot restaurant in Baton Rouge, Louisiana. If a definitive
agreement is reached, the restaurant will be located in the Mall of Louisiana, a
comprehensive shopping facility currently under construction which is modeled
after the Mall of America. Costs to open the restaurant are expected to be
approximately $1.3 million of which, under the proposal, the landlord would
contribute approximately $750,000 in tenant improvements. The proposal provides
for a lease term of 20 years. Rent would be computed by adding a base rent,
which would increase during the term of the lease, to a percentage rent
determined by the amount of gross sales in excess of certain break point
figures. The Company currently expects the restaurant would open by November 1,
1997.
In selecting additional markets for expansion, the Company plans to focus
on secondary or tertiary markets which are not currently served by large numbers
of fine dining restaurants. By entering these markets, the Company, ideally,
will seek to fill a void and become perceived as the most significant upscale,
sophisticated, but moderately priced, restaurant in that market. Locations
currently under active consideration include Birmingham, Alabama; Ft. Myers,
Florida; Hilton Head, South Carolina; and Kansas City, Missouri.
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<PAGE> 30
The Company actively evaluates potential business opportunities and
concepts in addition to its Ciao Baby Cucina format. Future expansion via the
acquisition or development of complementary businesses is a possibility,
although the Company has no immediate plans in this connection.
DEVELOPMENT STRATEGY
The Company's development strategy is to locate its restaurants close to
arts and entertainment facilities, convention centers or other high traffic
generators which provide a readily accessible customer base. Examples to date
are the location of the Memphis, Tennessee restaurant near the Orpheum Theater
and Beale Street (which are projected to draw approximately 750,000 visitors
during 1996), the downtown Cincinnati site across the street from the Aronoff
Entertainment Center (which is expected to draw approximately 800,000 visitors
during 1996), the projected Cleveland Playhouse Square Center location and the
Ft. Lauderdale, Florida location (which is in very close proximity to the
Broward County Convention Center and the Port Everglades Cruise Port). The
Company utilizes the services of a nationally-known real estate firm to assist
with site selections and lease negotiations. Together, the Company and the firm
have developed computer-driven site selection profiles for both urban and
suburban locations for the Company's restaurants; these profiles evaluate
approximately 100 different criteria, such as area demographics, traffic
patterns and neighboring businesses.
Development costs vary depending on the site of the restaurant. Management
believes that its reputation among the developer community has enabled it to
attract favorable financing offers from developers of premier real estate
projects and, based upon discussion to date, that it will be able to enter into
similarly advantageous future arrangements. As set forth below, to date the
Company has been successful in obtaining tenant improvements and other developer
contributions which have substantially limited Company capital commitments for
each restaurant. For further information concerning leases, see
"Business -- Properties".
<TABLE>
<CAPTION>
COST PER RESTAURANT(1)
----------------------------- TRAILING
COMPANY DEVELOPER 3-PERIOD REVENUES TRAILING 13-PERIOD
CONTRIBUTION CONTRIBUTION (2) REVENUES (2)
------------ ------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Existing Restaurants:
Cincinnati, Ohio $ 528,000 $ 84,600 $336,602 $1,295,630
(Harper's Point)
Washington, D.C. $ 646,500 (3) $743,869 $2,069,193
Hackensack, New Jersey $ 597,000 $1,138,000 $514,868 $1,798,348
Memphis, Tennessee $ 785,000 $ 705,000 $569,168 n/a
Cincinnati, Ohio $1,240,000(4) $ 550,000 $705,111 n/a
(downtown)
Proposed Restaurants:
Cleveland, Ohio(5) $ 400,000 $2,800,000 n/a n/a
Ft. Lauderdale,
Florida(5) $ 539,500(6) $ 675,500 n/a n/a
</TABLE>
- ---------------
(1) Consists of leasehold improvements, restaurant equipment, computer equipment
and furniture, fixtures, china, flatware and glassware and pre-opening
expenses. See Notes 1 and 4 to Financial Statements.
(2) "Trailing 3-Period Revenues" and "Trailing 13-Period Revenues" consist of
revenues for an individual restaurant for the three four-week periods and 13
four-week periods, respectively, immediately following the opening of that
particular restaurant.
(3) The Company took over a fully equipped restaurant location in Washington,
D.C., with no "key-money." Therefore, total developer costs are not
quantifiable in this instance.
(4) Includes $150,000 of developer-provided financing.
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<PAGE> 31
(5) The Company has entered into a lease for the Ft. Lauderdale restaurant. The
Cleveland restaurant is contingent upon successful lease negotiations, which
may not occur. Projected costs are based upon management's best current
estimates; actual costs could vary significantly. See "Risk
Factors -- Adverse Effect of Unanticipated Costs of Expansion."
(6) Includes $169,000 of developer-provided financing.
The Company anticipates that future restaurants will be similar in size to
its two newest restaurants, ranging from approximately 6,000 to 8,000 square
feet with indoor seating for 165 to 220 people. The Company's strategy is to
utilize existing buildings for new units in lieu of free-standing construction.
Complete restaurant development typically takes eight to twelve months and
encompasses site selection, lease negotiation, restaurant design, production of
contract documents, licensing and permitting, contractor selection,
construction, installation of furniture, fixtures and equipment, hiring and
training of restaurant staff and various pre-opening activities. The Company's
senior management oversees all aspects of restaurant development and works
closely with the development community, the Company's designers, architects,
contractors and kitchen and bar equipment suppliers. To date, the Company has
utilized an unrelated Cincinnati, Ohio based construction firm as either the
construction manager or general contractor for all of its restaurants; the
Company currently expects to maintain this relationship for future restaurants.
OPERATIONS
The Company has extensive policies and procedures regarding the operations
of individual restaurants. Senior executives work directly with restaurant
general managers and executive chefs on a daily basis to emphasize menu
development, control of food, beverage and labor costs, marketing, special
promotions and revenue enhancement. In addition to their daily oversight
activities, the corporate officers conduct formal, quarterly management
operational reviews of each restaurant. These reviews encompass food quality,
bar operations, wine list, staffing, training, housekeeping standards,
preventative maintenance programs and profit and loss analysis. The bonus
programs for general managers and executive chefs are based, in part, upon the
results of these reviews.
Each restaurant is managed by a general manager who has direct
responsibility for the financial performance of the restaurant and who oversees
restaurant operations, including the kitchen, personnel, marketing and
compliance with Company procedures. Period sales and purchasing forecasts are
produced by the general manager for review by the corporate office. Within the
guidelines established by corporate headquarters, the general manager has broad
authority for day-to-day operations. The general manager is assisted by up to
three assistant managers.
The executive chef in each restaurant is responsible for operation of the
kitchen, including training, food preparation, purchasing, inventory management
and periodic analysis of labor and food costs. In addition, the executive chef
is involved each day in the creation of daily specials in each menu category for
both lunch and dinner. The executive chef is assisted in kitchen management by
up to two sous chefs and a head baker. Members of management meet with the
executive chefs of Ciao Baby Cucina on a regular basis to develop new menu
items.
PURCHASING
The Company has firmly established corporate purchasing policies, both to
control costs and to ensure the quality of the Company's menu offerings.
Non-perishable supplies are purchased on a Company-wide basis after receipt of
competitive bids. Perishable supplies are purchased locally by individual
restaurants on essentially a daily basis under the direction of the restaurant's
chef. These purchases are made from a list of approved vendors who are required
each Friday morning to bid prices at which they will supply products to the
Company for the following week. The Company has established payment procedures
with its vendors which, in effect, call for the Company to pay invoices an
average of 35 days after receipt. The Company intends to hire a Director of
Purchasing, who will be responsible for overseeing and coordinating all
purchasing activities;
29
<PAGE> 32
the Company also believes that its expanding base of restaurants will result in
procurement efficiencies which lower unit costs.
EMPLOYEE TRAINING
Consistent with management's commitment to providing exceptional customer
service, employees at Ciao Baby Cucina receive extensive training. Prior to the
opening of a new Ciao Baby Cucina restaurant, a team of Company employees
conducts a two week intensive training program for the staff of the new
restaurant. The Company generally fills key positions in new restaurants, such
as the chef and general manager, with employees who have been working at
existing Company restaurants. This transfer of trained and experienced Company
employees provides consistency among the Company's restaurants. Newly hired
waiters and waitresses must complete a two week training program before they are
allowed to serve customers.
The Company also conducts ongoing training programs for its employees. The
Company has implemented its "Customer Comes First" program, a twelve month
customer service training program that focuses each month on different aspects
of customer service, such as phone etiquette, greeting customers and challenges
in providing superior customer service. Each month during the program, members
of corporate staff meet with Ciao Baby Cucina employees to discuss restaurant
operations.
The Company has relocated its executive offices to the building which
houses its downtown Cincinnati restaurant. This has facilitated the training of
unit managers and chefs by permitting the Company to combine classroom-style
training in the Company's new corporate training facilities with practical
hands-on experience in the Company's flagship restaurant located in the same
building. Additionally, in order to facilitate its expansion, enhance employee
training programs and maximize opportunities for the recruiting of culinary
personnel, the Company plans to hire a Director of Human Resources.
MARKETING
The Company's marketing thrust is to create and sustain a reputation for
highly innovative cuisine, personal service, excellent value and an ambience of
high visibility and congeniality for its guests. The target customers of Ciao
Baby Cucina restaurants are professional/business people, working couples, young
adults and pre- and post-theater diners seeking a light meal or dessert.
The Company focuses its marketing efforts more heavily on public relations
than on paid advertising. A new Ciao Baby Cucina typically hosts a charity event
prior to or shortly after opening to build community relationships and to
attract customers to the restaurant. Through its corporate office the Company
directs national press relations and in-house marketing activities and
coordinates the activities of public relations firms as needed for each
restaurant.
The Company has an in-house marketing program at both the restaurant and
corporate levels. Each restaurant's management is responsible for promoting the
restaurant through the use of "red phone cards," frequent contacts with local
hotels and their concierges, development of relationships with area businesses
and organizations and the creation and implementation of individualized
promotions targeted to holidays and local special events. These activities are
supplemented by corporate-wide promotions, such as incentives for restaurant
servers and for private party bookings, and marketing tools such as guest check
inserts, mini menus and comment cards. As the Company's restaurant base expands,
it expects to realize lower costs as a percentage of sales from its centralized
marketing activities.
CONTROLS
The Company devotes considerable attention to controlling cash receipts and
cost of food, beverage and labor, and utilizes a system with both proprietary
and industry standard components to provide management with precise sales and
cost analysis on a daily basis.
Computerized processing of customer orders is used to enhance customer
service, minimize the possibility of loss from employee theft or spoilage,
control labor costs and provide information on the sales volume and overall
profitability of each food and beverage item on the menu. To obtain food from
the kitchen
30
<PAGE> 33
or a beverage from the bar, a dining room server must enter the order into
computer terminals conveniently located throughout the dining area. The order
prints in the kitchen or the bar, identified by table and seat number. The
computer accumulates orders by server which must be accounted for at the end of
the dining period with either cash or signed credit card receipts.
Employees also clock in and out on these computer terminals. Each
employee's department and rate of pay are maintained in the computer enabling
management to review labor by department, including hours and dollars spent on a
daily, weekly or bi-weekly basis. The daily labor reports assist managers in
controlling labor costs.
The Company maintains financial and accounting controls for each of its
restaurants through the use of a personal computer network which accumulates all
sales information and labor costs for each day from dining area computer
terminals. These data are transferred daily to the Company's centralized
accounting department for review and updating of the Company's general ledger.
Credit card receipts are controlled through daily electronic deposits to the
Company's central operating account. Cash deposits are made to local bank
accounts, the balances of which are controlled by the Company's financial staff.
As a result of the accounting controls and systems, each restaurant
management team has current and precise information on sales, cost of sales and
labor cost on a daily basis, which allows fine tuning of operations. Less
profitable items on a menu can be quickly identified and, if desired, replaced
with more profitable selections. The restaurant's role in the accounting cycle
is that of data entry and processing of sales transactions, labor hours and
labor dollars expended as well as the daily tracking of food and beverage costs.
The Company's financial staff prepares period-end financial statements for each
restaurant, manages payables and monitors accounting practices at all
restaurants. Restaurant performance is evaluated relative to budgets which,
depending on the revenue or cost category, are based on weekly or period
standards.
COMPETITION
In general, the restaurant business is highly competitive and can be
affected by changes in the public's eating habits and preferences, local and
national economic conditions, consumer spending habits, population trends and
traffic patterns. Key competitive factors in the industry are the quality and
value of the food products offered, quality of service, price, dining
experience, restaurant location and the cleanliness and attractiveness of
facilities. The Company faces competition from a number of restaurants, both
locally-owned and those operated by national chains, some of which have greater
financial resources than the Company. The Company's strategy is to differentiate
itself from its competitors by coupling the ambience, food quality and personal
service associated with an individual upscale, "white tablecloth" restaurant
with the efficiencies and cost-effective management techniques of a centrally
managed restaurant chain.
EMPLOYEES
At September 1, 1996, the Company employed approximately 265 persons,
approximately 139 of whom were employed on a full-time basis (30 hours per week
or more), including approximately 30 management personnel. The Company has an
experienced core executive and administrative team, to which it intends to add a
Chief Operating Officer, a Director of Human Resources and a Director of
Purchasing in order to facilitate its expansion strategy and enhance operating
efficiencies. Management believes that this corporate infrastructure will
support its growth plans through the year 2000 with only the addition of lower
level clerical and accounting personnel as new restaurants come on line. The
Company's continued success will depend to a large degree on its ability to
attract and retain qualified on-site managers, chefs and employees. None of the
Company's employees is covered by a collective bargaining agreement. The Company
considers its employee relations to be good.
GOVERNMENT REGULATION
Each of the Company's restaurants is subject to licensing and regulation by
a number of governmental authorities, which include alcoholic beverage control
and health, safety and fire agencies in the state, county and municipality in
which each restaurant is located. Difficulties in obtaining or failures to
obtain the required
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<PAGE> 34
licenses or approvals could delay or prevent the opening of a new restaurant in
a particular area. The Company earns substantial revenues from the sale of
alcoholic beverages. Alcoholic beverage control regulations require each of the
Company's restaurants to apply to a state authority and, in certain locations,
county or municipal authorities for a license or a permit to sell alcoholic
beverages on the premises and to provide service for extended hours and on
Sundays. Typically, licenses must be renewed annually and may be revoked or
suspended for cause at any time, and the consent of the licensing authority must
be obtained before certain changes in ownership and/or control of the licensee
may occur. Alcoholic beverage control regulations relate to numerous aspects of
the daily operations of the Company's restaurants, including minimum age of
patrons and employees, hours of operation, advertising, wholesale purchasing,
inventory control and handling, storage and dispensing of alcoholic beverages.
Failure of a restaurant to obtain or retain liquor or food service licenses
would adversely affect the restaurant's operations.
The Company may be subject in certain states to "dram shop" statutes which
generally provide a person injured by an intoxicated person the right to recover
damages from an establishment which wrongfully served alcoholic beverages to the
intoxicated person. The Company has never been named in a lawsuit involving
"dram shop" statutes. The Company carries general liability policies in the
amount of $1,000,000 per occurrence and $4,000,000 in the aggregate. This
coverage is deemed by management to be sufficient.
The Company's restaurant operations are also subject to federal and state
minimum wage laws governing such matters as working conditions, overtime and tip
credits. Significant numbers of the Company's food service and preparation
personnel are paid at rates related to the federal minimum wage and,
accordingly, further increases in the minimum wage could increase the Company's
labor costs.
SERVICE MARKS AND PROPRIETARY INFORMATION
The Company believes that its service marks have significant value and are
important to its ability to create demand for and awareness of its restaurants.
The Company has registered the trade name "CIAO BABY" with the Ohio Secretary of
State and has acquired the registered service mark "CIAO!" in the State of
Tennessee. Hampden, Inc., a Colorado corporation unaffiliated with the Company,
operates a restaurant in Denver, Colorado using the "Ciao! baby" name and has
registered the service mark "Ciao! baby" with the U.S. Patent and Trademark
Office. As a result, and assuming the validity of its registration, under
federal law Hampden possesses the right to enjoin the Company's use of "Ciao!
baby" in any geographical market where the Company operates a restaurant if and
when Hampden enters that market. Currently, Hampden has not entered a
geographical market in which the Company presently operates or plans to open a
restaurant.
Any entity that can demonstrate the use of "Ciao! baby" in interstate
commerce prior to Hampden's first use may petition the U.S. Patent and Trademark
Office to cancel Hampden's federal registration of the "Ciao! baby" service
mark. Under federal law, any such petition to cancel Hampden's registration
based on prior use must be filed on or before November 10, 1997. The Company is
attempting to determine if it can demonstrate that it used "CIAO BABY" in
interstate commerce prior to Hampden's first use. Based upon the results of this
review, the Company may file a petition seeking to cancel Hampden's federal
registration. There can be no assurance, however, that the Company will be
successful in these efforts or that Hampden will not attempt to enjoin the
Company's use of "CIAO BABY" in existing or future markets in which the Company
operates. If the Company were prevented from using the "CIAO BABY" mark, the
adverse effect on the Company could be material.
The Company also relies on trade secrets and proprietary know-how and
employs various methods to protect its concepts and recipes. However, such
methods may not afford complete protection and there can be no assurance that
others will not independently develop similar know-how or obtain access to the
Company's know-how, concepts and recipes.
PROPERTIES
Effective July 1, 1996, the Company relocated its executive offices to
approximately 5,300 square feet of newly leased space in the building that also
houses its downtown Cincinnati restaurant. Approximately 2,900
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<PAGE> 35
square feet of space previously occupied by the Company as administrative
offices has been sublet for the remainder of the term of the lease, which
expires in 1999.
As of the date of this prospectus, the Company operates a total of five
restaurants, all of which are located in leased premises. Two of these
restaurants are located in Cincinnati, Ohio, one at Harper's Point, the other in
downtown Cincinnati. The remaining restaurants are situated in Washington, D.C.,
Hackensack, New Jersey, and Memphis, Tennessee. In addition, the Company has
entered into a lease for a site in Ft. Lauderdale, Florida. The table below
presents certain information concerning the Company's existing restaurant
leases. In addition, the Company is negotiating leases restaurants in Cleveland,
Ohio, and Baton Rouge, Louisiana. See "Business -- Expansion Strategy" on page
26 of this Prospectus for information regarding the proposals under
consideration. All of the Company's restaurant facilities are well maintained
and suitable for their current and reasonably foreseeable uses. During early
1997 the Company plans to renovate its original Cincinnati (Harper's Point)
restaurant to update its decor in line with the Company's two newest
restaurants; the cost of this modernization is expected to be approximately
$75,000.
<TABLE>
<CAPTION>
DEVELOPER
LOCATION LEASE EXPIRATION SQUARE FEET ANNUAL BASE RENT PERCENTAGE RENT CONTRIBUTION
- ----------------- ------------------------ ----------- ----------------------- ----------------------- ---------------------
<S> <C> <C> <C> <C> <C>
Cincinnati, Ohio February 2001 3,869 $69,642 6% of gross sales $84,600
(Harper's Point) (no renewal option) over specified
breakpoint
Washington, D.C. March 2004 7,147 $261,104 increasing 6% of gross sales Landlord delivered
(no renewal option) to $299,784 over increasing fully-equipped
breakpoints restaurant
Hackensack, October 2004 8,074 $201,850 6% of gross sales $1,138,000
New Jersey (5-year renewal option) over specified
breakpoint
Memphis, February 2012 6,448 $128,960 increasing 4.99% of gross sales $705,000
Tennessee (no renewal option) to $199,888 over increasing
breakpoints
Cincinnati, Ohio January 2011 7,925 $149,000 increasing 6% of gross sales $550,000
(downtown) (5-year renewal option) to $230,950, plus 20% over increasing
of operating income breakpoints
(after deducting 5% of
gross sales) up to a
maximum of $600,000
over the lease term
Ft. Lauderdale, 10-year term commencing 6,755 $202,650 (subject to 7% of gross sales over $675,500, plus loan
Florida 120 days after annual CPI increase) specified breakpoint; of up to $169,000
certificate of occupancy 8% of gross sales over repayable over lease
obtained (two 5-year specified breakpoint term with interest at
renewal 10%
options)
</TABLE>
LEGAL PROCEEDINGS
In August 1996, the Company was added as a defendant in an Amended
Counterclaim in litigation pending in the Superior Court of the District of
Columbia, Notte Luna Limited Partnership et al. v. Capital Management and
Development Corporation et al. (Civ. Div. No. 0007600-95). Notte Luna, a
Washington, D.C. restaurant, engaged Capital Management and Development
Corporation ("CMDC") to manage its restaurant. Alleging poor performance and
defaults in the management agreement, Notte Luna terminated the CMDC management
agreement, engaged the Company to manage the restaurant and sued CMDC. The
Company managed the restaurant from March 4, 1995 to April 21, 1996. CMDC has
now brought a counterclaim against the Company alleging conspiracy to induce
Notte Luna to terminate its contract with CMDC, as well as slander and
interference with contract and business relationships, and claiming $6,000,000
in compensatory and $6,000,000 in punitive damages. The litigation is in the
early stages of proceedings.
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<PAGE> 36
Accordingly, the Company is unable to predict the effect of the ultimate
resolution of the matter, although an unfavorable decision could have a material
adverse effect upon the Company's results of operations, financial condition and
liquidity. The Company believes it has meritorious defenses and intends to
defend the action vigorously.
EXECUTIVE OFFICERS, DIRECTORS AND NOMINEES
The following table sets forth certain information with respect to the
directors, executive officers and nominees for director of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Carl A. Bruggemeier...................... 46 Chairman of the Board,
President and Chief
Executive Officer
Catherine C. Jetter...................... 49 Nominee for Director,
Vice President -- Finance,
Secretary and Treasurer
Roger Lipton............................. 55 Director(1)
Marvin Rosenberg......................... 62 Nominee for Director(2)
Russell C. Wiles......................... 57 Nominee for Director(2)
John H. Wyant............................ 50 Director
</TABLE>
- ---------------
(1) Will become a member of the Audit and the Compensation Committees after this
Offering.
(2) Will become a director of the Company and a member of the Audit and
Compensation Committees after this Offering.
Mr. Bruggemeier is a founder of the Company and was responsible for the
development of the Ciao Baby Cucina concept. He has been President and Chief
Executive Officer of the Company since its formation in 1992 and was President
and Chief Executive Officer of Fire In The Kitchen from 1990 until 1993. Mr.
Bruggemeier has over 25 years of hospitality industry experience in both
high-volume single unit operations and multiple unit concepts. Immediately prior
to forming the Company, Mr. Bruggemeier was the President and Chief Operating
Officer of Phoenix Food Service Corporation, a multi-dimensional food service
company in Cincinnati, Ohio. Mr. Bruggemeier has also operated such high-volume,
high-visibility restaurants as Tavern on the Green in New York City, the Potomac
in Washington, D.C., Commander's Palace and Mr. B's Bistro in New Orleans,
Brennan's of Houston and the Star Line Cruise Corporation headquartered in
Chicago, Illinois. He is the recipient of many prestigious hospitality industry
awards, including The Hall of Fame Dining Award from Nations Restaurant News and
The Ivy Award presented by Restaurant and Institutions Magazine.
Ms. Jetter has served as the Company's Vice President -- Finance and
Secretary since 1993 and as its Treasurer since 1996. She also was Secretary of
Fire In The Kitchen, Inc. prior to its merger with the Company. Ms. Jetter was
formerly in public accounting and worked primarily as a consultant to small
businesses including, but not limited to, several restaurant companies. Prior to
her employment with the Company, she acted as a consultant to the Company since
its inception in 1990. Prior to her employment in public accounting, Ms. Jetter
served as an Assistant Treasurer of a publicly traded real estate investment
trust. She has over 25 years' experience in both public accounting and private
industry. Ms. Jetter is a Certified Public Accountant and holds a Bachelor of
Science in Accounting from Florida Institute of Technology.
Mr. Lipton has been a director of the Company since August 1992. Since
February 1995, he has been President of Lipton Financial Services, Inc., an
investment banking firm specializing in the restaurant, franchising and
retailing industries, and also has been employed by Axiom Capital Management,
Inc., an NASD broker/dealer, where he is a Managing Director. From 1981 until
February 1995 he was Managing
34
<PAGE> 37
Director of the Lipton Financial Services Division of Ladenburg, Thalmann & Co.,
Inc., also an investment banking firm. Mr. Lipton earned a Bachelor's Degree in
Mechanical Engineering from Rensselaer Polytechnic Institute (1962), and earned
an MBA at the Harvard Graduate School of Business Administration (1965). He has
been in the investment banking industry since 1967, with the exception of
1976-1980 when he financed and operated a chain of fifteen fast food
restaurants. Mr. Lipton assists the Company with strategic financial planning
and other related issues.
Mr. Rosenberg is a principal in Towne Properties, a Cincinnati, Ohio real
estate development business which he founded with others in 1961. He is a former
Chairman and member of the Board of Directors of the Cincinnati Branch of the
Federal Reserve Bank of Cleveland. Among other activities, he currently is a
member of the Board of Directors of Acordia of Cincinnati, Inc., the Board of
Visitors of the University of Cincinnati College of Law and the Board of
Overseers of Hebrew Union College. Mr. Rosenberg is a graduate of the University
of Illinois and the University of Cincinnati College of Law.
Mr. Wiles has been President of Heidelberg Distributing Company, a
distributor of premium beers and wines, since 1993 and President of Ohio Valley
Wine Co. Inc., a distributor of fine wines, of which he was a co-founder, since
1989. He is also the majority owner and general partner of C&W Investments,
which is primarily involved in owning and managing commercial warehousing in the
Cincinnati, Ohio market. Mr. Wiles is a founder and chairman of the Cincinnati
International Wine Festival, a nonprofit organization which raises funds for
Cincinnati area charities, a director of public radio station WGUC and a member
of the governing boards of other private companies and associations.
Mr. Wyant has served as President of Blue Chip Venture Company, a venture
capital investment firm which manages $56 million of committed capital for
investment in privately held high growth companies, since its formation in 1992.
From 1991 to 1992, Mr. Wyant served as Executive Vice President, Corporate
Finance of Gradison & Co., a financial services firm, where his primary activity
was the development and formation of Blue Chip Venture Company. Mr. Wyant was
initially trained in marketing with The Procter & Gamble Company and served in
marketing and general management positions with Taft Broadcasting Company.
Subsequently, he was Chief Executive Officer of Home Entertainment Network and
Nutrition Technology Corporation, both venture capital-backed companies. Mr.
Wyant holds a Bachelor of Arts from Denison University and a Juris Doctor from
Salmon P. Chase College of Law. He has been a director of the Company since 1995
and also is a director of Zaring Homes, Inc., DIGEX, Incorporated and a number
of privately held companies.
COMPENSATION
The following table sets forth the compensation of the Company's Chief
Executive Officer for fiscal 1995. No other executive officer earned over
$100,000 in salary and bonus for fiscal 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION -----------
--------------------------------------------- SECURITIES ALL OTHER
NAME AND PRINCIPAL FISCAL OTHER ANNUAL UNDERLYING COMPENSATION
POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#) ($)
- --------------------- ------ ---------- --------- ---------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Carl A. Bruggemeier,
President, Chief
Executive Officer 1995 $116,154 -- (1) (2) --
</TABLE>
- ---------------
(1) None, other than perquisites which did not exceed the lesser of $50,000 or
10% of salary and bonus.
(2) In March 1995 Mr. Bruggemeier entered into an amended Employment Agreement
with the Company which provided for the grant of options to purchase 138,120
shares of Common Stock at the price of $1.45 per share. This Employment
Agreement, including the options provided for (none of which have
35
<PAGE> 38
been or will be exercised), will be cancelled at the time of the closing of
the Offering and replaced by the Employment Agreement described below.
The Company has entered into an Employment Agreement dated as of August 1,
1996 with Carl A. Bruggemeier, President of the Company. The Agreement, which is
conditioned upon the closing of the Offering, provides for a base annual salary
of $182,000 and for raises and cash bonuses (equal to at least 25% of base
salary) as determined by the Company's Board of Directors depending upon the
Company's achieving certain sales and profit goals established by the Board. The
Employment Agreement also provides for miscellaneous compensation in the form of
insurance and other benefits. The Employment Agreement is for a three year term
and renews automatically for successive one year periods unless terminated by
either party upon 180 days prior written notice. In the event of specified
changes of control of the Company, Mr. Bruggemeier will have the right to
terminate his employment and to receive a lump sum settlement equivalent to the
then current value of the base salary payments to which he otherwise would be
entitled for the remainder of the term of the agreement plus any bonus related
to the then current fiscal year. Mr. Bruggemeier's right to be employed by or be
engaged, directly or indirectly, by a person or entity in a "competitive
business" (defined as any casual-themed restaurant located within 50 miles of a
Company restaurant and having specified average customer check prices) is
restricted during the term of the Agreement and, under certain circumstances,
for a year thereafter.
Ms. Jetter has an Employment Agreement with the Company which commenced on
December 1, 1995 and automatically extends from year-to-year unless terminated
by either party upon 30 days' written notice prior to the expiration of any
annual term. The Agreement provides for a base annual salary of $60,000,
increased by $2,500 per year for each new restaurant opened or managed by the
Company, for an annual bonus of 20% of salary if certain corporate objectives
are achieved (25%, if these objectives are exceeded by a set percentage) and for
miscellaneous compensation in the form of insurance and other benefits. For
1996, Ms. Jetter's base salary under the Agreement is $67,500.
STOCK OPTIONS
The Company has granted options to Mr. Bruggemeier, Ms. Jetter and one
other employee to purchase 14,250, 5,750 and 1,645 shares of Common Stock,
respectively, at the initial public offering price. The Company will not grant
options or other rights to purchase or acquire shares for a period of one year
after the Offering if, as a result, all outstanding options or rights would
entitle their holders to acquire in excess of 12% of the shares outstanding upon
completion of the Offering.
DIRECTOR COMPENSATION
Directors who are not employees of the Company will receive $5,000 per year
for serving as directors and members of committees, plus $500 for each Board of
Directors meeting attended (including Board meetings held by telephone).
Committee members will receive $500 per meeting attended, unless the meeting
occurs on the same day as a Board meeting, in which case no separate fee will be
paid. Employee directors will not be separately compensated for their services
as directors.
CERTAIN TRANSACTIONS
The Board of Directors of the Company has adopted a policy requiring that
after the Offering any transactions, including loans, between the Company and
its officers, directors, principal shareholders and their affiliates be on terms
no less favorable to the Company than could be obtained from unrelated third
parties and that any such transactions be approved by a majority of the
disinterested members of the Company's Board of Directors.
Described below are certain transactions and relationships between the
Company and certain of its officers, directors and shareholders which have
occurred during the last three fiscal years. The Company believes that the
material terms of the various transactions were as favorable to the Company as
could have been obtained from unrelated third parties.
36
<PAGE> 39
Carl A. Bruggemeier, Roger Lipton and Donald A. Karas, a shareholder and
former director of the Company, may be deemed founders of the Company.
Shortly after the Company's incorporation, Messrs. Lipton and Karas each
loaned the Company $50,000. These loans have been repaid in full. In December
1993 the Company exercised options it held to repurchase 17,265 and 129,487.5
shares of Common Stock, respectively, from Messrs. Lipton and Karas. Messrs.
Lipton and Karas received $20,000 and $150,000, respectively, for these shares.
In February 1994, the Company exercised an option to repurchase 77,692.5
shares of Common Stock from Mr. Bruggemeier for a price of $90,000; in payment,
Mr. Bruggemeier accepted a demand promissory note in that amount, bearing
interest at a bank's prime commercial rate plus 2%. In March 1995, this note was
canceled and, in consideration of an additional $90,000 loaned to the Company by
Mr. Bruggemeier, a new promissory note for $180,000, bearing interest at the
prime commercial rate, was issued to him. The $34,000 principal balance owing on
this note, which accrues interest at 9%, is due on February 1, 1997.
Mr. Lipton has a consulting arrangement with the Company pursuant to which
he is entitled to fees of $50,000 per year. The amount of the consulting fee was
determined by negotiations between the Company and Mr. Lipton. The services
provided by Mr. Lipton have included advice regarding the structuring of the
Company's debt and equity financings and assistance in the development of the
Company's concept and operating and expansion strategies. This consulting
arrangement will terminate upon the completion of this Offering.
In January 1995 Blue Chip LP loaned the Company $350,000 in return for a
promissory note bearing interest at 10% per annum. This promissory note was
personally guaranteed by Mr. Bruggemeier. On March 30, 1995, the Company, Blue
Chip LP and Mr. Bruggemeier entered into a Stock Purchase and Shareholder
Agreement (the "Shareholder Agreement") pursuant to which the Company issued
15,000 shares of its Series A Preferred Stock to Blue Chip LP in exchange for
cancellation of the January 1995 promissory note and guaranty (after payment of
$7,188 of accrued interest) and an additional investment by Blue Chip LP of
$1,150,000. The Series A Preferred Stock has a cumulative dividend rate of
$10.00 per share per annum and is convertible into 813,529 shares of Common
Stock. For fiscal 1995 and the first two quarters of 1996, dividends of $112,500
and $80,769, respectively, were accrued in respect of the Series A Preferred
Stock. Upon consummation of the Offering, all outstanding shares of Series A
Preferred Stock will be converted to 813,529 shares of Common Stock.
Pursuant to the Shareholder Agreement, the Company and Mr. Bruggemeier
agreed to take all action necessary for the Company's Board of Directors to
consist of three members, one of whom would be named by Blue Chip LP and the
others of whom would be Messrs. Bruggemeier and Lipton. In accordance with this
agreement, Mr. Wyant became a director of the Company on March 30, 1995. Also in
accordance with the Shareholder Agreement, the Company entered into a Consulting
Agreement with Blue Chip Venture Company, an Ohio corporation and the general
partner of Blue Chip LP ("Blue Chip Venture"), on March 30, 1995, pursuant to
which Blue Chip Venture has advised the Company with respect to financial
matters, including the obtaining of additional debt and equity capital and the
structuring of this Offering. Blue Chip Venture is entitled to receive fees of
$18,750 per quarter for its services. The amount of the consulting fee was
determined by arms length negotiations. The Consulting Agreement terminates on
the earliest of the sale by Blue Chip of all Company securities held by it, the
Company's consummation of an initial public offering or December 31, 1999. Mr.
Wyant is President and a 50% stockholder of Blue Chip Venture and a limited
partner in Blue Chip LP.
The consulting fees to Mr. Lipton and Blue Chip Venture under the
arrangements described above and the dividends with respect to the Series A and
Series B Preferred Stock are in arrears. The Company, Mr. Lipton, Blue Chip
Venture and the holders of such Preferred Stock have agreed that, upon the
consummation of the Offering, all such arrearages will be paid by the issuance
by the Company of shares of Common Stock at a price of $7.00 per share. The
following table shows the number of shares of Common Stock to be issued pursuant
to such Agreement, assuming that the Offering were consummated on September 30,
1996.
37
<PAGE> 40
<TABLE>
<CAPTION>
NUMBER OF SHARES
ARREARAGE AT OF COMMON STOCK
OBLIGATION SEPTEMBER 30, 1996 TO BE ISSUED
---------- ------------------ ----------------
<S> <C> <C>
Consulting Fees - Lipton............................... $ 50,500 7,214
Consulting Fees - Blue Chip Venture.................... $112,500 16,071
Dividends - Series A Preferred Stock................... $225,000 32,142
Dividends - Series B Preferred Stock................... $163,944 23,412
</TABLE>
In addition, the Shareholder Agreement (i) grants Blue Chip LP certain
rights of first refusal in the event of a third-party offer to purchase shares
of the Company's Common Stock from any shareholder; (ii) grants Blue Chip LP
certain preemptive rights to purchase securities issued by the Company; (iii)
requires the prior written consent of Blue Chip LP before the Company may pay
any dividends on its capital stock (other than the Series A Preferred Stock),
amend its Articles of Incorporation, engage in any other business or in any
material transaction outside of the ordinary course of business, and enter into
other specified transactions; and (iv) grants Blue Chip LP the right to register
shares in the Company's initial and subsequent public offerings (which right has
been waived with respect to the initial public offering) and, on two occasions
subsequent to such offering, to demand registration of shares of Common Stock
held by it. Blue Chip has agreed to waive and release, upon the consummation of
the Offering, all of its rights under the Shareholder Agreement except for the
registration rights.
On February 7, 1996, Blue Chip LP loaned the Company $750,000 evidenced by
a promissory note due March 8, 1996 bearing interest at 15% per annum. Blue Chip
LP made subsequent loans to the Company of $250,000 on each of March 11, 1996
and July 29, 1996. Effective as of August 1, 1996, Blue Chip exchanged the
principal amount of all three loans, plus $200,000 in loan fees owed by the
Company, for a $1,450,000 principal amount secured note bearing interest at
10.35% per annum and due on the earlier of March 8, 1998 or within 10 days after
the closing of the Company's initial public offering. As further consideration,
the Company also issued Bridge Financing Warrants to Blue Chip to purchase
100,000 shares of Common Stock, exercisable at $7.00 per share for a period of
five years after the closing of such initial public offering. Accrued interest
on the three loans to August 1, 1996 is payable upon maturity of the secured
note. The secured promissory note is convertible at Blue Chip's option upon
default into shares of a new class of preferred stock to be created. However,
because the secured promissory note will be paid by use of a portion of the
proceeds from this Offering, the Company will not issue any of the shares of
this class of preferred stock if the Offering is completed.
The Company has promissory notes with The Provident Bank, in the aggregate
outstanding amount at September 17, 1996 of $212,359, which are personally
guaranteed by Mr. Bruggemeier. This indebtedness will be repaid in full with a
portion of the proceeds of the Offering.
Payment of the Company's obligations under the lease for its Cincinnati,
Ohio restaurant at Harper's Point is personally guaranteed by Mr. Bruggemeier.
Heidelberg Distributing Company and Ohio Valley Wine Co., of which Mr.
Wiles is the President, sell beverage products to the Company. During fiscal
years 1994 and 1995 and the first two quarters of fiscal 1996, purchases by the
Company from these businesses were $79,647, $82,766 and $112,321, respectively.
Mr. Rosenberg is a principal of the entities from which the Company leases
the space occupied by its executive offices and its two Cincinnati, Ohio
restaurants. Aggregate lease payments by the Company for these properties during
1993, 1994, 1995 and the first two quarters of 1996 were $85,244, $58,035,
$75,645 and $140,247, respectively. In July 1995, Towne Investment Company, a
Limited Partnership, of which Mr. Rosenberg is a partner, advanced the Company
$150,000 for tenant improvements to its downtown Cincinnati, Ohio restaurant in
exchange for a promissory note (the "Towne Note") convertible into 81,352 shares
of the Company's Common Stock. The Towne Note will be so converted at the time
of the closing of the Offering.
38
<PAGE> 41
HOLDINGS OF MANAGEMENT
AND PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of Company's Common Stock and Preferred Stock at November 1, 1996, by
its directors and nominees for director, Mr. Bruggemeier, all directors,
nominees and executive officers as a group and, giving effect to the Offering,
each person owning over 5% of the outstanding Common Stock. At the time of
consummation of the Offering, each outstanding share of Series A Preferred Stock
and Series B Preferred Stock will be converted into 54.235 and 348.7 shares of
Common Stock, respectively.
<TABLE>
<CAPTION>
PREFERRED STOCK(1)
COMMON STOCK(1) ------------------
---------------------------------------------
BEFORE AFTER
BEFORE OFFERING AFTER OFFERING OFFERING OFFERING
------------------ ------------------------ -------- -------
NO. OF PERCENT NO. OF PERCENT NO. OF NO. OF
SHARES OF CLASS SHARES OF CLASS SHARES SHARES
------- -------- --------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Carl A. Bruggemeier(2)............ 276,757 48.6% 291,007(3) 9.2% -- --
Catherine C. Jetter............... -- -- 5,750(3) * -- --
Roger Lipton(2)................... 103,590 18.2 268,358(4)(5) 8.5 433.5(4) --
Marvin Rosenberg.................. 2,071 * 83,423(6) 2.6 -- --
Russell C. Wiles.................. -- -- -- -- -- --
John H. Wyant(2).................. -- -- 961,742(4)(7) 29.6 15,000.0(6) --
Blue Chip Capital Fund Limited
Partnership(2).................... -- -- 945,671(4)(8) 29.1 15,000.0(7) --
All directors, nominees and
executive officers as a group
(6 persons)....................... 382,418 67.1 1,610,280(4)(9) 49.2 15,433.5 --
</TABLE>
- ---------------
* Less than 1%.
(1) Beneficial ownership includes sole or shared voting or investment power with
respect to a security or the right to acquire beneficial ownership of a
security within 60 days. The numbers of shares indicated are owned with sole
voting and investment power unless otherwise noted.
(2) The address of Mr. Bruggemeier is 700 Walnut Street, Suite 300, Cincinnati,
Ohio 45202; the address of Mr. Lipton is 399 Park Avenue, New York, New York
10022; and the address of Mr. Wyant and Blue Chip LP is 201 East Fifth
Street, Cincinnati, Ohio 45202.
(3) Common Stock after the Offering includes shares which may be acquired upon
the exercise of outstanding options at the initial offering price as
follows: Mr Bruggemeier, 14,250 shares and Ms. Jetter, 5,750 shares.
(4) If the Underwriters' over-allotment option is exercised in full, after the
Offering shares beneficially owned will be as follows: Mr. Lipton, 193,358
(6.1%), Mr. Wyant, 886,742 (27.3%), Blue Chip LP, 870,671 (26.8%), and all
directors, nominees and executive officers as a group, 1,460,280(44.7%). See
"Selling Shareholders" and "Underwriting."
(5) Common Stock after the Offering includes 151,145 shares to be received upon
conversion of Series B Preferred Stock, 6,409 shares to be received in
payment of deferred dividends on Series B Preferred Stock (based on amounts
outstanding at September 30, 1996) and 7,214 shares to be received in
payment of deferred consulting fees (based on amounts outstanding at
September 30, 1996). Includes 70,600 shares of Common Stock to be held by an
Individual Retirement Account ("IRA") for the benefit of Mr. Lipton and
122,395 shares to be held by RHL Associates, LP, a limited partnership of
which Mr. Lipton is the general partner and a 20% limited partner ("RHL
Associates'). Preferred Stock before the Offering represents 433.5 shares
(27.4%) of Series B Preferred Stock, of which 194.25 shares are held by Mr.
Lipton's IRA and 194.25 shares are held by RHL Associates. See "Certain
Transactions."
(6) Includes 81,352 shares issuable upon conversion of the Towne Note. See
"Certain Transactions."
39
<PAGE> 42
(7) Common Stock after the Offering includes 813,529 shares to be received by
Blue Chip LP upon conversion of Series A Preferred Stock, 32,142 shares to
be received by Blue Chip LP in payment of deferred dividends on Series A
Preferred Stock (based on amounts outstanding at September 30, 1996), 16,071
shares to be received by Blue Chip Venture in payment of deferred consulting
fees (based on amounts outstanding at September 30, 1996) and 100,000 shares
which may be acquired upon exercise of Bridge Financing Warrants held by
Blue Chip LP. Preferred Stock before the Offering represents 15,000 shares
(100%) of Series A Preferred Stock, all of which is held by Blue Chip LP.
Mr. Wyant disclaims beneficial ownership of all such shares of Common and
Preferred Stock except to the extent of his pro rata interest therein. See
"Certain Transactions."
(8) Common Stock after the Offering includes 813,529 shares to be received upon
conversion of Series A Preferred Stock, 32,142 shares to be received in
payment of deferred dividends on Series A Preferred Stock (based on amounts
outstanding at September 30, 1996) and 100,000 shares which may be acquired
upon exercise of Bridge Financing Warrants held. Preferred Stock before the
Offering represents 15,000 shares (100%) of Series A Preferred Stock. See
"Certain Transactions."
(9) See Notes (3) through (8) for information concerning shares, options and
warrants included and the effect of the exercise of the Underwriters'
over-allotment option.
SELLING SHAREHOLDERS
The Selling Shareholders, Blue Chip LP and Roger H. Lipton, have granted
the Underwriters an option, expiring 30 days from the date of this Prospectus,
to purchase up to 150,000 shares of Common Stock beneficially owned by them.
Blue Chip LP is a Cincinnati, Ohio based venture capital limited partnership
organized under Delaware law. The Underwriters may exercise this option solely
to cover over-allotments, if any, made in connection with the sale of Common
Stock. If the Underwriters' over-allotment option is exercised in full, 75,000
shares will be sold by Blue Chip LP and 75,000 shares will be sold by Mr.
Lipton. Of the up to 75,000 shares which may be sold by Mr. Lipton, 37,500 are
owned by an Individual Retirement Account for his benefit and 37,500 are owned
by RHL Associates. Information on shares held by each of the Selling
Shareholders, prior to and giving effect to the Offering, is provided above
under "Holdings of Management and Principal Shareholders."
Each of the Selling Shareholders is a director and/or affiliate of the
Company. See "Executive Officers, Directors and Nominees" and "Certain
Transactions." In view of their affiliation with the Company, it is possible
that the Selling Shareholders may be deemed to be statutory underwriters under
the provisions of the Securities Act of 1933.
DESCRIPTION OF CAPITAL STOCK
Under the Company's Amended and Restated Articles of Incorporation, the
Company's authorized capital stock consists of 10,000,000 shares of Common
Stock, without par value, 15,000 shares of Series A Convertible Preferred Stock,
$100 par value, 1,740 shares of Series B Convertible Preferred Stock, $690 par
value, and 100,000 shares of undesignated preferred stock, without par value.
The following description of certain matters relating to the capital stock of
the Company is a summary and is qualified in its entirety by the provision of
the Company's Amended and Restated Articles of Incorporation and Code of
Regulations and by the provisions of the Ohio General Corporation Law.
COMMON STOCK
The Company had 569,910 shares of Common Stock outstanding on the date of
this Prospectus. Holders of Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of shareholders. Shareholders
do not have the right to cumulate their votes in the election of directors.
Subject to preferences which have been and may be granted to holders of
preferred stock, holders of Common Stock are entitled to share in such dividends
as the Board of Directors, in its discretion, may validly declare from funds
legally available. In the event of liquidation, each outstanding share of Common
Stock
40
<PAGE> 43
entitles its holder to participate ratably in the assets remaining after payment
of liabilities and any preferred stock liquidation preferences.
Shareholders have no preemptive or other rights to subscribe for or
purchase additional shares of any class of stock or any other securities of the
Company. There are no redemption or sinking fund provisions with regard to the
Common Stock. All outstanding shares of Common Stock are fully paid, validly
issued, and non-assessable.
The vote of holders of a majority of all outstanding shares of Common Stock
is required to amend the Articles of Incorporation and to approve mergers,
reorganizations, and similar transactions.
PREFERRED STOCK
The Company's Amended and Restated Articles of Incorporation authorize
15,000 shares of Series A Preferred Stock, all of which were outstanding before
the Offering, 1,740 shares of Series B Preferred Stock, of which 1,584 were
outstanding before the Offering, and 100,000 shares of currently undesignated
preferred stock. At the time of consummation of the Offering, each outstanding
share of Series A Preferred Stock and Series B Preferred Stock will be converted
into 54.235 and 348.7 shares of Common Stock, respectively, and fractional
shares will be eliminated. The Series A Preferred Stock and Series B Preferred
Stock will not be reissued.
Following consummation of the Offering, all of the authorized shares of
undesignated preferred stock will be available for issue from time to time in
series having such designations, preferences and rights, qualifications, and
limitations as the Board of Directors may determine without any approval of
shareholders. Preferred stock could be given rights, including voting and/or
conversion rights, which would adversely affect the voting power and equity of
holders of Common Stock and could have preference to Common Stock with respect
to dividend and liquidation rights. Issuance of preferred stock could have the
effect of acting as an anti-takeover device to prevent a change of control of
the Company.
PROVISIONS AFFECTING BUSINESS COMBINATIONS AND CHANGES IN CONTROL
Ohio law governs the rights of shareholders of the Company. Chapter 1704 of
the Ohio Revised Code may be viewed as having an anti-takeover effect. This
statute, in general, prohibits an "issuing public corporation" (the definition
of which would include the Company) from entering into a "Chapter 1704
Transaction" with the beneficial owner (or affiliates of such beneficial owner)
of 10% or more of the outstanding shares of the corporation (an "interested
shareholder") for at least three years following the date on which the
interested shareholder attains such 10% ownership, unless the board of directors
of the corporation approves, prior to such person becoming an interested
shareholder, either the transaction or the acquisition of shares resulting in a
10% ownership. A "Chapter 1704 Transaction" is broadly defined to include, among
other things, a merger or consolidation with, a sale of substantial assets to,
or the receipt of a loan, guaranty or other financial benefit (which is not
proportionately received by all shareholders) from the interested shareholder.
Following the expiration of such three-year period, a Chapter 1704 Transaction
with the interested shareholder is permitted only if either (i) the transaction
is approved by the holders of at least two-thirds of the voting power of the
corporation (or such different proportion as is set forth in the corporation's
articles of incorporation), including a majority of the outstanding shares,
excluding those owned by the interested shareholder, or (ii) the business
combination results in the shareholders other than the interested shareholder
receiving a prescribed "fair price" for their shares. One significant effect of
Chapter 1704 is to cause an interested shareholder to negotiate with the board
of directors of a corporation prior to becoming an interested shareholder.
In addition, Section 1707.043 of the Ohio Revised Code requires a person or
entity that makes a proposal to acquire the control of a corporation to repay to
that corporation any profits made from trades in the corporation's stock within
18 months after making the control proposal.
Section 1701.831 of the Ohio GCL (the "Control Share Acquisition Statute")
requires shareholder approval of any proposed "control share acquisition" of an
Ohio corporation. A "control share acquisition" is
41
<PAGE> 44
the acquisition, directly or indirectly, by any person (including any
individual, partnership, corporation, limited liability company, society,
association or two or more persons who have a joint or common interest) of
shares of a corporation that, when added to all other shares of the corporation
that may be voted, directly or indirectly, by the acquiring person, would
entitle such person to exercise or direct the exercise of 20% or more (but less
than 33 1/3%) of the voting power of the corporation in the election of
directors or 33 1/3% or more (but less than a majority) of such voting power or
a majority or more of such voting power. Under the Control Share Acquisition
Statute, the control share acquisition must be approved in advance by the
holders of a majority of the outstanding voting shares represented at a meeting
at which a quorum is present and by the holders of a majority of the portion of
the outstanding voting shares represented at such a meeting excluding the voting
shares owned by the acquiring shareholder and certain "interested shares,"
including shares owned by officers elected or appointed by the directors of the
corporation and by directors of the corporation who are also employees of the
corporation.
The purpose of the Control Share Acquisition Statute is to give
shareholders of Ohio corporations a reasonable opportunity to express their
views on a proposed shift in control, thereby reducing the coercion inherent in
an unfriendly takeover. The provisions of the Control Share Acquisition Statute
grant to the shareholders of the Company the assurance that they will have
adequate time to evaluate the proposal of the acquiring person, that they will
be permitted to vote on the issue of authorizing the acquiring person's purchase
program to go forward in the same manner and with the same proxy information
that would be available to them if a proposed merger of the Company were before
them and, most importantly, that the interests of all shareholders will be taken
into account in connection with such vote and the probability will be increased
that they will be treated equally regarding the price to be offered for their
common shares if the implementation of the proposal is approved.
The Control Share Acquisition Statute applies not only to traditional
tender offers but also to open market purchases, privately negotiated
transactions and original issuances by an Ohio corporation, whether friendly or
unfriendly. The procedural requirements of the Control Share Acquisition Statute
could render approval of any control share acquisition difficult in that the
transaction must be authorized at a special meeting of shareholders, at which a
quorum is present, by the affirmative vote of the majority of the voting power
represented and by a majority of the portion of such voting power excluding
"interested shares." It is recognized that any corporate defense against persons
seeking to acquire control may have the effect of discouraging or preventing
offers which some shareholders might find financially attractive. On the other
hand, the need on the part of the acquiring person to convince the shareholders
of the Company of the value and validity of his offer may cause such offer to be
more financially attractive in order to gain shareholder approval.
While the Company believes that these provisions are in its best interests,
potential shareholders should be aware that such provisions could be
disadvantageous to them because the overall effect of these statutes may be to
render more difficult or discourage the removal of incumbent management or the
assumption of effective control by other persons.
TRANSFER AGENT AND REGISTRAR
The registrar and transfer agent for the Company's Common Stock is Star
Bank, National Association, Cincinnati, Ohio.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
3,149,766 shares of Common Stock. The 1,000,000 shares sold in the Offering and
any of the up to 150,000 shares sold upon exercise of the Underwriters'
over-allotment option, will be freely tradeable by persons other than
"affiliates" of the Company, as that term is defined in Rule 144 under the Act,
without restriction or registration under that Act. The remaining 2,149,766
shares (the "Restricted Shares") will continue to be held by the Company's
current shareholders (assuming no exercise of the over-allotment option). The
Restricted Shares may not be sold unless they are registered under the Act or
sold pursuant to an applicable exemption from registration, including an
exemption pursuant to Rule 144.
42
<PAGE> 45
Rule 144 governs the public sale in ordinary trading transactions of
"restricted securities" and of securities owned by "affiliates." Restricted
securities are securities acquired directly or indirectly from an issuer in a
transaction not involving a public offering. In general, under Rule 144, if a
period of at least two years has elapsed since the date the restricted
securities were acquired from the Company, then the holder of such restricted
securities (including an affiliate of the Company) is entitled, subject to
certain conditions, to sell within any three-month period a number of shares
which does not exceed the greater of (i) 1% of the Company's then outstanding
shares of Common Stock or (ii) the shares' average weekly trading volume during
the four calendar weeks preceding such sale. Sales under Rule 144 are also
subject to certain manner-of-sale provisions and requirements as to notice and
the availability of current public information about the Company.
Upon completion of the Offering, approximately 1,176,000 of the Restricted
Shares will be eligible for sale in the public market in compliance with Rule
144 beginning 90 days after the date of this Prospectus. However, each of the
Company's officers and directors and certain other holders of the Company's
Common Stock, who together will hold an aggregate of 1,645,665 Restricted
Shares, have agreed not to offer, sell or otherwise dispose of any of the
Restricted Shares upon completion of the Offering for a period of 180 days from
the date of this Prospectus, without the prior written consent of the Managing
Underwriter.
Blue Chip LP has the right, on two occasions subsequent to the Offering, to
require the Company to register shares of Common Stock held by it and the right
to participate in any subsequent public offering initiated by the Company. In
addition, the Company has outstanding warrants to purchase 249,990 shares of
Common Stock which become exercisable upon the closing of the Offering. Each
holder of these warrants has the right to require the Company to register the
shares of Common Stock which may be acquired upon warrant exercise and the right
to participate in any subsequent registration of the Company's securities. Blue
Chip LP and each warrant holder have agreed not to exercise their respective
registration rights during the 180-day lock-up period.
Prior to the Offering, there has been no public market for the Common
Stock, and no prediction can be made as to the effect, if any, that market sales
of shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of
Common Stock in the public market could adversely affect prevailing market
prices and the Company's ability to raise capital at favorable prices.
Application has been made for approval of the Common Stock for listing on the
Nasdaq under the symbol "CIAO." There can be no assurance, however, that, if
received, the Company will be able to maintain its Nasdaq listing.
43
<PAGE> 46
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to each of the underwriters named
below (the "Underwriters"), for whom Glaser Capital Corporation is acting as
Managing Underwriter, and each of the Underwriters has severally agreed to
purchase from the Company, the respective number of shares of Common Stock set
forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Glaser Capital Corporation
---------
Total...................................................................... 1,000,000
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all 1,000,000 shares of
Common Stock offered hereby if any such shares of Common Stock are purchased. In
the event of a default by any Underwriter, the Underwriting Agreement provides
that, in certain circumstances, purchase commitments of the non-defaulting
Underwriters may be increased or the Underwriting Agreement may be terminated.
The Company has been advised by the Managing Underwriter that the several
Underwriters propose initially to offer such shares of Common Stock to the
public at the public offering price set forth on the cover page of this
Prospectus, and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow and such dealers may
re-allow a concession not in excess of $ per share to other dealers.
After the initial public offering, the public offering price and such
concessions may be changed.
The Selling Shareholders have granted to the Underwriters an option,
expiring 30 days from the date of this Prospectus, to purchase up to 150,000
additional shares of Common Stock at the initial public offering price less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriters may exercise such option solely to cover over-allotments, if any,
made in connection with the sale of shares of Common Stock that the Underwriters
have agreed to purchase. To the extent the Underwriters exercise such option,
each of the Underwriters will have a firm commitment, subject to certain
conditions, to purchase a number of option shares proportionate to such
Underwriter's initial commitment. The Company will not receive any of the
proceeds from the sale of shares by the Selling Shareholders.
The Company has agreed in connection with the Offering of the Common Stock
to issue to the Managing Underwriter five-year warrants (the "Underwriter's
Warrants"), at a price of $.01 per warrant, to purchase up to an aggregate of
100,000 shares of Common Stock at an exercise price of 120% of the initial
public offering price of the shares of Common Stock offered hereby (subject to
certain adjustments pursuant to antidilution provisions). The Company also has
agreed to grant to the Managing Underwriter certain registration rights with
respect to the Underwriter's Warrants and the shares of Common Stock issuable
upon the exercise thereof, including one "demand" registration and one
"piggyback" registration. The Company will bear the costs, with exceptions, of
the "piggyback" registration. Furthermore, in addition to the underwriting
discount set forth on the cover page of this Prospectus, the Company has agreed
to pay the Managing Underwriter a
44
<PAGE> 47
nonaccountable expense allowance equal to 1% of the total Offering proceeds,
including proceeds from any sale of shares pursuant to the Underwriters'
over-allotment option. Of this amount, up to $30,000 (which has been advanced)
is payable for out-of-pocket expenses whether or not the Offering is completed.
During the first two quarters of 1996 the Managing Underwriter assisted the
Company in securing $1,050,000 of bridge financing. The Managing Underwriter
received $52,500 in fees in connection with these services.
The Company, each of its officers and directors and certain other holders
of the Company's Common Stock have agreed that they will not sell, without the
consent of the Managing Underwriter, any Common Stock or any securities
convertible into Common Stock, during the 180 days following the date of this
Prospectus except for the Common Stock offered in this Offering. Additionally,
certain warrant holders of the Company have agreed not to exercise, during the
180-day period, registration rights for shares of Common Stock purchasable upon
exercise of the warrants. The Managing Underwriter will not consent to any
shortening of such period unless, in its judgment, the timing of the sales and
the number of shares of Common Stock sold as a result of any said consent would
not have a material adverse effect on the market of the Common Stock. In such
event, such sales would not necessarily be preceded by a public announcement of
the Company or the Managing Underwriter that such consent has been given.
The initial public offering price for the shares of Common Stock included
in this Offering has been determined by negotiation among the Company, the
Selling Shareholders and the Managing Underwriter. Among the factors considered
in determining such price were the history of and prospects for the Company's
business and the industry in which it operates, an assessment of the Company's
management, past and present revenues and earnings of the Company, the prospects
for growth of the Company's revenues and earnings and currently prevailing
conditions in the securities markets, including current market valuations of
publicly traded companies which are comparable to the Company.
The Underwriting Agreement provides that the Company and the Selling
Shareholders (if the over-allotment option is exercised) will indemnify the
Underwriters against certain liabilities under the Act, or contribute to
payments the Underwriters may be required to make in respect thereof.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Taft, Stettinius & Hollister, Cincinnati, Ohio. Certain legal matters
in connection with this Offering will be passed upon for the Underwriters by
Dinsmore & Shohl, Cincinnati, Ohio.
EXPERTS
The financial statements of Ciao Cucina Corporation included in this
Prospectus have been audited by Joseph Decosimo and Company, PLL, independent
certified public accountants as set forth in their report thereon included
herein. Such financial statements have been included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Act with respect to the Common
Stock offered hereby. The Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and such Common Stock, reference
is hereby made to such Registration Statement and to the exhibits and schedules
thereto. The Registration Statement can be inspected without charge at the
office of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies may be obtained from the Commission at prescribed rates.
The Commission also maintains an internet web site at http://www.sec.gov that
contains reports, proxy statements and other information.
45
<PAGE> 48
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants..................................................... F-2
Balance Sheets at December 25, 1994 and December 31, 1995 and at July 14, 1996
(unaudited)......................................................................... F-3
Statements of Operations for the years ended December 25, 1994 and December 31, 1995
and for the two quarters ended July 9, 1995 (unaudited) and July 14, 1996
(unaudited)......................................................................... F-4
Statement of Redeemable Equity and Shareholders' Deficit for the years ended December
25, 1994 and December 31, 1995 and for the two quarters ended July 14, 1996
(unaudited)......................................................................... F-5
Statements of Cash Flows for the years ended December 25, 1994 and December 31, 1995
and for the two quarters ended July 9, 1995 (unaudited) and July 14, 1996
(unaudited)......................................................................... F-6
Notes to Financial Statements......................................................... F-8
</TABLE>
F-1
<PAGE> 49
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Ciao Limited, Inc.
Cincinnati, Ohio
We have audited the accompanying balance sheets of Ciao Limited, Inc. as of
December 31, 1995 and December 25, 1994 and the related statements of
operations, redeemable equity and shareholders' deficit and cash flows for the
years then ended. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ciao Limited, Inc. as of
December 31, 1995 and December 25, 1994 and the results of its operations and
cash flows for the years then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As discussed in the Liquidity and
Operations note, the company's recurring losses from operations, net working
capital deficiency and total stockholders' deficit raise substantial doubt about
its ability to continue as a going concern. Management's plans concerning these
matters are also described in the Liquidity and Operations note. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Joseph Decosimo and Company, PLL
Cincinnati, Ohio
September 5, 1996,
except for Note 13, as to which the date is November 18, 1996
F-2
<PAGE> 50
CIAO LIMITED, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER DECEMBER
25, 31,
ASSETS 1994 1995 JULY 14,
----------- ----------- 1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents........................... $ 33,864 $ 137,660 $ 35,508
Accounts Receivable................................. 39,943 28,689 61,365
Inventories......................................... 47,696 46,074 107,151
Prepayments......................................... 61,059 22,836 186,252
----------- ----------- -----------
Total Current Assets............................. 182,562 235,259 390,276
EQUIPMENT AND IMPROVEMENTS, NET....................... 2,174,709 3,102,576 4,440,653
INTANGIBLE ASSETS, NET................................ 242,069 203,715 408,136
SECURITY DEPOSITS AND OTHER........................... 219,103 344,174 345,593
----------- ----------- -----------
TOTAL ASSETS.......................................... $ 2,818,443 $ 3,885,724 $ 5,584,658
=========== =========== ===========
LIABILITIES, REDEEMABLE EQUITY AND SHAREHOLDERS'
DEFICIT
CURRENT LIABILITIES
Bank Overdraft...................................... $ 22,555 $ -- $ --
Current Portion of Long-Term Debt................... 1,742,503 449,638 342,141
Accounts Payable.................................... 296,872 259,397 404,462
Accrued Expenses.................................... 507,843 375,998 546,260
----------- ----------- -----------
Total Current Liabilities........................ 2,569,773 1,085,033 1,292,863
----------- ----------- -----------
LONG-TERM LIABILITIES
Notes Payable....................................... 388,718 184,335 2,262,012
Accrued Rentals..................................... 200,485 373,164 454,315
Deferred Lease Incentives........................... 1,168,406 2,125,829 2,124,153
----------- ----------- -----------
Total Long-Term Liabilities...................... 1,757,609 2,683,328 4,840,480
----------- ----------- -----------
REDEEMABLE EQUITY--
10% Series A Convertible Preferred Stock--$100 par
value, 15,000 shares authorized and issued for
1995............................................. -- 1,558,604 1,646,628
10% Series B Convertible Preferred Stock--$690 par
value, 1,740 shares authorized, 1,584 shares
issued for 1995.................................. -- 1,174,932 1,233,784
----------- ----------- -----------
Total Redeemable Equity.......................... -- 2,733,536 2,880,412
----------- ----------- -----------
SHAREHOLDERS' DEFICIT
Common Stock--no par value, 10,000,000 shares
authorized, 794,355 shares issued................ 750 750 750
Additional Paid-In Capital (Deficit)................ 127,327 (1,767,372) (1,717,372)
Accumulated Deficit................................. (1,502,016) (714,551) (1,577,475)
Treasury Stock--224,445 shares, stated at cost...... (135,000) (135,000) (135,000)
----------- ----------- -----------
Total Shareholders' Deficit...................... (1,508,939) (2,616,173) (3,429,097)
----------- ----------- -----------
TOTAL LIABILITIES, REDEEMABLE EQUITY AND SHAREHOLDERS'
DEFICIT............................................. $ 2,818,443 $ 3,885,724 $ 5,584,658
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 51
CIAO LIMITED, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
------------------------- TWO QUARTERS ENDED
DECEMBER DECEMBER ------------------------
25, 31, JULY 9, JULY 14,
1994 1995 1995 1996
---------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
RESTAURANT REVENUES........................ $3,273,083 $ 4,778,742 $2,554,841 $4,130,369
---------- ----------- ---------- ----------
OPERATING EXPENSES--
Food and Beverage Costs.................. 944,593 1,409,422 730,266 1,274,845
Restaurant Labor Costs................... 1,049,802 1,548,678 716,793 1,377,809
Occupancy and Other Restaurant
Expenses.............................. 1,013,734 1,589,833 997,798 977,887
General and Administrative Expenses...... 364,849 604,490 317,599 641,155
Depreciation and Amortization............ 259,044 459,549 240,510 386,231
----------- ----------- ---------- ----------
Total Operating Expenses.............. 3,632,022 5,611,972 3,002,966 4,657,927
----------- ----------- ---------- ----------
LOSS FROM OPERATIONS....................... (358,939) (833,230) (448,125) (527,558)
----------- ----------- ---------- ----------
OTHER INCOME (EXPENSE)--
Interest Expense......................... (268,134) (94,459) (40,772) (189,358)
Interest Income.......................... 9,180 21,949 10,293 12,488
Other Income (Expense), net.............. (52,397) 3,083 (28,391) (11,620)
----------- ----------- ---------- ----------
Total Other Expense................... (311,351) (69,427) (58,870) (188,490)
----------- ----------- ---------- ----------
NET LOSS................................... (670,290) (902,657) (506,995) (716,048)
Accretion of Dividends on Preferred
Stock................................. -- (194,472) (70,590) (139,621)
Accretion of Discount on Preferred
Stock................................. -- (10,105) (3,668) (7,255)
----------- ----------- ---------- ----------
NET LOSS APPLICABLE TO COMMON STOCK........ $ (670,290) $(1,107,234) $ (581,253) $ (862,924)
=========== =========== ========== ==========
NET LOSS PER COMMON SHARE.................. $(1.16) $(1.94) $(1.02) $(1.51)
=========== =========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING.............................. 576,384 569,910 569,910 569,910
=========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 52
CIAO LIMITED, INC.
STATEMENT OF REDEEMABLE EQUITY AND SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
REDEEMABLE EQUITY TOTAL SHAREHOLDERS' DEFICIT
--------------------------------------------------------- --------------------------------
SERIES A CONVERTIBLE SERIES B COMMON STOCK
CONVERTIBLE ----------------- ADDITIONAL
PREFERRED STOCK PREFERRED STOCK TOTAL NUMBER PAID-IN
-------------------- ------------------- REDEEMABLE OF CAPITAL
SHARES AMOUNT SHARES AMOUNT EQUITY SHARES AMOUNT (DEFICIT)
------ ---------- ----- ---------- ---------- ------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE--
DECEMBER 26, 1993......... -- $ -- -- $ -- $ -- 794,355 $750 $ 127,327
Issuance of Note Payable
for 77,692 Shares of
Treasury Stock............
Net Loss................... -- -- -- -- -- -- -- --
------ ---------- ----- ---------- ---------- ------- ------ -----------
BALANCE--
DECEMBER 25, 1994......... -- -- -- -- -- 794,355 750 127,327
Issuance of Redeemable
Equity.................... 15,000 1,435,999 1,584 1,092,960 2,528,959
Reclassification of S
Corporation Accumulated
Deficit to Additional
Paid-In Deficit........... (1,894,699)
Dividends Accrued on
Redeemable Equity......... 112,500 81,972 194,472
Accretion of Discount on
Redeemable Equity......... 10,105 10,105
Net Loss................... -- -- -- -- -- -- -- --
------ ---------- ----- ---------- ---------- ------- ------ -----------
BALANCE--
DECEMBER 31, 1995......... 15,000 1,558,604 1,584 1,174,932 2,733,536 794,355 750 (1,767,372)
Issuance of Warrants to
Noteholders............... 50,000
Dividends Accrued on
Redeemable Equity
(unaudited)............... 80,769 58,852 139,621
Accretion of Discount on
Redeemable Equity
(unaudited)............... 7,255 7,255
Net Loss (unaudited)....... -- -- -- -- -- -- -- --
------ ---------- ----- ---------- ---------- ------- ------ -----------
BALANCE--
JULY 14, 1996
(UNAUDITED)............... 15,000 $1,646,628 1,584 $1,233,784 $2,880,412 794,355 $750 $(1,717,372)
======= =========== ====== =========== =========== ======== ========= =============
<CAPTION>
TOTAL
ACCUMULATED TREASURY SHAREHOLDERS'
DEFICIT STOCK DEFICIT
----------- --------- -----------
<S> <C> <C> <C>
BALANCE--
DECEMBER 26, 1993......... $ (831,726) $ (45,000) $ (748,649)
Issuance of Note Payable
for 77,692 Shares of
Treasury Stock............ (90,000) (90,000)
Net Loss................... (670,290) -- (670,290)
----------- --------- -----------
BALANCE--
DECEMBER 25, 1994......... (1,502,016) (135,000) (1,508,939)
Issuance of Redeemable
Equity.................... --
Reclassification of S
Corporation Accumulated
Deficit to Additional
Paid-In Deficit........... 1,894,699 --
Dividends Accrued on
Redeemable Equity......... (194,472) (194,472)
Accretion of Discount on
Redeemable Equity......... (10,105) (10,105)
Net Loss................... (902,657) -- (902,657)
----------- --------- -----------
BALANCE--
DECEMBER 31, 1995......... (714,551) (135,000) (2,616,173)
Issuance of Warrants to
Noteholders............... 50,000
Dividends Accrued on
Redeemable Equity
(unaudited)............... (139,621) (139,621)
Accretion of Discount on
Redeemable Equity
(unaudited)............... (7,255) (7,255)
Net Loss (unaudited)....... (716,048) -- (716,048)
----------- --------- -----------
BALANCE--
JULY 14, 1996
(UNAUDITED)............... $(1,577,475) $(135,000) $(3,429,097)
============= =========== =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 53
CIAO LIMITED, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
------------------------ TWO QUARTERS ENDED
DECEMBER DECEMBER -------------------------
25, 31, JULY 9, JULY 14,
1994 1995 1995 1996
---------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES--
Net Loss.................................. $(670,290) $(902,657) $ (506,995) $ (716,048)
Depreciation.............................. 132,335 275,259 126,662 233,691
Amortization.............................. 126,709 184,290 113,848 152,540
Amortization of Lease Incentives.......... (22,916) (122,083) (64,497) (91,764)
Accretion of Notes Payable Discount....... -- -- -- 6,250
Changes in Operating Assets and
Liabilities--
Decrease (Increase) in--
Accounts Receivable.................. 6,624 11,254 7,523 (32,676)
Inventories.......................... (22,502) 1,622 (63,765) (61,077)
Prepayments.......................... (46,182) 38,223 9,469 (163,416)
Preopening Costs..................... (188,512) (121,060) (23,225) (256,134)
Increase (Decrease) in--
Accounts Payable..................... 126,577 (44,515) (13,523) 145,065
Accrued Expenses..................... 290,844 (131,845) (208,805) 170,262
Accrued Rentals...................... 69,158 172,679 93,230 81,151
---------- ---------- ---------- -----------
NET CASH USED BY OPERATING
ACTIVITIES........................... (198,155) (638,833) (530,078) (532,156)
---------- ---------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES--
Purchase of Equipment and Improvements.... (330,500) (123,620) (112,532) (1,481,681)
Cash paid for Intangible Assets........... -- (24,876) -- (827)
Cash paid for Security Deposits........... (64,081) (125,071) (119,499) (1,419)
---------- ---------- ---------- -----------
NET CASH USED BY INVESTING
ACTIVITIES........................... (394,581) (273,567) (232,031) (1,483,927)
---------- ---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES--
Increase (Decrease) in Bank Overdraft..... 22,555 (22,555) (22,555) --
Proceeds from Issuance of Redeemable
Equity................................. -- 1,150,000 1,150,000 --
Proceeds from Issuance of Warrants........ -- -- -- 50,000
Payment of Preferred Stock Issuance
Costs.................................. -- (64,001) (64,001) --
Proceeds from Notes Payable............... 720,575 628,038 475,000 2,007,200
Payments of Notes Payable................. (574,551) (675,286) (571,061) (143,270)
---------- ---------- ---------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES........................... 168,579 1,016,196 967,383 1,913,930
---------- ---------- ---------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................... (424,157) 103,796 205,274 (102,152)
CASH AND CASH EQUIVALENTS--
BEGINNING OF PERIOD....................... 458,021 33,864 33,864 137,660
---------- ---------- ---------- -----------
CASH AND CASH EQUIVALENTS--
END OF PERIOD............................. $ 33,864 $ 137,660 $ 239,138 $ 35,508
========== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 54
CIAO LIMITED, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
------------------------ TWO QUARTERS ENDED
DECEMBER 25, DECEMBER 31, -----------------------
JULY 9, JULY 14,
1994 1995 1995 1996
---------- ---------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Deferred landlord incentives received used
to purchase leasehold improvements and
equipment................................ $1,128,618 $1,079,506 $ 168,972 $ 90,087
========== ========== ========== =========
Purchase of Treasury Stock for note
payable.................................. $ 90,000 -- -- --
========== ========== ========== =========
Conversion of short-term note into Series A
Convertible Preferred Stock.............. -- $ 350,000 $ 350,000 --
========== ========== ========== =========
Conversion of Series A and B Convertible
Subordinated Participating Income Notes
into Series B Convertible Preferred
Stock.................................... -- $1,092,960 $1,092,960 --
========== ========== ========== =========
Dividends accrued on Series A and B
Convertible Preferred Stock.............. -- $ 194,472 $ 70,590 $139,621
========== ========== ========== =========
Accretion of discount on Series A
Convertible Preferred Stock.............. -- $ 10,105 $ 3,668 $ 7,255
========== ========== ========== =========
Accretion of discount on issuance of
Bridge Notes............................. -- -- -- $ 6,250
========== ========== ========== =========
Issuance of Bridge Note for Deferred
Financing Costs.......................... -- -- -- $100,000
========== ========== ========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest..................... $ 168,565 $ 210,292 $ 111,098 $130,096
========== ========== ========== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE> 55
CIAO LIMITED, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies and practices followed by the Company
are as follows:
Description of Business--The Company develops, owns and operates certain
restaurants which operate under the name Ciao Baby Cucina. The Company also
managed a restaurant in Washington D.C. under another name.
Restaurants operated, managed or under development as of December 31, 1995
are summarized as follows:
<TABLE>
<CAPTION>
YEAR
LOCATION OPENED STATUS
-------- ------ ------
<S> <C> <C>
Cincinnati, Ohio (Harper's Point) 1991 Owned and operating
Washington, D.C. 1993 Owned and operating
Hackensack, New Jersey 1994 Owned and operating
Washington, D.C. 1995 Managed and operated (agreement
terminated in April, 1996)
Memphis, Tennessee 1996 Owned and operating
Cincinnati, Ohio (downtown) 1996 Owned and operating
</TABLE>
Cash and Cash Equivalents--The Company considers all money market accounts
and highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents. The Company maintains at a single financial
institution cash and cash equivalent accounts which may exceed federally insured
amounts at times and which may at times significantly exceed balance sheet
amounts due to outstanding checks.
Inventories--Inventories consist primarily of food, liquor and supplies and
are stated at the lower of cost or market. Cost is determined using the
first-in, first-out (FIFO) method.
Equipment and Improvements--Equipment and improvements are stated at cost.
Expenditures for repairs and maintenance are charged to expense as incurred and
additions and improvements that significantly extend the lives of assets are
capitalized. Upon sale or other retirement of depreciable property, the cost and
accumulated depreciation are removed from the related accounts and any gain or
loss is reflected in operations.
Depreciation is calculated on the straight-line method over the following
estimated useful lives:
<TABLE>
<S> <C>
Leasehold Improvements Remaining lease term, principally 10 years
Restaurant Equipment 7 to 10 years
Office Furniture and Equipment 5 to 7 years
Computer Equipment 5 years
</TABLE>
Intangible Assets--The costs of intangible assets are amortized on the
straight-line basis over the following estimated useful lives:
<TABLE>
<S> <C>
Licenses........................................................ 15 years
Preopening Costs................................................ 12 months
Organizational and Startup Costs................................ 5 years
</TABLE>
Preopening costs consist primarily of payroll, training and other direct
costs incurred prior to the opening of a new restaurant and are amortized using
the straight-line method over the twelve month period subsequent to the date of
opening.
The Company evaluates the recoverability of intangible assets at each
balance sheet date based on forecasted future operations and undiscounted cash
flows exclusive of capital investments and other subjective
F-8
<PAGE> 56
CIAO LIMITED, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
criteria. Based upon this information management believes that the carrying
amount of these intangible assets will be realized over the respective
amortization periods.
Security Deposits--The Company has certificates of deposit totaling
$337,500 at a single financial institution which are pledged to the Company's
principal financial institution as collateral for three letters of credit
totaling $397,000. These letters of credit are provided to the Company's
landlords in accordance with certain lease agreements.
Revenue Recognition--The Company recognizes revenues from its restaurant
operations as earned on the close of each day's business.
Advertising--The Company expenses the costs of advertising as incurred.
Advertising expense totaled $101,405 for 1994, $84,277 for 1995 and $41,544
(unaudited) for the two quarters ended July 14, 1996.
Income Taxes--Income taxes are computed based on the provisions of SFAS
109, "Accounting for Income Taxes." Deferred tax assets and liabilities are
recognized for the estimated future tax effects attributed to temporary
differences between book and tax bases of assets and liabilities and for
carryforward items. The measurement of current and deferred tax assets and
liabilities is based on enacted tax law.
Prior to March 30, 1995, the Company, with the consent of its shareholders,
had elected to be taxed as an S corporation under the provisions of Section 1362
of the Internal Revenue Code. The shareholders were personally liable for their
proportionate share of the Company's federal and state taxable income;
therefore, no provision or liability for federal and state income taxes was
reflected in the financial statements.
Leases--The Company leases its restaurant facilities under operating lease
agreements that generally provide for a base amount and a percentage of sales
over a base amount. Generally these leases provide for escalating base lease
payments over the terms of the leases and corresponding increases in the base
amount applicable for the computation of percentage rents. For financial
reporting purposes, the total amount of base rentals over the terms of the
leases is charged to expense on the straight-line method over the lease terms.
Rental expense in excess of lease payments is recorded as a deferred rental
liability.
The Company generally receives substantial lease incentives from its
landlords upon signing of its lease agreements. The proceeds of these lease
incentives are principally used to purchase leasehold improvements for the
leased location, and certain lease agreements provide that the proceeds from
these incentives may be used to purchase restaurant furniture, fixtures and
equipment, preopening costs and certain other items. These lease incentives are
classified as a long-term liability and are amortized as a reduction of rent
expense on a straight-line basis over the lease term.
Fiscal Year--The Company's fiscal year ends on the last Sunday in December,
which includes 53 weeks in fiscal year 1995 and 52 weeks in fiscal year 1994.
The first quarter consists of four periods and each of the remaining three
quarters consists of three periods, with the first, second and third quarters
ending 16 weeks, 28 weeks and 40 weeks, respectively, into the fiscal year.
Estimates and Assumptions--The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Unaudited Interim Financial Statements--In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair presentation of the Company's financial statements as of
July 14, 1996 and for the two quarters ended July 9, 1995 and the two quarters
ended July 14, 1996, have been reflected in the accompanying interim financial
statements. Operating results for the two quarters are not necessarily
indicative of results of the entire year.
F-9
<PAGE> 57
CIAO LIMITED, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Net Loss Per Common Share--Net loss per common share is computed using the
weighted average number of shares of common stock outstanding. The Company's
weighted average number of common shares outstanding of 569,910 reflect issued
shares of 794,355 less treasury stock shares of 224,445. The weighted average
number of common shares outstanding do not reflect the conversion of Series A
preferred stock, Series B preferred stock, cumulative unpaid Series A and B
preferred stock dividends, cumulative unpaid consulting fees, Series A and B
Convertible Participating Income Notes, the 10% Convertible Subordinated Note
Payable and the common stock warrant issuable to the underwriter upon closing of
the initial public offering, as these common stock equivalents are
anti-dilutive.
Recent Accounting Pronouncements--The Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of" (SFAS 121) in March, 1995, to be effective for fiscal years
beginning after December 15, 1995. SFAS 121 establishes accounting standards for
the recognition and measurement of impairment of long-lived assets, certain
identifiable intangibles and goodwill either to be held or disposed of. The
Company adopted SFAS 121 during the year ended December 31, 1995, with no impact
on operations.
Stock-Based Compensation--Accounting Principles Board (APB) Opinion 25
requires compensation cost for stock-based compensation plans to be recognized
based on the difference, if any, between the fair market value of the stock on
the date of grant and the option exercise price. In October, 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
(SFAS) 123, "Accounting for Stock-Based Compensation". SFAS 123 established a
fair value-based method of accounting for compensation cost related to stock
options and other forms of stock-based compensation plans. However, SFAS 123
allows an entity to continue to measure compensation costs using the principles
of APB Opinion 25 if certain pro forma disclosures are made. SFAS 123 is
effective for fiscal years beginning after December 15, 1995. The Company
intends to adopt the provisions for pro forma disclosure requirements of SFAS
123 in fiscal year 1996.
NOTE 2. LIQUIDITY AND OPERATIONS
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company has incurred net losses of $902,657 for the year ended December 31, 1995
and $716,048 (unaudited) for the two quarters ended July 14, 1996. The Company
has a deficiency in working capital of $849,774 at December 31, 1995 and
$902,587 (unaudited) at July 14, 1996, and has a shareholders' deficit of
$2,616,173 at December 31, 1995 and $3,429,097 (unaudited) at July 14, 1996.
These factors among others raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Due in part to the Company's continued expansion and plans for expansion,
current operating cash flow is not sufficient to meet liquidity needs. The
Company's current financing arrangements do not provide sufficient cash flow for
continuing operating losses and the development and opening of the restaurant in
Fort Lauderdale, Florida, for which the Company has executed a lease agreement,
and for planned restaurants in Cleveland, Ohio and Baton Rouge, Louisiana. The
Company intends to file with the Securities and Exchange Commission a Form SB-2
Registration Statement for the sale by the Company of approximately 1,000,000
shares of common stock at a proposed price of $7.00 per share (the offering).
Offering proceeds to the Company of approximately $6.1 million are anticipated
to be used to retire the 10.35% to 12% bridge notes for $2,500,000 and the
Company's prime plus 2% bank debt totaling approximately $200,000 at July 14,
1996, to fund development activities of the Fort Lauderdale, Cleveland, Baton
Rouge and other restaurants, and to provide working capital.
F-10
<PAGE> 58
CIAO LIMITED, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the proposed initial public offering by the Company,
subsequent to December 31, 1995, the following transactions have occurred or are
anticipated to occur at the closing date of the offering:
1) The 15,000 shares of Series A preferred stock will convert into
813,529 shares of the Company's common stock.
2) The 1,584 shares of Series B preferred stock will convert into
552,270 shares of the Company's common stock.
3) The Company will issue 55,554 shares of common stock to its former
Series A and B preferred shareholders in satisfaction of cumulative unpaid
dividends and 23,285 shares to a director and affiliate of a director for
unpaid consulting fees. These share amounts assume an offering closing of
September 30, 1996.
4) The holders of the Series A and B Convertible Participating Income
Notes will convert their notes into 53,866 shares of the Company's common
stock.
After giving effect to the financing secured subsequent to December 31,
1995 and the offering, the unaudited pro forma effect on the Company's financial
position as of July 14, 1996 is summarized as follows:
<TABLE>
<CAPTION>
PRO FORMA
JULY 14,
1996
(UNAUDITED)
-----------
<S> <C>
Cash.................................................................. $3,157,258
Current Assets........................................................ $3,512,026
Equipment and Improvements, net....................................... $4,440,653
Security Deposits and Intangibles, net................................ $ 345,593
Total Assets.......................................................... $8,553,908
Total Debt, including current portion................................. $ 10,479
Shareholders' Equity.................................................. $5,649,123
Total Liabilities and Shareholders' Equity............................ $8,553,908
</TABLE>
NOTE 3. EQUIPMENT AND IMPROVEMENTS
Equipment and improvements consist of the following major classifications:
<TABLE>
<CAPTION>
JULY 14,
1996
1994 1995 (UNAUDITED)
---------- ---------- -----------
<S> <C> <C> <C>
Leasehold Improvements...................... $1,527,902 $1,609,732 $3,549,477
Restaurant Furniture and Equipment.......... 675,846 698,358 1,274,961
Computer Equipment.......................... 148,952 148,952 231,540
Office Furniture and Equipment.............. 60,934 89,244 110,608
China, Glassware and Flatware............... 55,154 46,123 77,097
Construction in Progress.................... -- 1,079,506 --
---------- ---------- ----------
2,468,788 3,671,915 5,243,683
Accumulated Depreciation.................... (294,079) (569,339) (803,030)
---------- ---------- ----------
$2,174,709 $3,102,576 $4,440,653
========== ========== ==========
</TABLE>
F-11
<PAGE> 59
CIAO LIMITED, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
JULY 14,
1996
1994 1995 (UNAUDITED)
----------- ---------- -----------
<S> <C> <C> <C>
Licenses.................................... $ 57,500 $ 80,298 $ 81,125
Preopening Costs............................ 392,413 515,551 771,684
Organizational and Startup Costs............ 65,178 65,178 65,178
Deferred Financing Costs.................... -- -- 100,000
--------- --------- ----------
515,091 661,027 1,017,987
Accumulated Amortization.................... (273,022) (457,312) (609,851)
--------- --------- ----------
$ 242,069 $ 203,715 $ 408,136
========= ========= ==========
</TABLE>
NOTE 5. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
JULY 14,
1996
1994 1995 (UNAUDITED)
----------- --------- -----------
<S> <C> <C> <C>
Notes payable to bank, rates from 9% to prime plus
2%, maturities extending through May, 1997......... $ 306,680 $ 282,204 $ 195,899
10% Series A and B Convertible Subordinated
Participating Income Notes......................... 1,200,000 100,000 100,000
7% Notes payable to holders of Series B Convertible
Subordinated Participating Income Notes............ 425,000 --
10% Convertible Subordinated Note Payable............ -- 150,000 150,000
Prime note payable to officer and
shareholder--payable $7,500 monthly plus interest,
due February, 1997................................. 194,391 95,984 41,525
10.35% to 12% Bridge Notes--due on the earlier of
March 8, 1998 or within 10 days of closing of the
company's initial public offering--convertible upon
default into shares of a new class of convertible
stock.............................................. -- -- 2,106,250
Equipment notes payable.............................. 5,150 5,785 10,479
---------- --------- ----------
2,131,221 633,973 2,604,153
Less current portion................................. (1,742,503) (449,638) (342,141)
----------- --------- ----------
$ 388,718 $ 184,335 $2,262,012
=========== ========= ==========
</TABLE>
The notes payable to bank are secured by substantially all assets of the
Company and the guarantee of the Company's president.
The Series A and B Convertible Participating Income Notes provide for
interest at 10% plus contingent interest based on sales not to exceed 10% of the
principal amount. These notes are convertible into 53,866 shares of the
Company's common stock, are subject to certain prepayment penalties through
September, 1998 and are unsecured. These notes are included in the current
portion of long-term debt at December 31, 1995 as the notes are in default due
to nonpayment of interest.
F-12
<PAGE> 60
CIAO LIMITED, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The 10% Convertible Subordinated Note Payable is due to an entity
controlled by certain shareholders and is convertible into 81,352 shares of the
Company's common stock. This note is subject to certain redemption options
subsequent to December 31, 1999.
At December 31, 1995 aggregate maturities of long-term debt for the five
years subsequent to that date are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
-----------
<S> <C>
December 29, 1996............................ $449,638
December 28, 1997............................ $ 34,335
December 27, 1998............................ --
December 26, 1999............................ $150,000
</TABLE>
Based on the borrowing rates currently available to the Company for notes
payable with similar terms and average maturities, the fair values of debt
securities approximate their carrying values.
NOTE 6. REDEEMABLE EQUITY
In March, 1995, the Company issued Series A and Series B redeemable
convertible preferred stock to retire certain indebtedness, to fund restaurant
development and to provide working capital. This preferred stock may be
described as follows:
Series A--15,000 shares of $100 par value Series A preferred stock were
issued in exchange for an existing $350,000 note and $1,150,000 in cash. The
Series A preferred stock is entitled to annual cumulative dividends equal to 10%
of par value, is convertible into 813,529 shares of common stock at the option
of the preferred shareholders, is entitled to voting rights equal to the
respective number of common stock equivalents to which the preferred
shareholders are entitled in the event of conversion and is subject to mandatory
redemption beginning December 31, 1999 for a price equal to the par value plus
accumulated and unpaid dividends. The Company is restricted from paying
dividends on its Series B preferred stock and on its common stock until
cumulative unpaid dividends on Series A preferred stock have been paid. These
cumulative unpaid dividends totaled $112,500 at December 31, 1995 and $193,269
(unaudited) at July 14, 1996.
Series B--1,584 shares of $690 par value Series B preferred stock were
issued in exchange for then outstanding Series A notes of $650,000 and Series B
notes of $450,000 respectively. The Series B preferred stock is entitled to
annual cumulative dividends equal to 10% of par value, is convertible into
552,270 shares of common stock at the option of the preferred shareholders, is
entitled to voting rights equal to the respective number of common stock
equivalents to which the preferred shareholders are entitled in the event of
conversion and is subject to mandatory redemption beginning December 31, 1999
for a price equal to the par value plus accumulated and unpaid dividends. The
Company is restricted from paying dividends on its common stock until cumulative
unpaid dividends on Series A and Series B preferred stock have been paid. These
cumulative unpaid dividends totaled $81,972 for Series B at December 31, 1995
and $140,824 (unaudited) at July 14, 1996.
At December 31, 1995, the Series A preferred stock had a carrying value of
$1,558,604 and the Series B preferred stock had a carrying value of $1,174,932.
Based upon terms available to the Company for similar instruments, the Company
believes these carrying values approximate the fair market values as of such
date.
F-13
<PAGE> 61
CIAO LIMITED, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<S> <C>
Deferred Provision............................................... $(107,000)
Tax Benefit of Net Operating Loss Carryforward................... (162,000)
---------
Valuation Allowance.............................................. 269,000
---------
Total Provision for Income Taxes............................ $ --
=========
</TABLE>
The provision for income taxes differs from the amounts computed by
applying the federal statutory rate to book income for the period from March 30,
1995 to December 31, 1995 is as follows:
<TABLE>
<S> <C>
Income tax at federal statutory rate............................. $(230,000)
State income taxes, net of federal benefit....................... (40,000)
Valuation Allowance.............................................. 269,000
Other............................................................ 1,000
---------
$ --
=========
</TABLE>
As discussed in the summary of significant accounting policies, the Company
changed its tax status from non-taxable to taxable effective March 30, 1995.
Accordingly, the deferred tax asset at that date of approximately $219,500 has
been recorded during 1995 along with an offsetting valuation allowance of
$219,500.
Given the historical net losses incurred by the Company and the tax rates
and jurisdictions in which the Company operates, the Company would incur no
income tax expense as a C corporation; therefore, pro forma net loss and net
loss applicable to common stock would be equivalent to results as reported in
the income statement. The Company's net operating losses and certain other items
would result in a deferred tax asset and income tax benefit, but the Company
would record a valuation allowance in an equivalent amount to reduce the
deferred tax asset and income tax benefit to zero; accordingly, the statement of
financial position and results of operations would not be impacted by the
Company's pro forma taxation as a C corporation.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of
significant items comprising the Company's deferred tax assets are as follows:
<TABLE>
<S> <C>
Accrued expenses................................................. $ 84,000
Deferred Rent.................................................... 149,000
Net operating loss carryforwards................................. 162,000
Asset depreciation and amortization, net of deferred lease
incentive...................................................... 93,500
---------
488,500
---------
Valuation allowances............................................. (488,500)
---------
Net Deferred Tax Asset...................................... $ --
=========
</TABLE>
No benefit for income taxes has been recorded due to losses reported in
fiscal year 1995 given that the realization of this asset is uncertain in that
it is dependent upon, among others, prospective taxable income.
NOTE 8. LEASE COMMITMENTS
The Company leases restaurant facilities and administrative offices under
terms which generally provide for minimum annual rental plus additional rents
computed as a percentage of sales if a restaurant's sales exceed certain levels.
The restaurant leases expire through 2012 and generally contain options to renew
for
F-14
<PAGE> 62
CIAO LIMITED, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
terms of up to ten years. Two of the Company's restaurant locations and the
Company's administrative offices are leased from an entity controlled by certain
of its shareholders. The lease for one restaurant location is guaranteed by the
Company's president.
Future minimum lease payments under noncancellable operating leases with
initial or remaining lease terms in excess of one year as of December 31, 1995,
including the lease agreement executed for the Fort Lauderdale, Florida
restaurant during 1996, are as follows:
<TABLE>
<CAPTION>
THIRD RELATED SUB-LEASE
YEAR ENDING PARTIES PARTIES RENTALS TOTAL
--------------------------------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C>
December 29, 1996................ $ 558,400 $ 178,380 $ (41,477) $ 695,303
December 28, 1997................ 845,647 286,676 (43,137) $ 1,089,186
December 27, 1998................ 857,149 286,676 (44,862) $ 1,098,963
December 26, 1999................ 829,052 286,676 (11,324) $ 1,104,404
December 31, 2000................ 823,304 286,676 -- $ 1,109,980
Thereafter....................... 4,664,518 1,914,891 -- $ 6,579,409
---------- ---------- --------- -----------
$8,578,070 $3,239,975 $(140,800) $11,677,245
========== ========== ========= ===========
</TABLE>
Rent expense totaled $373,209 for 1994, $527,060 for 1995 and $367,388
(unaudited) for the two quarters ended July 14, 1996. Contingent rental expense,
computed principally on the basis of sales in excess of specified threshold
amounts, totaled $23,581 for 1994, $116,331 for 1995 and $80,465 (unaudited) for
the two quarters ended July 14, 1996.
NOTE 9. RELATED PARTY TRANSACTIONS
The Company has a consulting agreement with one of its directors and
shareholders which provides for consulting and financial advisory fees of
$50,000 annually. Consulting fees totaled $37,500 for 1995 and $26,923
(unaudited) for the two quarters ended July 14, 1996 under this arrangement, of
which $13,000 was outstanding at December 31, 1995 and $39,923 (unaudited) at
July 14, 1996.
The Company has a consulting agreement with an affiliate of the holder of
its Series A convertible preferred stock and a director which provides for
consulting and financial advisory fees of $75,000 annually. Consulting fees
totaled $56,250 for 1995 and $40,385 (unaudited) for the two quarters ended July
14, 1996 under this arrangement, of which $56,250 was outstanding at December
31, 1995 and $96,635 (unaudited) at July 14, 1996.
The Company has a demand note payable to a shareholder and officer bearing
interest at the prime rate. The outstanding balance on this note was $194,391 at
December 25, 1994, $95,984 at December 31, 1995, and $41,525 (unaudited) at July
14, 1995. Interest expense on this note totaled $8,550 for 1994, $10,964 for
1995, and $2,712 (unaudited) for the two quarters ended July 14, 1996.
The Company leases one restaurant, and in 1996 commenced leasing an
additional restaurant and its administrative offices, from partnerships in which
a nominee for director and shareholders serve as general partners. Rent expense
for these facilities totaled $57,448 for 1994, $76,111 for 1995 and $63,523
(unaudited) for the two quarters ended July 14, 1996.
The Company purchases certain alcoholic beverages from a company in which a
nominee for director of the Company is an officer. Purchases of alcoholic
beverage products totaled $79,647 for 1994, $82,766 for 1995 and $112,321
(unaudited) for the two quarters ended July 14, 1996.
F-15
<PAGE> 63
CIAO LIMITED, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. LITIGATION
In August 1996, the Company was added as a defendant in an Amended
Counterclaim in litigation pending in the Superior Court of the District of
Columbia, Notte Luna Limited Partnership et al. v. Capital Management and
Development Corporation et al. (Civ. Div. No. 0007600-95). Notte Luna, a
Washington, D.C. restaurant, engaged Capital Management and Development
Corporation ("CMDC") to manage its restaurant. Alleging poor performance and
defaults in the management agreement, Notte Luna terminated the CMDC management
agreement, engaged the Company to manage the restaurant and sued CMDC. The
Company managed the restaurant from March 4, 1995 to April 21, 1996. CMDC has
now brought a counterclaim against the Company alleging conspiracy to induce
Notte Luna to terminate its contract with CMDC, as well as slander and
interference with contract and business relationships, and claiming $6,000,000
in compensatory and $6,000,000 in punitive damages. The litigation is in the
early stages of proceedings. Accordingly, the Company is unable to predict the
effect of the ultimate resolution of the matter. Although an unfavorable
decision could have a material adverse effect upon the Company's results of
operations, financial condition and liquidity, the Company believes it has
meritorious defenses and intends to defend the action vigorously.
NOTE 11. STOCK OPTIONS
The Company has an employment agreement with its president and chief
executive officer which extends through March, 1997 and is subject to annual
renewals. This agreement provides for the issuance of options to purchase 46,270
shares subsequent to April 1, 1995 and 45,924 shares for each of the following
two years at a price of $1.45 per share. The Company and its president plan to
cancel this employment agreement and the related options.
NOTE 12. DEVELOPMENT COMMITMENTS
During February and March, 1996, the Company opened additional restaurants
in Memphis, Tennessee and Cincinnati, Ohio. The Company expended approximately
$1,739,000 subsequent to December 31, 1995 for leasehold improvements,
furniture, fixtures, equipment and preopening costs, net of reimbursements from
landlords.
On July 1, 1996, the Company entered into a lease for a 6,755 square foot
restaurant in Fort Lauderdale, Florida for a ten-year term, with two five-year
renewal options. This restaurant is expected to be open in the first quarter of
fiscal year 1997, and is projected to require a $675,500 contribution from the
Company for leasehold improvements and approximately $674,500 from the Company
for restaurant furniture, fixtures and equipment, preopening costs and other
costs. The lease agreement provides for minimum base rental of $202,650 annually
plus contingent rentals due at percentages of gross sales in excess of certain
levels.
The Company is engaged in negotiations to lease a 5,700 square foot
restaurant and a 11,500 square feet banquet facility in Cleveland, Ohio. These
facilities are projected to open in April, 1997 and require a $400,000
contribution from the Company for leasehold improvements, restaurant furniture,
fixtures and equipment, preopening costs and other costs. The minimum base
rentals have not yet been determined, but are anticipated to include a
contingent rental payment based on 50% of restaurant net income, as adjusted for
certain items.
The Company is evaluating a proposal from a developer to lease a 7,515
square foot restaurant in Baton Rouge, Louisiana for a twenty year term, which
is projected to be open in mid-1997. The proposal provides for minimum annual
rentals of $210,420 for the first ten years and $225,450 for the second ten
years of the lease term. The cost of leasehold improvements is projected to be
$1,350,000, of which the landlord is anticipated to provide lease incentives
totaling $750,000. This lease agreement is anticipated to contain pro rata
payment of
F-16
<PAGE> 64
CIAO LIMITED, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
common area maintenance, taxes and insurance, and a provision for contingent
rentals for sales in excess of certain minimum amounts.
NOTE 13. SUBSEQUENT EVENTS
Subsequent to December 31, 1995, the Company issued $2,500,000 face value
in 10.35% to 12% convertible notes to fund development costs and operations.
These notes are secured by certain personal property and are convertible in the
event of default into Series C, 8% preferred stock redeemable in December, 1999.
The notes include warrants for the purchase of common stock at the offering
price in the event of an initial public offering for a period of five years
subsequent to the public offering, which were allocated $50,000 from the
proceeds of the note offering. The term of the notes is two years, with payment
accelerated in the event of a closing of an initial public offering or in the
event of a material adverse change as determined by the agent for the notes. The
Company expects to repay these notes with the proceeds of its initial public
offering. In the event that this offering does not occur, the supplemental loss
per common and equivalent share, as if the bridge notes were converted to Series
C redeemable equity for all periods presented, is $1.51 and $2.29 for the years
ended December 31, 1994 and December 25, 1995 and $1.70 for the two quarters
ended July 14, 1996.
On November 18, 1996, the Company changed its name to Ciao Cucina
Corporation and increased its authorized number of common shares to 10,000,000
and its authorized number of preferred shares to 100,000. The financial
statements reflect a 345.3 to 1 stock split (effected in the form of a stock
dividend), which transaction occurred in connection with the Company's initial
public offering. All share and per share data have been restated to reflect the
stock split and reclassification.
F-17
<PAGE> 65
[PICTURE OF FOOD ITEMS]
EUROPEAN BREADS, MUFFINS & PASTRIES
[PICTURE OF STORE-FRONT STYLE
SPECIALTY GOURMET COFFEE
OPERATION]
CIAO ESPRESSO MEMPHIS
[PICTURE OF RETAIL ITEMS]
CIAO RETAIL PRODUCTS & MERCHANDISE
[PICTURE OF WINE LOCKER]
CIAO WINE LOCKERS
[PICTURE OF DINING ROOM]
PRIVATE DINING ROOM MEMPHIS
<PAGE> 66
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ON BEHALF OF
THE COMPANY ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS,
IN CONNECTION WITH THE OFFER MADE HEREBY, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITY OTHER THAN THE SECURITIES OFFERED
HEREBY, OR AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT QUALIFIED OR TO
ANY PERSON TO WHOM SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 8
History of the Company................ 15
Use of Proceeds....................... 16
Dividend Policy....................... 16
Capitalization........................ 17
Dilution.............................. 18
Selected Financial Data............... 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 25
Executive Officers, Directors and
Nominees............................ 34
Compensation.......................... 35
Certain Transactions.................. 36
Holdings of Management and Principal
Shareholders........................ 39
Selling Shareholders.................. 40
Description of Capital Stock.......... 40
Shares Eligible for Future Sale....... 42
Underwriting.......................... 44
Legal Matters......................... 45
Experts............................... 45
Available Information................. 45
Index to Financial Statements......... F-1
</TABLE>
------------------------
Until , 1996 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Common Stock, whether or not participating
in the distribution, may be required to deliver a Prospectus. This delivery
requirement is in addition to the obligation of dealers to deliver a Prospectus
when acting as Underwriters and with respect to their unsold allotments or
subscriptions.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
CIAO LIMITED INC LOGO
1,000,000
SHARES
CIAO
CUCINA
CORPORATION
COMMON STOCK
-----------------
PROSPECTUS
-----------------
GLASER CAPITAL CORPORATION
, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 67
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 1701.13(E) of the Ohio General Corporation Law allows
indemnification by the registrant to any person made or threatened to be made a
party to any proceedings, other than a proceeding by or in the right of the
registrant, by reason of the fact that he is or was a director, officer,
employee or agent of the registrant, against expenses, including judgments and
fines, if he acted in good faith and in a manner reasonably believed to be in or
not opposed to the best interests of the registrant and, with respect to
criminal actions, in which he had no reasonable cause to believe that his
conduct was unlawful. Similar provisions apply to actions brought by or in the
right of the registrant, except that no indemnification shall be made in such
cases when the person shall have been adjudged to be liable for negligence or
misconduct to the registrant unless determined by the court. The right to
indemnification is mandatory in the case of a director or officer who is
successful on the merits or otherwise in defense of any action, suit or
proceeding or any claim, issue or matter therein. Permissive indemnification is
to be made by a court of competent jurisdiction, the majority vote of a quorum
of disinterested directors, the written opinion of independent counsel or by the
shareholders.
The registrant's Code of Regulations provides that the registrant shall
indemnify such persons to the fullest extent permitted by law.
The registrant is planning to obtain director and officer liability
insurance which provides coverage against certain liabilities.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses of the Offering (other than underwriting discounts and
commissions but including a 1% nonaccountable expense allowance to be paid to
one of the Underwriters) are estimated to be as follows:
<TABLE>
<S> <C>
SEC registration fee..................................................... $ 3,621
NASD fee................................................................. 1,550
Nasdaq Stock Market listing fee.......................................... 8,150
Printing costs........................................................... 50,000
Legal fees............................................................... 42,500
Accounting fees.......................................................... 35,000
Transfer agent fees...................................................... 5,000
Blue sky fees and expenses............................................... 20,000
Miscellaneous............................................................ 96,679
--------
$262,500
========
</TABLE>
The Selling Shareholders will bear their proportional share of the expenses
of the Offering if the over-allotment option is exercised.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Since March 1993, the registrant has made the following sales of
unregistered securities (all Common Stock share amounts give effect to a 345.3:1
split of the registrant's Common Stock):
Between March 1993 and January 1994, the registrant issued $700,000
aggregate principal amount of Series A Convertible Subordinated Participating
Income Notes to fifteen persons. In August and September 1993, the registrant
issued $500,000 aggregate principal amount of Series B Convertible Subordinated
Participating Income Notes to six persons. The Series A and Series B Convertible
Subordinated Participating Income Notes were issued to accredited investors in
offerings under Rule 506 of Regulation D and, as such, were exempt from
registration pursuant to Section 4(2) of the Securities Act. On March 30, 1995,
the registrant issued 1,584 shares of Series B Convertible Preferred Stock, $690
par value, to the holders of all
II-1
<PAGE> 68
(except $100,000 aggregate principal amount) of the Series A and Series B
Convertible Subordinated Participating Income Notes. The issuance was exempt
from registration pursuant to Section 3(a)(9) of the Securities Act.
On December 26, 1993, the registrant issued 103,762.7 shares of its Common
Stock, no par value, to the eleven shareholders of Fire in the Kitchen, Inc., an
Ohio corporation, in connection with the merger of Fire in the Kitchen, Inc.
into the registrant. The issuances were exempt from registration pursuant to
Section 4(2) of the Securities Act as transactions not involving a public
offering.
On January 13, 1995, the registrant issued a promissory note in the amount
of $350,000 payable to Blue Chip Capital Fund Limited Partnership ("Blue Chip
LP"). On March 30, 1995, the registrant issued 15,000 shares of its Series A
Convertible Preferred Stock, $100 par value, to Blue Chip LP in exchange for
$1,150,000 and the cancellation of the $350,000 promissory note executed January
13, 1995. On February 7, 1996, Blue Chip LP loaned the registrant $750,000
evidenced by a promissory note. Blue Chip LP made subsequent loans to the
registrant of $250,000 on each of March 11, 1996 and July 29, 1996. Effective
August 1, 1996, Blue Chip LP exchanged the principal amount of all three loans,
plus $200,000 in loan fees owed by the Company, for a $1,450,000 principal
amount secured note bearing interest at 10.35% per annum and due on the earlier
of March 8, 1998 or within 10 days after the closing of the registrant's initial
public offering. As further consideration, the registrant also issued Bridge
Financing Warrants to Blue Chip LP to purchase 100,000 shares of Common Stock,
exercisable at $7.00 per share for a period of five years after the closing of
such initial public offering. The secured promissory note is convertible at Blue
Chip's option upon default into shares of a new class of preferred stock to be
created. All of these issuances were exempt pursuant to Section 4(2) of the
Securities Act as transactions not involving a public offering.
On July 21, 1995, the registrant issued a Convertible Subordinated Note in
the amount of $150,000 to Towne Investment Company, a Limited Partnership. The
note is convertible into 81,352 shares of the registrant's Common Stock, at the
holder's option. The note was issued pursuant to the exemption set forth in
Section 4(2) of the Securities Act as a transaction not involving a public
offering.
In April 1996, the registrant issued $1,050,000 aggregate principal amount
of Secured Promissory Notes to fourteen persons. As further consideration, the
registrant also issued warrants to the holders of the Secured Promissory Notes
to purchase 149,990 shares of the registrant's Common Stock, exercisable up to
five years after an initial public offering. The Managing Underwriter received
fees of $52,500 in connection with these transactions. The Secured Promissory
Notes and warrants were issued to accredited investors in an offering under Rule
506 of Regulation D and, as such, were exempt from registration pursuant to
Section 4(2) of the Securities Act.
Certain consulting fees payable by the registrant and certain dividends
with respect to the registrant's Series A and Series B Preferred Stock are in
arrears. The registrant and the parties involved have agreed that upon the
consummation of the Offering all such arrearages will be paid by the issuance of
shares of Common Stock at a price of $7.00 per share. The following table shows
the number of shares of Common Stock to be issued pursuant to such Agreement,
assuming that the Offering is consummated on September 30, 1996.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
ARREARAGE AT OF COMMON STOCK
OBLIGATION SEPTEMBER 30, 1996 TO BE ISSUED
---------- ------------------ ---------------
<S> <C> <C>
Consulting Fees - Lipton............................. $ 50,500 7,214
Consulting Fees - Blue Chip Venture.................. $112,500 16,071
Dividends - Series A Preferred Stock................. $225,000 32,142
Dividends - Series B Preferred Stock................. $163,944 23,412
</TABLE>
All such issuances will be exempt pursuant to Section 4(2) of the Securities Act
as transactions not involving a public offering.
Except as indicated above, no underwriting commissions were paid in
connection with any of the issuances described above.
II-2
<PAGE> 69
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The Exhibit Index is set forth beginning on page E-1 of this registration
statement and is incorporated herein by reference. Exhibit Numbers correspond to
those of Regulation S-B, Item 601.
ITEM 28. UNDERTAKINGS.
*(d) The small business issuer will provide to the underwriter at the
closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
*(e) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
*(f) The small business issuer will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the small business issuer under Rule 424(b)(1), or (4) or
497(h) under the Securities Act as part of this registration statement as of the
time the Commission declared it effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that the offering of the securities at that time as the initial bona fide
offering of those securities.
- ---------------
* Paragraph references correspond to those of Regulation S-B, Item 512.
II-3
<PAGE> 70
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this amendment to
registration statement to be signed on its behalf by the undersigned, in the
City of Cincinnati, State of Ohio, as of the 18th day of November, 1996.
CIAO LIMITED, INC.
By: /s/ CARL A. BRUGGEMEIER
------------------------------------
Carl A. Bruggemeier, President and
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
amendment to registration statement has been signed by the following persons in
the capacities indicated as of the 18th day of November, 1996.
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<S> <C>
/s/ CARL A. BRUGGEMEIER Chairman of the Board, President and Chief
- -------------------------------------------- Executive Officer (Principal Executive
Carl A. Bruggemeier Officer)
/s/ CATHERINE C. JETTER Vice President -- Finance (Principal
- -------------------------------------------- Financial Officer)
Catherine C. Jetter
/s/ GARY A. SALAZAR Controller (Principal Accounting Officer)
- --------------------------------------------
Gary A. Salazar
/s/ ROGER LIPTON* Director
- --------------------------------------------
Roger Lipton
/s/ JOHN H. WYANT* Director
- --------------------------------------------
John H. Wyant
*By /s/ CARL A. BRUGGEMEIER
- --------------------------------------------
Carl A. Bruggemeier
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 1
Exhibit 1.1
1,000,000 SHARES
CIAO CUCINA CORPORATION
COMMON STOCK
UNDERWRITING AGREEMENT
, 1996
-----------
Cincinnati, Ohio
THE GLASER CAPITAL CORPORATION
As Representative of the several Underwriters
Atrium One
201 East Fourth Street
Suite 1710
Cincinnati, Ohio 45202
Dear Sirs:
Ciao Cucina Corporation, an Ohio corporation (the "Company"), proposes
to issue and sell to you and the other Underwriters named in Schedule I to this
Agreement (the "Underwriters") an aggregate of 1,000,000 shares of the
Company's Common Stock (the "Common Stock") (such shares being hereinafter
collectively referred to as the "Firm Shares"). In addition, Blue Chip Capital
Fund Limited Partnership ("Blue Chip") and the Roger Lipton group (consisting
of the signatories to this Agreement designated as members of such group on the
signature pages hereof; such group is hereafter referred to as the "Lipton
Group") (Blue Chip and the Lipton Group are hereinafter collectively referred
to as the "Selling Shareholders") propose to grant to the Underwriters an
option to purchase up to an additional 150,000 shares (collectively the
"Optional Shares") of the Company's Common Stock to cover over-allotments. The
Firm Shares and the Optional Shares are called, collectively, the "Shares" and
the term "Representative" refers to you in your capacity as representative of
yourself and the other Underwriters. You are also sometimes referred to herein
as the "Managing Underwriter."
The Company and the Selling Shareholders wish to confirm as follows
their respective agreements with you and the other several Underwriters on
whose behalf you are acting, in connection with the several purchases of the
Shares by the Underwriters.
1
<PAGE> 2
1. SALE AND PURCHASE OF THE SHARES.
1.1 FIRM SHARES. On the basis of the representations, warranties and
agreements contained in, and subject to the terms and conditions of, this
Agreement, the Company hereby agrees to sell to each of the Underwriters, and
each of the Underwriters agrees, severally and not jointly, to purchase at a
purchase price of $__________ per Share, the number of Firm Shares set forth
opposite the name of such Underwriter on Schedule I.
1.2 OPTIONAL SHARES. On the basis of the representations, warranties
and agreements contained in, and subject to the terms and conditions of, this
Agreement, the Selling Shareholders hereby grant to the several Underwriters an
option to purchase, severally and not jointly, all or any part of the Optional
Shares at the same price per Share set forth in Section 1.1 (the
"over-allotment option"). The Optional Shares shall be sold by the Selling
Shareholders in the following numbers and ratios: Blue Chip and the Lipton
Group will each sell one-half of the Optional Shares. The number of Optional
Shares to be purchased by each Underwriter shall be in the same percentage
(adjusted by the Representative to eliminate fractional shares) of the total
number of Optional Shares to be purchased by the Underwriters as such
Underwriter is purchasing of the Firm Shares. The over-allotment option may be
exercised in whole or in part at any time or times on or before 12:00 noon,
Cincinnati time, on the day before the Firm Shares Closing Date (as defined in
Section 2 below), and only once at any time after that date and within 30 days
after the Effective Date (as defined in Section 3 below) (or, if such 30th day
shall be a Saturday or Sunday or a holiday, on the next business day thereafter
when the New York Stock Exchange is open for trading), in each case upon
written or telecopier notice, or verbal or telephonic notice confirmed by
written or telecopier notice, by the Representative to the Company no later
than 12:00 noon, Cincinnati time, on the day before the Firm Shares Closing
Date or at least three days before the Optional Shares Closing Date (as defined
in Section 2 below), as the case may be, setting forth the number of Optional
Shares to be purchased and the time and date (if other than the Firm Shares
Closing Date) of such purchase.
1.3 SEVERAL, NOT JOINT, OBLIGATIONS. The obligations of the
Underwriters under this Agreement are several and not joint.
2. DELIVERY AND PAYMENT.
2.1 FIRM SHARES; FIRM SHARES CLOSING DATE. Delivery by the Company of
the Firm Shares to the Representative, and payment of the purchase price by
certified or official bank check payable in Cincinnati clearing house (next
day) funds to the Company shall take place at the offices of the Underwriters'
counsel, Dinsmore & Shohl, 1900 Chemed Center, Cincinnati, Ohio 45202, at 10:00
am. Cincinnati time, on the third full business day following the date on which
the Firm Shares are priced (or, if the Firm Shares are priced, as contemplated
by Rule 15c- 6-1(c) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), on the fourth full business day thereafter), or at such time
on such other date, not later than 12 business days after the Effective Date,
as shall be agreed upon by the Company and the Representative (such time and
date of delivery and payment are called the "Firm Shares Closing Date").
2
<PAGE> 3
2.2 OPTIONAL SHARES; OPTIONAL SHARES CLOSING DATE. To the extent the
over-allotment option with respect to the Optional Shares is exercised,
delivery by the Selling Shareholders of the Optional Shares, and payment of the
purchase price by certified or official bank check payable in Cincinnati
clearing house (next day) funds to the Selling Shareholders, shall take place
at the offices of the Underwriters' counsel specified in Section 2.1 above at
the time and on the date (which may be the Firm Shares Closing Date) specified
in the notice referred to in Section 1.2 (such time and date of delivery and
payment are called the "Optional Shares Closing Date"). The Firm Shares Closing
Date and the Optional Shares Closing Date are called, individually, a "Closing
Date" and, collectively, the "Closing Dates".
2.3 REGISTRATION AND AVAILABILITY OF CERTIFICATES. Certificates
representing the Firm Shares shall be registered in such names and shall be in
such denominations as the Representative shall request at least three full
business days before the Firm Shares Closing Date or, in the case of the
Optional Shares, on the day of notice of exercise of the option as described in
Section 1.2 and shall be made available to the Representative for checking and
packaging, at such place as is designated by the Representative, at least one
full business day before the Firm Shares Closing Date in the case of the Firm
Shares or on the Optional Shares Closing Date in the case of Optional Shares.
2.4 EXPENSE ALLOWANCE. The Company shall pay the Representative as a
nonaccountable expense allowance an amount equal to 1% of the gross offering
proceeds of the Firm Shares on the Firm Shares Closing Date less a credit of
$30,000 representing an advance previously paid by the Company, and, if
applicable, 1% of the gross offering proceeds of the Optional Shares on the
Optional Shares Closing Date.
2.5 WARRANT. In consideration of the agreement of the Managing
Underwriter to act hereunder in connection with the offering of the Shares, the
Company shall issue and deliver to the Managing Underwriter a warrant (the
"Warrant") to purchase shares of the Company's Common Stock in an amount equal
to 10% of the number of Firm Shares purchased by the Underwriters hereunder,
such Warrant to be dated as of the Effective Date and to be in the form
appended hereto as Annex B. The Company represents and warrants that the
Warrant has been duly authorized and, when issued and delivered in accordance
with the terms hereof, will be a valid, binding and enforceable obligation of
the Company.
3. REGISTRATION STATEMENT AND PROSPECTUS; PUBLIC OFFERING.
3.1 REGISTRATION STATEMENT AND PROSPECTUS. The Company has prepared in
conformity with the requirements of the Securities Act of 1933 (the "Securities
Act"), and the published rules and regulations adopted by the Securities and
Exchange Commission (the "Commission") thereunder (the "Rules"), a registration
statement on Form SB-2 (No. 333-5674) (the "registration statement"), including
a prospectus subject to completion relating to the Shares, and has filed with
the Commission the registration statement and such amendments thereof as may
have been required to the date of this Agreement. Copies of such registration
statement
3
<PAGE> 4
(including all amendments thereof) and of the related prospectus subject to
completion relating to the Shares have heretofore been delivered by the Company
to you.
The term "Registration Statement" as used in this Agreement means the
registration statement (including all financial schedules and exhibits), as
amended or supplemented at the time it becomes effective, or, if the
registration statement becomes effective prior to the execution of this
Agreement, as supplemented or amended prior to the execution of this Agreement.
If it is contemplated, at the time this Agreement is executed, that a
post-effective amendment to the registration statement will be filed and must
be declared effective before the offering of the Shares may commence, the term
"Registration Statement" as used in this Agreement means the registration
statement as amended by such post-effective amendment. The term "Effective
Date" as used in this Agreement means the time and date upon which the
Commission shall declare the Registration Statement to be effective. The term
"Prospectus" as used in this Agreement means the prospectus in the form
included in the Registration Statement or, if the prospectus included in the
Registration Statement omits information in reliance on Rule 430A under the
Rules and such information is included in a prospectus filed with the
Commission pursuant to Rule 424(b) of the Rules, the term "Prospectus" means
the prospectus in the form included in the Registration Statement as
supplemented by the addition of the Rule 430A information contained in the
prospectus filed with the Commission pursuant to Rule 424(b). The term
"Prepricing Prospectus" as used in this Agreement means the prospectus subject
to completion in the form included in the registration statement at the time of
the initial filing of the registration statement with the Commission and as
such prospectus shall have been amended from time to time prior to the date of
the Prospectus.
The Company will not file any amendment of the Registration Statement
or supplement to the Prospectus to which you shall reasonably object in writing
after being furnished with a copy thereof.
3.2 PUBLIC OFFERING. The Company understands that the Underwriters
propose to make a public offering of the Shares, as set forth in and pursuant
to the Prospectus, as soon after the Effective Date as the Representative and
the Company deem advisable. The Company hereby confirms that the Underwriters
and dealers have been authorized to distribute or cause to be distributed each
Prepricing Prospectus and are authorized to distribute the Prospectus (as from
time to time amended or supplemented if the Company furnishes amendments
thereof or supplements thereto to the Underwriters).
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each Underwriter as follows:
4.1 COMPLIANCE OF PREPRICING PROSPECTUS, REGISTRATION STATEMENT, AND
PROSPECTUS. Each Prepricing Prospectus, at the time of filing thereof,
contained all material statements which were required to be stated therein in
accordance with the Securities Act and the Rules, and conformed in all material
respects with the requirements of the Securities Act and the
4
<PAGE> 5
Rules, and did not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The Commission has not issued any order suspending or
preventing the use of any Prepricing Prospectus. When the Registration
Statement shall become effective, when the Prospectus is first filed pursuant
to Rule 424 (b) of the Rules, when any post-effective amendment of the
Registration Statement shall become effective, when any supplement to or
preeffective amendment of the Prospectus is filed with the Commission and at
each Closing Date, the Registration Statement and the Prospectus (and any
amendment thereof or supplement thereto) will comply with the applicable
provisions of the Securities Act and the Securities Exchange Act of 1934 (the
"Exchange Act"), and the respective rules and regulations of the Commission
thereunder, and neither the Registration Statement nor the Prospectus, nor any
amendment thereof or supplement thereto, will contain any untrue statement of a
material fact or will omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not misleading;
provided, however, that the Company makes no representation or warranty as to
the information contained in or omitted from the Registration Statement or the
Prospectus or any amendment thereof or supplement thereto in reliance upon and
in conformity with information furnished in writing to the Company by or on
behalf of and with respect to any Underwriter through the Representative,
specifically for use in connection with the preparation thereof.
4.2 DESCRIPTIONS IN AND EXHIBITS TO REGISTRATION STATEMENT AND
PROSPECTUS. All contracts and other documents required to be described in or
filed as exhibits to the Registration Statement or the Prospectus have been
described in or filed with the Commission as exhibits to the Registration
Statement or the Prospectus in accordance with the Securities Act and the
Rules.
4.3 FINANCIAL INFORMATION. The financial statements of the Company
(including all notes and schedules thereto) included in the Registration
Statement and the Prospectus fairly present, respectively, the financial
position, the results of operations, the changes in financial position and the
changes in shareholders' equity of the Company at the respective dates and for
the respective periods to which they apply; such financial statements have been
prepared in conformity with generally accepted accounting principles,
consistently applied throughout the periods involved, and all adjustments
necessary for a fair presentation of the results for such periods have been
made; and the other financial and statistical information and data included in
the Registration Statement and the Prospectus (and any amendment or supplement
thereto) are accurately presented and prepared on a basis consistent with such
financial statements and the books and records of the Company.
4.4 INDEPENDENT ACCOUNTANTS. To the best knowledge of the Company,
Joseph Decosimo and Company PLL, whose certified reports are filed with the
Commission as part of the Registration Statement, are, and during the periods
covered by their respective reports were, independent public accountants as
required by the Securities Act and the Rules.
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4.5 ORGANIZATION AND AUTHORITY OF COMPANY. The Company has been duly
organized and is validly existing as a corporation in good standing under the
laws of the State of Ohio. The Company is duly qualified and in good standing
as a foreign corporation in each jurisdiction in which the character or
location of its properties (owned, leased or licensed) or the nature or conduct
of its business makes such qualification necessary and where such failure to be
qualified would have a Material Adverse Effect (as hereinafter defined). Except
as described in the Prospectus, Company has no subsidiaries. Except as
described in the Prospectus, the Company does not own, lease or license any
property or conduct any business outside the United States of America. Except
as described in the Prospectus, the Company has all requisite power and
authority, and all necessary material authorizations, approvals, consents,
orders, licenses, certificates and permits of and from all federal, state and
foreign governmental or regulatory officials, bodies and tribunals, to own,
lease, license and operate its properties and conduct its business as now being
conducted and as described in the Prospectus; the Company has fulfilled and
performed all of its material obligations with respect to such permits and no
event has occurred which allows, or after notice or lapse of time would allow,
revocation or termination thereof or results in any other material impairment
of the rights of the holder of any such permit; no such authorization,
approval, consent, order, license, certificate or permit contains a materially
burdensome restriction other than as disclosed in the Prospectus; and the
Company has all such power, authority, authorizations, approvals, consents,
orders, licenses, certificates and permits (except such as may be necessary to
make the Registration Statement effective and to qualify the Shares for public
offering by the Underwriters under state securities or "blue sky" laws) to
enter into, deliver and perform this Agreement and to issue and sell the
Shares.
4.6 INTANGIBLES. Except as described in the Prospectus, the Company
owns, or possesses adequate and enforceable rights to use, all patents, patent
applications, trademarks, trademark applications, service marks, copyrights,
copyright applications, licenses, inventions, trade secrets and other similar
rights (collectively, "Intangibles") necessary for the conduct of the material
aspects of its business as described in the Prospectus and has not infringed,
is not infringing, or has not received any notice of infringement of, any
Intangibles of any other person which is reasonably likely to have a material
adverse effect on the condition (financial or other), business, properties, net
worth or results of operations of the Company or on the transactions
contemplated hereby (a "Material Adverse Effect"), and the Company does not
know of any basis therefor.
4.7 PROPERTY. The Company has good and marketable title to all of the
items of real property and good title to all of the items of personal property
which are reflected in the financial statements referred to in subsection 4.3
or are referred to in the Prospectus as being owned by it and valid and
enforceable leasehold estates in each of the items of real and personal
property which are referred to in the Prospectus as being leased by it, in each
case free and clear of all liens, encumbrances, claims, security interests and
defects, other than those properly described in the Prospectus and those which
do not and will not have a Material Adverse Effect.
4.8 PROCEEDINGS AND INVESTIGATIONS. Except as described in the
Prospectus, there are no material legal or governmental or other proceedings or
investigations pending before
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any court or before or by any public body or board or, to the Company's
knowledge, threatened (or any reasonable basis therefor) against, or involving
the properties or business of, the Company.
4.9 TAXES. The Company has filed all federal, state, local and foreign
tax returns required to be filed by it, which returns are complete and correct
in all material respects, and has paid all taxes shown due on such returns as
well as all other taxes, assessments and governmental charges which have become
due; no deficiency with respect to any such return has been assessed or
proposed; except in each case where the failure to file, failure to pay or
deficiency would not be reasonably likely to have a Material Adverse Effect.
4.10 MATERIAL CHANGES. Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, except
as set forth in or contemplated by the Registration Statement and the
Prospectus, the Company has not (i) issued any securities, (ii) incurred any
liability or obligation, direct or contingent, or entered into any transaction,
not in the ordinary course of business, or (iii) declared or paid any dividend
or made any distribution on any shares of its stock or redeemed, purchased or
otherwise acquired or agreed to redeem, purchase or otherwise acquire any
shares of its stock. In addition, subsequent to the respective dates as of
which information is given in the Registration Statement and the Prospectus,
except as set forth in or contemplated by the Registration Statement and the
Prospectus, there has not been any change in the capital stock and there has
not been any material adverse change, or any development involving or which may
reasonably be expected to involve, a prospective material adverse change, in
the condition (financial or other), earnings, business, properties, net worth,
results of operations or prospects of the Company, whether or not arising from
transactions in the ordinary course of business.
4.11 NO DEFAULT: AGREEMENTS. No default exists, and no event has
occurred which with notice or lapse of time, or both, would constitute a
default in the due performance and observance of any material term, covenant or
condition, by the Company, or, to the best of the Company's knowledge, any
other party, of any indenture, mortgage, deed of trust, note or any other
agreement or instrument to which the Company is a party or by which it or any
of its properties or businesses may be bound or affected and where such default
would be reasonably likely to have a Material Adverse Effect.
4.12 NO DEFAULT: ARTICLES AND CODE OF REGULATIONS; PERMITS, JUDGMENTS,
AND REGULATIONS. The Company is not in violation of any term or provision of
its Articles of Incorporation or Code of Regulations. The Company is not in
violation of, nor is it required to take any action to avoid any violation of,
any franchise, license, permit, judgment, decree, order, statute, rule or
regulation, where the consequences of such violation or prospective violation
is reasonably likely to have a Material Adverse Effect.
4.13 NO DEFAULT: EXECUTION AND PERFORMANCE OF THIS AGREEMENT. Except
for instances which do not and will not have a Material Adverse Effect, neither
the execution, delivery and performance of this Agreement by the Company, nor
the consummation of the
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transactions contemplated hereby (including, without limitation, the issuance
and sale by the Company of the Shares), will give rise to a right to terminate
or accelerate the due date of any payment due under, or conflict with or result
in the breach of any term or provision of, or constitute a default (or an,
event which with notice or lapse of time, or both, would constitute a default)
under, or require any consent under, or result in the execution or imposition
of any lien, charge or encumbrance upon any properties or assets of the Company
pursuant to the terms of, any indenture, mortgage, deed of trust, note or other
agreement or instrument to which the Company is a party or by which it or any
of its properties or businesses is bound or any franchise, license, permit,
judgment, decree, order, statute, rule or regulation or violate any provision
of the Articles of Incorporation or Code of Regulations of the Company.
4.14 CAPITAL STOCK; SHARES. All of the outstanding shares of Common
Stock have been duly authorized and validly issued, are fully paid and
nonassessable, and none of them was issued in violation of any preemptive or
other right. The issuance, sale and delivery of the Firm Shares have been duly
authorized by all necessary corporate action by the Company and, when issued,
sold and delivered against payment therefor pursuant to this Agreement, will be
duly and validly issued, fully paid and nonassessable and none of them will
have been issued in violation of any preemptive or other right. Except as
disclosed in the Prospectus, there is no outstanding option, warrant or other
right calling for the issuance of, and no commitment, plan or arrangement to
issue, any share of stock of the Company or any security convertible into or
exchangeable for stock of the Company. The capital stock of the Company,
including the Common Stock and the Shares, conforms to all statements in
relation thereto contained in the Registration Statement and the Prospectus.
4.15 EXCHANGE ACT; NASDAQ; SECURITIES MANUAL. The Company has filed a
Form 8-A Exchange Act registration statement and the Common Stock will be
registered with the Commission pursuant to Section 12 of the Exchange Act as of
the Effective Date. The Company has applied to have the Common Stock designated
for trading on the National Association of Securities Dealers, Inc. Nasdaq
SmallCap Market, which application will be effective on the Effective Date. The
Company has applied for a listing in the applicable Standard & Poors or Moody's
securities manual (the "Securities Manual"), and the Company's listing in the
Securities Manual will be effective on or before the Effective Date.
4.16 REGISTRATION RIGHTS. No holder of any security of the Company has
the right or, because of the filing of the Registration Statement or the
consummation of the transac tions contemplated in this Agreement, will have the
right, which right has not been waived, to (i) have any security owned by such
holder included in the Registration Statement or (ii) require any other
registration statement to be filed in connection with any capital stock of the
Company within 180 days from the date of the Prospectus.
4.17 AUTHORIZATION; ENFORCEABILITY. This Agreement and the performance
by the Company of its obligations under this Agreement, has been duly and
validly authorized, executed and delivered by the Company and is the legal,
valid and binding agreement and obligation of the Company, enforceable against
the Company in accordance with its terms, except
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as (i) the enforceability hereof may be limited by bankruptcy, fraudulent
conveyance, insolvency, reorganization, moratorium, or other laws relating to
creditors, rights generally, (ii) the remedy of specific performance and other
forms of equitable relief may be subject to certain equitable defenses and to
the discretion of the courts before which the proceeding may be brought, and
(iii) rights to indemnity and contribution hereunder may be limited by federal
or state securities laws or principles of public policy.
4.18 PROHIBITED ACTIVITIES. Neither the Company nor, to the Company's
knowledge, any director, officer, agent, employee or other person authorized to
act on behalf of the Company has (i) used any funds of the Company for any
unlawful contribution, gift, entertainment or other unlawful expense relating
to political activity, (ii) made any direct or indirect unlawful payment to any
foreign or domestic government official or employee from funds of the Company,
(iii) violated or is in violation of any provision of the Foreign Corrupt
Practices Act of 1977 in respect of the Company, or (iv) made any bribe,
rebate, payoff, influence payment, kickback or other unlawful payment in
respect of the Company.
4.19 BOOKS AND RECORDS. The Company makes and keeps accurate books and
records reflecting its assets and maintains internal accounting controls which
provide reasonable assurance that (i) transactions are executed with
management's authorization, (ii) transactions are recorded as necessary to
permit preparation of the Company's consolidated financial statements and to
maintain accountability for the assets of the Company, (iii) access to the
assets of the Company is permitted only in accordance with management's
authorization, and (iv) the reported accountability of the assets of the
Company is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
4.20 STABILIZATION AND MANIPULATION. Neither the Company nor, to the
Company's knowledge, any affiliate of the Company has taken, and the Company
will not take, directly or indirectly, any action designed to cause or result
in, or which has constituted or which might reasonably be expected to
constitute, the stabilization or manipulation of the price of the shares of the
Common Stock in order to facilitate the sale or resale of any of the Shares.
4.21 AFFILIATED TRANSACTIONS. No transaction has occurred between or
among the Company and any of its officers or directors or any of the
shareholders holding 10% or more of the outstanding shares of any class of the
Company's stock or any affiliate or affiliates of any such officer, director or
shareholder, that is required to be described in and is not described in the
Prospectus.
4.22 INVESTMENT COMPANY. The Company is not now, and after the sale of
the Shares to be sold by it hereunder and application of the net proceeds from
such sale as described in the Prospectus under the caption "Use of Proceeds"
will not be, an "investment company", or a company "controlled" by an
"investment company", within the meaning of the Investment Company Act of 1940,
as amended.
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4.23 GOVERNMENTAL AUTHORITIES AND REGULATIONS. Except as set forth in
the Registration Statement and the Prospectus, to the Company's knowledge (i)
the Company is not in violation of any order of any governmental authority
directing the Company to make any material change in the method of conducting
its business, (ii) the Company has conducted and is conducting its business so
as to comply in all material respects with all applicable statutes and
regulations, (iii) neither the Company nor any affiliated persons thereof is a
party or directly or indirectly subject to any supervisory agreement or other
similar operating restrictions imposed by any governmental authority which have
had or may be expected to have a material effect on the conduct of any of the
business of the Company.
4.24 LOCK-UP ARRANGEMENTS. The Company has obtained from all of its
officers and directors and certain of its shareholders their written letters of
agreement that for a period beginning on the date of the Prospectus and ending
on the close of business 180 days thereafter they will not, without the prior
written consent of the Representative, offer, sell, contract to sell or grant
any option for the sale of or otherwise dispose of, directly or indirectly, any
shares of Common Stock of the Company (or any securities convertible into or
exercisable for such shares of Common Stock) owned by them, except as provided
herein or in the Registration Statement, and except for bona fide gifts to
persons who agree in writing with the Representative to be bound by this
clause.
4.25 LABOR DISPUTES. The Company is not involved in any labor dispute
which would have a Material Adverse Effect and no such dispute is threatened.
4.26 CONSENTS AND APPROVALS. Except for the order of the Commission
declaring the Registration Statement effective and permits and similar
authorizations required under the securities or Blue Sky laws of certain
jurisdictions, no consent, authorization, or approval is required from any
federal, state or local governmental agency or body or from any other third
party in connection with this Agreement and the transactions contemplated
hereby other than such consents, authorizations or approvals as have been
obtained.
4.27 EQUITY INTERESTS. The Company does not own any shares of stock or
any securities of any corporation and does not have any equity interest in any
firm, partnership, association or other entity that is required to be
disclosed, and is not disclosed, in the Registration Statement and the
Prospectus.
4.28 DISTRIBUTION OF OFFERING MATERIALS. The Company has not
distributed and, prior to the later to occur of (i) the Closing Date and (ii)
the completion of the distribution of the Shares, will not distribute any
offering material in connection with the offering and sale of the Shares other
than the Registration Statement, the Prepricing Prospectus, the Prospectus or
other materials, if any, permitted by the Securities Act and the Rules.
4.29 ENVIRONMENTAL MATTERS. The Company (i) is in compliance with any
and all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants
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or contaminants ("Environmental Laws"), (ii) has received all permits, licenses
or other approvals required of it under applicable Environmental Laws to
conduct its business, and (iii) is in compliance with all terms and conditions
of any such permit, license or approval, except where such noncompliance with
Environmental Laws, failure to receive required permits, licenses or approvals
or, failure to comply with the terms and conditions of such permits, licenses
or approvals would not, singly or in the aggregate, have a Material Adverse
Effect.
4.30 DOING BUSINESS WITH CUBA. The Company has complied with all
provisions of Florida Statutes, ss. 517.075, relating to issuers doing business
with Cuba.
5. REPRESENTATION AND WARRANTIES OF THE SELLING SHAREHOLDERS. Each
Selling Shareholder represents and warrants, as to such Selling Shareholder
only and not as to the other Selling Shareholders, severally and not jointly,
to each Underwriter (a) that such Selling Shareholder now has, and on the
relevant Closing Date will have valid title to such of the Shares as are to be
sold by such Selling Shareholder pursuant to this Agreement, free and clear of
any security interests, claims, liens, equities and other encumbrances, (b)
that such Selling Shareholder now has, and on the relevant Closing Date will
have, the legal right and power, and all consents, approvals and authorizations
required by law, to enter into this Agreement and to sell, transfer and deliver
such shares of Stock in the manner provided in this Agreement and that no such
action will contravene any provision of applicable law or any material
agreement or other instrument binding upon such Selling Shareholder, (c) that
all information furnished in writing by or on behalf of such Selling
Shareholder for use in the Registration Statement and Prospectus is, and on the
relevant Closing Date will be, true, correct and complete in all material
respects, and (d) without having undertaken to determine the accuracy or
completeness of the information contained in the Registration Statement (except
as provided by such Selling Shareholder), nothing has come to the attention of
such Selling Shareholder which leads it to believe that the Registration
Statement contains any untrue statement of a material fact or omits to state
any material fact necessary to make the statements contained therein, in light
of the circumstances under which they were made, not misleading.
6. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The respective
obligations of the Underwriters to purchase the Shares are subject to each of
the following terms and conditions:
6.1 EFFECTIVENESS OF REGISTRATION STATEMENT; NO STOP ORDER. The
Registration Statement shall have become effective not later than 5:00 P.M.,
Cincinnati time, on the date of this Agreement or on such later date and time
as shall be consented to in writing by the Representative. At each Closing
Date, if any, no stop order shall have been issued or proceedings therefor
initiated or threatened by the Commission and any request of the Commission for
additional information (to be included in the Registration Statement or the
Prospectus or otherwise) shall have been complied with to your satisfaction.
6.2 OPINION OF COMPANY COUNSEL. At each Closing Date, you shall have
received the favorable opinion of Taft, Stettinius & Hollister, special
securities counsel for the Company, dated the Firm Shares Closing Date or the
Optional Shares Closing Date, as the case
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may be, addressed to the Underwriters and in form and scope satisfactory to
counsel for the Underwriters, with reproduced copies or signed counterparts
thereof for each of the Underwriters to the effect that:
(i) The Company is a corporation duly incorporated and validly
existing in good standing under the laws of the State of Ohio, is duly
qualified and in good standing as a foreign corporation in each jurisdiction in
which the character or location of its properties (owned, leased or licensed),
the maintenance of an office or the nature of its business makes such
qualification necessary, except where the failure so to qualify would not have
a Material Adverse Effect, and has full corporate power and authority and, to
the best of such counsel's knowledge after due inquiry, all necessary and
material authorizations, approvals, orders, licenses, certificates and permits
of and from all governmental regulatory officials and bodies, to own, lease,
license and operate its properties and to conduct its business as now being
conducted as described in the Registration Statement and Prospectus;
(ii) The Company has authorized and outstanding capital stock as set
forth under the caption "Capitalization" in the Registration Statement and the
Prospectus; all the shares of capital stock of the Company outstanding prior to
the issuance of the Shares to be issued and sold by the Company hereunder have
been duly authorized and validly issued and are fully paid and nonassessable
and none of them were issued in violation of any preemptive or other right; the
Shares to be issued and sold to the Underwriters by the Company hereunder have
been duly authorized and, when issued, sold and delivered against payment
therefor pursuant to this Agreement, will be validly issued, fully paid and
nonassessable, and none of them will have been issued in violation of any
preemptive or, to the knowledge of such counsel after due inquiry, similar
rights that entitle or will entitle any person to acquire any shares of Common
Stock upon the issuance of the Shares by the Company; and the Shares and the
other capital stock of the Company conform as to legal matters to the
description thereof contained under the caption "Description of Securities" in
the Registration Statement and the Prospectus;
(iii) To such counsel's knowledge after due inquiry, the Company does
not own any shares of stock or any securities of any corporation or have any
equity interest in any firm, partnership, association or other entity that is
required to be disclosed, and is not disclosed, in the Registration Statement
and the Prospectus;
(iv) The certificates evidencing the Shares are in the form approved
by the Board of Directors of the Company and comply with the Code of
Regulations and the Articles of Incorporation of the Company and the laws of
the State of Ohio.
(v) The Company has the corporate power and authority to enter into
this Agreement and to issue, sell and deliver the Shares to be sold by it to
the Underwriters as provided herein, and this Agreement has been duly and
validly authorized, executed and delivered by the Company, and is a valid,
legal and binding agreement and obligation of the Company, enforceable against
the Company in accordance with its terms, except as enforcement of rights to
indemnity and contribution hereunder may be limited by federal or state
securities laws or
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principles of public policy and subject to the qualification that the
enforceability of the Company's obligations hereunder may be limited by
bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium, and
other laws relating to or affecting creditors' rights generally and by general
equitable principles;
(vi) To the best of such counsel's knowledge after due inquiry, the
Company is conveying to the Underwriters good and valid title to the Shares,
free and clear of any liens, encumbrances, adverse claims, security interests,
or other restrictions whatsoever;
(vii) To the best of such counsel's knowledge after due inquiry, there
are (A) no contracts or other documents which are required to be described in
or filed as exhibits to the Registration Statement or the Prospectus other than
those described in or filed as exhibits thereto, (B) no legal or governmental
or other proceedings or investigations pending or threatened against, or
involving the assets, properties or business of, the Company, of a character
required to be disclosed in the Registration Statement and Prospectus, which
have not been so disclosed and properly described therein, and (C) no statutes
or regulations applicable to the Company, or certificates, permits, grants or
other consents, approvals, orders, licenses or authorizations from regulatory
officials or bodies, required to be obtained or maintained by the Company, of a
character required to be disclosed in the Registration Statement and
Prospectus, which have not been so disclosed and properly described therein;
(viii) Neither the execution, delivery and performance of this
Agreement by the Company, nor the consummation of the transactions herein
contemplated (including, without limitation, the issuance and sale by the
Company of the Shares), will give rise to a right to terminate or accelerate
the due date of any payment due under, or conflict with or result in a breach
of any term or provision of, or constitute a default (or an event which, with
notice or lapse of time, or both, would constitute a default) under, or require
consent under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or asset of the Company pursuant to the terms of
any agreement or instrument known to such counsel (having made due inquiry with
respect thereto) to which the Company is a party or by which the Company or any
of the properties or business of the Company is bound, nor will such action
result in any violation of the provisions of the Articles of Incorporation or
Code of Regulations of the Company or, to the knowledge of such counsel, any
statute or any order, rule, or regulation applicable to the Company or, to the
knowledge of such counsel, any court or any federal, state, local or other
regulatory authority or other governmental body having jurisdiction over the
Company;
(ix) To the best of such counsel's knowledge after due inquiry, no
consent, approval, authorization or order of, or registration or filing with,
any court or governmental agency or body, domestic or foreign, is required to
be obtained by or on behalf of the Company in connection with the execution,
delivery and performance of this Agreement or the consummation of the
transactions contemplated hereby (including, without limitation, the issuance
and sale by the Company of the Shares), except such as may be required under
the
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Securities Act, by the National Association of Securities Dealers, Inc. or
under state securities or Blue Sky laws;
(x) To the best of such counsel's knowledge after due inquiry, and
except for those instances which do not and will not have a Material Adverse
Effect, the Company (a) is not in default (nor has an event occurred which,
with notice or lapse time or both, would constitute a default) under, any
indenture, mortgage, deed of trust, note, bank loan or credit agreement or any
other material agreement or instrument to which the Company is a party or by
which it or any of its properties or assets may be bound or affected, (b) is
not in violation of any term or provision of its Articles of Incorporation or
Code of Regulations, and, (c) is not in violation of any franchise, license,
grant, permit, judgment, decree, order, statute, rule or regulation or has
received any notice of conflict with the asserted rights of others in respect
of intangibles necessary for the conduct of its business, where, in each case,
such matter is required to be described in the Registration Statement and the
Prospectus and is not described therein;
(xi) The Registration Statement and the Prospectus and any amendments
or supplements thereto (other than the financial statements, and other
financial and statistical data included therein, as to which no opinion need be
rendered) comply as to form in all material respects with the requirements of
the Securities Act and the Rules;
(xii) The Registration Statement (including all post-effective
amendments, of any) is effective under the Securities Act and the Rules, and,
to the best of such counsel's knowledge after due inquiry, no stop order
suspending the effectiveness of the Registration Statement has been issued and
no proceedings for that purpose are pending or threatened under the Securities
Act; and any required filing of the Prospectus pursuant to Rule 424(b) has been
made in accordance with Rule 424(b);
(xiii) To the best of such counsel's knowledge after due inquiry, (A)
the Company has good and marketable title to, or valid and enforceable
leasehold estates in, the items of real and personal property stated in the
Prospectus to be owned or leased by it, in each case free and clear of all
liens, encumbrances, and security interests, other than those referred to in
Prospectus and those which do not have a Material Adverse Effect, and (B) the
Company owns, or possesses adequate and enforceable rights to use, the
Intangibles, except as described in the Prospectus or where the lack of such
ownership or possession would not have a Material Adverse Effect; and
(iv) The Company is not, after giving effect to the sale of the Shares
sold by it hereunder and application of the net proceeds from such sale as
described in the Prospectus under the caption "Use of Proceeds", an "investment
company" within the meaning of the Investment Company Act of 1940, as amended.
In addition, such counsel will state that, in the course of
preparation of the Registration Statement and the Prospectus, (X) such counsel
had conferences with officials of the Company,
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its independent auditors, and with representative of the Representative and
their counsel, and also had discussions with such officials of the Company with
a view toward a clear understanding on their part of the requirements of the
Securities Act and the Rules with reference to the preparation of registration
statements and prospectuses, and (Y) such counsel's examination of the
Registration Statement and Prospectus and its discussions in the
above-mentioned conferences did not disclose to it any information which gives
it reason to believe that the Registration Statement or the Prospectus (other
than the schedules, financial statements and other financial and statistical
information as to which such counsel need express no comment or opinion) at the
time the Registration Statement became effective contained any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, or that the
Prospectus (other than the schedules, financial statements and other financial
and statistical information as to which such counsel need express no comment or
opinion) contains any untrue statement of a material fact or omits to state any
material fact necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading.
Such opinion shall be to such further effect with respect to other
legal matters relating to this Agreement and the sale of the shares as counsel
for the Underwriters may reasonably request.
In rendering the foregoing opinion, such counsel may rely (A) as to
matters not governed by federal law or the laws of jurisdictions in which they
are admitted on opinions of other legal counsel reasonably satisfactory to the
Underwriters and their counsel and upon which, in such counsel's opinion, such
counsel is justified in relying, (B) on the opinion of Katz, Greenberger and
Norton, and (C) as to matters of fact upon certificates of public officials and
officers of the Company. Where such opinion shall state that a matter is to the
best of such counsel's knowledge after due inquiry, it shall mean actual
knowledge of those attorneys who have provided substantive services in
connection with the matters contemplated by this Agreement and may be based
upon certificates of a responsible officer of the Company and letters received
by the Company or such counsel from other legal counsel to the Company. Copies
of all such opinions and certificates shall be furnished to counsel to the
Representative on the Closing Date.
6.3 OPINION OF COUNSEL TO SELLING SHAREHOLDERS. At the Optional Shares Closing
Date you shall have received the opinion of Taft, Stettinius & Hollister,
counsel to the Selling Shareholders, to the effect that:
(i) This Agreement has been duly authorized, executed and delivered by
or on behalf of each of the Selling Shareholders and is a valid and binding
agreement of each of the Selling Shareholders, except as rights to indemnity
hereunder may be limited under applicable law;
(ii) To the best of such counsel's knowledge in reliance upon one or
more certificates from the Selling Shareholders, without independent
verification, the execution, delivery and performance of this Agreement will
not contravene any material agreement or other instrument binding upon any
Selling Shareholder or any writ, order of injunction of any court
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or other governmental body, and, to the knowledge of such counsel, no consent,
approval, authorization or order of, or registration or filing with, any court
or governmental body or agency is required for the performance of this
Agreement by any Selling Shareholder, except such as are specified and have
been obtained and such as may be required by the securities or Blue Sky laws of
the various states in connection with the purchase and distribution of the
Shares by the Underwriters (as to which such counsel need not express any
opinion);
(iii) Each of the Selling Shareholders has good, valid and marketable
title to the Shares to be sold by such Selling Shareholder and has the legal
right and power, and all authorization and approval required by law, to enter
into this Agreement and to sell, transfer and deliver the Shares to be sold by
such Selling Shareholder pursuant to the terms of this Agreement.
(iv) To the best knowledge of such counsel, the delivery of the
certificates representing the Shares to be sold by each Selling Shareholder
pursuant to this Agreement against payment therefor as provided in this
Agreement will pass valid title to such Shares to the Underwriters free and
clear of any security interests, claims, liens, equities and other
encumbrances, assuming that the Underwriters are each "bona fide purchasers (as
defined in Section 1308.17 of the Ohio Revised Code.)
6.4 REPRESENTATIONS AND WARRANTIES. All of the representations and
warranties of the Company and the Selling Shareholders contained in this
Agreement shall be true and correct on and as of the date of this Agreement and
on and as of each Closing Date as if made on and as of each Closing Date.
6.5 PERFORMANCE. Neither the Company nor any of the Selling
Shareholders shall have failed at or prior to each Closing Date to have
performed or complied with any of its or their agreements herein contained and
required to be performed or complied with by it or them hereunder at or prior
to the Closing Date.
6.6 OFFICER'S CERTIFICATE. At each Closing Date, the Representative
shall have received a certificate of the principal executive officer and the
principal financial and accounting officers of the Company dated the Firm
Shares Closing Date or Optional Shares Closing Date, as the case may be,
stating that (i) the Company shall not have failed at or prior to the Closing
Date to have performed or complied with any of its agreements herein required
to be performed or complied with it hereunder at or prior to the Firm Shares
Closing Date or the Optional Shares Closing Date, as the case may be, and (ii)
all of the representations and warranties of the Company contained in this
Agreement are be true and correct on and as of the date of this Agreement and
on and as of the Firm Shares Closing Date or the Optional Shares Closing Date,
as the case may be, as if made on and as of the Firm Shares Closing Date or the
Optional Shares Closing Date, as the case may be.
6.7 ACCOUNTANT'S LETTER. At the time this Agreement is executed and at
each Closing Date, you shall have received a letter, addressed to the
Underwriters and in form and
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substance satisfactory to the Representative in all respects (including the
nonmaterial nature of the changes or decreases, if any, referred to in clause
6.7 (iii) below), with reproduced copies or signed counterparts thereof for
each of the Underwriters, from Joseph Decosimo and Company PLL dated as of the
date of this Agreement and as of each Closing Date, as the case may be:
(i) Confirming that they are independent public accountants with
respect to the Company within the meaning of the Securities Act and the
applicable published Rules and stating that the answer to Item 13 of Part I of
Registration Statement is correct insofar as it relates to them;
(ii) Stating that, in their opinion, the financial statements of the
Company examined by them and included in the Registration Statement and in the
Prospectus comply as to form in all material respects with the applicable
accounting requirements of the Securities Act and the related published Rules;
(iii) Stating that, on the basis of procedures used, including a
formal review, made in accordance with generally accepted auditing standards
but not an examination, which included a reading of the latest available
unaudited interim financial statements of the Company (with an indication of
the date of the latest available unaudited interim financial statements), a
reading of the latest available minutes of the shareholders and board of
directors of the Company and committees of such boards and inquiries to certain
officers and other employees of the Company responsible for financial and
accounting matters and other specified procedures and inquiries, nothing has
come to their attention that would cause them to believe that: (A) the
unaudited financial statements and related schedules of the Company, included
in the Registration Statement and Prospectus, if any, (1) do not comply as to
form in all material respects with the applicable accounting requirements of
the Securities Act and the related Rules, or (2) were not fairly presented in
conformity with generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial statements included
in the Registration Statement and Prospectus; (B) at a specified date not more
than five business days prior to the date of such letter, there was any change
in the capital stock or long-term debt of the Company as compared with the
amounts shown on the balance sheet of the Company included in the Registration
Statement and Prospectus, other than as set forth in or contemplated by the
Registration Statement and Prospectus or, if there was any change or decrease,
setting forth the amount of such change or decrease; and (C) during the period
from January 1, 1996 to a specified date not more than five business days prior
to the date of such letter, there was any decrease in total revenues, operating
income, net income or earnings per share of the Company, as compared with the
corresponding period beginning January 1, 1995 other than as set forth in or
contemplated by the Registration Statement and Prospectus, or, if there was any
such decrease, setting forth the amount of such decrease; and
(iv) Stating that they have compared the selected financial data,
specific dollar amounts, numbers of shares, percentages of revenues and
earnings and other financial information pertaining to the Company set forth in
the Prospectus, which have been specified by the Representative prior to the
date of this Agreement, to the extent that such amounts, numbers,
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<PAGE> 18
percentages and information may be derived from the general accounting records
of the Company, and excluding any questions requiring an interpretation by
legal counsel, with the results obtained from the application of specified
readings, inquiries and other appropriate procedures (which procedures do not
constitute an examination in accordance with generally accepted auditing
standards) set forth in the letter, and found them to be in agreement.
6.8 SATISFACTORY OFFERING PROCEEDINGS; OPINION OF UNDERWRITERS'
COUNSEL. All proceedings taken in connection with the sale of the Shares as
herein contemplated shall be reasonably satisfactory in form and substance to
the Representative and to counsel for the Underwriters, and the Underwriters
shall have received from said counsel for the Underwriters a favorable opinion,
dated as of each Closing Date, with respect to such of the matters set forth
under subsection 6.2, and with respect to such other related matters, as the
Representative may reasonably require.
6.9 CERTIFICATES. There shall have been duly tendered to the
Representative for the accounts of the several Underwriters certificates
representing all the Shares agreed to be sold by the Company and/or the Selling
Shareholders on each Closing Date in accordance with the provisions of this
Agreement.
6.10 NO STOP ORDER. No order suspending the sale of the Shares, in any
jurisdiction designated by the Representative pursuant to subsection 7.4
hereof, shall have been issued on the Firm Shares Closing Date or the Optional
Shares Closing Date, as the case may be, and no proceedings for that purpose
shall have been instituted or, to the Representative's knowledge or that of the
Company, shall be contemplated.
6.11 NASD REVIEW. The National Association of Securities Dealers (the
"NASD"), upon review of the terms of the public offering of the Shares, shall
not have objected to the Underwriters' participation in the same.
6.12 NASDAQ. The Shares shall have been designated or approved for
designation upon notice of issuance on the Nasdaq SmallCap Market without
waiver of any quantitative criterion for such designation.
6.13 LOCK-UP LETTERS. You shall have received on or before the Closing
Date all "lock-up" letters described in subsections 4.24 and 7.10 hereof.
6.14 OTHER. The Company shall have furnished or caused to be furnished
to you such further certificates and documents as you shall have reasonably
requested.
Any certificate signed by any officer of the Company and delivered to
the Representative or to counsel for the Underwriters shall be deemed a
representation and warranty by the Company to the Underwriters as to the
statements made therein. If any condition to the Underwriters' obligations
hereunder to be fulfilled prior to or at the Firm Shares Closing Date or the
Optional Shares Closing Date, as the case may be, is not so fulfilled, the
Representative may, on behalf
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of the several Underwriters, terminate this Agreement or, if the Representative
so elects, waive any such conditions which have not been fulfilled or extend
the time of their fulfillment.
7. COVENANTS OF THE COMPANY.
The Company covenants and agrees with the several Underwriters as
follows:
7.1 REGISTRATION STATEMENT. The Company will use its best efforts to
cause the Registration Statement to become effective and will notify the
Representative immediately, and confirm the notice in writing, (i) when the
Registration Statement and any post-effective amendment thereto becomes
effective, (ii) of the issuance by the Commission of any stop order or of the
initiation, or the threatening, of any proceedings for that purpose, and (iii)
of the receipt of any comments from the Commission. The Company will make every
reasonable effort to prevent the issuance of a stop order, and, if the
Commission shall enter a stop order at any time, the Company will make every
reasonable effort to obtain the lifting of such order at the earliest possible
moment.
7.2 DELIVERY OF PROSPECTUS; AMENDMENTS AND SUPPLEMENTS. During the
time when a prospectus is required to be delivered under the Securities Act,
the Company will comply so far as it is able with all requirements imposed upon
it by the Securities Act, as now and hereafter amended, and by the Rules, from
time to time in force, so far as necessary to permit the continuance of sales
of or dealings in the Shares in accordance with the provisions hereof and the
Prospectus. If at any time when a prospectus relating to the Shares is required
to be delivered under the Securities Act any event shall have occurred as a
result of which, in the opinion of counsel for the Company or counsel for the
Underwriters, the Registration Statement or Prospectus as then amended or
supplemented includes an untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it is necessary at any time to amend or supplement
the Registration Statement or Prospectus to comply with the Securities Act, the
Company will notify the Representative promptly and prepare and file with the
Commission an appropriate amendment or supplement in form satisfactory to the
Representative. The cost of preparing, filing and delivering copies of such
amendment or supplement shall be paid by the Company.
7.3 DELIVERY AND USE OF PROSPECTUS. The Company will deliver to each
of the several Underwriters such number of copies of each Prepricing Prospectus
as may reasonably be requested by the Underwriters and, as soon as the
Registration Statement, or any amendment or supplement thereto, becomes
effective, deliver to the Representative three signed copies of the
Registration Statement, including exhibits, and all post-effective amendments
thereto and deliver to each of the several Underwriters such number of copies
of the Prospectus, the Registration Statement and supplements and amendments
thereto, if any, without exhibits, as the Representative may reasonably request
for the purposes contemplated by the Securities Act. The Company consents to
the use, in accordance with the provisions of the Securities Act and the Rules
and with the securities or Blue Sky laws of the jurisdictions in which the
Shares are offered
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by the several Underwriters and by dealers, prior to the date of the
Prospectus, of each Prepricing Prospectus so furnished by the Company.
7.4 BLUE SKY QUALIFICATION. The Company will endeavor in good faith,
in cooperation with the Representative and their counsel, at or prior to the
time the Registration Statement becomes effective, to qualify the Shares for
offering and sale under the securities laws relating to the offering or sale of
the Shares of such jurisdictions as the Representative may reasonably designate
and will file such consents to service of process or other documents necessary
or appropriate in order to effect such registration or qualification; provided
that no such qualification shall be required in any jurisdiction in which such
qualification will require the Company to qualify to do business as a foreign
corporation where it is not now so qualified or to take action which would
subject it to service of process in suits, other than those arising out of the
offering or sale of the Shares, in any jurisdictions where it is not now so
subject. In each jurisdiction where such qualification shall be effected, the
Company will, unless the Representative agrees that such action is not at the
time necessary or advisable, file and make such statements or reports at such
times as are or may reasonably be required by the laws of such jurisdiction.
7.5 DOCUMENTS TO BE FURNISHED TO THE REPRESENTATIVE. For a period of
five years from the effective date of the Registration Statement, the Company
will furnish to the Representative the following:
(i) As soon as practicable after they have been sent to shareholders
of the Company or filed with the Commission, three copies of each annual and
interim financial and other report or communication sent by the Company to its
shareholders or filed with the Commission; and
(ii) As soon as practicable, three copies of every press release and
every material news item and article in respect of the Company or the affairs
of the Company which was released by the Company.
7.6 APPLICATION OF NET PROCEEDS. The Company will apply the net
proceeds from the sale of the Shares sold by it hereunder in the manner set
forth under "Use of Proceeds" in the Prospectus.
7.7 UNAUDITED INTERIM FINANCIAL STATEMENTS. The Company will furnish
to the Representative as early as practicable prior to each Closing Date, but
not later than two full business days prior thereto, a copy of the latest
available unaudited interim financial statements of the Company which have been
read by the Company's independent public accountants as stated in their letters
to be furnished pursuant to subsection 6.7 hereof.
7.8 SECURITIES ACT AND EXCHANGE ACT REQUIREMENTS. The Company will use
its best efforts to comply with all registration, filing and reporting
requirements of the Securities Act or the Exchange Act, which may from time to
time be applicable to the Company.
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7.9 CONSENT TO JURISDICTION. If any action or proceeding shall be
brought by any of the Underwriters in order to enforce any right or remedy
under this Agreement, the Company hereby consents to, and agrees that it will
submit to, the jurisdiction of the courts of the State of Ohio and of any
federal court sitting in the City of Cincinnati, County of Hamilton.
7.10 LOCK-UP ARRANGEMENTS. The Company will not, without the prior
written consent of the Representative, offer, sell, contract to sell or grant
any option for the sale or otherwise dispose of, directly or indirectly, any
shares of Common Stock of the Company (or any securities convertible into or
exercisable for such shares of Common Stock) or register with the Commission
any securities of the Company prior to the close of business on the date 180
days from the Effective Date, except for the registration of the Shares
pursuant to the Registration Statement and except for options granted pursuant
to the Company's 1996 Stock Option Plan.
7.11 RULE 424(B) FILING. If Rule 430A of the Rules is employed, the
Company will timely file the Prospectus pursuant to Rule 424(b) of the Rules
and will advise you of the time and manner of such filing.
7.12 STABILIZATION AND MANIPULATION. Except as stated in this
Agreement and in the Prepricing Prospectus and Prospectus, the Company has not
taken, nor will it take, directly or indirectly, any action designed to or that
might reasonably by expected to cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or resale
of the Shares.
7.13 SECONDARY TRADING QUALIFICATIONS. Until such time as the Common
Stock becomes eligible for trading on the Nasdaq National Market or a
registered stock exchange reasonably acceptable to the Managing Underwriter,
the Company shall use its best efforts to maintain the listing of the Common
Stock on the Nasdaq SmallCap Market and in the Securities Manual.
8. INDEMNIFICATION AND CONTRIBUTION.
8.1 INDEMNIFICATION BY THE COMPANY. The Company agrees to indemnify
and hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act from and against any and all losses, claims, damages and
liabilities, joint or several (including any reasonable investigation, legal
and other expenses incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claim asserted), to which
they or any of them, may become subject under the Securities Act, the Exchange
Act or other federal or state statutory law or regulation, at common law or
otherwise, insofar as such losses, claims, damages or liabilities arise out of
or are based upon any untrue statement or alleged untrue statement of a
material fact contained in any Prepricing Prospectus, the Registration
Statement or the Prospectus or any amendment thereof or supplement thereto, or
arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that such indemnity
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shall not inure to the benefit of any Underwriter (or any person controlling
such Underwriter) on account of any losses, claims, damages or liabilities
arising from the sale of the Shares upon the public offering to any person by
such Underwriter if such untrue statement or omission or alleged untrue
statement or omission was made in such Prepricing Prospectus, the Registration
Statement or the Prospectus, or such amendment or supplement, in reliance upon
and in conformity with information furnished in writing to the Company by the
Representative on behalf of such Underwriter specifically for use therein. The
Company shall not be liable hereunder to any Underwriter, or any controlling
person thereof, to the extent that any loss, claim, damage or other liability
incurred by such Underwriter arises from such Underwriter's fraudulent act or
omission.
8.2 INDEMNIFICATION BY THE UNDERWRITERS. Each Underwriter, severally
and not jointly, agrees to indemnify and hold harmless the Company, the Selling
Shareholders, each person, if any, who controls the Company or any Selling
Shareholder within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act, each director of the Company and each officer of the
Company who signs the Registration Statement, to the same extent as the
foregoing indemnity from the Company to each Underwriter, but only insofar as
such losses, claims, damages or liabilities arise out of or are based upon any
untrue statement or omission or alleged untrue statement or mission which was
made in any Prepricing Prospectus, the Registration Statement or the
Prospectus, or any amendment thereof or supplement thereto, in reliance upon
and in conformity with information furnished in writing to the Company by the
Representative on behalf of such Underwriter specifically for use therein;
provided, however, that the obligation of each Underwriter to indemnify the
Company, including any controlling person, director or officer thereof,
hereunder shall not be in excess of the amount by which the total price of the
Shares underwritten by it and distributed to the public exceeds the amount of
any damages which such Underwriter has otherwise been required to pay by reason
of such untrue or alleged untrue statement or omission or alleged omission and,
notwithstanding any other provision of this Agreement, no Selling Shareholder
shall be required to contribute any amount in excess of he product of the
number of shares sold by such Selling Shareholder times the price per share
paid to such Selling Shareholder by the Underwriters pursuant hereto. No
Underwriter shall be liable hereunder to the Company or any Selling Shareholder
(including any controlling person, director or officer thereof) to the extent
that any loss, claim, damage or other liability incurred by the Company arises
from a fraudulent act or omission by the Company or such Selling Shareholder.
8.3 INDEMNIFICATION BY THE SELLING SHAREHOLDERS. Each Selling
Shareholder, severally and not jointly, agrees to indemnify and hold harmless
each Underwriter and each person, if any, who controls any Underwriter within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act, against any losses, claims, damages or liabilities to which any such
person may become subject under the Securities Act, the Exchange Act or other
federal or state statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of or are based upon (i) any untrue
statement of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
or (ii) the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse such person for any
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<PAGE> 23
legal or other expenses reasonably incurred by such person in connection with
investigating or defending any such loss, claim, damage, liability, action or
proceeding; provided, however, that a Selling Shareholder will only be liable
in any such case and to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement, or alleged untrue
statement, or omission or alleged omission made in the Registration Statement,
any Preliminary Prospectus, the Prospectus, or any such amendment or
supplement, in conformity with written information furnished by or on behalf of
such Selling Shareholder specifically for use in the preparation thereof. In no
event, however, shall the liability of any Selling Shareholder for
indemnification under this Section exceed an amount equal to the offering price
of the Shares sold by such Selling Shareholder to the Underwriters, less
applicable underwriting discounts and commissions.
8.4 PROCEDURES. Any party that proposes to assert the right to be
indemnified under this Section 8 shall, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in respect of
which a claim is to be made against an indemnifying party or parties under this
Section 8, notify each such indemnifying party of the commencement of such
action, suit or proceeding, but the omission so to notify such indemnifying
party of any such action, suit or proceeding shall not relieve it from any
liability that it may have to any indemnified party otherwise than under this
Section. In the event any such action, suit or proceeding is brought against
any indemnified party and such indemnified party notifies the indemnifying
party of the commencement thereof, the indemnifying party shall be entitled to
participate in, and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party, and after notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof and the approval by the indemnified party of such counsel, the
indemnifying party shall not be liable to such indemnified party for any legal
or other expenses, except as provided below and except for the reasonable costs
of investigation subsequently incurred by such indemnified party in connection
with the defense thereof. The indemnified party shall have the right to employ
its counsel in any such action, but the fees and expenses of such counsel shall
be at the expense of such indemnified party unless (i) the employment of
counsel by such indemnified party has been authorized in writing by the
indemnifying parties, (ii) the indemnified party shall have reasonably
concluded that, because of the existence of different or additional defenses
available to the indemnified party or of other reasons, there may be a conflict
of interest between the indemnifying parties and the indemnified party in the
conduct of the defense of such action (in which case the indemnifying parties
shall not have the right to direct the defense of such action on behalf of the
indemnified party) or (iii) the indemnifying parties shall not have employed
counsel to assume the defense of such action within a reasonable time after
notice of the commencement thereof, in each of which cases the fees and
expenses of counsel shall be at the expense of the indemnifying parties,
provided that the Company shall not be required to pay the fees and expenses of
more than one additional law firm representing the Underwriters. An
indemnifying party shall not be liable for any settlement of any action, suit,
proceeding or claims effected without its written consent, and no settlement
shall be made without including a full and complete release of the indemnified
parties in form and content reasonably satisfactory to such indemnified party.
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8.5 CONTRIBUTION. If the indemnification provided for herein is
unavailable to an indemnified party under subsections 8.1, 8.2 or 8.3 hereof in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then an indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses (i) in
such proportion as is appropriate to reflect the relative benefits received by
the Company, the Selling shareholders, and the Underwriters respectively, from
the offering of the Shares, or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company, the Selling Shareholders, and the
Underwriters, respectively, in connection with the statements or omissions that
resulted in such losses, claims, damages, liabili ties or expenses, as well as
any other relevant equitable considerations. The relative benefits received by
the Company, the Selling Shareholders and the Underwriters, respectively, shall
be deemed to be in the same proportion as the total net proceeds from the
offering and sale of the Shares contemplated hereby (before deducting expenses)
received by the Company and the Selling Shareholders bear to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the Prospectus; provided
that, in the event that the Underwriters shall have purchased any Optional
Shares hereunder, any determination of the relative benefits received by the
Selling Shareholders or the Underwriters from the offering and sale of the
Shares shall include the net proceeds (before deducting expenses) received by
the Selling Shareholders, and the underwriting discounts and commissions
received by the Underwriters, from the sale of such Optional Shares, in each
case computed on the basis of the respective amounts set forth in the notes to
the table on the cover page of the Prospectus. The relative fault of the
Company, the Selling Shareholders and the Underwriters, respectively, shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to
state a material fact relates to information supplied by the Company, the
Selling Shareholders, or the Underwriters, respectively, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Company, the Selling Shareholders, and the Underwriters agree that
it would not be just and equitable if contribution pursuant to this Section 8
were determined by a pro rata allocation (even if the Underwriters were treated
as one entity for such purpose) or by any other method of allocation that does
not take account of the equitable considerations referred to in this subsection
8.5. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, liabilities and expenses referred to in this
subsection 8.5 shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating any claim or defending any such action,
suit or proceeding. Notwithstanding the provisions of this Section 8, no
Underwriter shall be required to contribute any amount in excess of the amount
by which the underwriting discounts and commissions applicable to the Shares
purchased by such Underwriter hereunder exceeds the amount of any damages which
such Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission and, notwithstanding
any other provision of this Agreement, no Selling Shareholder shall be required
to contribute any amount in excess of the product of the number of shares sold
by such Selling Shareholder times the price per share paid to such Selling
Shareholder by the Underwriters
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pursuant hereto. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11 of the Securities Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute pursuant to this Section 8 are several
in proportion to the respective numbers of Firm Shares set forth opposite their
names in Schedule I hereto (or such numbers of Firm Shares increased as set
forth in Section 10 hereof) and not joint.
Any party entitled to contribution shall, promptly after receipt of
notice of commencement of any action, suit or proceeding against such party in
respect of which a claim for contribution may be made against another party or
parties under this Section 8, notify such party or parties from whom
contribution may be sought, but the omission so to notify such party or parties
from whom contribution may be sought shall not relieve the party or parties
from whom contribution may be sought from any other obligation it or they may
have hereunder or otherwise than under this Section except to the extent that
such party has been harmed materially by the failure to receive such notice. No
party shall be liable for contribution with respect to any action, suit,
proceeding or claim settled without its written consent.
8.6 SCOPE. The obligations of the Company under this Section 8 shall
be in addition to any liability which the Company may otherwise have and
obligations of the Underwriters under this Section 8 shall be in addition to
any liability which the respective Underwriters may otherwise have. In addition
a successor to any Underwriter or any person controlling any Underwriter or to
the Company, its directors or officers who signed the Registration Statement,
or any person controlling the Company shall be entitled to the benefits of the
indemnity, contribution and reimbursement agreements contained in this Section
8.
8.7 PAYMENTS. Any losses, claims, damages, liabilities or expenses for
which an indemnified party is entitled to indemnification or contribution under
this Section 8 shall be paid by the indemnifying party to the indemnified party
as such losses, claims, damages, liabilities or expenses are incurred, subject
to the agreement of such indemnified party to return any amounts paid to it if
it should be determined ultimately that the indemnified party is not entitled
to indemnification under this Section 8.
8.8 SETTLEMENT. The Company will not settle any claims made by any
party or governmental unit, whether by suit, administrative action or
otherwise, that arise from the offering of securities which is the subject of
this Agreement, without obtaining your written consent unless such settlement
includes provisions for the full satisfaction of any claims which might be made
against you. No provisions of any settlement purporting to bar your rights to
seek indemnification or contribution pursuant to this Agreement or otherwise
shall be effective without your written consent.
9. EFFECTIVENESS AND TERMINATION.
9.1 EFFECTIVENESS. This Agreement shall become effective (i) upon the
execution and delivery hereof by the parties hereto, or (ii) if, at the time
this Agreement is executed and delivered, it is necessary for the Registration
Statement or a post-effective
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amendment thereto to be declared effective by the Commission before the
offering of the Shares may commence, when notification of the effectiveness of
the Registration Statement or such post-effective amendment has been released
by the Commission.
9.2 TERMINATION. This Agreement may be terminated by the
Representative by notifying the Company at any time:
(i) Before the earliest of (A) 10:00 am., Cincinnati time, on the
business day following the Effective Date, (B) the time of release by the
Representative for publication of the first newspaper advertisement that is
subsequently published with respect to the Shares, and (C) the time when the
Shares are first generally offered by the Representative to dealers by letter
or facsimile;
(ii) At or before any Closing Date if, in the judgment of the
Representative, payment for and delivery of the Shares is rendered
impracticable or inadvisable because (A) additional material governmental
restrictions, not in force and effect on the date of this Agreement, shall have
been imposed upon trading in securities generally or minimum or maximum prices
shall have been generally established on the New York Stock Exchange, on the
American Stock Exchange or on the over-the-counter market, or trading in
securities generally shall have been suspended on either such Exchange or on
the over-the-counter market, or (B) a general banking moratorium shall have
been established by federal, Ohio or New York authorities, or (C) there shall
have occurred any outbreak or escalation of hostilities or other international
or domestic calamity, crisis, or change in political, financial or economic
conditions, the effect of which on the financial markets of the United States
is such as to make it, in your judgment, impractical or inadvisable to commence
or continue the offering of the Shares at the offering price to the public set
forth on the cover page of the Prospectus or to enforce contracts for the
resale of the Shares by the Underwriters; or
(iii) At or before any Closing Date, if any of the conditions
specified in Section 6 shall not have been fulfilled when and as required by
this Agreement.
If this Agreement is terminated pursuant to any of its provisions, except as
otherwise provided in this Agreement, the Company shall not be under any
liability to any Underwriter, and no Underwriter shall be under any liability
to the Company, except that if this Agreement is terminated by the
Representative because of any failure, refusal or inability on the part of the
Company to comply with the terms or to fulfill any of the conditions of this
Agreement, the Company will reimburse the Underwriters for all reasonable
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by them in connection with the proposed purchase and sale
of the Shares or in contemplation of performing their obligations hereunder,
subject to the terms and conditions of a letter agreement dated January 30,
1996 and entered into among the Company and the Managing Underwriter, attached
hereto as Annex A (the "Letter Agreement") and except that no Underwriter who
shall have failed or refused to purchase the Shares agreed to be purchased by
it under this Agreement, without reason sufficient thereunder to justify the
cancellation or termination of its obligations under this Agreement, shall be
relieved of any liability to the Company or to the other Underwriters for
damages occasioned by its default.
26
<PAGE> 27
10. SUBSTITUTION OF UNDERWRITERS.
10.1 DEFAULT IN PURCHASE OF 10% OR LESS OF SHARES. If any Underwriter
or Underwriters shall fail or refuse to purchase the number of the Shares
agreed by such Underwriter or Underwriters to be purchased hereunder, upon
tender of such Shares in accordance with the terms hereof, and the number of
the Shares not purchased does not aggregate more than 10% of the total number
of the Shares set forth in Schedule I hereto, each non-defaulting Underwriter
shall be obligated, severally, in the proportion which the number of Firm
Shares set forth opposite its name in Schedule I hereto bears to the aggregate
number of Firm Shares set forth opposite the names of all non-defaulting
Underwriters or in such other proportion as may otherwise be determined by you,
to purchase the Shares which such defaulting Underwriter or Underwriters
agreed, but failed or refused, to purchase.
10.2 DEFAULT IN PURCHASE OF MORE THAN 10% OF SHARES. If any
Underwriter or Underwriters shall fail or refuse to purchase the number of the
Shares agreed by such Underwriter or Underwriters to be purchased hereunder,
upon tender of such Shares in accordance with the terms hereof, and the number
of the Shares not purchased aggregates more than 10% of the total number of the
Shares set forth in Schedule I hereto, and arrangements satisfactory to you and
the Company for purchase of such Shares by non-defaulting Underwriters or other
persons are not made within 36 hours after such default, this Agreement will
terminate. In the event of any such termination, the Company shall not be under
any liability to any Underwriter (except to the extent provided in Sections 8
and 13 hereof) and none of the Underwriters (other than the defaulting
Underwriters) be under any liability to the Company (except to the extent
provided in Section 8 hereof).
10.3 OTHER. In any such case which does not result in the
termination of this Agreement, either the Representative or the Company shall
have the right to postpone the applicable Closing Date for a period of not more
than five business days in order that necessary changes and arrangements
(including any necessary amendments or supplements to the Registration
Statement or Prospectus) may be effected by the Representative and the Company.
The provisions of this Section 10 shall not in any way affect the liability of
any defaulting Underwriter to the Company or the non-defaulting Underwriters
arising out of such default. A substitute underwriter hereunder shall become an
Underwriter for all purposes of this Agreement.
11. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. Except as the
context otherwise requires, all representations, warranties and agreements
contained in this Agreement shall be deemed to be representations, warranties
and agreements at the Closing Dates, and such representations, warranties and
agreements of the Company and the Underwriters, including the indemnity and
contribution agreements contained in Section 8, shall remain operative and in
full force and effect regardless of (i) any investigation made by or an behalf
of any Underwriter or any person controlling any Underwriter or the Company,
its directors or officers or any person controlling the Company, (ii) delivery
and acceptance of any Shares and payment therefor hereunder, and (iii) any
termination of this Agreement.
12. INFORMATION FURNISHED BY UNDERWRITERS. The information set forth
in the last paragraph of the cover page, the stabilizing legend on the inside
cover page, and the section
27
<PAGE> 28
captioned "Underwriting" in any Prepricing Prospectus and in the Prospectus
constitute the only information furnished by or on behalf of the Underwriters
through you as such information is referred to in this Agreement, including,
without limitation, as such information is referred to in subsection 4.1 and
Section 8 hereof.
13. EXPENSES. Subject to the terms of the Letter Agreement, the
Company agrees to pay, or reimburse if paid by the Representative, whether or
not the transactions contemplated hereby are consummated or this Agreement is
terminated, all costs and expenses incident to the performance of the
obligations of the Company under this Agreement, including those relating to
(i) the preparation, printing, filing and delivery of the Registration
Statement, including all exhibits thereto, each Prepricing Prospectus, the
Prospectus, all amendments of and supplements to the Registration Statement and
the Prospectus, and the printing of the Underwriting Agreement (including the
Selected Dealer Agreements), (ii) the issuance of the Shares and the
preparation and delivery of certificates for the Shares to the Underwriters,
(iii) the registration or qualification of the Shares for offer and sale under
the securities or "Blue Sky" laws of the various jurisdic tions referred to in
subsection 7.4, including the fees and disbursements of counsel for the
Underwriters not to exceed $_________ in connection with such registration and
qualification and the preparation and printing of preliminary and supplemental
Blue Sky memoranda, (iv) the furnishing (including costs of shipping and
mailing) to the Representative and to the Underwriters of copies of each
Prepricing Prospectus, the Prospectus and all amendments of or supplements to
the Prospectus, and of the several documents required by this Section to be so
furnished, (v) the filing requirements of the NASD in connection with its
review of the terms of the public offering, (vi) the furnishing (including
costs of shipping and mailing) to the Representative and to the Underwriters of
copies of all reports and information required by subsection 7.5, (vii) all
transfer taxes, if any, with respect to the sale and delivery of the Shares by
the Company to the Underwriters, (viii) the inclusion of the Shares on the
Nasdaq SmallCap Market, (ix) the transportation and other expenses incurred by
or on behalf of the Company's representatives in connection with presentations
to prospective purchasers of the Shares, (x) the fees and expenses of the
Company's accountants, and (xi) the inclusion of the Company in the Securities
Manual.
In addition, subject to the terms of the Letter Agreement, the Company
agrees to pay the Representative whether or not the transactions contemplated
hereby are consummated or this Agreement is terminated, the Representative's
out-of-pocket expenses incurred in connection with this offering, up to a
maximum of $30,000 (the Managing Underwriter acknowledging that, pursuant to the
Letter Agreement, it has received $30,000 as an advance against such expenses).
If the offering is completed, the Company will pay to the Managing Underwriter a
nonaccountable expense allowance equal to 1% of the total proceeds of the
offering (including the Optional Shares), in which case the $30,000 previously
paid will be credited against the nonaccountable expense allowance.
14. MISCELLANEOUS.
14.1 PARTIES IN INTEREST. This Agreement has been and is made for
benefit of the Underwriters, the Company and their respective successors and
assigns, and, to the extent expressed herein, for the benefit of persons
controlling any of the Underwriters or the Company, and directors and certain
officers of the Company, and their respective successors and assigns,
28
<PAGE> 29
and no other person, partnership, association or corporation shall acquire or
have any right under or by virtue of this Agreement. The term successors and
assigns, shall not include any purchaser of Shares from any Underwriter merely
because of such purchase.
14.2 NOTICES. All notices and communications hereunder shall be in
writing and mailed, telecopied or delivered or given by telephone or verbally
if subsequently confirmed in writing as follows:
(i) To the Representative, The Glaser Capital Corporation, 201 East
Fourth Street, Suite 1710, Cincinnati, Ohio 45202, Attention: Thomas G. Glaser,
Chairman (with a copy to Dinsmore & Shohl, 1900 Chemed Center, 255 East Fifth
Street, Cincinnati, Ohio 45202, Attention: Charles F. Hertlein, Jr., Esq.); and
(ii) To the Company, Ciao Cucina Corporation, 700 Walnut Street, Suite
300, Cincinnati, Ohio 45202, Attention: Carl A. Bruggemeier (with copies to
Taft, Stettinius & Hollister, 1800 Star Bank Center, 425 Walnut Street,
Cincinnati, Ohio 45202-3957, Attention: Timothy E. Hoberg, Esq. and to Katz,
Greenberger & Norton, Suite 900, 105 East Fourth Street, Cincinnati, Ohio
45202, Attention: Scott P. Kadish, Esq.).
14.3 COUNTERPARTS. This Agreement may be executed by any one or more
of the parties hereto in any number of counterparts, each of which shall be
deemed an original, but all such counterparts shall together constitute one and
the same instrument.
14.4 CAPTIONS. The captions of the sections and subsections have been
inserted as a matter of convenience and reference only and shall not control or
affect the meaning or con struction of this Agreement.
14.5 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Ohio, without giving effect to
principles of conflicts of laws.
29
<PAGE> 30
If the foregoing correctly sets forth your understanding of the
agreement between us, please sign and return to us the enclosed copies hereof,
whereupon it will become a binding agreement by and among the Company and the
several Underwriters in accordance with its terms.
Very truly yours,
Ciao Cucina Corporation
By:
--------------------------------
Carl A. Bruggemeier, President
SELLING SHAREHOLDERS:
Blue Chip Capital Fund Limited Partnership
By:
--------------------------------
*
--------------------------------
Roger H. Lipton
RHL Associates
By: *
--------------------------------
Roger H. Lipton Individual Retirement Account
By: *
--------------------------------
*Members of the Lipton Group
The foregoing Agreement is hereby confirmed and accepted by the undersigned in
Cincinnati, Ohio, acting on behalf of itself and as the Representative of the
several Underwriters named on Schedule I attached hereto as of the date first
above written.
THE GLASER CAPITAL CORPORATION
By:
-------------------------------
Thomas G. Glaser
Chairman
30
<PAGE> 31
SCHEDULE I
Number of
Firm Shares
Underwriter to be Purchased
- ----------- ---------------
31
<PAGE> 32
EXHIBITS
Annex A - Letter Agreement
Annex B - Form of Common Stock Warrant
32
<PAGE> 1
Exhibit 1.2
EXHIBIT B TO
UNDERWRITING AGREEMENT
THE SECURITY EVIDENCED HEREBY MAY NOT BE TRANSFERRED EXCEPT (I) IN
ACCORDANCE WITH THE PROVISIONS OF PARAGRAPH 1 HEREOF AND (II) WITH EITHER (A)
AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH TRANSFER MAY BE
LAWFULLY MADE WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933 OR (B) SUCH
REGISTRATION.
COMMON STOCK WARRANT
To Purchase 100,000
Shares of Common Stock of
Ciao Cucina Corporation
, 1996
---------------
THIS CERTIFIES THAT, in consideration for its payment of $50.00 to the
Company, The Glaser Capital Corporation ("Initial Holder") or its registered
assigns is entitled to subscribe for and purchase from Ciao Cucina Corporation
(herein called the "Company"), an Ohio corporation, at any time after the first
anniversary of the date hereof (which is the effective date of the registration
statement to which this Warrant relates) to and including __________, 2001 (the
fifth anniversary of the effective date of the registration statement for the
public offering to which this Warrant relates), 100,000 fully paid and
nonassessable shares of the Company's Common Stock without par value at a price
per share of $__________ (which price is equal to 120% of the price of the
Company's Common Stock offered in the public offering to which this Warrant
relates).
This Warrant is subject to the following provisions, terms and conditions:
1. EXERCISE; TRANSFERABILITY. The rights represented by this Warrant
may be exercised by the holder hereof, in whole or in part (but not as to a
fractional share of common stock), by written notice of exercise delivered to
the Company 20 days prior to the intended date of exercise and by the surrender
of this Warrant (properly endorsed if required) at the principal office of the
Company and upon payment to it by check of the purchase price for such shares.
This Warrant may be transferred, or divided into two or more Warrants of
smaller denominations (collectively, the "Warrants"), subject to the following
conditions: (i) during the first year after the date hereof, the Warrant may
not be exercised, sold, transferred, assigned or hypothecated, and (ii) after
such period, the Warrant shall be transferable only to officers and employees
of the Initial Holder, subject to the Company's receipt of the opinion of
counsel as provided by paragraph 7 herein to the effect that such transfer is
not in violation of federal or state securities laws.
<PAGE> 2
2. ISSUANCE OF SHARES. The Company agrees that the shares purchasable
hereunder shall be and are deemed to be issued to the record holder hereof as
of the close of business on the date on which this Warrant shall have been
surrendered and the payment made for such shares as aforesaid. Subject to the
provisions of the next succeeding paragraph, certificates for the shares of
stock so purchased shall be delivered to the holder hereof within a reasonable
time, not exceeding ten days after the rights represented by this Warrant shall
have been so exercised, and, unless this Warrant has expired, a new Warrant
representing the number of shares, if any, with respect to which this Warrant
shall not then have been exercised shall also be delivered to the holder hereof
within such time. Notwithstanding the foregoing, however, the Company shall not
be required to deliver any certificate for shares of stock upon exercise of
this Warrant, except in accordance with the provisions, and subject to the
limitations, of paragraph 7 hereof.
3. COVENANTS OF COMPANY. The Company covenants and agrees that all
shares which may be issued upon the exercise of the rights represented by this
Warrant will, upon issuance, be duly authorized and issued, fully paid,
nonassessable and free from all taxes, liens and charges with respect to the
issue thereof, and, without limiting the generality of the foregoing, the
Company covenants and agrees that it will from time to time take all such
action as may be required to assure that the par value per share of common
stock is at all times equal to or less than the then effective purchase price
per share of the common stock issuable pursuant to this Warrant. The Company
further covenants and agrees that, during the period within which the rights
represented by this Warrant may be exercised, the Company will at all times
have authorized, and reserved for the purpose of issue or transfer upon
exercise of the subscription rights evidenced by this Warrant, a sufficient
number of shares of its common stock to provide for the exercise of the rights
represented by this Warrant.
4. ANTI-DILUTION ADJUSTMENTS. The above provisions are, however,
subject to the following:
(a) In case the Company shall at any time hereafter subdivide or
combine the outstanding shares of common stock or declare a dividend payable in
common stock, the exercise price of this Warrant in effect immediately prior to
the subdivision, combination or record date for such dividend payable in common
stock shall forthwith be proportionately increased, in the case of combination,
or decreased, in the case of subdivision or dividend payable in common stock,
and each share of common stock purchasable upon exercise of this Warrant shall
be changed to the number determined by dividing the then current exercise price
by the exercise price as adjusted after the subdivision, combination or
dividend payable in common stock.
(b) No fractional shares of common stock are to be issued upon the
exercise of this Warrant, but the Company shall pay a cash adjustment in
respect of any fraction of a share which would otherwise be issuable in an
amount equal to the same fraction of the market price per share of common stock
on the day of exercise as determined in good faith by the Company.
(c) If any capital reorganization or reclassification of the capital
stock of the Company, or consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets to another
corporation shall be effected in such a way that holders of common stock shall
be entitled to receive stock, securities or assets with respect to or in
2
<PAGE> 3
exchange for common stock, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate provision
shall be made whereby the holder hereof shall thereafter have the right to
purchase and receive, upon the basis and upon the terms and conditions
specified in this Warrant and in lieu of the shares of common stock of the
Company immediately theretofore purchasable and receivable upon the exercise of
the rights represented hereby, such stock, securities or assets as may be
issued or payable with respect to or in exchange for a number of outstanding
shares of such common stock equal to the number of shares of such stock
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby had such reorganization, reclassification,
consolidation, merger or sale not taken place, and in any such case appropriate
provisions shall be made with respect to the rights and interests of the holder
of this Warrant to the end that the provisions hereof (including without
limitation provisions for adjustments of the Warrant purchase price and of the
number of shares purchasable upon the exercise of this Warrant) shall
thereafter be applicable, as nearly as may be, in relation to any shares of
stock, securities or assets thereafter deliverable upon the exercise hereof.
The Company shall not effect any such consolidation, merger or sale unless
prior to the consummation thereof the successor corporation (if other than the
Company) resulting from such consolidation or merger, or the corporation
purchasing such assets, shall assume by written instrument executed and mailed
to the registered holder hereof at the last address of such holder appearing on
the books of the Company, the obligation to deliver to such holder such shares
of stock, securities or assets as, in accordance with the foregoing provisions,
such holder may be entitled to purchase.
(d) Upon any adjustment of the Warrant purchase price, then, and in
each such case, the Company shall give written notice thereof, by first class
mail, postage prepaid, addressed to the registered holder of this Warrant at
the address of such holder as shown on the books of the Company, which notice
shall state the Warrant purchase price resulting from such adjustment and the
increase or decrease, if any, in the number of shares purchasable at such price
upon the exercise of this Warrant, setting forth in reasonable detail the
method of calculation and the facts upon which such calculation is based.
5. COMMON STOCK. As used herein, the term "common stock" shall mean
and include the Company's presently authorized shares of common stock and shall
also include any capital stock of any class of the Company hereafter authorized
which shall not be limited to fixed sum or percentage in respect of the rights
of the holders thereof to participate in dividends or in the distribution,
dissolution or winding up of the Company.
6. NO VOTING RIGHTS. This Warrant shall not entitle the holder hereof
to any voting rights or other rights as a shareholder of the Company.
7. NOTICE OF TRANSFER OF WARRANT OR RESALE OF SHARES. The holder of
this Warrant, by acceptance hereof, agrees to give written notice to the
Company before transferring any common stock issued upon the exercise hereof
("Warrant Shares"), of such holder's intention to do so, describing briefly the
manner of any proposed transfer. Promptly upon receiving such written notice,
the Company shall present copies thereof to the Company's counsel and to
counsel
3
<PAGE> 4
to the original purchaser of this Warrant. If in the opinion of each such
counsel the proposed transfer may be effected without registration or
qualification (under any federal or state law), the Company, as promptly as
practicable, shall notify such holder of such opinions, whereupon such holder
shall be entitled to transfer the Warrant Shares or to dispose of shares of
common stock received upon the previous exercise hereof in accordance with the
notice delivered by such holder to the Company, provided that an appropriate
legend may be endorsed on this Warrant or the certificates for such Warrant
Shares respecting restrictions upon transfer thereof necessary or advisable in
the opinion of counsel satisfactory to the Company to prevent further transfers
which would be in violation of Section 5 of the Securities Act of 1933.
If, in the reasonable opinion of either of the counsel referred to in
this paragraph 7, the proposed transfer or disposition described in the written
notice given pursuant to this paragraph 7 may not be effected without
registration or qualification of the Warrant Shares, the Company shall promptly
give written notice thereof to the holder hereof, and such holder will limit
its activities in respect to such proposed transfer or disposition as, in the
opinion of both such counsel, are permitted by law.
8. REGISTRATION RIGHTS. (a) If the Company proposes to claim an
exemption under Section 3(b) for a public offering of any of its securities or
to register under the Securities Act of 1933 (except by a registration
statement on a form that does not permit the inclusion of shares by its
security holders) any of its securities, it will give written notice to all
registered holders of Warrants, and all registered holders of shares of common
stock acquired upon the exercise of Warrants, of its intention to do so and, on
the written request of any registered holders given within 20 days after
receipt of any such notice (which request must be made on or before , 2003 (the
seventh anniversary of the effective date of the registration statement for the
public offering to which this Warrant relates) and which notice shall specify
the Warrant Shares intended to be sold or disposed of by such registered holder
and describe the nature of any proposed sale or other disposition thereof), the
Company will use its best efforts to cause all such Warrant Shares, the
registered holders of which shall have requested the registration or
qualification thereof, to be included in such notification or registration
statement proposed to be filed by the Company. All expenses of such offering,
except the fees of special counsel and brokers' commissions to such holders,
shall be borne by the Company.
(b) Further, on a one-time basis only, upon request by a majority in
interest of Warrants, or by the holders of a majority of the shares of the
common stock issued upon exercise thereof, the Company will, at the expense of
such holders, promptly take all necessary steps to register or qualify the
Warrant Shares under Section 3(b) or Section 5 of the Securities Act of 1933
and such state laws as such holders may reasonably request; provided that such
request must be made within five years from the effective date of the
registration statement filed with the Securities and Exchange Commission with
respect to the offering to which this Warrant relates. The Company shall keep
effective and maintain any registration, qualification, notification or
approval specified in this paragraph for such period as may be necessary for
the holders of the Warrant Shares to dispose of such shares and from time to
time shall amend or supplement, at the holder's expense, the prospectus, or
offering circular used in connection therewith to the
4
<PAGE> 5
extent necessary in order to comply with applicable law, provided that the
Company shall not be obligated to maintain any registration for a period of
more than six months after effectiveness except that a Form S-3 Registration
Statement or successor thereof shall be maintained for up to 12 months after
effectiveness.
(c) The Company shall indemnify the holder of this Warrant and of any
common stock issued or issuable hereunder, its officers and directors, and any
person who controls such Warrant holder or such holder of common stock within
the meaning of Section 15 of the Securities Act of 1933, against all losses,
claims, damages and liabilities caused by any untrue statement of a material
fact contained in any registration statement, prospectus, notification or
offering circular (and as amended or supplemented if the Company shall have
furnished any amendments or supplements thereto) or any preliminary prospectus
relating to the registration or qualification of the Warrant Shares or caused
by any omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading except insofar as
such losses, claims, damages or liabilities are caused by any untrue statement
or omission contained in information furnished in writing to the Company by
such Warrant holder or such holder of Warrant Shares expressly for use therein,
and each such holder by its acceptance hereof severally agrees that it will
indemnify and hold harmless the Company and each of its officers who signs such
registration statement and each of its directors and each person, if any, who
controls the Company within the meaning of Section 15 of the Securities Act of
1933 with respect to losses, claims, damages or liabilities which are caused by
any untrue statement or omission contained in information furnished in writing
to the Company by such holder expressly for use therein.
IN WITNESS WHEREOF, Ciao Cucina Corporation has caused this Warrant to be
signed by its duly authorized officer and this Warrant to be dated as of
__________, 1996.
CIAO CUCINA CORPORATION
By_________________________________
Its______________________________
5
<PAGE> 6
CIAO CUCINA CORPORATION
TO:________________________________
PURCHASE FORM -- To be executed by the Registered Holder in Order to Exercise
the Warrant.
The undersigned hereby irrevocably elects to exercise the attached Warrant
Certificate to purchase, for cash, _________________ of the shares issuable
upon the exercise of such Warrant, and requests that certificates for such
shares shall be issued in the name of:
-----------------------------------
(Name)
-----------------------------------
(Address)
-----------------------------------
(Tax ID No.)
-----------------------------------
(Signature)
ASSIGNMENT FORM -- To be Executed By the Registered Holder in Order to Transfer
the Warrant.
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers _____
of the Warrants represented by the attached Warrant Certificate unto
__________________________________________________ (please print or typewrite
name and address including postal zip code of assignee) having the Social
Security or other identifying number of ________________, and does irrevocably
constitute and appoint ________________________ attorney to transfer the
Warrant Certificate on the records of the Company with full power of
substitution in the premises.
Date:__________________, 19____.
PLEASE NOTE: The signature(s) to the Purchase Form or the Assignment
Form must correspond to the name as written upon the face of the
Warrant Certificate in every particular without alteration or
enlargement or any change whatsoever.
6
<PAGE> 7
EXERCISE NOTICE
The undersigned Warrant holder hereby irrevocably elects to exercise the
attached Warrant Certificate by exercising the conversion rights of Section 9 of
the Warrant. The Warrant is hereby exercised for _____________________ shares
and is accompanied by a check in the amount of $_____________ to cover the
exercise price thereof.
Date:
-----------------------------------
(Name)
-----------------------------------
(Address)
-----------------------------------
(Tax ID No.)
-----------------------------------
(Signature)
7
<PAGE> 1
Exhibit 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF CIAO LIMITED, INC.
The Articles of Incorporation are hereby amended and restated and
supercede all previous Articles of Incorporation as follows:
FIRST: The name of the Corporation shall be Ciao Cucina Corporation.
SECOND: The place in Ohio where its principal office is to be located is
the City of Cincinnati, Hamilton County.
THIRD: The purpose for which the Corporation is formed is to engage in any
lawful act or activity for which corporations may be formed under Sections
1701.01 through 1701.98, inclusive, of the Ohio Revised Code, and to do
all other things as may be necessary or convenient to carry out the
foregoing purpose.
FOURTH: The number of shares of stock which the said corporation is
authorized to have outstanding is Ten Million One Hundred Sixteen Thousand
Seven Hundred Forty (10,116,740), to be divided into four classes as
follows:
A. Ten Million (10,000,000) shares of Common Stock, no par value.
B. Fifteen Thousand (15,000) shares of Series A Convertible Preferred
Stock with a par value of One Hundred Dollars ($100) per share (the "Series A
Stated Value") and the following additional terms:
1. Designation and Amount. The Series A Convertible Preferred Stock
shall consist of Fifteen Thousand (15,000) shares.
2. Dividends. The holder of each share of the Series A Convertible
Preferred Stock shall be entitled to receive dividends when and as declared by
the Board of Directors as provided herein from funds legally available for the
payment thereof, in an amount equal to $10 per share per annum, prorated for
any partial year. Such dividends shall be cumulative from the date the holder
first acquires its shares of Series A Convertible Preferred Stock, whether or
not earned or declared. No cash dividend shall be declared or paid on any
shares of Common Stock or any other class or series of stock ranking junior to
the Series A Convertible Preferred Stock (including the Series B Preferred
Stock), and no shares of such stock shall be acquired by the corporation or any
subsidiary for value, unless full cumulative dividends on the Series A
Convertible Preferred Stock have been paid.
3. Liquidation Preference.
(a) General. The Series A Convertible Preferred Stock shall be
preferred over the Common Stock and any other class or series of stock ranking
junior to the Series A Convertible Preferred Stock (including the Series B
Preferred Stock) as to distribution of assets in the event of any liquidation
or dissolution or winding up of the Corporation, and in that event the holders
of the Series A Convertible Preferred Stock
<PAGE> 2
shall be entitled to receive, after payment or provision for payment of the
debts and other liabilities of the Corporation, out of the assets of the
Corporation available for distribution to its shareholders, the Series A Stated
Value, plus any accumulated but unpaid dividends, and no more, for every share
of the Series A Convertible Preferred Stock held by them, before any
distribution of the assets shall be made to the holders of the Common Stock or
any other class or series of stock ranking junior to the Series A Convertible
Preferred Stock (including the Series B Preferred Stock) as to distribution of
assets. Upon any liquidation, dissolution or winding up of the Corporation,
after payment shall have been made in full on the Series A Convertible
Preferred Stock as provided in the preceding sentence, but not prior thereto,
the Common Stock or any other series or class of stock ranking junior to the
Series A Convertible Preferred Stock (including the Series B Preferred Stock)
as to distribution of assets shall, subject to the respective terms and
provisions, if any, applying thereto, be entitled to receive any and all assets
remaining to be paid or distributed and the Series A Convertible Preferred
Stock shall not be entitled to share therein.
(b) Distributions Pro Rata. If upon any liquidation or
dissolution or winding up of the Corporation the amounts payable on or with
respect to the Series A Convertible Preferred Stock are not paid in full, the
holders of shares of Series A Convertible Preferred Stock shall share pro rata
in any distribution of assets in respect of the shares held by them upon such
distribution in proportion to the amounts that would have been distributable to
each such share if all amounts payable on or with respect to the Series A
Convertible Preferred Stock had been paid in full.
(c) Merger or Consolidation. Neither the merger or consolidation
of the Corporation with another corporation nor the sale or lease of all or
substantially all of the assets of the Corporation shall be deemed to be a
liquidation or dissolution or winding up of the Corporation.
(d) Notice Required. Written notice of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Corporation, stating the payment date and the place where the distributable
amount shall be payable and stating the anticipated amount of any such
distributable amount, shall be given by mail, postage prepaid, not less than
thirty (30) days prior to the payment date stated therein, to the holders of
record of the Series A Convertible Preferred Stock at their respective
addresses as the same shall then appear on the books of the Corporation.
4. Redemption.
(a) Mandatory Redemption. On December 31, 1999 the Corporation
shall redeem any Series A Convertible Preferred Stock then outstanding at a per
share price equal to the Series A Stated Value plus all accumulated and unpaid
dividends, whether or not declared (the "Redemption Price").
(b) Special Redemption. If (i) the Corporation or any
Shareholder (as defined in the Stock Purchase and Shareholder Agreement
referred to below) commits any material breach of its or his obligations under
or there is any material inaccuracy in any of the representations of the
Corporation or the Shareholder in the Stock Purchase and Shareholder Agreement
dated as of March 31, 1995, among the Corporation, Blue Chip Capital Fund
Limited Partnership and Carl A. Bruggemeier or the Corporation shall breach any
of its obligations under its Consulting Agreement with Blue
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<PAGE> 3
Chip Venture Company and, in any such case, such breach continues for thirty
(30) days after notice thereof is given by Blue Chip Capital Fund Limited
Partnership to the Corporation, or (ii) the Corporation enters into a binding
obligation to merge (regardless of whether the Corporation is the surviving
entity) or consolidate with any entity or sell, lease, transfer, exchange or
otherwise dispose of all or any substantial portion of its assets, then the
Series A Convertible Preferred Stock shall be subject to immediate redemption
at the Redemption Price at the election of the holders thereof exercised by
notice to the Corporation. Such notice shall specify the date for redemption,
which shall be not less than ten (10) nor more than thirty (30) days after
delivery of such notice. If any shares of Series A Convertible Preferred Stock
are redeemed prior to December 31, 1999, then, in addition to the Redemption
Price, the Corporation shall also deliver to the holder of each share of Series
A Convertible Preferred Stock then outstanding a warrant (in form and substance
reasonably acceptable to the holder), expiring on December 31, 1999, to
purchase, for each share of Series A Convertible Preferred Stock so redeemed, a
number of shares of Common Stock equal to the Series A Conversion Rate (as
defined in Section 5 below) in effect on the date of redemption at an exercise
price equal to the then current Series A Conversion Price (as defined in
Section 5 below); such number and exercise price to be subject to adjustment as
provided with respect to the Series A Conversion Rate and Series A Conversion
Price in Section 5 below. Such warrant shall require the consent of the warrant
holder to transactions of the nature described in Section 6(b)(iii) hereof
(voting as a single class together with any unredeemed Series A Convertible
Preferred Stock), with the holder of each warrant entitled to a number of votes
per share of Series A Convertible Preferred Stock redeemed equal to the then
current Series A Conversion Rate.
(c) Redemption at the option of the Holder.
(i) The Holder of any share of Series A Convertible
Preferred Stock or any share of Common Stock issued upon conversion thereof may,
at any time after December 31, 1999, if the Corporation is not then subject-to
the reporting requirements of Section 15 of the Securities Exchange Act of 1934
and does not have a class of equity securities registered pursuant to Section 12
of such Act, by notice to the Corporation require the Corporation to redeem
immediately such shares of Series A Convertible Preferred Stock at a price equal
to the Redemption Price and such shares of Common Stock at a price equal to the
"fair market value" thereof.
(ii) The "fair market value" of such Common Stock shall be
determined by agreement of the Corporation and such Holder or, if they are
unable to agree, by a person expert in valuing the shares of corporations who
shall be selected by agreement of such Holder and the Corporation. If such
Holder and the Corporation cannot agree upon the selection of such an expert,
then the "fair market value" shall be determined by a person expert in valuing
shares of corporations chosen by two such persons, one chosen by such Holder and
one by the Corporation. The determination of the "fair market value" made
pursuant to this Section 4(c) shall be made without any discount for lack of
marketability or minority interest and shall be final and binding. The fees and
expenses of such expert(s) shall be paid jointly by such Holder and the
Corporation.
(d) Retirement of Shares. Any shares of Series A Convertible
Preferred Stock redeemed pursuant to the provisions of this Section 4 shall be
retired and may not be reissued .
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<PAGE> 4
(e) Payment of Redemption Price. The redemption price shall be
paid in cash, provided that if the Corporation lacks sufficient cash to pay such
redemption price in full, the balance thereof may be paid, with the consent of
the holder thereof, by means of a promissory note payable on demand and bearing
interest at 10% per annum, secured by the shares so redeemed and containing such
other terms and conditions as the Holder may reasonably require.
5. Conversion.
(a) General. Shares of Series A Convertible Preferred Stock may
be converted at the option of the holder thereof into fully paid and
nonassessable shares of Common Stock of the Corporation. Shares of Series A
Convertible Preferred Stock automatically convert into fully paid and
nonassessable shares of Common Stock of the Corporation contemporaneous with
the closing of and receipt by the Corporation of net proceeds of not less than
five million dollars ($5,000,000) from a registered public offering of shares
of Common Stock of the Corporation pursuant to a Registration Statement that
has been declared effective by the Securities and Exchange Commission under the
Securities Act of 1933 as amended and such shares were registered pursuant to
Section Twelve of the Securities Exchange of 1934 as amended. Paragraph (e) of
this Section 5 notwithstanding, any automatic conversion shall be effective
without the need for action on the part of the holder of Series A Convertible
Preferred Stock upon not less than twenty (20) days prior written notice of the
proposed automatic conversion delivered to all holders of the Series A
Convertible Preferred Stock. In the case of automatic conversion, the existing
Series A Convertible Preferred Stock certificates shall represent the correct
number of Common Shares of the Corporation as automatically converted until
such time as the Corporation notifies the holders of the Series A Convertible
Preferred Stock of the automatic conversion and therein requests the surrender
of the Series A Convertible Preferred Stock certificates in exchange for Common
Share stock certificates. All shares of Series A Convertible Preferred Stock
which shall have been automatically converted into Common Shares shall be
retired and may not be reissued. Shares of Series A Convertible Preferred Stock
will convert into fully paid and nonassessable shares of Common Stock of the
Corporation at a price (the "Series A Conversion Price") of Six Hundred
Thirty-Six Dollars and Sixty-Seven Cents ($636.67) per share of Common Stock
with respect to the Series A Stated Value which is equivalent to a rate (the
"Series A Conversion Rate") of .157067 shares of Common Stock as now
constituted for each share of Series A Convertible Preferred Stock surrendered
for conversion, subject to adjustment as provided in Paragraph (b) below.
(b) Adjustments. The Series A Conversion Price, the Series A
Conversion Rate and the kind and amounts of securities and property for which
the shares of Series A Convertible Preferred Stock may be converted shall be
subject to adjustment from time to time as follows:
(i) If, at any time after December 31, 1994, the
Corporation shall (a) declare or pay a dividend, or make a distribution, to all
holders of its Common Stock in shares of Common Stock, (b) subdivide its
outstanding shares of Common Stock into a greater number of shares, (c) combine
its outstanding shares of Common Stock into a smaller number of shares, or (d)
issue by reclassification of its shares of Common Stock (other than a
subdivision or combination thereof or a change in par value) any securities,
the terms of conversion in effect immediately prior to such action shall be
adjusted so that the holder of any share of Series A Convertible Preferred
Stock
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<PAGE> 5
thereafter surrendered for conversion shall be entitled to receive the kind and
number of shares of Common Stock of the Corporation and/or other securities
which he would have owned or been entitled to receive immediately following
such action had such share of Series A Convertible Preferred Stock been
converted immediately prior thereto. Any adjustment made pursuant to this
Paragraph (b)(i) shall become effective immediately after the record date in
the case of a dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision, combination or
reclassification.
(ii) If, at any time after December 31, 1994, the
Corporation shall issue shares of Common Stock, or securities (other than the
Series A Convertible Preferred Stock or the Series B Convertible Preferred
Stock) convertible into shares of Common Stock or rights, options or warrants
containing the right to subscribe for or purchase shares of Common Stock or
securities convertible into shares of Common Stock for a price per share of
Common Stock, in the case of the issuance of Common Stock, or for a price per
share of Common Stock initially deliverable upon conversion, exchange or
exercise of such convertible securities or rights, options or warrants
(including all consideration paid to acquire such convertible securities or
rights, options or warrants) (the "Issue Price"), less than the then current
Series A Conversion Price on the date the Corporation fixed the offering,
conversion, exchange or exercise price of such shares (the "Record Date"), then
the Series A Conversion Price shall be adjusted by multiplying it by a
fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately prior to the Record Date plus the number derived by
dividing (x) the product of the number of shares of Common Stock to be issued
upon such offering, conversion, exchange or exercise multiplied by the Issue
Price, by (y) the then current Series A Conversion Price and the denominator of
which is the number of shares of Common Stock outstanding immediately prior to
the Record Date plus the number of shares of Common Stock to be issued upon
such offering, conversion or exchange. Such adjustment shall be made whenever
such shares, convertible securities, rights, options or warrants are issued,
and shall become effective immediately after the effective date of such event
retroactive to the Record Date, if any, for such event. Upon any such
adjustment of the Series A Conversion Price, the Series A Conversion Rate shall
be adjusted accordingly.
(iii) If, at any time after December 31, 1994, the
Corporation shall distribute to all or substantially all holders of its Common
Stock either (a) evidences of indebtedness or assets (excluding cash dividends
or distributions) or (b) any other securities of the Corporation or any rights,
warrants, options to subscribe for, purchase or otherwise acquire securities of
the Corporation in a transaction not covered by Paragraph (b)(i) above (any of
which are referred to herein as "Other Securities"), then and in any such case
the Corporation shall either distribute such Other Securities to the holders of
the Series A Convertible Preferred Stock or reserve for the benefit of the
holders of the Series A Convertible Preferred Stock such amount of such Other
Securities as the holders of all Series A Convertible Preferred Stock then
outstanding would have owned or been entitled to receive immediately following
such action had the shares of Series A Convertible Preferred Stock been
converted into shares of Common Stock immediately prior thereto. In addition,
the Corporation shall either distribute to, or reserve for the benefit of, the
holders of the Series A Convertible Preferred Stock any principal, interest,
dividends or other property payable with respect to such Other Securities as
and when such interest, dividends or other property is distributed to the
holders of Common Stock. If such a reserve is made, as and when each such share
of Series A Convertible Preferred Stock is converted, the holder of such share
shall be entitled to
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receive from the Corporation his share of such Other Securities together with
the principal, interest, dividends or other property payable with respect
thereto.
(iv) All calculations under this Section 5 shall be made to
the nearest one-tenth of a cent or to the nearest one hundred thousandth of a
share, as the case may be. No adjustment in the Series A Conversion Rate shall
be required unless such adjustment would result in an increase or decrease of
at least one (1%) percent of the Series A Conversion Price; provided, however,
that any adjustments which by reason of this subparagraph (iv) are not required
to be made shall be carried forward and taken into account in any subsequent
adjustment.
(v) Whenever the terms of conversion are adjusted or Other
Securities are reserved as herein provided, the Corporation shall mail or cause
to be mailed a copy of a statement, verified by its independent certified
public accountants, setting forth the adjusted Series A Conversion Rate and
Series A Conversion Price or the nature and amount of Other Securities, as the
case may be, to each person who is a registered holder of Series A Convertible
Preferred Stock at such person's last address as the same appears on the books
of the Corporation. Each adjustment shall remain in effect until a subsequent
adjustment is required hereunder. Failure to give or receive such notice or any
defect therein shall not affect the legality or validity of any action taken.
Following any adjustment to the Series A Conversion Rate and the Series A
Conversion Price, the holders of the Series A Convertible Preferred Stock shall
be entitled, by themselves or through attorneys or accountants retained by
them, to inspect the books and records of the Corporation in order to verify
such adjustment. Such inspection shall be at the expense of the holders of the
Series A Convertible Preferred Stock unless such inspection reveals an error in
the adjustment equal to five (5%) percent or more of the Series A Conversion
Price, in which case the Corporation shall promptly reimburse the holders for
all expenses incurred in connection therewith.
(vi) If at any time, as a result of an adjustment made
pursuant to subparagraph (iii) above, the holders of Series A Convertible
Preferred Stock shall become entitled to purchase any Other Securities,
thereafter the number of such Other Securities purchasable upon conversion of
the Series A Convertible Preferred Stock and the price of the Other Securities
shall be subject to adjustment from time to time and in a manner and on terms
as nearly equivalent as practicable to the provisions with respect to Series A
Convertible Preferred Stock contained in subparagraphs (i) and (ii) above.
(vii) Upon the expiration of any rights, options, warrants
or conversion or exchange privileges which caused an adjustment to the Series A
Conversion Rate to be made, if any thereof shall not have been exercised, the
Series A Conversion Rate shall, upon such expiration, be readjusted and shall
thereafter be such as it would have been had it been originally adjusted (or
had the original adjustment not been required, as the case may be) as if (a)
the only shares of Common Stock so issued were the shares of Common Stock, if
any, actually issued or sold upon the exercise of such rights, options,
warrants or conversion or exchange privileges and (b) such shares of Common
Stock, if any, were issued or sold for the consideration actually received by
the Corporation upon such exercise plus the aggregate consideration, if any,
actually received by the Corporation for the issuance, sale or grant of all
such rights, options, warrants or conversion or exchange privileges, whether or
not exercised; provided further, that no such readjustment shall have the
effect of decreasing the Series A Conversion Price by an
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<PAGE> 7
amount in excess of the amount of the adjustment initially made in respect to
the issuance, sale or grant of such rights, options, warrants or conversion or
exchange privileges.
(c) Merger or Consolidation. In case of a merger or
consolidation of the Corporation with or into another corporation, or the sale
or transfer of all, or substantially all, of the property or assets of the
Corporation, the holders of shares of Series A Convertible Preferred Stock
shall thereafter have the right to convert each of such shares into the kind
and amount of shares of stock or other securities and property (including cash)
receivable (the "Consideration") upon such merger, consolidation or sale by a
holder of the number of shares of Common Stock (whether whole or fractional)
into which such shares of Series A Convertible Preferred Stock might have been
converted immediately prior to such a merger, consolidation or sale (all of
which Consideration shall be reserved and become payable upon conversion in the
same manner as for Other Securities pursuant to Paragraph (b)(iii) above and
shall be adjusted as provided in Paragraph (b) above), and shall have no other
conversion rights under these provisions and, in addition, the Corporation
shall reserve, on a current basis as and when distributed, for payment upon
conversion, in the same manner as required for Other Securities pursuant to
Paragraph (b)(iii) above, any interest, dividends, other stock, securities or
property distributable with respect to the Consideration, the same as if such
shares of Series A Convertible Preferred Stock had been converted immediately
prior to such merger, consolidation, or sale of assets; and effective provision
shall be made in the charter of the resulting or surviving corporation or
otherwise, so that the provisions set forth herein for the adjustment of the
Series A Conversion Rate shall thereafter be applicable, as nearly as
reasonably may be, to any of the Consideration deliverable upon conversion of
Series A Convertible Preferred Stock remaining outstanding or other convertible
preferred stock received in place thereof. Any such resulting or surviving
corporation shall expressly assume the obligation to deliver the Consideration,
upon the exercise of the conversion right (and, to that end, shall reserve
sufficient Consideration to issue, distribute and/or pay the holders of the
Series A Convertible Preferred Stock; to be calculated as if all such stock
were to be converted), as holders of Series A Convertible Preferred Stock
remaining outstanding, or other convertible preferred stock received by such
holders in place thereof, shall be entitled to receive pursuant to the
provisions hereof, and to make provision for protection of conversion rights as
above provided.
(d) Notices. If, at any time while shares of Series A
Convertible Preferred Stock are outstanding, the Corporation shall (i) declare
a dividend (or any other distribution) on its Common Stock, other than in cash,
or (ii) reclassify its Common Stock (other than through a subdivision or
combination thereof or a change in par value) or become a party to any
consolidation or merger or sale or transfer of all or substantially all of the
assets of the Corporation, for which approval of the holders of its stock is
required, then the Corporation shall cause to be mailed to registered holders
of Series A Convertible Preferred Stock, at their last addresses as they shall
appear on the books of the Corporation, at least ten (10) days prior to the
applicable record date hereinafter specified, a notice stating (x) the date on
which a record is to be taken for the purpose of such dividend or distributions
or, if a record is not to be taken, the date as of which holders of Common
Stock of record to be entitled to such dividend or distribution are to be
determined, or (y) the date on which any such reclassification, consolidation,
merger, sale or transfer is expected to become effective, and the date as of
which any such reclassification, consolidation, merger, sale or transfer is
expected to become effective, and the date as of which it is expected that
holders of record of Common Stock shall be entitled to exchange their Common
Stock for securities or other property, if any,
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deliverable upon such reclassification, consolidation, merger, sale or
transfer. Failure to give or receive the notice required by this Paragraph (d)
or any defect therein shall not affect the legality or validity of any such
dividend, distribution, reclassification, consolidation, merger, sale, transfer
or other action.
(e) Exercise of Conversion Rights. Except where otherwise
provided, the holder of any shares of Series A Convertible Preferred Stock may
exercise its option to convert such shares into shares of Common Stock only by
surrendering for such purpose to the Corporation the certificates representing
the shares to be converted, accompanied by written notice that such holder
elects to convert such shares in accordance with the provisions of this Section
5. Said notice shall also state the name or names (with addresses) in which the
certificate or certificates for shares of Common Stock which shall be issuable
on such conversion shall be issued. Each certificate or certificates
surrendered for conversion shall, unless the shares issuable on conversion are
to be issued in the same name as that in which such certificate or certificates
are registered, be accompanied by instruments of transfer, in form satisfactory
to the Corporation, duly executed by the holder or his duly authorized
attorney. Each conversion shall be deemed to have been effected on the date on
which such certificate or certificates shall have been surrendered and such
notice received by the Corporation as aforesaid, and the person or persons in
whose name or names any certificate or certificates for shares of Common Stock
shall be issuable upon such conversion shall be deemed to have become on said
date the holder or holders of record of the shares represented thereby
notwithstanding that the transfer books of the Corporation may then be closed
or that certificates representing such shares of Common Stock shall not then be
actually delivered to such person. As promptly as practicable on or after the
conversion date, the Corporation shall issue and deliver to the person or
persons entitled to receive the same a certificate or certificates representing
the number of shares of Common Stock issuable upon such conversion and shall
pay or cause the payment of such Other Securities or Consideration or other
property as may be payable upon conversion pursuant to Paragraphs (b)(iii) or
(c) of this Section 5.
(f) Effect of Unpaid Dividends.
(i) Except as otherwise provided by Paragraph (f)(ii) of
this Section 5, upon any conversion of shares of Series A Convertible Preferred
Stock at a time when there are dividends or distributions unpaid (whether as to
the Series A Convertible Preferred Stock (including accumulated dividends
thereon) or as to the Common Stock or Other Securities or other property
payable with respect thereto) and as to which the dividend date or other date
fixed for payment has passed, then, (i) to the fullest extent permitted by law,
such unpaid dividends or distributions shall be paid by the Corporation
contemporaneously with the conversion of such shares of Series A Convertible
Preferred Stock and, (ii) to the extent payment of such unpaid dividends or
distributions is not legally permitted, then the Series A Conversion Rate shall
be further adjusted by increasing the number of shares of Common Stock or Other
Securities or property issuable upon conversion to take into account the value
of such unpaid dividends or other distributions in determining the amount of
Common Stock or Other Securities into which the Series A Convertible Preferred
Stock will be converted.
(ii) Upon any automatic conversion of shares of Series A
Convertible Preferred Stock as provided by Paragraph (a) of this Section 5 and
resulting from a public offering of shares of Common Stock of the Corporation
as defined by Paragraph (a) of this Section 5 (the "Public Offering") at a time
when there are dividends
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or distributions unpaid as to the Series A Convertible Preferred Stock (the
"Unpaid Dividends") and as to which the dividend date or other date fixed for
payment has passed, then each holder of the Series A Convertible Preferred
Stock shall receive in satisfaction of that holder's Unpaid Dividends such
shares of Common Stock of the Corporation equal to the quotient of that
holder's Unpaid Dividends divided by the Public Offering per share price
provided that any fractional share of Common Stock otherwise due shall be
converted to and distributed in cash.
(g) Fractional Shares. No fractional shares of Common Stock
shall be issued in connection with the conversion of shares of Series A
Convertible Preferred Stock into Common Stock. Instead of any fractional share
of Common Stock which would otherwise be issuable on conversion, the Company
shall pay a cash adjustment with respect to such fractional share computed on
the basis of the then current Series A Conversion Price.
(h) Tax on Conversion. The issuance of stock certificates on
conversion of shares of Series A Convertible Preferred Stock shall be made
without charge to converting shareholders for any tax in respect of the
issuance thereof except any tax on the income or gain derived by the converting
shareholders as a result of the issuance thereof. The Corporation shall not,
however, be required to pay any tax which may be payable in respect of any
registration of transfer involved in the issue and delivery of stock in any
name other than that of the holder of the shares of Series A Convertible
Preferred Stock converted, and the Corporation shall not be required to so
issue or deliver any stock certificate unless and until the person or persons
requesting the registration of transfer shall have paid to the Corporation the
amount of such tax or shall have established to the satisfaction of the
Corporation that such tax has been paid.
(i) Securities Reserved. The Corporation shall at all times
reserve and keep available out of its authorized Common Stock (and any Other
Securities or Consideration or property) the full number of shares of Common
Stock (and any Other Securities or Consideration or property) deliverable upon
the conversion of all outstanding shares of Series A Convertible Preferred
Stock. The Corporation shall not enter into any agreement or take any action
which would impair or restrict its legal authority to issue such shares of
Common Stock, Other Securities or Consideration or property upon conversion or
to defeat in any way the right of the holders of the Series A Convertible
Preferred Stock to receive such consideration upon conversion. In addition,
whenever the Corporation is required to reserve any interest, dividends or
other property payable upon conversion of the Series A Convertible Preferred
Stock, the Corporation shall, as to cash, deposit such amounts in one or more
separate accounts for the sole benefit of the holders of the Series A
Convertible Preferred Stock upon conversion and, as to other property,
physically segregate or otherwise set such property aside in such a manner as
to protect the rights of the holders of the Series A Convertible Preferred
Stock to the receipt of such property upon conversion.
(j) Effect of Conversion. Any shares of Series A Convertible
Preferred Stock converted shall be retired and may not be reissued.
6. Voting Rights.
(a) In addition to the class vote provided for below and any
class vote required by law, holders of Series A Convertible Preferred Stock
shall be
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entitled to vote on any matter submitted to the shareholders of the Corporation
for their vote, waiver, release or other action, together with the holders of
the Common Stock and the Series B Convertible Preferred Stock, voting as a
single class, with each share of Series A Convertible Preferred Stock having a
number of votes equal to the then current Series A Conversion Rate.
(b) The Corporation shall not take any of the following actions
without the prior approval of the holders of not less than a majority of the
Series A Convertible Preferred Stock, voting separately as a class:
(i) Issue any shares of any class in the capital stock of
the Corporation ranking equal or senior to the Series A Convertible Preferred
Stock with respect to dividends or liquidation proceeds or securities
convertible into any such class; or
(ii) Pay any dividend or make any distribution with respect
to the Common Stock or the Series B Convertible Preferred Stock or repurchase
or redeem any shares of Common Stock or the Series B Convertible Preferred
Stock.
(c) (i) If the Corporation fails for any reason (including
without limitation by reason of lack of legal capacity) to redeem any shares of
Series A Convertible Preferred Stock when such shares are required to be
redeemed (including redemption at the election of the holders thereof) for the
required Redemption Price (which includes all accumulated and unpaid dividends,
whether or not declared), then until all such shares have been redeemed, the
holders of all of the shares of Series A Convertible Preferred Stock voting
separately as a class shall be entitled to (x) elect a number of additional
directors equal to a majority of the entire Board of Directors of the
Corporation, (y) set the number of directors of the Corporation, and (z) amend
the Articles of Incorporation or Code of Regulations of the Corporation to
amend or establish qualifications for directors, and holders of any other class
of capital stocks including Common Stock, shall not be entitled to vote on such
matters.
(ii) At such time when the right of the holders of the
Series A Convertible Preferred Stock to elect the Board of Directors shall have
become vested as aforesaid, the holder or holders of twenty-five (25%) percent
or more of the Series A Convertible Preferred Stock shall have the right to
call a special meeting or meetings of shareholders for purpose of voting on any
matter described in (c)(i)(x), (y) or (z) above. Such meetings may be held at
any place within or without the State of Ohio. Any holder of Series A
Convertible Preferred Stock shall have access to the stock books of the
Corporation for purpose of giving notice of such meeting.
7. Amendment. Notwithstanding the foregoing, so long as any share of
Series A Convertible Preferred Stock is outstanding, the Articles of
Incorporation of the Corporation shall not be amended in any manner without the
affirmative vote of the holders of a majority of the outstanding shares of such
Class.
C. One Thousand Seven Hundred Forty (1,740) shares of Series B Convertible
Preferred Stock with a par value of Six Hundred and Ninety Dollars ($690) per
share (the "Series B Stated Value") and the following additional terms:
1. Designation and Amount. The Series B Convertible Preferred Stock
shall consist of One Thousand Seven Hundred Forty (1,740) shares. The Series B
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Convertible Preferred Stock shall be junior to the Series A Convertible
Preferred Stock and all rights of the holders of the Series B Convertible
Preferred Stock are subject to the prior rights of the holders of the Series A
Convertible Preferred Stock.
2. Dividends. The holder of each share of the Series B Convertible
Preferred Stock shall be entitled to receive dividends when and as declared by
the Board of Directors as provided herein from funds legally available for the
payment thereof, in an amount equal to $69.00 per share per annum, prorated for
any partial year. Such dividends shall be cumulative from the date the holder
first acquires its shares of Series B Convertible Preferred Stock, whether or
not earned or declared. No cash dividend shall be declared or paid on any
shares of Common Stock or any other class or series of stock ranking junior to
the Series B Convertible Preferred Stock, and no shares of such stock shall be
acquired by the corporation or any subsidiary for value, unless full cumulative
dividends on the Series B Convertible Preferred Stock have been paid.
3. Liquidation Preference.
(a) General. The Series B Convertible Preferred Stock shall be
preferred over the Common Stock and any other class or series of stock ranking
junior to the Series B Convertible Preferred Stock as to distribution of assets
in the event of any liquidation or dissolution or winding up of the
Corporation, and in that event the holders of the Series B Convertible
Preferred Stock shall be entitled to receive, after payment or provision for
payment of the debts and other liabilities of the Corporation, and subject to
the prior rights of the Series A Convertible Preferred Stock out of the assets
of the Corporation available for distribution to its shareholders, the Series B
Stated Value, plus any accumulated but unpaid dividends, and no more, for every
share of the Series B Convertible Preferred Stock held by them, before any
distribution of the assets shall be made to the holders of the Common Stock or
any other class or series of stock ranking junior to the Series B Convertible
Preferred Stock as to distribution of assets. Upon any liquidation, dissolution
or winding up of the Corporation, after payment shall have been made in full on
the Series B Convertible Preferred Stock as provided in the preceding sentence,
but not prior thereto, the Common Stock or any other series or class of stock
ranking junior to the Series B Convertible Preferred Stock as to distribution
of assets shall, subject to the respective terms and provisions, if any,
applying thereto, be entitled to receive any and all assets remaining to be
paid or distributed and the Series B Convertible Preferred Stock shall not be
entitled to share therein.
(b) Distributions Pro Rata. If upon any liquidation or
dissolution or winding up of the Corporation the amounts payable on or with
respect to the Series B Convertible Preferred Stock are not paid in full, the
holders of shares of Series B Convertible Preferred Stock shall share pro rata
in any distribution of assets in respect of the shares held by them upon such
distribution in proportion to the amounts that would have been distributable to
each such share if all amounts payable on or with respect to the Series B
Convertible Preferred Stock had been paid in full.
(c) Merger or Consolidation. Neither the merger or consolidation
of the Corporation with another corporation nor the sale or lease of all or
substantially all of the assets of the Corporation shall be deemed to be a
liquidation or dissolution or winding up of the Corporation.
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(d) Notice Required. Written notice of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Corporation, stating the payment date and the place where the distributable
amount shall be payable and stating the anticipated amount of any such
distributable amount, shall be given by mail, postage prepaid, not less than
thirty (30) days prior to the payment date stated therein, to the holders of
record of the Series B Convertible Preferred Stock at their respective
addresses as the same shall then appear on the books of the Corporation.
4. Redemption.
(a) Mandatory Redemption. On December 31, 1999, or as soon
thereafter as possible, if no shares of Class A Convertible Preferred Stock are
then outstanding and have not been outstanding during the preceding 90-day
period, the Corporation shall redeem any Series B Convertible Preferred Stock
then outstanding at a per share price equal to the Series B Stated Value plus
all accumulated and unpaid dividends, whether or not declared (the "Redemption
Price").
(b) Special Redemption. If the Corporation enters into a binding
obligation to merge (regardless of whether the Corporation is the surviving
entity) or consolidate with any entity or sell, lease, transfer, exchange or
otherwise dispose of all or any substantial portion of its assets, and no
shares of Class A Convertible Preferred Stock are then outstanding, and have
not been outstanding during the preceding 90-day period, then the Series B
Convertible Preferred Stock shall be subject to immediate redemption at the
Redemption Price at the election of the holders thereof exercised by notice to
the Corporation. Such notice shall specify the date for redemption, which
shall be not less than ten (10) nor more than thirty (30) days after delivery
of such notice. If any shares of Series B Convertible Preferred Stock are
redeemed prior to December 31, 1999, then, in addition to the Redemption Price,
the Corporation shall also deliver to the holder of each share of Series B
Convertible Preferred Stock then outstanding a warrant (in form and substance
reasonably acceptable to the holder), expiring on December 31, 1999, to
purchase, for each share of Series B Convertible Preferred Stock so redeemed, a
number of shares of Common Stock equal to the Series B Conversion Rate (as
defined in Section 5 below) in effect on the date of redemption at an exercise
price equal to the then current Series B Conversion Price (as defined in
Section 5 below); such number and exercise price to be subject to adjustment as
provided with respect to the Series B Conversion Rate and Series B Conversion
Price in Section 5 below. Such warrant shall require the consent of the warrant
holder to transactions of the nature described in Section 6(b)(iii) hereof
(voting as a single class together with any unredeemed Series B Convertible
Preferred Stock), with the holder of each warrant entitled to a number of votes
per share of Series B Convertible Preferred Stock redeemed equal to the then
current Series B Conversion Rate.
(c) Redemption at the Option of the Holder.
(i) The Holder of any share of Series B Convertible
Preferred Stock or any share of Common Stock issued upon conversion thereof
may, at any time after December 31, 1999, if the Corporation is not then
subject to the reporting requirements of Section 15 of the Securities Exchange
Act of 1934 and does not have a class of equity securities registered pursuant
to Section 12 of such Act, and no shares of Class A Convertible Preferred Stock
are then outstanding, and have not been outstanding during the preceding 90-day
period, by notice to the Corporation require the Corporation
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<PAGE> 13
to redeem immediately such shares of Series B Convertible Preferred Stock at a
price equal to the Redemption Price and such shares of Common Stock at a price
equal to the "fair market value" thereof.
(ii) The "fair market value" of such Common Stock shall be
determined by agreement of the Corporation and such Holder or, if they are
unable to agree, by a person expert in valuing the shares of corporations who
shall be selected by agreement of such Holder and the Corporation. If such
Holder and the Corporation cannot agree upon the selection of such an expert,
then the "fair market value" shall be determined by a person expert in valuing
shares of corporations chosen by two such persons, one chosen by such Holder
and one by the Corporation. The determination of the "fair market value" made
pursuant to this Section 4(c) shall be made without any discount for lack of
marketability or minority interest and shall be final and binding. The fees and
expenses of such expert(s) shall be paid jointly by such Holder and the
Corporation.
(d) Retirement of Shares. Any shares of Series B Convertible
Preferred Stock redeemed pursuant to the provisions of this Section 4 shall be
retired and may not be re issued.
(e) Payment of Redemption Price. The Redemption Price shall be
paid in cash, provided that if the Corporation lacks sufficient cash to pay
such Redemption Price in full, the balance thereof may be paid, with the
consent of the holder thereof, by means of a promissory note payable on demand
and bearing interest at 10% per annum.
5. Conversion.
(a) General. Shares of Series B Convertible Preferred Stock may
be converted at the option of the holder thereof into fully paid and
nonassessable shares of Common Stock of the Corporation. Shares of Series B
Convertible Preferred Stock automatically convert into fully paid and
nonassessable shares of Common Stock of the Corporation contemporaneous with
the closing of and receipt by the Corporation of net proceeds of not less than
five million dollars ($5,000,000) from a registered public offering of shares
of Common Stock of the Corporation pursuant to a Registration Statement that
has been declared effective by the Securities and Exchange Commission under the
Securities Act of 1933 as amended and such shares were registered pursuant to
Section Twelve of the Securities Exchange of 1934 as amended. Paragraph (e) of
this Section 5 notwithstanding, any automatic conversion shall be effective
without the need for action on the part of the holder of Series B Convertible
Preferred Stock upon not less than twenty (20) days prior written notice of the
proposed automatic conversion delivered to all holders of the Series B
Convertible Preferred Stock. In the case of automatic conversion, the existing
Series B Convertible Preferred Stock certificates shall represent the correct
number of Common Shares of the Corporation as automatically converted until
such time as the Corporation notifies the holders of the Series B Convertible
Preferred Stock of the automatic conversion and therein requests the surrender
of the Series B Convertible Preferred Stock certificates in exchange for Common
Share stock certificates. All shares of Series B Convertible Preferred Stock
which shall have been automatically converted into Common Shares shall be
retired and may not be reissued. Shares of Series B Convertible Preferred Stock
will convert into fully paid and nonassessable shares of Common Stock of the
Corporation at a price (the "Series B
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Conversion Price") of Six Hundred and Ninety Dollars ($690) per share of Common
Stock with respect to the Series B Stated Value, which is equivalent to a rate
(the "Series B Conversion Rate") of one (1) share of Common Stock as now
constituted for each share of Series B Convertible Preferred Stock surrendered
for conversion, subject to adjustment as provided in Paragraph (b) below.
(b) Adjustments. The Series B Conversion Price, the Series B
Conversion Rate and the kind and amounts of securities and property for which
the shares of Series B Convertible Preferred Stock may be converted shall be
subject to adjustment from time to time as follows:
(i) If, at any time after December 31, 1994, the
Corporation shall (a) declare or pay a dividend, or make a distribution, to all
holders of its Common Stock in shares of Common Stock, (b) subdivide its
outstanding shares of Common Stock into a greater number of shares, (c) combine
its outstanding shares of Common Stock into a smaller number of shares, or (d)
issue by reclassification of its shares of Common Stock (other than a
subdivision or combination thereof or a change in par value) any securities,
the terms of conversion in effect immediately prior to such action shall be
adjusted so that the holder of any share of Series B Convertible Preferred
Stock thereafter surrendered for conversion shall be entitled to receive the
kind and number of shares of Common Stock of the Corporation and/or other
securities which he would have owned or been entitled to receive immediately
following such action had such share of Series B Convertible Preferred Stock
been converted immediately prior thereto. Any adjustment made pursuant to this
Paragraph (b)(i) shall become effective immediately after the record date in
the case of a dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision, combination or
reclassification.
(ii) If, at any time after December 31, 1994, the
Corporation shall issue shares of Common Stock (other than upon conversion of
the Series A Convertible Preferred Stock), or securities (other than the Series
A Convertible Preferred Stock or the Series B Convertible Preferred Stock)
convertible into shares of Common Stock or rights, options or warrants
containing the right to subscribe for or purchase shares of Common Stock or
securities convertible into shares of Common Stock for a price per share of
Common Stock, in the case of the issuance of Common Stock, or for a price per
share of Common Stock initially deliverable upon conversion, exchange or
exercise of such convertible securities or rights, options or warrants
(including all consideration paid to acquire such convertible securities or
rights, options or warrants) (the "Issue Price"), less than the then current
Series B Conversion Price on the date the Corporation fixed the offering,
conversion, exchange or exercise price of such shares (the "Record Date"), then
the Series B Conversion Price shall be adjusted by multiplying it by a
fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately prior to the Record Date plus the number derived by
dividing (x) the product of the number of shares of Common Stock to be issued
upon such offering, conversion, exchange or exercise multiplied by the Issue
Price, by (y) the then current Series B Conversion Price and the denominator of
which is the number of shares of Common Stock outstanding immediately prior to
the Record Date plus the number of shares of Common Stock to be issued upon
such offering, conversion or exchange. Such adjustment shall be made whenever
such shares, convertible securities, rights, options or warrants are issued,
and shall become effective immediately after the effective date of such event
retroactive to the Record Date, if any, for such event. Upon any such
adjustment
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of the Series B Conversion Price, the Series B Conversion Rate shall be
adjusted accordingly.
(iii) If, at any time after December 31, 1994, the
Corporation shall distribute to all or substantially all holders of its Common
Stock either (a) evidences of indebtedness or assets (excluding cash dividends
or distributions) or (b) any other securities of the Corporation or any rights,
warrants, options to subscribe for, purchase or otherwise acquire securities of
the Corporation in a transaction not covered by Paragraph (b)(i) above (any of
which are referred to herein as "Other Securities"), then and in any such case
the Corporation shall either distribute such Other Securities to the holders of
the Series B Convertible Preferred Stock or reserve for the benefit of the
holders of the Series B Convertible Preferred Stock such amount of such Other
Securities as the holders of all Series B Convertible Preferred Stock then
outstanding would have owned or been entitled to receive immediately following
such action had the shares of Series B Convertible Preferred Stock been
converted into shares of Common Stock immediately prior thereto. In addition,
the Corporation shall either distribute to, or reserve for the benefit of, the
holders of the Series B Convertible Preferred Stock any principal, interest,
dividends or other property payable with respect to such Other Securities as
and when such interest, dividends or other property is distributed to the
holders of Common Stock. If such a reserve is made, as and when each such share
of Series B Convertible Preferred Stock is converted, the holder of such share
shall be entitled to receive from the Corporation his share of such Other
Securities together with the principal, interest, dividends or other property
payable with respect thereto.
(iv) All calculations under this Section 5 shall be made to
the nearest one-tenth of a cent or to the nearest one hundred thousandth of a
share, as the case may be. No adjustment in the Series B Conversion Rate shall
be required unless such adjustment would result in an increase or decrease of
at least one (1%) percent of the Series B Conversion Price; provided, however,
that any adjustments which by reason of this subparagraph (iv) are not required
to be made shall be carried forward and taken into account in any subsequent
adjustment.
(v) Whenever the terms of conversion are adjusted or Other
Securities are reserved as herein provided, the Corporation shall mail or cause
to be mailed a copy of a statement, verified by its independent certified
public accountants, setting forth the adjusted Series B Conversion Rate and
Series B Conversion Price or the nature and amount of Other Securities, as the
case may be, to each person who is a registered holder of Series B Convertible
Preferred Stock at such person's last address as the same appears on the books
of the Corporation. Each adjustment shall remain in effect until a subsequent
adjustment is required hereunder. Failure to give or receive such notice or any
defect therein shall not affect the legality or validity of any action taken.
Following any adjustment to the Series B Conversion Rate and the Series B
Conversion Price, the holders of the Series B Convertible Preferred Stock shall
be entitled, by themselves or through attorneys or accountants retained by
them, to inspect the books and records of the Corporation in order to verify
such adjustment. Such inspection shall be at the expense of the holders of the
Series B Convertible Preferred Stock unless such inspection reveals an error in
the adjustment equal to five (5%) percent or more of the Series B Conversion
Price, in which case the Corporation shall promptly reimburse the holders for
all expenses incurred in connection therewith.
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(vi) If at any time, as a result of an adjustment made
pursuant to subparagraph (iii) above, the holders of Series B Convertible
Preferred Stock shall become entitled to purchase any Other Securities,
thereafter the number of such Other Securities purchasable upon conversion of
the Series B Convertible Preferred Stock and the price of the Other Securities
shall be subject to adjustment from time to time and in a manner and on terms
as nearly equivalent as practicable to the provisions with respect to Series B
Convertible Preferred Stock contained in subparagraphs (i) and (ii) above.
(vii) Upon the expiration of any rights, options, warrants
or conversion or exchange privileges which caused an adjustment to the Series B
Conversion Rate to be made, if any thereof shall not have been exercised, the
Series B Conversion Rate shall, upon such expiration, be readjusted and shall
thereafter be such as it would have been had it been originally adjusted (or
had the original adjustment not been required, as the case may be) as if (a)
the only shares of Common Stock so issued were the shares of Common Stock, if
any, actually issued or sold upon the exercise of such rights, options,
warrants or conversion or exchange privileges and (b) such shares of Common
Stock, if any, were issued or sold for the consideration actually received by
the Corporation upon such exercise plus the aggregate consideration, if any,
actually received by the Corporation for the issuance, sale or grant of all
such rights, options, warrants or conversion or exchange privileges, whether or
not exercised; provided further, that no such readjustment shall have the
effect of decreasing the Series B Conversion Price by an amount in excess of
the amount of the adjustment initially made in respect to the issuance, sale or
grant of such rights, options, warrants or conversion or exchange privileges.
(c) Merger or Consolidation. In case of a merger or
consolidation of the Corporation with or into another corporation, or the sale
or transfer of all, or substantially all, of the property or assets of the
Corporation, the holders of shares of Series B Convertible Preferred Stock
shall thereafter have the right to convert each of such shares into the kind
and amount of shares of stock or other securities and property (including cash)
receivable (the "Consideration") upon such merger, consolidation or sale by a
holder of the number of shares of Common Stock (whether whole or fractional)
into which such shares of Series B Convertible Preferred Stock might have been
converted immediately prior to such a merger, consolidation or sale (all of
which Consideration shall be reserved and become payable upon conversion in the
same manner as for Other Securities pursuant to Paragraph (b)(iii) above and
shall be adjusted as provided in Paragraph (b) above), and shall have no other
conversion rights under these provisions and, in addition, the Corporation
shall reserve, on a current basis as and when distributed, for payment upon
conversion, in the same manner as required for Other Securities pursuant to
Paragraph (b)(iii) above, any interest, dividends, other stock, securities or
property distributable with respect to the Consideration, the same as if such
shares of Series B Convertible Preferred Stock had been converted immediately
prior to such merger, consolidation, or sale of assets; and effective provision
shall be made in the charter of the resulting or surviving corporation or
otherwise, so that the provisions set forth herein for the adjustment of the
Series A Conversion Rate shall thereafter be applicable, as nearly as
reasonably may be, to any of the Consideration deliverable upon conversion of
Series B Convertible Preferred Stock remaining outstanding or other convertible
preferred stock received in place thereof. Any such resulting or surviving
corporation shall expressly assume the obligation to deliver the Consideration,
upon the exercise of the conversion right (and, to that end, shall reserve
sufficient Consideration to issue, distribute and/or pay the holders of the
Series B Convertible Preferred Stock; to be calculated as if all such stock
were to be converted), as holders of Series B Convertible
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Preferred Stock remaining outstanding, or other convertible preferred stock
received by such holders in place thereof, shall be entitled to receive
pursuant to the provisions hereof, and to make provision for protection of
conversion rights as above provided.
(d) Notices. If, at any time while shares of Series B
Convertible Preferred Stock are outstanding, the Corporation shall (i) declare
a dividend (or any other distribution) on its Common Stock, other than in cash,
or (ii) reclassify its Common Stock (other than through a subdivision or
combination thereof or a change in par value) or become a party to any
consolidation or merger or sale or transfer of all or substantially all of the
assets of the Corporation, for which approval of the holders of its stock is
required, then the Corporation shall cause to be mailed to registered holders
of Series B Convertible Preferred Stock, at their last addresses as they shall
appear on the books of the Corporation, at least ten (10) days prior to the
applicable record date hereinafter specified, a notice stating (x) the date on
which a record is to be taken for the purpose of such dividend or distributions
or, if a record is not to be taken, the date as of which holders of Common
Stock of record to be entitled to such dividend or distribution are to be
determined, or (y) the date on which any such reclassification, consolidation,
merger, sale or transfer is expected to become effective, and the date as of
which any such reclassification, consolidation, merger, sale or transfer is
expected to become effective, and the date as of which it is expected that
holders of record of Common Stock shall be entitled to exchange their Common
Stock for securities or other property, if any, deliverable upon such
reclassification, consolidation, merger, sale or transfer. Failure to give or
receive the notice required by this Paragraph (d) or any defect therein shall
not affect the legality or validity of any such dividend, distribution,
reclassification, consolidation, merger, sale, transfer or other action.
(e) Exercise of Conversion Rights. Except where otherwise
provided, the holder of any shares of Series B Convertible Preferred Stock may
exercise its option to convert such shares into shares of Common Stock only by
surrendering for such purpose to the Corporation the certificates representing
the shares to be converted, accompanied by written notice that such holder
elects to convert such shares in accordance with the provisions of this Section
5. Said notice shall also state the name or names (with addresses) in which the
certificate or certificates for shares of Common Stock which shall be issuable
on such conversion shall be issued. Each certificate or certificates
surrendered for conversion shall unless the shares issuable on conversion are
to be issued in the same name as that in which such certificate or certificates
are registered, be accompanied by instruments of transfer, in form satisfactory
to the Corporation, duly executed by the holder or his duly authorized
attorney. Each conversion shall be deemed to have been effected on the date on
which such certificate or certificates shall have been surrendered and such
notice received by the Corporation as aforesaid, and the person or persons in
whose name or names any certificate or certificates for shares of Common Stock
shall be issuable upon such conversion shall be deemed to have become on said
date the holder or holders of record of the shares represented thereby
notwithstanding that the transfer books of the Corporation may then be closed
or that certificates representing such shares of Common Stock shall not then be
actually delivered to such person. As promptly as practicable on or after the
conversion date, the Corporation shall issue and deliver to the person or
persons entitled to receive the same a certificate or certificates representing
the number of shares of Common Stock issuable upon such conversion and shall
pay or cause the payment of such Other Securities or Consideration or other
property as may be payable upon conversion pursuant to Paragraphs (b)(iii) or
(c) of this Section 5.
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(f) Effect of Unpaid Dividends.
(i) Except as otherwise provided by Paragraph (f)(ii) of
this Section 5, upon any conversion of shares of Series B Convertible Preferred
Stock at a time when there are dividends or distributions unpaid (whether as to
the Series B Convertible Preferred Stock (including accumulated dividends
thereon) or as to the Common Stock or Other Securities or other property
payable with respect thereto) and as to which the dividend date or other date
fixed for payment has passed, then, (i) to the fullest extent permitted by law,
such unpaid dividends or distributions shall be paid by the Corporation
contemporaneously with the conversion of such shares of Series B Convertible
Preferred Stock and, (ii) to the extent payment of such unpaid dividends or
distributions is not legally permitted, then the Series B Conversion Rate shall
be further adjusted by increasing the number of shares of Common Stock or Other
Securities or property issuable upon conversion to take into account the value
of such unpaid dividends or other distributions in determining the amount of
Common Stock or Other Securities into which the Series B Convertible Preferred
Stock will be converted.
(ii) Upon any automatic conversion of shares of Series B
Convertible Preferred Stock as provided by Paragraph (a) of this Section 5 and
resulting from a public offering of shares of Common Stock of the Corporation
as defined by Paragraph (a) of this Section 5 (the "Public Offering") at a time
when there are dividends or distributions unpaid as to the Series B Convertible
Preferred Stock (the "Unpaid Dividends") and as to which the dividend date or
other date fixed for payment has passed, then each holder of the Series B
Convertible Preferred Stock shall receive in satisfaction of that holder's
Unpaid Dividends such shares of Common Stock of the Corporation equal to the
quotient of that holder's Unpaid Dividends divided by the Public Offering per
share price provided that any fractional share of Common Stock otherwise due
shall be converted to and distributed in cash.
(g) Fractional Shares. No fractional shares of Common Stock
shall be issued in connection with the conversion of shares of Series B
Convertible Preferred Stock into Common Stock. Instead of any fractional share
of Common Stock which would otherwise be issuable on conversion, the Company
shall pay a cash adjustment with respect to such fractional share computed on
the basis of the then current Series B Conversion Price.
(h) Tax on Conversion. The issuance of stock certificates on
conversion of shares of Series B Convertible Preferred Stock shall be made
without charge to converting shareholders for any tax in respect of the
issuance thereof except any tax on the income or gain derived by the converting
shareholders as a result of the issuance thereof. The Corporation shall not,
however, be required to pay any tax which may be payable in respect of any
registration of transfer involved in the issue and delivery of stock in any
name other than that of the holder of the shares of Series B Convertible
Preferred Stock converted, and the Corporation shall not be required to so
issue or deliver any stock certificate unless and until the person or persons
requesting the registration of transfer shall have paid to the Corporation the
amount of such tax or shall have established to the satisfaction of the
Corporation that such tax has been paid.
(i) Securities Reserved. The Corporation shall at all times
reserve and keep available out of its authorized Common Stock (and any Other
Securities or Consideration or property) the full number of shares of Common
Stock (and
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any Other Securities or Consideration or property) deliverable upon the
conversion of all outstanding shares of Series B Convertible Preferred Stock.
The Corporation shall not enter into any agreement or take any action which
would impair or restrict its legal authority to issue such shares of Common
Stock, Other Securities or Consideration or property upon conversion or to
defeat in any way the right of the holders of the Series B Convertible
Preferred Stock to receive such consideration upon conversion. In addition,
whenever the Corporation is required to reserve any interest, dividends or
other property payable upon conversion of the Series B Convertible Preferred
Stock, the Corporation shall, as to cash, deposit such amounts in one or more
separate accounts for the sole benefit of the holders of the Series B
Convertible Preferred Stock upon conversion and, as to other property,
physically segregate or otherwise set such property aside in such a manner as
to protect the rights of the holders of the Series B Convertible Preferred
Stock to the receipt of such property upon conversion.
(j) Effect of Conversion. Any shares of Series B Convertible
Preferred Stock converted shall be retired and may not be reissued.
6. Voting Rights.
(a) In addition to the class vote provided for below and any
class vote required by law, holders of Series B Convertible Preferred Stock
shall be entitled to vote on any matter submitted to the shareholders of the
Corporation for their vote, waiver, release or other action, together with the
holders of the Common Stock and the Series A Preferred Stock, voting as a
single class, with each share of Series B Convertible Preferred Stock having a
number of votes equal to the then current Series B Conversion Rate.
(b) The Corporation shall not take any of the following actions
without the prior approval of the holders of not less than a majority of the
Series B Convertible Preferred Stock, voting separately as a class:
(i) Issue any shares of any class in the capital stock of
the Corporation (other than the Series A Convertible Preferred Stock) ranking
equal or senior to the Series B Convertible Preferred Stock with respect to
dividends or liquidation proceeds or securities convertible into any such
class; or
(ii) Pay any dividend or make any distribution with respect
to the Common Stock or repurchase or redeem any shares of Common Stock.
(c) (i) If the Corporation fails for any reason (including
without limitation by reason of lack of legal capacity) to redeem any shares of
Series B Convertible Preferred Stock when such shares are required to be
redeemed (including redemption at the election of the holders thereof) for the
required Redemption Price (which includes all accumulated and unpaid dividends,
whether or not declared), then until all such shares have been redeemed, the
holders of all of the shares of Series B Convertible Preferred Stock voting
separately as a class shall be entitled to (x) elect a number of additional
directors equal to a majority of the entire Board of Directors of the
Corporation, (y) set the number of directors of the Corporation, and (z) amend
the Articles of Incorporation or Code of Regulations of the Corporation to
amend or establish qualifications for directors, and holders of any other class
of capital stocks including Common Stock, shall not be entitled to vote on such
matters.
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(ii) At such time when the right of the holders of the Series B
Convertible Preferred Stock to elect the Board of Directors shall have become
vested as aforesaid, the holder or holders of twenty-five (25%) percent or more
of the Series B Convertible Preferred Stock shall have the right to call a
special meeting or meetings of shareholders for purpose of voting on any matter
described in (c)(i)(x), (y) or (z) above. Such meetings may be held at any
place within or without the State of Ohio. Any holder of Series B Convertible
Preferred Stock shall have access to the stock books of the Corporation for
purpose of giving notice of such meeting.
7. Amendment. Notwithstanding the foregoing, so long as any share of
Series B Convertible Preferred Stock is outstanding, the Articles of
Incorporation of the Corporation shall not be amended in any manner without the
affirmative vote of the holders of a majority of the outstanding shares of such
Class.
D. One Hundred Thousand (100,000) shares of Undesignated Preferred Stock
with no par value per share and the following additional terms:
1. Except as otherwise provided by this Article Fourth or by the
amendment or amendments providing for the issue of any series of Preferred
Stock adopted by the Board of Directors pursuant to authority expressly vested
in it by this Article Fourth, the Preferred Stock may be issued at any time or
from time to time in any amount, not exceeding in the aggregate, including all
shares of any and all series thereof theretofore issued, the One Hundred
Thousand (100,000) shares of Preferred Stock hereinabove authorized, as
Preferred Stock of one or more series, as hereinafter provided, and for such
lawful consideration as shall be fixed from time to time by the Board of
Directors. All shares of any one series of Preferred Stock shall be alike in
every particular, each series thereof shall be distinctively designated by
letter or descriptive words, and all series of Preferred Stock shall rank
equally and be identical in all respects except as permitted by the provisions
of D.2. of this Article Fourth.
2. Authority is hereby expressly granted to the Board of Directors
from time to time to adopt amendments to these Restated and Amended Articles
providing for the issue in one or more series of any unissued or treasury
shares of the Preferred Stock, and to fix by the amendment creating each such
series of the Preferred Stock, the designation and number of shares, voting
rights, dividend rate or rates, dividend payment date or dates, redemption
rights and price, sinking fund requirements, conversion or exchange rights and
restrictions on issuance of shares of such series, to the fullest extent now or
hereafter permitted by the laws of the State of Ohio and notwithstanding the
provisions of any other Article of these Restated and Amended Articles of the
Corporation, in respect of the matters set forth in the following subdivisions
(a) to (i), inclusive:
(a) The designation and number of shares of such series;
(b) Voting rights (to the fullest extent now or hereafter
permitted by the laws of the State of Ohio);
(c) The dividend rate or rates of such series (which may be an
adjustable or variable rate and which may be cumulative);
(d) The dividend payment date or dates of such series;
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(e) The price or prices at which shares of such series may be
redeemed;
(f) The amount of the sinking fund, if any, to be applied to the
purchase or redemption of shares of such series and the manner of its
application;
(g) The liquidation price or prices of such series;
(h) Whether or not the shares of such series shall be made
convertible into, or exchangeable for, shares of any other class or classes or
of any other series of the same class of stock of the Corporation, and if made
so convertible or exchangeable, the conversion price or prices, or the rate or
rates of exchange, and the adjustments, if any, of the price or rate at which
such conversion or exchange may be made; and,
(i) Whether or not the issue of any additional shares of
such series or any future series in addition to such series shall be subject to
any restrictions and, if so, the nature of such restrictions.
Any of the voting rights, dividend rate or rates, dividend payment date or
dates, redemption rights and price, sinking fund requirements, conversion
rights and restrictions on issuance of shares of any such series of Preferred
Stock may, to the fullest extent now or hereafter permitted by the laws of the
State of Ohio, be made dependent upon facts ascertainable outside these
Restated and Amended Articles or outside the amendment or amendments providing
for the issue of such Preferred Stock adopted by the Board of Directors
pursuant to authority expressly vested in it by this Article Fourth. If the
then-applicable laws of the State of Ohio do not permit the Board of Directors
to fix, by the amendment creating a series of Preferred Stock, the voting
rights of shares of such series, each holder of a share of such series of
Preferred Stock shall be entitled to one (1) vote for each share of Preferred
Stock of such series held by such holder.
3. Before any dividends shall be declared or paid upon or set apart
for, or distribution made on, the Common Stock and before any sum shall be paid
or set apart for the purchase or redemption of Preferred Stock of any series or
for the purchase of the Common Stock, the holders of Preferred Stock of each
series shall be entitled to receive, if and when declared by the Board of
Directors, dividends at the rate or rates fixed for such series in accordance
with the provisions of this Article Fourth, and no more, from the dividend
payment date of, or next preceding the date of, issue thereof, payable on the
payment date or dates fixed from time to time by the Board of Directors.
4. Upon at least thirty (30) days previous notice given by mail to
record holders of Preferred Stock to be redeemed at their respective addresses
as they appear on the books of the Corporation and by publication in a
newspaper of general circulation in the City of Cincinnati, Ohio, and in a
newspaper of general circulation in the Borough of Manhattan, City and State of
New York, the Corporation, at its election, by action of its Board of Directors
may redeem the whole of the Preferred Stock or any series thereof or any part
of any series thereof by lot or pro rata, at any time or from time to time and
at the prices fixed for the redemption of such shares in accordance with the
provisions of this Article Fourth (the price so fixed for any series being
herein called the redemption price of such series). If the Corporation shall
determine to redeem by lot less than all the shares of any series of Preferred
Stock, the selection by lot of the shares
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of such series so to be redeemed shall be conducted by an independent bank or
trust company. From and after the date fixed in such notice as the date of
redemption, unless default shall be made by the Corporation in providing moneys
at the time and place specified for the payment of the redemption price
pursuant to such notice, or, if the Corporation shall so elect, from and after
a date, which shall be prior to the date fixed as the date of redemption, on
which the Corporation shall provide moneys for the payment of the redemption
price by depositing the amount thereof in trust for the account of the holders
of the Preferred Stock called for redemption with a bank or trust company doing
business in the City of Cincinnati, Ohio, and having capital and surplus of at
least Fifty Million Dollars ($50,000,000), pursuant to notice of such election
included in the notice of redemption specifying the date on which such deposit
will be made, all dividends on the Preferred Stock called for redemption shall
cease to accrue and all rights of the holders thereof as shareholders of the
Corporation, except the right to receive the redemption price upon presentation
and surrender of the respective certificates for the Preferred Stock called for
redemption, shall cease and determine. The Corporation may, from time to time,
purchase the whole of the Preferred Stock or any series thereof, or any part of
any series thereof, upon the best terms reasonably obtainable. Preferred Stock
of any series redeemed or purchased may in the discretion of the Board of
Directors be reissued, at any time or from time to time, as stock of the same
or of a different series, or may be canceled and not reissued.
5. After full dividends as aforesaid upon the Preferred Stock of all
series then outstanding shall have been paid for all past dividend periods, and
after or concurrently with making payment of or provision for full dividends on
the Preferred Stock of all series then outstanding for the current dividend
period, then and not otherwise dividends may be declared upon the Common Stock
at such rate as the Board of Directors may determine and no holders of shares
of any series of the Preferred Stock, as such, shall be entitled to share
therein.
6. If upon any dissolution, liquidation or winding up of the
Corporation or reduction of its capital stock, the assets so to be distributed
among the holders of the Preferred Stock pursuant to the provisions of this
Article Fourth or of the amendment or amendments providing for the issue of
such Preferred Stock adopted by the Board of Directors pursuant to authority
expressly vested in it by this Article Fourth shall be insufficient to permit
the payment to such holders of the full preferential amounts aforesaid, then
the entire assets of the Corporation shall be distributed ratably among the
holders of the Preferred Stock in proportion to the full preferential amounts
to which they are respectively entitled as aforesaid. After payment to the
holders of the Preferred Stock of the full preferential amounts hereinbefore
provided for, the holders of the Preferred Stock, as such, shall have no right
or claim to any of the remaining assets of the Corporation and the remaining
assets to be distributed, if any, shall be distributed to the holders of the
Common Stock.
7. The term "accrued dividends", whenever used herein with respect to
the Preferred Stock of any series, shall be deemed to mean that amount which
would have been paid as dividends on the Preferred Stock of such series to date
had full dividends been paid thereon at the rate fixed for such series in
accordance with the provisions of this Article Fourth, less in each case the
amount of all dividends paid upon the shares of such series and the dividends
deemed to have been paid as provided in D.2. of this Article Fourth.
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FIFTH: No holders of shares of the Corporation shall have any preemptive
rights to subscribe for or to purchase any shares of the Corporation of
any class whether now or hereafter authorized.
SIXTH: To the extent permitted by law, the Corporation may, from time to
time, pursuant to authorization of the board of directors and without any
action by the shareholders, purchase or otherwise acquire shares of any
class, bonds, debentures, notes, script, warrants, obligations, evidence
of indebtedness, or other securities of the Corporation (or any other
corporation) in such manner, upon such terms and in such amounts as the
board of directors may determine.
SEVENTH: No transaction between the Corporation and any other corporation
shall in any way be affected or invalidated by the fact that any director
of the Corporation has an interest in such other Corporation, including
being a director or officer of such other corporation, provided that the
fact that the interest exists shall be disclosed or shall have been known
to the board of directors, or a majority thereof; and any director of the
Corporation has such an interest may be counted in determining the
existence of a quorum at any meeting of the board of directors of the
Corporation which shall authorize such transactions, and may vote thereat
to authorize such transaction, with like force and effect as if he were
not so interested.
EIGHTH: No holder of shares of the Corporation shall have any right to
cumulate votes in the election of directors of the Corporation or in
voting upon any other matter permitted to be voted upon.
NINTH: Any amendment hereto, including any that could be adopted by the
board of directors of this Corporation, may be adopted at a meeting of
shareholders held for such purpose by the affirmative vote of the holders
of shares entitled under these articles to exercise the majority of the
voting power of the Corporation on such proposal.
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Exhibit 3.2
CODE OF REGULATIONS
OF
CIAO CUCINA CORPORATION
ARTICLE I
Shareholders
Section 1. Annual Meetings.
The Annual Meeting of the shareholders of this Corporation, for the
election of the Board of Directors and the transaction of such other business as
may properly be brought before such meeting, shall be held at the time, date and
place designated by the Board of Directors or, if it shall so determine, by the
Chairman of the Board or the President. If the Annual Meeting is not held or if
Directors are not elected thereat, a Special Meeting may be called and held for
that purpose.
Section 2. Special Meetings.
Special meetings of the shareholders may be held on any business day
when called by the Chairman of the Board, the President, a majority of Directors
or persons holding fifty percent of all voting power of the Corporation and
entitled to vote at such meeting.
Section 3. Place of Meetings.
Any meeting of shareholders may be held at such place within or without
the State of Ohio as may be designated in the Notice of said meeting.
Section 4. Notice of Meeting and Waiver of Notice
4.1 Notice. Written notice of the time, place and purposes of any
meeting of shareholders shall be given to each shareholder entitled thereto
not less than seven (7) days nor more than sixty (60) days before the date
fixed for the meeting and as prescribed by law. Such notice shall be given
either by personal delivery or mail to the shareholders at their respective
addresses as they appear on the records of the Corporation. Notice shall be
deemed to have been given on the day mailed. If any meeting is adjourned to
another time or place, no notice as to such adjourned meeting need be given
other than by announcement at the meeting at which such an adjournment is
taken. No business shall be transacted at any such adjourned meeting except as
might have been lawfully transacted at the meeting at which such adjournment
was taken.
<PAGE> 2
4.2 Notice to Joint Owners. All notices with respect to any shares
to which persons are entitled by joint or common ownership may be given to
that one of such persons who is named first upon the books of this
Corporation, and notice so given shall be sufficient notice to all the holders
of such shares.
4.3 Waiver. Notice of any meeting may be waived in writing by any
shareholder either before or after any meeting, or by attendance at such
meeting without protest to its commencement.
Section 5. Shareholders Entitled to Notice and to Vote.
If a record date shall not be fixed, the record date for the
determination of shareholders entitled to notice of or to vote at any meeting of
shareholders shall be the date next preceding the day on which notice is given,
or the date next preceding the day on which the meeting is held, as the case may
be.
Section 6. Quorum and Voting.
The holders of shares entitling them to exercise a majority of the
voting power of the Corporation, present in person or by proxy, shall constitute
a quorum for any meeting. The shareholders present in person or by proxy,
whether or not a quorum be present, may adjourn the meeting from time to time
without notice other than by announcement at the meeting.
In any other matter brought before any meeting of shareholders, the
affirmative vote of the holders of shares representing a majority of the votes
actually cast shall be the act of the shareholders provided, however, that no
action required by law, the Articles, or these Regulations to be authorized or
taken by the holders of a designated proportion of the shares of the Corporation
may be authorized or taken by a lesser proportion.
Section 7. Organization of Meetings.
7.1 Presiding Officer. The Chairman of the Board, or in the
Chairman of the Board's absence the President, or the person designated by the
Board of Directors, shall call all meetings of the shareholders to order and
shall act as Chairman thereof; if all are absent, the shareholders shall elect
a Chairman.
7.2 Minutes. The Secretary of the Corporation, or in the Secretary's
absence, an Assistant Secretary, or, in the absence of both, a person
appointed by the Chairman of the meeting, shall act as Secretary of the
meeting and shall keep and make a record of the proceedings thereat.
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Section 8. Voting.
Except as provided by statute or in the Articles, every shareholder
entitled to vote shall be entitled to cast one vote on each proposal submitted
to the meeting for each share held of record on the record date for the
determination of the shareholders entitled to vote at the meeting.
Section 9. Proxies.
A person who is entitled to attend a shareholders' meeting, to vote
thereat or to execute consents, waivers and releases, may be represented at such
meeting or vote thereat, and execute consents, waivers and releases and exercise
any of the person's rights, by proxy or proxies appointed by a writing signed by
such person, or by his duly authorized attorney which may be transmitted
physically or by facsimile.
Section 10. List of Shareholders.
At any meeting of shareholders a list of shareholders, alphabetically
arranged, showing the number and classes of shares held by each on the record
date applicable to such meeting, shall be produced upon the request of any
shareholder.
ARTICLE II
Directors
Section 1. General Powers.
The authority of this Corporation shall be exercised by or under the
direction of the Board of Directors, except where the law, the Articles or these
Regulations require action to be authorized or taken by the shareholders.
Section 2. Election, Number and Qualification of Directors.
2.1 Election. The Directors shall be elected at the Annual Meeting
of the shareholders, or if not so elected, at a special meeting of
shareholders. The only candidates who shall be eligible for election at such
meeting shall be those who have been nominated by or at the direction of the
Board of Directors (which nominations shall be either made at such meeting or
disclosed in a proxy statement, or supplement thereto, distributed to
shareholders for such meeting) and those who have been nominated at such
meeting by a shareholder who has complied with the procedures set forth in
this Section 2. A shareholder may make a nomination for the office of
director only if such shareholder has first delivered or sent by certified
mail, return receipt requested, to the Secretary of the
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Corporation notice in writing at least five and no more than thirty days
prior to such meeting of shareholders, which notice shall set forth or be
accompanied by (a) the name and residence of such shareholder; (b) a
representation that such shareholder is a holder of record of voting stock of
the Corporation and intends to appear in person or by proxy at such meeting
to nominate the person or persons specified in the notice; (c) the name and
residence of each such nominee; and (d) the consent of such nominee to serve
as director if so elected. The Chairman of the meeting may, if the facts
warrant, determine and declare to the meeting that a nomination was not made
in accordance with the foregoing procedure, and if he should so determine, he
shall so declare to the meeting and the defective nomination shall be
disregarded.
2.2 Number. The number of Directors, which shall not be less than
the lesser of three or the number of shareholders of record, may be fixed or
changed at a meeting of the shareholders called for the purpose of electing
Directors at which a quorum is present, by the affirmative vote of the holders
of a majority of the shares represented at the meeting and entitled to vote on
such proposal. In addition, the number of Directors may be fixed or changed
by action of the Directors at any meeting of Directors at which a quorum is
present by a majority vote of the Directors present at the meeting. The
Directors then in office may fill any Director's office that is created by an
increase in the number of Directors. The number of Directors elected shall be
deemed to be the number of Directors fixed unless otherwise fixed by
resolution adopted at the meeting at which such Directors are elected.
2.3 Qualifications. Directors need not be shareholders of the
Corporation.
Section 3. Term of Office of Directors.
3.1 Term. Each Director shall hold office until the next Annual
Meeting of the shareholders and until a Director's successor has been elected
or until a Director's earlier resignation, removal from office or death.
Directors shall be subject to removal as provided by statute or by other
lawful procedures and nothing herein shall be construed to prevent the removal
of any or all Directors in accordance therewith.
3.2 Resignation. A resignation from the Board of Directors shall be
deemed to take effect immediately upon its being received by any incumbent
corporate officer other than an officer who is also the resigning Director,
unless some other time is specified therein.
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3.3 Vacancy. In the event of any vacancy in the Board of Directors
for any reason, the remaining Directors, though less than a majority of the
whole Board, may fill any such vacancy for the unexpired term.
Section 4. Meetings of Directors.
4.1 Regular Meetings. A regular meeting of the Board of Directors
shall be held immediately following the adjournment of the meeting of
shareholders at which Directors are elected. The holding of such
shareholders' meeting shall constitute notice of such Directors' meeting and
such meeting shall be held without further notice. Other regular meetings of
the Board of Directors shall be held at such times and places as may be fixed
by the Directors.
4.2 Special Meetings. Special meetings of the Board of Directors may
be held at any time upon call of the Chairman of the Board, the President or
any two Directors.
4.3 Place of Meeting. Any meeting of Directors may be held at such
place within or without the State of Ohio as may be designated in the notice
of said meeting.
4.4 Notice of Meeting and Waiver of Notice. Notice of the time and
place of any regular or special meeting of the Board of Directors shall be
given to each Director by personal delivery, telephone, facsimile transmission
or mail at least forty-eight hours before the meeting, which notice need not
specify the purpose of the meeting.
Section 5. Quorum and Voting.
At any meeting of Directors, not less than one-half of the whole
authorized number of Directors is necessary to constitute a quorum for such
meeting, except that a majority of the remaining Directors in office shall
constitute a quorum for filling a vacancy in the Board. At any meeting at which
a quorum is present, all acts, questions and business which may come before the
meeting shall be determined by a majority of votes cast by the Directors present
at such meeting, unless the vote of a greater number is required by the Articles
or Regulations.
Section 6. Committees.
6.1 Appointment. The Board of Directors may from time to time
appoint certain of its members to act as a committee or committees in the
intervals between meetings of the Board and may delegate to such committee or
committees power to be exercised under the control and direction of the Board.
Each committee shall be composed of at least three directors unless a lesser
number is allowed by law. Each such
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committee and each member thereof shall serve at the pleasure of the Board.
6.2 Executive Committee. In particular, the Board of Directors may
create from its membership and define the powers and duties of an Executive
Committee. During the intervals between meetings of the Board of Directors,
the Executive Committee shall possess and may exercise all of the powers of
the Board of Directors in the management and control and the business of the
Corporation to the extent permitted by law. All action taken by the Executive
Committee shall be reported to the Board of Directors at its first meeting
thereafter.
6.3 Committee Action. Unless otherwise provided by the Board of
Directors, a majority of the members of any committee appointed by the Board
of Directors pursuant to this Section shall constitute a quorum at any meeting
thereof and the act of a majority of the members present at a meeting at which
a quorum is present shall be the act of such committee. Any such committee
shall prescribe its own rules for calling and holding meetings and its method
of procedure, subject to any rules prescribed by the Board of Directors, and
shall keep a written record of all action taken by it.
Section 7. Action of Directors Without a Meeting.
Any action which may be taken at a meeting of Directors or any committee
thereof may be taken without a meeting if authorized by a writing or writings
signed by all the Directors or all of the members of the particular committee,
which writing or writings shall be filed or entered upon the records of the
Corporation.
Section 8. Compensation of Directors.
The Board of Directors may allow compensation to directors for
performance of their duties and for attendance at meetings or for any special
services, may allow compensation to members of any committee, and may reimburse
any Director for the Director's expenses in connection with attending any Board
or committee meeting.
Section 9. Relationship with Corporation.
Directors shall not be barred from providing professional or other
services to the Corporation. No contract, action or transaction shall be void
or voidable with respect to the Corporation for the reason that it is between or
affects the Corporation and one or more of its Directors, or between or affects
the Corporation and any other person in which one or more of its Directors are
directors, trustees or officers or have a
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financial or personal interest, or for the reason that one or more interested
Directors participate in or vote at the meeting of the Directors or committee
thereof that authorizes such contract, action or transaction, if in any such
case any of the following apply:
(i) the material facts as to the Director's relationship or interest
and as to the contract, action or transaction are disclosed or are known to
the Directors or the committee and the Directors or committee, in good faith,
reasonably justified by such facts, authorize the contract, action or
transaction by the affirmative vote of a majority of the disinterested
Directors, even though the disinterested Directors constitute less than a
quorum;
(ii) the material facts as to the Director's relationship or interest
and as to the contract, action or transaction are disclosed or are known to
the shareholders entitled to vote thereon and the contract, action or
transaction is specifically approved at a meeting of the shareholders held for
such purpose by the affirmative vote of the holders of shares entitling them
to exercise a majority of the voting power of the Corporation held by persons
not interested in the contract, action or transaction; or
(iii) the contract, action or transaction is fair as to the
Corporation as of the time it is authorized or approved by the Directors, a
committee thereof or the shareholders.
ARTICLE III
Officers
Section 1. General Provisions.
The Board of Directors shall elect a Chairman of the Board, a President,
a Secretary, a Treasurer, one or more Vice Presidents, and such other officers
and assistant officers as the Board may from time-to-time deem necessary. The
Chairman of the Board, if any, shall be a Director, but none of the other
officers needs to be a Director. Any two or more offices may be held by the
same person, but no officer shall execute, acknowledge or verify any instrument
in more than one capacity if such instrument is required to be executed,
acknowledged or verified by two or more officers.
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Section 2. Powers and Duties.
All officers, as between themselves and the Corporation, shall
respectively have such authority and perform such duties as are customarily
incident to their respective offices, and as may be specified from time to time
by the Board of Directors regardless of whether such authority and duties are
customarily incident to such office. In the absence of any officer of the
Corporation, or for any other reason the Board of Directors may deem sufficient,
any or all of the powers or duties of such officer may be delegated to any other
officer or to any Director. The Board of Directors may from time to time
delegate to any officer authority to appoint and remove subordinate officers and
to prescribe their authority and duties.
Section 3. Term of Office and Removal.
3.1 Term. Each officer of the Corporation shall hold office at the
pleasure of the Board of Directors and, unless sooner removed by the Board of
Directors, until the meeting of the Board of Directors following the date of
election of Directors and until his or her successor is elected and qualified.
3.2 Removal. The Board of Directors may remove any officer at any
time with or without cause by the affirmative vote of a majority of Directors
in office.
Section 4. Compensation of Officers.
The Directors shall establish the compensation of officers and employees
or may, to the extent not prohibited by law, delegate such authority to one or
more officers or Directors as they determine.
ARTICLE IV
Indemnification
Section 1. Right to Indemnification.
Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved (including, without limitation, as a witness)
in any actual or threatened action, suit, or proceeding, whether civil,
criminal, administrative, or investigative (hereinafter a "proceeding"), by
reason of the fact that such person is or was a director or officer of the
Corporation or that, being or having been such a director or officer of the
Corporation, such person is or was serving at the request of an executive
officer of the Corporation as a director, officer, partner, employee, or agent
of another corporation or of a partnership, joint venture, trust, limited
liability company,
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or other enterprise, including service with respect to an employee benefit plan
(hereinafter an "indemnitee"), whether the basis of such proceeding is alleged
action in an official capacity as such a director, officer, partner, employee,
or agent, shall be indemnified and held harmless by the Corporation to the
fullest extent permitted by the General Corporation Law of Ohio, as the same
exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Corporation to provide
broader indemnification rights than permitted prior thereto), or by other
applicable law as then in effect, against all expense, liability, and loss
(including, without limitation, attorneys' fees, costs of investigation,
judgments, fines, excise taxes or penalties arising under the Employee
Retirement Income Security Act of 1974 ("ERISA") or other federal or state
acts) actually incurred or suffered by such indemnitee in connection therewith
and such indemnification shall continue as to an indemnitee who has ceased to
be a director, officer, employee, or agent and shall inure to the benefit of
the indemnitee's heirs, executors, and administrators. Except as provided in
Section 2 with respect to proceedings seeking to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee
only if such proceeding (or part thereof) was authorized or ratified by the
Board of Directors of the Corporation.
The right to indemnification conferred in this Section 1 shall be a
contract right and shall include the right to be paid by the Corporation the
expenses incurred in defending any such proceeding in advance of its final
disposition (hereinafter an "advancement of expenses"). An advancement of
expenses incurred by an indemnitee in such person's capacity as a director,
officer or employee (and not in any other capacity in which service was or is
rendered by such indemnitee including, without limitation, service to an
employee benefit plan) shall be made only upon delivery to the Corporation of an
undertaking, by or on behalf of such indemnitee to repay all amounts so advanced
if it is proved by clear and convincing evidence in a court of competent
jurisdiction that such indemnitee's omission or failure to act involved an act
or omission undertaken with deliberate intent to cause injury to the Corporation
or undertaken with reckless disregard for the best interests of the Corporation.
An advancement of expenses shall not be made if the Corporation's Board of
Directors makes a good faith determination that such payment would violate
applicable law or public policy.
Section 2. Right of Indemnitee to Bring Suit.
If a claim under Section 1 is not paid in full by the Corporation within sixty
days after a written claim has been received by the Corporation, except in the
case of a claim for an advancement of expenses, in which case the applicable
period shall be twenty days, the indemnitee may at any time thereafter
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bring suit against the Corporation to recover the unpaid amount of the claim.
If successful in whole or in part in any such suit, or in a suit brought by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the indemnitee shall also be entitled to be paid the expense of
prosecuting or defending such suit. The indemnitee shall be presumed to be
entitled to indemnification under this Article IV upon submission of a written
claim (and, in an action brought to enforce a claim for an advancement of
expenses, where the required undertaking has been tendered to the Corporation),
and thereafter the Corporation shall have the burden of proof to overcome the
presumption that the indemnitee is not so entitled. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel, or
its shareholders) to have made a determination prior to the commencement of
such suit that indemnification of the indemnitee is proper in the
circumstances, nor an actual determination by the Corporation (including its
Board of Directors, independent legal counsel or its shareholders) that the
indemnitee is not entitled to indemnification shall be a defense to the suit or
create a presumption that the indemnitee is not so entitled.
Section 3. Nonexclusivity and Survival of Rights.
The rights to indemnification and to the advancement of expenses
conferred in this Article IV shall not be exclusive of any other right which any
person may have or hereafter acquire under any statute, provisions of the
Articles of Incorporation, Code of Regulations, agreement, vote of shareholders
or disinterested directors, or otherwise.
Notwithstanding any amendment to or repeal of this Article IV, or of any
of the procedures established by the Board of Directors pursuant to Section 7,
any indemnitee shall be entitled to indemnification in accordance with the
provisions hereof and thereof with respect to any acts or omissions of such
indemnitee occurring prior to such amendment or repeal.
Without limiting the generality of the foregoing paragraph, the rights
to indemnification and to the advancement of expenses conferred in this Article
IV shall, notwithstanding any amendment to or repeal of this Article IV, inure
to the benefit of any person who otherwise may be entitled to be indemnified
pursuant to this Article IV (or the estate or personal representative of such
person) for a period of six years after the date such person's service to or in
behalf of the Corporation shall have terminated or for such longer period as may
be required in the event of a lengthening in the applicable statute of
limitations.
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Section 4. Insurance, Contracts, and Funding.
The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee, or agent of the Corporation or
another corporation, partnership, joint venture, trust, or other enterprise
against any expense, liability, or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability, or loss
under the General Corporation Law of Ohio. The Corporation may enter into
contracts with any indemnitee in furtherance of the provisions of this Article
IV and may create a trust fund, grant a security interest, or use other means
(including, without limitation, a letter of credit) to ensure the payment of
such amounts as may be necessary to effect indemnification as provided in this
Article IV.
Section 5. Persons Serving Other Entities.
Any person who is or was a director, officer, or employee of the
Corporation who is or was serving (i) as a director or officer of another
corporation of which a majority of the shares entitled to vote in the election
of its directors is held by the Corporation or a wholly-owned subsidiary of the
Corporation, or (ii) in an executive or management capacity in a partnership
joint venture, trust, limited liability company or other enterprise of which the
Corporation or a wholly-owned subsidiary of the Corporation is a general partner
or member or has a majority ownership shall be deemed to be so serving at the
request of an executive officer of the Corporation and entitled to
indemnification and advancement of expenses under Section 1.
Section 6. Indemnification of Employees and Agents of the Corporation.
The Corporation may, by action of its Board of Directors, authorize one
or more executive officers to grant rights to advancement of expenses to
employees or agents of the Corporation on such terms and conditions no less
stringent than provided in Section 1 hereof as such officer or officers deem
appropriate under the circumstances. The Corporation may, by action of its
Board of Directors, grant rights to indemnification and advancement of expenses
to employees or agents or groups of employees or agents of the Corporation with
the same scope and effect as the provisions of this Article IV with respect to
the indemnification and advancement of expenses of directors and officers of the
Corporation; provided, however, that an undertaking shall be made by an employee
or agent only if required by the Board of Directors.
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Section 7. Procedures for the Submission of Claims.
The Board of Directors may establish reasonable procedures for the
submission of claims for indemnification pursuant to this Article IV,
determination of the entitlement of any person thereto, and review of any such
determination. Such procedure, shall be set forth in an appendix to these Code
of Regulations and shall be deemed for all purposes to be a part hereof.
ARTICLE V
Amendments
This Code of Regulations may be amended by the affirmative vote or the
written consent of the shareholders entitled to exercise a majority of the
voting power on such proposal. If an amendment is adopted by written consent
the Secretary shall mail a copy of such amendment to each shareholder who would
be entitled to vote thereon and did not participate in the adoption thereof.
This Code of Regulations may also be amended by the affirmative vote of a
majority of the Directors to the extent permitted by Ohio law at the time of
such amendment.
- 12 -
<PAGE> 1
Exhibit 10.20
SECOND AMENDMENT TO INVESTMENT AGREEMENT
This SECOND AMENDMENT TO INVESTMENT AGREEMENT (the "Second Amendment")
is made between CIAO LIMITED, INC., an Ohio corporation (the "Company"), and
BLUE CHIP CAPITAL FUND LIMITED PARTNERSHIP, a Delaware limited partnership
("Blue Chip") effective as of November 15, 1996.
RECITALS:
WHEREAS, the parties entered into an Investment Agreement dated as of
August 1, 1996 (the "Agreement"), as amended effective September 15, 1996 (the
"First Amendment") on the terms contained therein;
WHEREAS, the parties desire to amend the Agreement and the First
Amendment on the terms contained herein;
NOW, THEREFORE, the parties agree as follows:
1. Paragraph 1 of the First Amendment is hereby deleted and the
following new Paragraph 1 is substituted in lieu thereof:
"1. The Company hereby confirms that Blue Chip shall be
entitled to sell up to 75,000 shares in the over- allotment
option of the initial public offering (as referenced in the
Agreement)."
2. Except as amended hereby, the Agreement shall remain in full
force and effect.
BLUE CHIP CAPITAL FUND LIMITED
PARTNERSHIP
By: Blue Chip Venture Company, its
General Partner
By: /s/ John H. Wyant
---------------------------
Name: John H. Wyant
Title: President
CIAO LIMITED, INC.
By: /s/ Carl A. Bruggemeier
---------------------------
Carl A. Bruggemeier
President
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Joseph Decosimo and Company, PLL
--------------------------------------
Joseph Decosimo and Company, PLL
Cincinnati, Ohio
November 18, 1996
