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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 29, 1996
or
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission file number: 000-21745
CIAO CUCINA CORPORATION
<TABLE>
<S> <C>
OHIO 31-1357862
(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
</TABLE>
700 WALNUT STREET, SUITE 300, CINCINNATI, OH 45202
(Address of principal executive offices)
(513) 241-9161
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, no
par value.
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during preceding 12 months
(or for shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
-------- ------------
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10- KSB or any
amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $ 7,787,631
The aggregate market value of the Common Stock of the registrant held by
non-affiliates of the registrant was approximately $6,638,724 as of March 1,
1997.
The issuer had 3,120,386 shares of Common Stock outstanding as of March 1, 1997.
Documents Incorporated by Reference: None
Transitional Small Business Disclosure Format(check one): Yes No X
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CIAO CUCINA CORPORATION
INDEX
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<S> <C> <C>
PART I
Item 1 Description of Business 3
Item 2 Description of Property 11
Item 3 Legal Proceedings 12
Item 4 Submission of Matters to a Vote of Security Holders 12
PART II
Item 5 Market for the Registrant's's Common Equity and
Related Stockholder Matters 12
Item 6 Management's Discussion and Analysis or
Plan of Operation 12
Item 7 Financial Statements 20
Item 8 Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure 20
PART III
Item 9 Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act 20
Item 10 Executive Compensation 23
Item 11 Security Ownership of Certain Beneficial Owners
And Management 25
Item 12 Certain Relationships and Related Transactions 26
Item 13 Exhibits and Reports on Form 8-K 28
</TABLE>
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CIAO CUCINA CORPORATION
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
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 $7.8 million in 1996.
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. 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.
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, DC.................... 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>
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HISTORY
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, opened in 1991. This
restaurant 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
$1,092,960 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 note holders and were agreed to by the Company and all but two note
holders (the note issued to one such note holder is still outstanding). All
outstanding shares of Preferred Stock converted automatically to shares of
Common Stock at the closing of the Company's initial public 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. 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 initial public offering and received warrants to purchase 249,990 shares of
Common Stock at a price of $7.00 per share (the "Bridge Financing Warrants").
The Company completed the initial public offering (the "Offering") of
1,000,000 shares of its Common Stock, at a price of $7.00 per share, on November
27, 1996. All bridge financing provided by Blue Chip LP and other investors and
all indebtedness of the Company to its bank were repaid from the net proceeds of
the Offering. The balance of the net proceeds of the Offering was retained for
the development and opening of new restaurants and for working capital.
As noted above, all outstanding shares of Preferred Stock were converted to
shares of Common Stock upon closing of the Offering. In addition, one of the two
notes not previously converted to Preferred Stock was converted voluntarily by
its holder to shares of Common Stock during the first quarter of 1997.
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.
CURRENT YEAR'S DEVELOPMENTS
Two of the Company's five restaurants opened during the first quarter of 1996.
These two restaurants are located in Memphis, Tennessee and Cincinnati, Ohio.
The Memphis, Tennessee restaurant is located in downtown Memphis in the newly
constructed Peabody Place on Main Street in close proximity to the Orpheum
Theater and Beale Street. The Cincinnati, Ohio restaurant is located in downtown
Cincinnati across the street from the city's Aronoff Center for the Arts.
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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 Festival Marketplace Center, in close proximity to the Broward County
Convention Center and the Port Everglades Cruise Port.
Since mid-1996, the Company has been 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 will
be 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 and 1996,
Cleveland Playhouse Square attracted approximately 1 million patrons each year
to its four theaters. A fifth theater is scheduled to open in late 1997. In
December 1996, the Company funded Ciao Playhouse with $400,000 from the net
proceeds of the Offering, in anticipation of the completion of arrangements for
the Playhouse Square restaurant and banquet facility.
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 are anticipated to provide a readily accessible customer base.
Examples to date are the location of the Memphis, Tennessee restaurant near the
Orpheum Theater and Beale Street, the downtown Cincinnati site across the street
from the Aronoff Center for the Arts, 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. The Company
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.
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<TABLE>
<CAPTION>
COST PER RESTAURANT(1)
--------------------------------------
COMPANY DEVELOPER
CONTRIBUTION CONTRIBUTION
------------ ------------
<S> <C> <C>
EXISTING RESTAURANTS:
Cincinnati, Ohio $ 528,000 $ 84,600
(Harper's Point)
Washington, D.C. $ 646,500 (2)
Hackensack, New Jersey $ 597,000 $ 1,138,000
Memphis, Tennessee $ 785,000 $ 705,000
Cincinnati, Ohio $ 1,240,000(3) $ 550,000
(downtown)
PROPOSED RESTAURANTS:
Cleveland, Ohio (4) $ 400,000 $ 2,800,000
Ft. Lauderdale, (4) $ 539,500(5) $ 675,500
Florida
<FN>
- ----------
(1) Consists of leasehold improvements, restaurant equipment, computer equipment
and furniture, fixtures, china, flatware and glassware and pre-opening expenses.
See Notes 1 and 3 to Financial Statements.
(2) 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.
(3) Includes $150,000 of developer-provided financing.
(4) 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.
(5) Includes $169,000 of developer-provided financing.
</TABLE>
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
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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
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 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 chefs at work. The 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 oils form centerpieces for the tables and a variety of freshly baked
breads is furnished shortly after a customer is seated.
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.
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 also offers an
extensive array of premium alcoholic and non-alcoholic beverages.
CONTROLS
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, preventive 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 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.
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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 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 on a regular basis to develop new menu items.
The Company devotes considerable attention to controlling cash receipts and
costs 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 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, costs of sales and
labor on a daily basis, which facilitates 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.
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
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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.
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 restaurant typically hosts a charity event prior
to or shortly after opening to build community relationships and to attract
customers. 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" (which enable frequent customers
to make priority reservations), 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 inserts, mini menus
and comment cards.
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 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 substantially 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.
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.
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 licenses or approvals could delay or prevent the
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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 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 also are subject to federal and state
minimum wage laws governing such matters as minimum wage to be paid per hour,
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 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.
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.
The Company has been contacted by Hampden, Inc., asking the Company to
discontinue using the "Ciao Baby" name. The Company is contemplating changing
the name of its restaurants to "Ciao Cucina" and has applied for a federal
registration of this service mark. The Company believes the "Ciao Cucina" name
to be as beneficial to the Company as "Ciao Baby" in its efforts to create
demand for and awareness of its restaurants. If the Company were prevented from
using the "CIAO BABY" mark, the Company believes it is not likely to have a
material adverse effect.
EMPLOYEES
At February 23, 1997, the Company employed 220 persons, 153 of whom were
employed on a
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full-time basis (30 hours per week or more), including 25 management personnel.
None of the Company's employees is covered by a collective bargaining agreement.
ITEM 2. DESCRIPTION OF PROPERTY
On 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 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.
Currently, 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 a lease in Cleveland, Ohio. All of the Company's restaurant
facilities are well maintained and suitable for their current and reasonably
foreseeable uses. In January 1997, the Company completed renovation of its
original Cincinnati (Harper's Point) restaurant to update its decor in line with
that of the Company's two newest restaurants.
<TABLE>
<CAPTION>
SQUARE
LOCATION LEASE EXPIRATION FEET ANNUAL BASE RENT PERCENTAGE RENT
- -------- ---------------- ---- ---------------- ---------------
<S> <C> <C> <C> <C>
Cincinnati, Ohio February 2001 3,869 $69,642 6% of gross sales
(Harper's Point) (no renewal option) over specified
breakpoint
Washington, D.C. March 2004 7,147 $261,104 increasing 6% of gross sales
(No renewal option) to $299,784 over increasing
breakpoints
Hackensack, October 2004 8,074 $201,850 6% of gross sales
New Jersey (5-year renewal option) over specified
breakpoint
Memphis, February 2012 6,448 $128,960 increasing 4.99% of gross sales
Tennessee (no renewal option) to $199,888 over increasing
breakpoints
Cincinnati, Ohio January 2011 7,925 $149,000 (subject to 6% of gross sales
(downtown) (5-year renewal option) annual CPI increase) over increasing
plus 20% of operating breakpoints
income (after deducting
5% of gross sales) up to a
maximum of $600,000 over
the lease term.
Ft. Lauderdale, 10 year-term 6,755 $202,650 (subject to 7% of gross sales
Florida commencing 120 days annual CPI increase) over specified
after certificate of occupancy plus repayment of a breakpoint; 8% of
obtained (two 5-year renewal $169,000 loan over gross sales over
options) the lease term with specified breakpoint
interest at 10%.
</TABLE>
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ITEM 3. 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
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. During the fourth quarter, the
Company settled the litigation for $20,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
As of November 27, 1996, the Company's Common Stock trades on The Nasdaq
SmallCap Market under the symbol "CIAO." The high and low sale prices as
reported by Nasdaq for the fourth quarter of 1996 were as follows:
High 7 3/4 Low 5 1/4
As of December 29, 1996, the Company had 61 shareholders of record. The
Company has not paid cash dividends on its Common Stock since its inception and
does not intend to pay cash dividends in the foreseeable future.
All information required by Item 701 of Regulation S-B (Recent Sales of
Unregistered Securities) for fiscal year 1996 prior to completion of the
Company's initial public offering on November 27, 1996 was provided in Item 26
of Part II of the Company's Registration Statement on Form SB-2, No. 333-5674.
There were no such sales in 1996 subsequent to the initial public offering.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
OVERVIEW
The Company has a limited operating history and the results achieved to date
by the Company's restaurants may not be indicative of future results.
The Company uses a 52/53 week year which is generally comprised of 13
four-week periods. The Company's 1995 and 1996 fiscal years ended on December
31, 1995 and December 29, 1996, respectively.
12
<PAGE> 13
The selected historical financial data presented below as of December 25,
1994, December 31, 1995 and December 29, 1996 and for the fiscal years 1994,
1995 and 1996 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 and December 26, 1993 and for fiscal years 1992 and 1993, are derived from
the Company's unaudited financial statements. In the opinion of management, the
financial data reflect all adjustments, consisting of normal recurring
adjustments, necessary for a fair statement of such data. The selected financial
data should be read in conjunction with the Financial Statements and Notes
thereto set forth elsewhere in this Form 10-KSB.
<TABLE>
<CAPTION>
FISCAL YEAR
STATEMENT OF OPERATIONS DATA: 1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(dollars and shares in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Restaurant revenues $ 1,080 $ 1,870 $ 3,273 $ 4,779 $ 7,787
Restaurant costs and expenses (935) (1,737) (3,008) (4,548) (7,154)
Depreciation and amortization (86) (90) (259) (460) (782)
RESTAURANT OPERATIONS 59 43 6 (229) (149)
Interest expense (54) (102) (259) (72) (469)
Other income (expense) (23) 0 (52) 3 28
General and administrative (91) (377) (365) (604) (985)
Restructuring costs 0 0 0 0 (517)
Loss on disposal of assets 0 0 0 0 (47)
Net loss (109) (436) (670) (902) (2,139)
Net loss per common and
equivalent share (0.14) (0.55) (1.16) (1.94) (2.96)
Weighted average number of common
and equivalent shares outstanding 794 794 576 570 806
OPERATING DATA:
Number of restaurants open at period
end 1 2 3 3 5
Number of mature restaurants (1) 1 1 1 2 3
Average revenue per mature restaurant (2) $ 1,080 $ 1,071 $ 1,139 $ 1,462 $ 1,345
<FN>
(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.
</TABLE>
<TABLE>
<CAPTION>
AS OF FISCAL YEAR END
-- -- ------ ---- ---
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
BALANCE SHEET DATA: (in thousands)
<S> <C> <C> <C> <C> <C>
Working capital $(165) $ (406) $(2,387) $ (850) $2,002
Total assets 594 1,728 2,818 3,886 8,303
Long-term obligations, including
current portion 457 1,985 2,131 3,368 109
Shareholders' equity (deficit) (116) (832) (1,508) (2,616) 4,429
</TABLE>
13
<PAGE> 14
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal years ended December 31, 1995
and December 29, 1996, certain items from the Company's consolidated Statement
of Operations expressed as a percentage of net revenues.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR ENDED
STATEMENT OF OPERATIONS DATA: DECEMBER 31, 1995 DECEMBER 29, 1996
-------- --- ---- -------- --- ----
<S> <C> <C>
RESTAURANT REVENUES (1) 100.0% 100.0%
OPERATING EXPENSES
Food and Beverage Costs 29.5 30.6
Restaurant Labor Costs (2) 32.4 33.6
Occupancy and Other Restaurant Expenses (3) 33.3 27.7
Depreciation and Amortization 9.6 10.0
--- ----
Total Operating Expenses 104.8 101.9
RESTAURANT OPERATIONS (4.8) (1.9)
Interest Expense, net and other (1.4) (5.6)
General and Administrative Expenses (4) (12.6) (12.7)
Restructuring Costs - (6.6)
Loss on Disposal of Assets - (0.6)
NET LOSS (18.8)% (27.4)%
<FN>
(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, repairs and maintenance and operating supplies.
(4) General and administrative expenses include corporate salaries, benefits and
taxes, rent, insurance, professional services, travel and other expenses.
</TABLE>
RESTAURANT REVENUES
Restaurant revenues for fiscal year 1996 exceeded restaurant revenues for
fiscal year 1995 by $3,008,889, an increase of 63.0%. The increase was due to
the opening of two additional restaurants in the first quarter of 1996. Total
restaurant seats for the Company increased 83.4% with the opening of the two
newest restaurant units in Memphis, Tennessee and Cincinnati, Ohio. The
Company's newest restaurants represent the prototypical restaurant units
developed by the Company and planned to be used by the Company in its expansion;
these units incorporate store-front style gourmet coffee shops and bakeries
adding an additional source of revenues to those units.
When a restaurant first opens, its novelty and freshness often lead to a
period of high revenues. Generally this occurs during the first six months of a
restaurant's initial operations. In the industry, this is referred to as a
"honeymoon period." Following the "honeymoon period," restaurant revenues
typically decline to a more realistic level reflecting continued business and
mature operations. Thereafter, revenues are influenced by a number of factors,
including
14
<PAGE> 15
competition by nearby restaurants, changes in marketing expenditures (and
related changes in traffic counts) by malls in which a restaurant is located,
scheduling of nearby special events, performance schedules of nearby theaters
and renovation or construction activities in proximity to a restaurant.
Same store sales for mature restaurants decreased $178,743 or 6.1% for fiscal
year 1996. Fiscal year 1996 was one week shorter than fiscal year 1995 due to
the Company's use of a 52/53 week year; the 53rd week occurred in 1995.
Two of the Company's mature restaurants which are not prototypical units
(only one of which was mature for the entire fiscal year 1996) experienced a
decline in same store sales, as compared to 1995, for the following reasons: One
restaurant has experienced a rapid growth in competition in its market area.
Thirteen new restaurants opened within a 1.5 mile radius of the location in 1993
and eleven additional restaurants were opened in the area in 1996. In addition,
certain special events which are high traffic generators were held in the
general vicinity of the restaurant in 1995, contributing to an increase in
sales. In 1996, these events did not take place in the immediate area. The
second restaurant has experienced a decrease in traffic count. A $25 million
renovation of the mall, where the restaurant is located, was completed in 1995
accompanied by heavy marketing by mall ownership which increased traffic counts
at that location. In 1996, the mall ownership reduced its marketing budget and
mall traffic counts have been down. In addition, the two level, 30,000 square
foot anchor store directly adjacent to the restaurant was unoccupied through the
third quarter of 1996. The Company's third mature restaurant, which was mature
for the entire fiscal year, experienced an increase in same store sales for
fiscal year 1996 as compared to fiscal year 1995.
FOOD AND BEVERAGE COSTS
Food and beverage costs for fiscal year 1996 exceeded food and beverage costs
for fiscal year 1995 by $972,935 or 69.0%. The 1996 increase in food and
beverage costs was attributable to the opening of two additional restaurants in
the first quarter of the year. As a percentage of sales, food and beverage costs
increased from 29.5% to 30.6%. The percentage increase in costs was attributable
to inefficiencies occurring during the first months of operation of the new
restaurants, caused by newly hired personnel needing the training necessary to
achieve the corporate goals and standards for food and beverage costs. As the
Company continues to open new restaurants, this pattern is expected to continue.
RESTAURANT LABOR
Restaurant labor for fiscal year 1996 exceeded restaurant labor costs for
fiscal year 1995 by $1,067,484 or 68.9%. The increase, for fiscal year 1996, was
attributable to the opening of two additional restaurants in the first quarter
of the year. As a percentage of revenues, restaurant labor costs for fiscal year
1996 versus 1995 increased from 32.4% to 33.6%, an increase of 1.2%. The
increase in labor cost percentage for the year was caused by inefficiencies of
labor due to training and the need for more personnel during the first months of
operation of new restaurants than is normally necessary with a trained staff.
This pattern is expected to continue as new restaurants are opened.
15
<PAGE> 16
OCCUPANCY AND OTHER RESTAURANT EXPENSES
Occupancy and other restaurant expenses for fiscal year 1996 exceeded
occupancy and other restaurant expenses for fiscal year 1995 by $565,778 or
35.6%. As a percentage of sales, occupancy and other restaurant expenses
decreased from 33.3% for fiscal year 1995 to 27.7% for fiscal year 1996 or a
decrease of 5.6%. This decrease is primarily due to higher sales volumes of the
two restaurants opened in 1996 as compared to their fixed occupancy costs during
the first 180 days of operation and efficiencies achieved in other restaurant
expenses.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $322,194 for fiscal year 1996 over
fiscal year 1995 or 70.1%. This increase was due to additional depreciation of
assets acquired for the two new restaurants opened in 1996 and the amortization
of pre-opening costs for these two units. Pre-opening costs are amortized over
the first twelve months following the opening of a restaurant unit.
As a percentage of sales, depreciation and amortization increased for fiscal
year 1996 to 10.0% from 9.6% for fiscal year 1995. Depreciation and amortization
from year to year remained relatively constant in spite of the increased
amortization of pre-opening costs for the two new units because pre-opening
amortization for the New Jersey restaurant was completed by the end of 1995 and
amortization for the two new units did not commence until March 1996.
RESTAURANT OPERATIONS
The loss from restaurant operations decreased from $228,740 in 1995 to
$148,242 in 1996 or a decrease of $80,498. As a percentage of sales, the loss
from restaurant operations decreased from 4.8% in 1995 to 1.9% in 1996.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses for fiscal year 1996 increased over
fiscal year 1995 by $380,827 or an increase of 63.0%. As a percentage of
revenues general and administrative expenses for fiscal year 1996 remained
relatively constant increasing from 12.6% to 12.7%.
The increases in general and administrative expenses for the year are
attributable to the growth in corporate management, including increased
compensation costs, and systems needed to manage increased numbers of restaurant
units.
RESTRUCTURING COSTS
The Company incurred certain restructuring costs associated with the Series A
and Series B Preferred Stock and the bridge financing necessary to complete the
construction of the Company's two newest restaurants and provide working capital
prior to the Company's initial public offering. These costs, totaling $517,464,
were expensed in the fourth quarter.
16
<PAGE> 17
INTEREST EXPENSE
Interest expense net of interest income increased $396,799 for fiscal year
1996, compared to 1995, or an increase of 547.2%. This increase for the year was
mainly due to the bridge note financing in the amount of $2,300,000 acquired in
the first two quarters of 1996 (see "Liquidity and Capital Resources").
NET LOSS
The net loss, for fiscal year 1996, increased by $1,236,436 or 137.0%. The
increase was due primarily to the restructuring costs of $517,464, an increase
in depreciation and amortization and an increase in interest expense due to the
bridge financing. As a percentage of sales, the net loss increased from 18.8% in
1995 to 27.4% in 1996.
Eliminating the non-recurring items (the restructuring costs, the loss on
disposal of assets and the increased interest expense from the bridge financing)
the net loss as a percentage of sales would have decreased 3.7% to 15.1% for
fiscal year 1996 versus 18.8% in 1995. This decrease was due to increased total
revenues and operating efficiencies achieved in occupancy and other restaurant
expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are for capital expenditures and
operating expenses. Historically, the Company's primary sources of cash have
been from operations, bank borrowing, and the issuance of subordinated
debentures and preferred stock. The Company's cash flow increased from $103,796
in 1995 to $2,591,667 for fiscal year 1996. In 1996, the Company acquired
$2,300,000 in bridge financing (net of financing costs) in anticipation of its
initial public offering, to provide the Company with the funds necessary to
complete its two newest restaurant units and to provide working capital. Prior
to the Offering, the Company's financing arrangements did not provide sufficient
cash flow for continuing operating losses and the development and opening of the
restaurant in Ft. Lauderdale, Florida, for which the Company has executed a
lease agreement, and for other expansion plans.
In late November 1996, the Company completed the sale of 1,000,000 shares of
its common stock at an initial public offering price of $7.00 per share. Net
proceeds of the Offering were approximately $6.1 million. Of this, approximately
$2,900,000 was used to repay certain indebtedness. The balance of the net
proceeds will be used for the development and opening of new restaurants and
working capital. For further information concerning uses of funds, see
"Outlook."
In conjunction with the Offering, all outstanding shares of the Company's
Series A and Series B Preferred Stock and an outstanding note in the principal
amount of $150,000 were converted to Common Stock. In addition, in February
1997, a subordinated convertible debenture in the amount of $50,000 was
converted to shares of the Company's Common Stock at the initial public offering
price of $7.00 per share. The Company historically has had working capital
deficiencies, which it believes are typical in the restaurant industry. As of
December 29, 1996, subsequent to the Company's initial public offering, the
Company's current assets of $3,247,181 exceeded its current liabilities of
$1,245,623 resulting in positive working capital of $2,001,558. The positive
working capital is due to the cash balance of $2.7 million. The prior
deficiencies in working
17
<PAGE> 18
capital were due primarily to the current portion of certain indebtedness (which
was repaid from the proceeds of the Offering), the Company's ability to acquire
favorable terms with its vendors and its aggressive growth strategy.
Net cash used by operating activities increased $161,905 for fiscal year 1996
as compared to fiscal year 1995. This increase was due primarily to
restructuring costs of $517,464, pre-opening costs expensed of $257,718 and the
write-off of deferred financing costs of $219,319. Cash flow provided from
restaurant operations before depreciation, amortization, restructuring, general
and administrative expenses and interest expense was $633,501 for fiscal year
1996 compared to the cash flow from restaurant operations, before depreciation,
amortization, general and administrative expenses and interest expense, for 1995
of $230,809. The Company opened two new restaurants in 1996 and, as discussed
above, the favorable terms acquired from the Company's vendors had a favorable
impact on cash used by operating activities.
Cash used in investing activities increased from $394,627 for fiscal year
1995 to $2,221,445 for fiscal year 1996 or an increase of $1,826,818. This
increase is mainly attributable to the expenditures for equipment and
improvements for the two new restaurants opened in 1996 and the investment in
Ciao Playhouse Inc.
Cash flows from financing activities increased for fiscal year 1996 to
$5,492,790 as compared to $1,016,196 for fiscal year 1995, or an increase of
$4,476,594. This increase in cash flow provided by financing activities was
attributable to the Offering.
OUTLOOK
THE STATEMENTS CONTAINED IN THIS OUTLOOK ARE BASED ON CURRENT EXPECTATIONS.
THESE STATEMENTS ARE FORWARD LOOKING AND ACTUAL RESULTS MAY DIFFER MATERIALLY
DUE TO VARIOUS FACTORS AND UNCERTAINTIES INCLUDING, BUT NOT LIMITED TO, THE
EFFECT OF UNANTICIPATED COSTS OF EXPANSION, ADVERSE EFFECTS IF GROWTH IS NOT
MANAGED PROPERLY, EXPOSURE TO COST FLUCTUATIONS, AVAILABILITY OF LABOR,
COMPETITION FROM OTHER RESTAURANTS, CHANGING TRENDS, GOVERNMENT REGULATION,
AVAILABILITY OF LOCATIONS WITH FAVORABLE LANDLORD INCENTIVES AND ABILITY TO
SECURE REQUIRED PERMITS AND LICENSING.
The Company expects to open its Ft. Lauderdale restaurant on July 1, 1997. It
is anticipated that the investment by the Company to build the Ft. Lauderdale
restaurant will be approximately $539,500. The Company is negotiating a lease
for a Cleveland, Ohio restaurant expected to open on September 1, 1997. The
Company's contribution to the development of the Cleveland location is estimated
at $400,000. The Company expects to open three other locations in 1997. These
sites have not been firmly identified. The Company is evaluating developer
proposals for 1997 projects in the following locations: Pointe Orlando, Orlando,
Florida; and Merrick Place, Coral Gables, Florida, developed by the City of
Coral Gables. The Company is also considering, for 1997 sites, a second location
in Cleveland, Ohio, and locations in Columbus, Ohio and the Ft. Myers/Naples
area on the west coast of Florida.
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.
The Company renovated its oldest restaurant located in Harper's Point, Ohio,
during the first two weeks of January 1997. This restaurant, after its
renovation, more closely resembles in decor the Company's prototype restaurants
in Memphis, Tennessee and downtown Cincinnati,
18
<PAGE> 19
Ohio. The restaurant's square footage remains the same. The Company believes
this renovation will create new customer interest at that location.
The Company also plans to remodel its New Jersey restaurant in the first
quarter of 1997 and to adjust the restaurant concept to better serve the New
Jersey customer base and market.
As noted above, the Company expects to open five restaurants during 1997 and
estimates that approximately $2.6 million will be needed for the opening of
these restaurants. The Company also expects that during 1997 it will spend
approximately $275,000 for the capital improvements to its existing restaurants
discussed above. The Company believes the remaining net proceeds from its
initial public offering, along with cash provided by operating activities and
developer leasehold incentives, will be sufficient both to meet operating
expenses and capital expenditures for 1997 and to fund the costs associated with
the opening of these five restaurants.
For the longer term, the Company's goal is to expand to thirty restaurants by
year-end 2000. The Company anticipates that additional bank and other financing
will be needed to fund costs associated with the opening of these restaurants.
If such financing is not available, or if the Company's assumptions regarding
cash flow or landlord leasehold incentives prove incorrect, the Company would be
required to curtail its expansion plans.
The Company expects growth to continue in the restaurant industry as more
people consume their meals away from home or take prepared meals to the home.
The Company's strategy is to provide high quality food and personal service at a
reasonable price.
The Company continues to search for additional locations in its target market
for continued growth of the Company. The Company has received developer
proposals projects in Auburn Hills, Michigan, at Great Lakes Crossing, developed
by the Taubman Company; Arlington, Virginia, a project developed by Forest City
Development Company; Hilton Head, South Carolina area; and a second location in
Orlando, Florida, at The Marketplace at Oviedo Crossing, developed by The Rouse
Company. The Company was considering a proposal for a restaurant in Baton Rouge,
Louisiana, but during the fourth quarter, had decided not to proceed with this
proposal.
The restaurant business is seasonal by nature and the Company's strategy of
locating its restaurants near high traffic generators is intended to attract
customers who are already in the area for purposes other than a meal. Any
seasonality associated with these high traffic generators could affect the level
of sales for a particular unit.
19
<PAGE> 20
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements are included in this report on Form 10-KSB:
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Accountants F-1
Consolidated Balance Sheets as of December 29, 1996 and December 31, 1995 F-2
Consolidated Statements of Operations for the Years Ended December 29, 1996,
December 31, 1995 and December 25, 1994 F-3
Consolidated Statement of Redeemable Equity and Shareholders' Equity (Deficit)
for the Years Ended December 29, 1996, December 31, 1995 and December 25, 1994 F-4
Consolidated Statements of Cash Flows for the Years Ended December 29, 1996,
December 31, 1995 and December 25, 1994 F-5
Notes to Consolidated Financial Statements F-7
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Pursuant to the Ohio General Corporation Law, as implemented by the Company's
Certificate of Incorporation and By-Laws, all corporate powers are exercised,
and the Company's business, property and affairs are managed by or under the
direction of the Board of Directors. Directors of the Company are elected at the
Annual Meeting of Shareholders. Currently there are six directors. Set forth
below is certain information with respect to each director.
CARL A. BRUGGEMEIER Mr. Bruggemeier, is a founder of the Company and is
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, Inc. from
1990 until 1993. Mr. Bruggemeier has over twenty-five years of hospitality
industry experience in 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 corporation 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
20
<PAGE> 21
Star Line Cruise Corporation headquartered in Chicago, Illinois. He has been a
director of the Company since 1990. Age 47.
CATHERINE C. JETTER Ms. Jetter has served as the Company's Executive Vice
President/Chief Financial Officer, Treasurer and Assistant Secretary since 1996;
she was Vice President-Finance and Secretary of the Company from 1993 until
1996. She was also 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 business, 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 Assistant Treasurer of a
publicly traded real estate investment trust. She has over twenty-five years
experience in both public accounting and private industry, is a Certified Public
Accountant, and holds a Bachelor of Science in Accounting from Florida Institute
of Technology. She has been a director of the Company since 1996. Age 49.
ROGER LIPTON Since February 1995, Mr. Lipton 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 1995, he was a Managing Director of the Lipton
Financial Services Division of Ladenburg, Thalmann & Co., Inc., an investment
banking firm. Mr. Lipton has been a director of Boston Restaurant Associates,
Inc. since December 1996. Mr. Lipton earned a Bachelor's Degree in Mechanical
Engineering from Rensselaer Polytechnic Institute (1962) and 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 has
been a director of the Company since 1992. Age 56.
MARVIN ROSENBERG 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. Rosenberg has been a director of the Company since 1996. Age 63.
RUSSELL C. WILES 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. Wiles has been a director of the Company since 1996. Age 58.
JOHN H. WYANT 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
21
<PAGE> 22
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. Age 50.
EXECUTIVE OFFICERS
The current executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Title
- ---- --- -----
<S> <C> <C>
Carl A. Bruggemeier 47 Chairman of the Board, President
and Chief Executive Officer
Catherine C. Jetter 49 Executive Vice President, Chief
Financial Officer, Treasurer, Assistant
Secretary and Director
Roger D. Taylor 45 Executive Vice President, Chief
Operating Officer
</TABLE>
Information about Mr. Bruggemeier and Ms. Jetter is given above.
ROGER D. TAYLOR Mr. Taylor has been Executive Vice President and Chief
Operating Officer of the Company since January 1997. From January 1989 to
October 1991 and again from February 1993 to January 1997, Mr. Taylor was the
Corporate Director of Food and Beverage for Columbia Sussex Corporation, a
privately-held hotel operating company. From 1991 to 1993, Mr. Taylor was the
Vice President of Operations for Willies Sports Cafes. From 1982 to 1988 Mr.
Taylor was Vice President of Food and Beverage for Windegardner & Hammons Inc.,
a Cincinnati-based hotel management company. Mr. Taylor holds a Bachelor's
Degree in Business from Sydney University in Australia.
Officers of the Company are elected by, and serve at the discretion of, the
Board of Directors.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who beneficially own more than ten percent
of the Company's equity securities, to file reports of security ownership and
changes in such ownership with the Securities and Exchange Commission (the
"SEC"). Officers, directors and greater than ten-percent beneficial owners also
are required by SEC regulations to furnish the Company with copies of all
Section 16(a) forms they file. Based upon a review of copies of such forms and
written representations from its officers and directors, the Company believes
that all Section 16(a) filing requirements were complied with on a timely basis
during and for 1996, except that a Form 3 was filed 2 days after its due date
for the Company's Controller, Gary Salazar.
22
<PAGE> 23
ITEM 10. EXECUTIVE COMPENSATION
- ---- --- --------- ------------
SUMMARY INFORMATION. The following table sets forth, for the fiscal years
indicated, amounts of cash and certain compensation paid by the Company to Mr.
Carl A Bruggemeier. No other executive officer earned salary and bonus in excess
of $100,000 for 1996.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------ ------------ ------------
Securities All Other
Name and Principal Fiscal Other Annual Underlying Compensation
Position Year Salary ($) Bonus($) Compensation ($)(1) Options (#) ($)
-------- ---- ------ --- -------- ------------ ------ ------- --- ---
<S> <C> <C> <C> <C> <C>
Carl A. Bruggemeier 1996 $139,732 $100,000 - 14,250
President and Chief 1995 $116,154 - - (2)
Executive Officer
<FN>
(1) None, other than prerequisites 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 $1.45 per share. This Employment
Agreement, including the options provided for (none of which was exercised), was
canceled at the time of the Offering.
</TABLE>
STOCK OPTIONS. The following tables set forth information regarding options
granted during the year ended December 29, 1996, to Mr. Bruggemeier and held by
him at fiscal year end. The Company has no outstanding stock appreciation rights
(SARs).
<TABLE>
<CAPTION>
OPTIONS GRANTS IN LAST FISCAL YEAR
------- ------ -- ---- ------ ----
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES OR BASE EXPIRATION
NAME GRANTED(#) IN FISCAL YEAR PRICE($/SH) DATE
- ---- ---------- -- ------ ---- ----------- ----
<S> <C> <C> <C> <C> <C>
Carl A. Bruggemeier 14,250 65% $7.00 11/20/06
- ----------------------
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL
YEAR AND FY-END OPTION VALUES
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FY-END (#) FY-END ($)
SHARES
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
- ---- -------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Carl A. - - 14,250/ - - / -
Bruggemeier
</TABLE>
23
<PAGE> 24
DIRECTOR COMPENSATION
During 1996, directors who were not employees of the Company received $500
for attending a Board of Directors meeting in December 1996, after the Company's
initial public offering. Starting in 1997, 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 are not
separately compensated for their services as directors.
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement dated August 1, 1996 with
Carl A. Bruggemeier, President and Chief Executive Officer of the Company. The
agreement 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-theme
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. In December 1996, the
Board approved a cash bonus to Mr. Bruggemeier in the amount of $100,000 as
compensation for services rendered in 1996.
In December 1996, the Board approved an Employment Agreement with Roger
Taylor dated December 2, 1996, which provides for an annual base salary of
$109,200 and a signing bonus of $15,000. The agreement includes 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 net earnings
levels established by the Board. The agreement further provides for
miscellaneous other compensation in the form of insurance and other benefits.
The agreement is for a three year term and renews automatically for successive
one year terms unless terminated by either party upon 90 days prior written
notice. In the event of a sale of the Company, Mr. Taylor will have the right to
terminate his employment and to receive a lump sum payment equivalent to the
then current value of the base salary payments to which he would otherwise be
entitled for the remainder of the term plus any bonus related to the current
fiscal year. On January 2, 1997 the Compensation Committee authorized an
increase in the base salary payable to Mr. Taylor to $125,000 and an increase in
his signing bonus to $20,000.
In December 1996, the Board authorized the execution of an Employment
Agreement, effective December 4, 1996, with Catherine C. Jetter. The agreement
provides for an annual base salary of $75,000, which may be increased in the
discretion of the Board based upon the Company's achievement of net earnings
goals established by the Company's Board and for cash bonuses in the discretion
of the Board. The agreement is for a one year term and renews automatically for
24
<PAGE> 25
successive one year terms unless terminated by either party upon 30 days notice
prior to expiration of the applicable term. In the event the Company is sold or
consummates a merger in which it is not the surviving entity, Ms. Jetter will
have the right to terminate her employment and receive a twelve month severance
payment. The agreement further provides for miscellaneous other compensation in
the form of insurance and other benefits. The Board also approved a cash bonus
to Ms. Jetter in the amount of $15,000 as compensation for services rendered in
1996.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
As of March 1, 1997, there were 3,120,386 shares of the Company's common
stock outstanding. The following table sets forth as of March 1, 1996, certain
information with regard to the beneficial ownership of the Company's Common
Stock by (i) each of the Company's shareholders known to hold more than 5% of
the outstanding shares of Common Stock, (ii) each director and each executive
officer named on the Summary Compensation Table, individually, and (iii) all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP (1)
-----------------------------------------
NUMBER OF PERCENT OF
NAME AND ADDRESS SHARES TOTAL
- ---------------- ------ -----
<S> <C> <C>
Carl A. Bruggemeier (2) 292,007 9.3%
Catherine C. Jetter 5,750 *
Roger Lipton (2) 271,218 8.7%
Marvin Rosenberg 43,747 1.4%
Russell C. Wiles 1,000 *
John H. Wyant (2)(3) 966,983 30.0%
Blue Chip Capital Fund Limited
Partnership (2) 949,165 29.5%
All directors and executive officers
as a group (7 persons) 1,580,705 48.8%
<FN>
* Less than 1%
(1) Includes shares which may be acquired upon exercise of presently exercisable
stock options and warrants, and options and warrants exercisable within 60 days
after March 1, 1997, in the following amounts: Mr. Bruggemeier, 14,250 shares;
Ms. Jetter, 5,750 shares; Mr. Wyant, 100,000 shares; Blue Chip LP, 100,000
shares; and all directors and executive officers as a group, 120,000 shares.
(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) Mr. Wyant disclaims beneficial ownership of all shares except to the extent
of his pro rata interest therein.
</TABLE>
25
<PAGE> 26
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The Board of Directors of the Company has adopted a policy requiring that 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 two 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 parties.
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 was paid in full in December 1996.
In March 1995 the Company entered into a consulting agreement with Mr. Lipton
pursuant to which he was 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 included advice regarding the
structuring of the Company's debt and equity financing and assistance in the
development of the Company's concept and operating and expansion strategies.
This consulting agreement terminated upon completion of the Offering and
consulting fees due to Mr. Lipton in the amount of $58,651 were converted to
8,378 shares of the Company's Common Stock at the initial public offering price
of $7.00 per share.
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 had a cumulative dividend rate of
$10.00 per share per annum. The Series A Preferred Stock was convertible into
813,529 shares of Common Stock and was so converted upon consummation of the
Offering. Additionally, upon consummation of the Offering, accrued dividends on
the Series A Preferred Stock totaling $249,452 were converted to 35,636 shares
of Common Stock at the initial public offering price of $7.00 per share.
Pursuant to the Shareholder Agreement and prior to the Offering, 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"),
26
<PAGE> 27
on March 30, 1995, pursuant to which Blue Chip Venture advised the Company with
respect to financial matters, including the obtaining of additional debt and
equity capital and the structuring of the initial public offering. Blue Chip
Venture was 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 terminated upon consummation of the Offering and accrued
consulting fees in the amount of $124,726 were converted to 17,818 shares of the
Company's Common Stock at the initial public offering price of $7.00 per share.
Mr. Wyant is President and a 50% stockholder of Blue Chip Venture and a limited
partner in Blue Chip LP.
In addition, the Shareholder Agreement (i) granted 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) granted Blue Chip LP
certain preemptive rights to purchase securities issued by the Company; (iii)
required the prior written consent of Blue Chip LP before the Company could 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 the ordinary course of business, and enter into
other specified transactions; and (iv) granted Blue Chip LP the right to
register shares in the Company's initial and subsequent public offerings (which
right was waived with respect to the Offering) and, on two occasions subsequent
to the Offering, to demand registration of shares of Common Stock held by it.
Blue Chip has released 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. On 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 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
closing of the Offering. The secured promissory note balance plus interest due
was paid in full on November 27, 1996.
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
1995 and 1996, purchases by the Company from these businesses were $82,766 and
$225,555, 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 for
the fiscal years 1995 and 1996 were $76,111 and $274,249, 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 was
so converted at the time of the closing of the Offering and the shares were
distributed from the Towne partnership 50% each to Mr. Rosenberg and another
partner.
27
<PAGE> 28
ITEM. 13 EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
a. Exhibit Index:
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation *
3.2 Code of Regulations *
10.1 Stock Purchase and Shareholder Agreement dated March 30, 1995 among Blue Chip
Capital Fund Limited Partnership, the Company and Carl A. Bruggemeier *
10.2 Convertible Subordinated Participating Income Note Series B dated September 7,
1993 between the Company and Peter E. Salas *
10.3 Lease dated July 1, 1996 between Northport Marketplace, Ltd. and the Company *
10.4 Lease dated April 29, 1996 between Hibben Building, Ltd. and the Company *
10.5 Lease dated February 7, 1994 between the Kroger Co. and the Company *
10.6 Lease dated July 28, 1995 between Hibben Building Associates and the Company *
10.7 Lease dated October 24, 1994 between Gayoso House L.P. and the Company *
10.8 Lease dated June 16, 1993 between JMB Income Properties, Ltd. and the Company *
10.9 Lease dated March 22, 1993 between Washington Square Ltd. Partnership and the
Company *
10.10 Sublease dated November 14, 1990 between Towne Investment Co. and Fire in the
Kitchen, Inc. *
10.11 Warrant between the Company and Blue Chip Capital Fund Limited Partnership *
10.12 Employment Agreement dated as of August 1, 1996 between the Company and Carl
A. Bruggemeier *
10.13 Employment Agreement dated as of December 4, 1996 between the Company and
Catherine C. Jetter
10.14 Employment Agreement dated as of December 2, 1996 between the Company and
Roger D. Taylor
21. Subsidiaries of the registrant
24. Power of Attorney
</TABLE>
28
<PAGE> 29
27. Financial Data Schedule **
* Filed as an exhibit to the Company's Registration Statement on Form SB-2, No.
333-5674 and incorporated herein by reference.
** EDGAR filing only.
b. Reports on Form 8-K: None
29
<PAGE> 30
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, as of the 28th day of March 1997.
CIAO CUCINA CORPORATION
By: /s/ Carl A. Bruggemeier
-------------------------------------
Carl A. Bruggemeier
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated as
of the 28th day of March 1997.
<TABLE>
<S> <C>
/s/ Carl A. Bruggemeier Chairman of the Board, President and Chief Executive
- ------------------------------------- Officer
Carl A. Bruggemeier
/s/ Catherine C. Jetter Director, Executive Vice President/Chief Financial
- ------------------------------------- Officer and Treasurer
Catherine C. Jetter
/s/ Gary a. Salazar Controller
- -------------------------------------
Gary A. Salazar
/s/* Roger Lipton Director
- -------------------------------------
Roger Lipton
/s/* Marvin Rosenberg Director
- -------------------------------------
Marvin Rosenberg
/s/* Russell C. Wiles Director
- -------------------------------------
Russell C. Wiles
/s/* John H. Wyant Director
- -------------------------------------
John H. Wyant
* By Power of Attorney
/s/ Catherine C. Jetter
- -------------------------------------
Catherine C. Jetter, Attorney in-Fact
</TABLE>
<PAGE> 31
(ON JOSEPH DECOSIMO AND COMPANY, LETTERHEAD)
AN OHIO REGISTERED PARTNERSHIP HAVING LIMITED LIABILITY
- --------------------------------------------------------------------------------
PRIVATE COMPANIES PRACTICE SECTION MEMBER AICPA DIVISION FOR CPA FIRMS
SEC PRACTICE SECTION
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
CIAO CUCINA CORPORATION
Cincinnati, Ohio
We have audited the accompanying consolidated balance sheets of CIAO CUCINA
CORPORATION and subsidiary as of December 31, 1995 and December 29, 1996, and
the related consolidated statements of operations, redeemable equity and
shareholders' equity (deficit) and cash flows for each of the three years in the
period ended December 29, 1996. These consolidated financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CIAO CUCINA
CORPORATION and subsidiary as of December 31, 1995 and December 29, 1996, and
the results of its operations and its cash flows for each of the three years in
the period ended December 29, 1996, in conformity with generally accepted
accounting principles.
/s/ Joseph Decosimo & Company, PLL
Cincinnati, Ohio
January 31, 1997
F-1
<PAGE> 32
CIAO CUCINA CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1995 1996
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 137,660 $ 2,729,327
Certificate of Deposit - 144,434
Accounts Receivable 28,689 42,377
Inventories 46,074 87,203
Prepayments 22,836 243,840
--------- ---------
Total Current Assets 235,259 3,247,181
EQUIPMENT AND IMPROVEMENTS, net 3,102,576 4,528,200
INTANGIBLE ASSETS, net 203,715 130,690
SECURITY DEPOSITS AND OTHER ASSETS 344,174 396,560
--------- ---------
TOTAL ASSETS $ 3,885,724 $ 8,302,631
========= =========
LIABILITIES, REDEEMABLE EQUITY
AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Current Portion of Long-Term Debt $ 449,638 $ 103,006
Accounts Payable 259,397 544,416
Accrued Expenses 375,998 598,201
--------- ---------
Total Current Liabilities 1,085,033 1,245,623
--------- ---------
LONG-TERM LIABILITIES
Notes Payable 184,335 6,007
Accrued Rentals 373,164 509,085
Deferred Lease Incentives 2,125,829 2,112,524
--------- ---------
Total Long-Term Liabilities 2,683,328 2,627,616
--------- ---------
REDEEMABLE EQUITY
10% Series A Convertible Preferred Stock - $100 par value,
15,000 shares authorized and issued for 1995 1,558,604 -
10% Series B Convertible Preferred Stock - $690 par value,
1,740 shares authorized, 1,584 shares issued for 1995 1,174,932 -
--------- ---------
Total Redeemable Equity 2,733,536 -
--------- ---------
SHAREHOLDERS' EQUITY (DEFICIT)
Common Stock - no par value, 10,000,000 shares authorized; 794,355 shares
issued for 1995 and 3,104,848 shares issued for 1996 750 9,179,195
Additional Paid-In Deficit (1,767,372) (1,647,372)
Accumulated Deficit ( 714,551) (3,102,431)
Treasury Stock - 224,445 shares for 1995 stated at cost ( 135,000) -
--------- ---------
Total Shareholders' Equity (Deficit) (2,616,173) 4,429,392
--------- ---------
TOTAL LIABILITIES, REDEEMABLE EQUITY
AND SHAREHOLDERS' EQUITY (DEFICIT) $ 3,885,724 $ 8,302,631
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE> 33
CIAO CUCINA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 25, DECEMBER 31, DECEMBER 29,
1994 1995 1996
<S> <C> <C> <C>
RESTAURANT REVENUES $ 3,273,083 $ 4,778,742 $ 7,787,631
--------- --------- ---------
OPERATING EXPENSES
Food and Beverage Costs 944,593 1,409,422 2,382,357
Restaurant Labor Costs 1,049,802 1,548,678 2,616,162
Occupancy and Other Restaurant Expenses 1,013,734 1,589,833 2,155,611
Depreciation and Amortization 259,044 459,549 781,743
--------- --------- ---------
3,267,173 5,007,482 7,935,873
--------- --------- ---------
RESTAURANT OPERATIONS 5,910 ( 228,740) ( 148,242)
Interest Expense, net ( 258,954) ( 72,510) ( 469,309)
Other Income (Expense) ( 52,397) 3,083 27,989
General and Administrative Expenses ( 364,849) ( 604,490) ( 985,317)
Restructuring Costs - - ( 517,464)
Loss on Disposal of Assets - - ( 46,750)
--------- --------- ---------
NET LOSS ( 670,290) ( 902,657) (2,139,093)
Accretion of Dividends on Preferred Stock - ( 194,472) ( 236,499)
Accretion of Discount on Preferred Stock - ( 10,105) ( 12,288)
--------- --------- ---------
NET LOSS APPLICABLE TO
COMMON STOCK $( 670,290) $(1,107,234) $(2,387,880)
========= ========= =========
NET LOSS PER COMMON SHARE $( 1.16) $( 1.94) $( 2.96)
========= ======== =========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 576,384 569,910 806,041
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 34
CIAO CUCINA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF REDEEMABLE EQUITY
AND SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
REDEEMABLE EQUITY
---------------------------------
SERIES A CONVERTIBLE SERIES B CONVERTIBLE TOTAL
PREFERRED STOCK PREFERRED STOCK REDEEMABLE
SHARES AMOUNT SHARES AMOUNT EQUITY
<S> <C> <C> <C> <C> <C>
BALANCE - December 26, 1993 - $ - - $ - $ -
Issuance of Note Payable
for 77,692 Shares of
Treasury Stock
Net Loss
------- ---------- ------- ---------- ----------
BALANCE - December 25, 1994 - - - - -
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
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
Issuance of Warrants Relating
to Bridge Financing
Dividends Accrued on
Redeemable Equity 136,812 99,687 236,499
Accretion of Discount on
Redeemable Equity 12,288 12,288
Conversion of Preferred
Stock to Common Stock (15,000) (1,707,704) ( 1,584) (1,274,619) (2,982,323)
Conversion of Consulting
Fees to Common Stock
Conversion of Debenture
to Common Stock
Issuance of Common Stock in
Initial Public Offering
Treasury Stock Canceled
Net Loss
------- ---------- ------- ---------- ----------
BALANCE - December 29, 1996 - $ - - $ - $ -
======= ========== ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 35
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY (DEFICIT)
---------------------------------------------
ADDITIONAL TOTAL
PAID-IN SHAREHOLDERS'
COMMON STOCK CAPITAL ACCUMULATED TREASURY EQUITY
SHARES AMOUNT (DEFICIT) DEFICIT STOCK (DEFICIT)
<S> <C> <C> <C> <C> <C>
794,355 $ 750 $ 127,327 $( 831,726) $( 45,000) $( 748,649)
( 90,000) ( 90,000)
( 670,290) ( 670,290)
--------- --------- --------- --------- --------- ---------
794,355 750 127,327 (1,502,016) ( 135,000) (1,508,939)
(1,894,699) 1,894,699
( 194,472) ( 194,472)
( 10,105) ( 10,105)
( 902,657) ( 902,657)
--------- --------- --------- --------- --------- ---------
794,355 750 (1,767,372) ( 714,551) ( 135,000) (2,616,173)
50,000 50,000
( 236,499) ( 236,499)
( 12,288) ( 12,288)
1,427,390 2,982,323 2,982,323
26,196 183,372 183,372
81,352 150,000 150,000
1,000,000 5,997,750 70,000 6,067,750
( 224,445) ( 135,000) 135,000 -
(2,139,093) (2,139,093)
--------- --------- --------- --------- --------- ---------
3,104,848 $ 9,179,195 $(1,647,372) $(3,102,431) $ - $ 4,429,392
========= ========= ========= ========= ========= =========
</TABLE>
<PAGE> 36
CIAO CUCINA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 25, DECEMBER 31, DECEMBER 29,
1994 1995 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $( 670,290) $( 902,657) $(2,139,093)
Adjustments to Reconcile Net Loss to Net
Cash Used by Operating Activities -
Depreciation 132,335 275,259 469,492
Amortization 126,709 184,290 312,251
Amortization of Lease Incentives ( 22,916) ( 122,083) ( 189,091)
Accretion and Write-Off of Notes
Payable Discount - - 50,000
Loss on Disposal of Assets - - 46,750
Write-Off of Deferred Financing Costs - - 219,319
Changes in Operating Assets and Liabilities -
Decrease (Increase) in -
Accounts Receivable 6,624 11,254 ( 13,688)
Inventories ( 22,502) 1,622 ( 41,129)
Prepayments ( 46,182) 38,223 ( 221,004)
Increase (Decrease) in -
Accounts Payable 126,577 ( 44,515) 285,019
Accrued Expenses 290,844 ( 131,845) 405,575
Accrued Rentals 69,158 172,679 135,921
--------- --------- ---------
NET CASH USED BY OPERATING ACTIVITIES ( 9,643) ( 517,773) ( 679,678)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Certificate of Deposit - - ( 144,434)
Capital Expenditures ( 330,500) ( 123,620) (1,766,080)
Cash Paid for Intangible Assets ( 188,512) ( 145,936) ( 258,545)
Cash Paid for Security Deposits ( 64,081) ( 125,071) ( 52,386)
--------- --------- ---------
NET CASH USED BY INVESTING ACTIVITIES ( 583,093) ( 394,627) (2,221,445)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (Decrease) in Bank Overdraft 22,555 ( 22,555) -
Issuance of Long-Term Debt 720,575 628,038 2,257,200
Repayment of Long-Term Debt ( 574,551) ( 675,286) (2,882,160)
Issuance of Redeemable Equity - 1,150,000 -
Payment of Preferred Stock Issuance Costs - ( 64,001) -
Issuance of Common Stock - - 6,067,750
Issuance of Warrants - - 50,000
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 168,579 1,016,196 5,492,790
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ( 424,157) 103,796 2,591,667
CASH AND CASH EQUIVALENTS - beginning of year 458,021 33,864 137,660
--------- --------- ---------
CASH AND CASH EQUIVALENTS - end of year $ 33,864 $ 137,660 $ 2,729,327
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 37
CIAO CUCINA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 25, DECEMBER 31, DECEMBER 29,
1994 1995 1996
<S> <C> <C> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING
ACTIVITIES
Deferred Landlord Incentives Used to
Purchase Leasehold Improvements
and Equipment $ 1,128,618 $ 1,079,506 $ 175,786
Conversion of Short-Term Note Into
Series A Convertible Preferred Stock $ 90,000 $ 350,000 $ -
Conversion of Series A and B
Convertible Subordinated
Participating Income Notes Into
Series B Convertible Preferred Stock $ - $ 1,092,960 $ -
Dividends Accrued On Series A and
B Convertible Preferred Stock $ - $ 194,472 $ 236,499
Accretion of Discount on Series A
Convertible Preferred Stock $ - $ 10,105 $ 12,288
Conversion of Series A and B
Preferred Stock into Common Stock $ - $ - $ 2,982,323
Issuance of Bridge Note for
Deferred Financing Costs $ - $ - $ 200,000
Conversion of Consulting Fees to
Common Stock $ - $ - $ 183,372
Conversion of Participating Debenture
to Common Stock $ - $ - $ 150,000
Warrants Issued for Stock Issuance
Costs $ - $ - $ 70,000
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash Paid for Interest $ 168,565 $ 210,292 $ 503,800
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 38
CIAO CUCINA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED 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. During a portion of
both 1995 and 1996, the Company also managed a restaurant in Washington D.C.
under another name.
Restaurants affiliated with the Company or under development as of December 29,
1996, are summarized as follows:
<TABLE>
<CAPTION>
LOCATION YEAR 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
Memphis, Tennessee 1996 Owned and operating
Cincinnati, Ohio (Downtown) 1996 Owned and operating
Fort Lauderdale, Florida 1997 (est.) Under development
Cleveland, Ohio 1997 (est.) Under development
</TABLE>
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary, Ciao Playhouse,
Incorporated. Significant intercompany accounts and transactions have been
eliminated in consolidation.
Fiscal Year - The Company's fiscal year ends on the last Sunday in December,
which included 53 weeks in the fiscal year 1995 and 52 weeks in fiscal years
1996 and 1994. The first quarter consists of four four-week periods and each of
the remaining three quarters consists of three four-week periods; the first,
second and third quarters end 16 weeks, 28 weeks and 40 weeks, respectively,
into the fiscal year.
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 have balances that may, at
times, exceed federally insured amounts and which, at times, may 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.
F-7
<PAGE> 39
CIAO CUCINA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Depreciation is provided using the straight-line method based on the estimated
useful lives of the depreciable assets.
Intangible Assets - Intangible assets consist of licenses, organization costs
and preopening costs and are amortized using the straight-line method over their
estimated useful lives of 15 years, 5 years and 12 months, respectively.
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 criteria. Based upon this
information the carrying amount of these intangible assets is expected to be
realized over the respective amortization periods.
Security Deposits - The Company had certificates of deposit totaling $337,500 as
of December 31, 1995 and $381,413 as of December 29, 1996, at a single financial
institution which were pledged to the Company's principal financial institution
as collateral on letters of credit totaling $397,000 as of December 31, 1995 and
$448,676 as of December 29, 1996. 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 $226,200 for
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 the book and tax bases of assets and liabilities 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.
Rent expense in excess of lease payments is recorded as an accrued rental
liability.
F-8
<PAGE> 40
CIAO CUCINA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
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 deferred and classified as a
long-term liability and are amortized as a reduction of rent expense on a
straight-line basis over the lease term.
Estimates and Uncertainties - 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.
Net Loss Per Common and Equivalent Share - Net loss per common share is computed
using the weighted average number of shares of common stock outstanding. Common
equivalent shares from options and convertible debt and preferred stock are
excluded from the computation as their effect is anti-dilutive.
Stock-Based Compensation - The Company accounts for compensation costs related
to employee stock options in accordance with the requirements of Accounting
Principles Board (APB) Opinion 25. APB Opinion 25 requires compensation costs
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 the 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 costs 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 adopted the provisions for pro forma
disclosure requirements of SFAS 123 in fiscal year 1996.
NOTE 2 - LIQUIDITY AND OPERATIONS
As disclosed in the accompanying consolidated financial statements, operations
of the Company have produced net losses of $670,290, $902,657 and $2,139,093,
and have used net cash of $9,643, $517,773 and $679,678 during 1994, 1995 and
1996, respectively; and, as of December 29, 1996, the Company had an accumulated
deficit of $3,102,431.
F-9
<PAGE> 41
CIAO CUCINA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - LIQUIDITY AND OPERATIONS - continued
In order to fund the expansion plans necessary to reverse these operating
trends, in September, 1996, the Company filed a Form SB-2 Registration Statement
with the Securities and Exchange Commission for the sale of 1,000,000 shares of
common stock at an initial public offering price of $7.00 per share. The
Offering was completed in November, 1996. Net offering proceeds of $6,067,750
were used to retire the 10.35% to 12% bridge notes for $2,500,000, the Company's
prime plus 2% bank debt totaling $282,204, fund development activities of the
Fort Lauderdale, Cleveland, and other restaurants, and provide working capital.
In connection with the initial public offering by the Company, all of the
redeemable equity was converted into common stock.
The Company believes the remaining proceeds of the Offering , along with cash
provided by operating activities and developer incentives, will be sufficient
both to meet operating expenses and capital expenditures for 1997.
NOTE 3 - EQUIPMENT AND IMPROVEMENTS
Equipment and improvements consist of the following major classifications:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Leasehold Improvements $ 1,609,732 $ 3,747,206
Restaurant Furniture and Equipment 698,358 1,300,577
Computer Equipment 148,952 229,493
Office Furniture and Equipment 89,244 123,747
China, Glassware and Flatware 46,123 79,601
Construction in Progress 1,079,506 52,434
--------- ---------
3,671,915 5,533,058
Accumulated Depreciation ( 569,339) (1,004,858)
--------- ---------
$ 3,102,576 $ 4,528,200
========= =========
</TABLE>
NOTE 4 - INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Licenses $ 80,298 $ 81,125
Preopening Costs 515,551 381,165
Organization Costs 65,178 -
------- -----
661,027 462,290
Accumulated Amortization (457,312) (331,600)
------- -------
$ 203,715 $ 130,690
======= =======
</TABLE>
F-10
<PAGE> 42
CIAO CUCINA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Notes Payable to Bank - rates from 9% to prime
plus 2%, maturities extending through May, 1997 $ 282,204 $ -
10% Series A and B Convertible Subordinated
Participating Income Notes 100,000 100,000
10% Convertible Subordinated Note Payable 150,000 -
Prime Note Payable to Officer and Shareholder -
payable $7,500 monthly plus interest, due July, 1996 95,984 -
Equipment Notes Payable - payable $378 monthly including
interest 5,785 9,013
------- -------
633,973 109,013
Less Current Portion 449,638 103,006
------- -------
$ 184,335 $ 6,007
======= =======
</TABLE>
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 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 29, 1996 and December 31, 1995, as they are in
default due to nonpayment of interest. Subsequent to year end, $50,000 of Series
A Convertible Participating Income Notes was converted into 15,538 shares of
common stock.
The 10% Convertible Subordinated Note Payable was due to an entity controlled by
certain of the Company's shareholders and was converted into 81,352 shares of
the Company's common stock.
Aggregate maturities of long-term debt, including the effects of the notes
converted to common stock, for the years subsequent to December 29, 1996, are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
<S> <C>
December 28, 1997 $ 53,006
December 27, 1998 $ 2,305
December 26, 1999 $ 1,627
December 31, 2000 $ 2,075
</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.
Interest expense totaled $268,134 for 1994, $94,459 for 1995 and $502,352 for
1996.
F-11
<PAGE> 43
CIAO CUCINA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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. A description of the preferred stock is as
follows:
Series A - 15,000 shares of $100 par value Series A preferred stock was issued
in exchange for an existing $350,000 note and $1,150,000 in cash. The Series A
preferred stock was entitled to annual cumulative dividends equal to 10% of par
value, and was convertible into shares of common stock. Cumulative unpaid
dividends totaled $112,500 as of December 31, 1995. Series A preferred stock,
including cumulative unpaid dividends was converted into 849,165 shares of the
Company's common stock on November 27, 1996.
Series B - 1,584 shares of $690 par value Series B preferred stock was 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 was entitled to annual
cumulative dividends equal to 10% of par value and was convertible into shares
of common stock. Cumulative unpaid dividends totaled $81,972 as of December 31,
1995. Series B preferred stock, including cumulative unpaid dividends, was
converted into 578,225 shares of the Company's common stock on November 27,
1996.
NOTE 7 - INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Deferred Provision $( 107,000) $ 87,500
Tax Benefit of Net Operating Loss Carryforward ( 162,000) ( 830,000)
Valuation Allowance 269,000 742,500
--------- ---------
$ - $ -
========= =========
</TABLE>
The provision for income taxes differs from the amounts computed by applying the
federal statutory rate to book income for the period from December 26, 1994 to
December 31, 1995 and from January 1, 1996 to December 29, 1996, as follows:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Income Tax at Federal Statutory Rate $(230,000) $(727,000)
State Income Taxes, net of federal benefit ( 40,000) ( 85,000)
Valuation Allowance 269,000 742,500
Other 1,000 69,500
------- -------
$ - $ -
======= =======
</TABLE>
F-12
<PAGE> 44
CIAO CUCINA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 - INCOME TAXES - continued
As discussed in the summary of significant accounting policies, the Company
changed its tax status from nontaxable to taxable effective March 30, 1995.
Accordingly, a deferred tax asset at that date of approximately $219,500 was
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 applicable to
common stock would be equivalent to results as reported in the statements of
operations. 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 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 amount 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>
<CAPTION>
1995 1996
<S> <C> <C>
Accrued Expenses $ 84,000 $ 4,000
Deferred Rent 149,000 204,000
Net Operating Loss Carryforwards 162,000 992,000
Asset Depreciation and Amortization, net of
deferred lease incentive 93,500 31,000
--------- ---------
488,500 1,231,000
Valuation Allowance ( 488,500) (1,231,000)
--------- ---------
Net Deferred Tax Asset $ - $ -
========= =========
</TABLE>
No benefit for income taxes has been recorded due to losses reported in 1995 and
1996 given that the realization of this asset is uncertain in that it is
dependent upon, among others, prospective taxable income.
The Company has a net operating loss carryforward of $2,481,000 which is
available to offset future taxable income through the years 2010 and 2011.
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 in excess of certain levels. The restaurant leases
expire through 2012 and generally contain options to renew for 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.
F-13
<PAGE> 45
CIAO CUCINA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - LEASE COMMITMENTS - continued
Future minimum lease payments under noncancelable operating leases with initial
or remaining lease terms in excess of one year as of December 29, 1996, are as
follows:
<TABLE>
<CAPTION>
THIRD RELATED SUB-LEASE
PARTIES PARTIES RENTALS TOTAL
YEAR ENDING
<S> <C> <C> <C> <C>
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
December 29, 2001 829,020 231,309 - 1,060,329
Thereafter 3,835,498 1,683,582 - 5,519,080
--------- --------- --------- ----------
$ 8,019,670 $ 3,061,595 $( 99,323) $ 10,981,942
========= ========= ========= ==========
</TABLE>
Rent expense totaled $373,209 for 1994, $527,060 for 1995 and $590,326 for 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
$38,800 for 1996.
NOTE 9 - RELATED PARTY TRANSACTIONS
The Company had a consulting agreement with one of its directors and
shareholders which provided for consulting and financial advisory fees of
$50,000 annually which terminated upon the completion of the Company's initial
public offering. Consulting fees totaled approximately $37,500 for 1995 and
$45,500 for 1996 under this arrangement, of which $13,000 was accrued at
December 31, 1995.
The Company had a consulting agreement with an affiliate of the holder of its
Series A convertible preferred stock and a director which provided for
consulting and financial advisory fees of $75,000 annually which terminated upon
the completion of the Company's initial public offering. Consulting fees totaled
approximately $56,500 for 1995 and $68,000 for 1996 under this arrangement, of
which $56,500 was accrued at December 31, 1995.
The Company had a demand note payable to a shareholder and officer bearing
interest at the prime rate. The outstanding balance on this note was $95,984 at
December 31, 1995, and $0 at December 29, 1996. Interest expense on this note
totaled $8,550 for 1994, $10,964 for 1995 and $13,171 for 1996.
The Company leases one restaurant, and in 1996 commenced leasing an additional
restaurant, and its administrative offices from partnerships in which a director
and shareholders serve as general partner. Rent expense for these facilities
totaled $57,448 for 1994, $76,111 for 1995 and $274,249 for 1996. Additionally,
the Company owed this landlord $43,295 in accrued and other rents at December
29, 1996.
The Company purchases certain alcoholic beverages from a company in which a
director of the Company is an officer. Purchases of alcoholic beverage products
totaled $79,647 for 1994, $82,766 for 1995 and $225,555 for 1996.
F-14
<PAGE> 46
CIAO CUCINA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - STOCK OPTIONS AND WARRANTS
During the second quarter of 1996, the Company issued warrants to purchase
249,990 shares of its common stock at $7.00 per share to investors who loaned
the Company an aggregate of $2,300,000 to finance its expansion and operations
in contemplation of the Company's initial public offering. The warrants are
exercisable for five years from November, 1996. The Company recorded the $50,000
estimated value of the warrants as financing costs related to the bridge
financing which was repaid from the proceeds of the offering.
Concurrent with the closing of its initial public offering, the Company granted
warrants to purchase 100,000 shares of its common stock at 120% of the offering
price or $8.40 per share to the underwriter of its initial public offering. The
warrants are exercisable for five years from November, 1996. The Company
recorded the $70,000 estimated value of the warrants as stock issue costs
related to the offering.
Concurrent with the closing of its initial public offering, the Company also
issued options to purchase 21,645 shares of its common stock at the $7.00 per
share initial offering price to its President, Chief Financial Officer and
another key employee. The options may be exercised for ten years from November,
1996. The Company applied APB Opinion No. 25 and related interpretations in
accounting for these employee options. Accordingly, no compensation cost has
been recognized for these options in its results of operations. Had the Company
recorded a charge for the fair value of the options granted consistent with FASB
Statement 123, net loss and net loss per common share would have been increased
by $5,942 and $.01 in 1996, respectively.
The fair value of the employee options was estimated on the date of grant using
the Black Scholes option pricing model using a risk-free interest rate of 6.70%,
an expected option life of 10 years, and nil volatility, since there was no
trading history for the Company's stock.
The following table summarizes the activity relating to options and warrants for
1996.
<TABLE>
<CAPTION>
EXERCISE
SHARES PRICE
<S> <C> <C>
Outstanding at Beginning of Year - N/A
Warrants Granted 249,990 $7.00
Warrants Granted 100,000 $8.40
Options Granted 21,645 $7.00
-------
Outstanding at End of Year 371,635 $7.38
=======
</TABLE>
F-15
<PAGE> 47
CIAO CUCINA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11 - DEVELOPMENT COMMITMENTS
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 second quarter of
fiscal year 1997. The landlord will contribute $675,500 to this project and the
Company is projected to contribute $539,500 which includes approximately
$169,000 of developer-provided financing.
The Company has also entered into a letter of intent to lease a 5,700 square
foot restaurant and an 11,500 square foot banquet facility in Cleveland, Ohio.
These facilities are projected to open in September, 1997, and are projected to
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, however, in addition to
the minimum base rentals, the Company expects to pay contingent rental payments
based on 50% of restaurant net income, as adjusted for certain items.
NOTE 12 - SUBSEQUENT EVENTS
In early 1996, the Company undertook renovations to its Harper's Point
restaurant and has contracted for certain renovations to be made at its New
Jersey restaurant. The approximate costs for these renovations are expected to
be $200,000 and $75,000, respectively.
F-16
<PAGE> 1
EXHIBIT 10.13
EMPLOYMENT CONTRACT DATED AS OF DECEMBER 4, 1996 BETWEEN THE COMPANY
AND CATHERINE C. JETTER
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement"), dated as of
December 4, 1996, is between CIAO CUCINA CORPORATION (the "Company") and
CATHERINE C. JETTER ("Executive").
RECITALS:
WHEREAS, the Company wishes to assure itself of the
substantial skill and abilities of Executive for the term provided in this
Agreement, and Executive is willing to be employed by the Company on a
full-time basis for such term; and
WHEREAS, the Board of Directors of the Company (the "Board")
has determined that the best interests of the Company would be served by
employing Executive on the terms of this Agreement;
NOW, THEREFORE, the parties hereby agree as follows:
1. Employment and Position. The Company shall employ Executive and
Executive shall serve as Executive Vice-President and Chief Financial Officer
for the term stated in Paragraph 2, upon the terms and conditions of this
Agreement. Executive shall report to the President of the Company and perform
those services consistent with such position and as may further be determined
from time to time by the Board. During the term of her employment, Executive
will devote substantially all of her business time and efforts to the
performance of her duties under this Agreement.
2. Term. The term of Executive's employment under this Agreement shall
commence as of the date hereof, and shall terminate on the anniversary of such
date; provided that if this Agreement has not been earlier terminated as
provided herein, the term of this Agreement and Executive's employment
hereunder shall automatically be extended for
- 1 -
<PAGE> 2
consecutive one year terms unless either party notifies the other to the
contrary in writing at least 30 days prior to the expiration of the then
applicable term.
3. Compensation.
(a) Base Salary. The Company shall pay Executive during the term of
this Agreement a minimum annual base salary of $75,000.00, payable biweekly.
This salary may be increased in the discretion of the Board based upon the
Company's achievement of net earning goals reasonably established by the Board.
(b) Bonus. Executive has been awarded a 1996 bonus of $15,000,
payable with the first payroll check issued to Executive in January, 1997. In
addition, Executive may receive additional cash bonuses during the term hereof
in the discretion of the Board.
(c) Reimbursement of Expenses. Upon delivery of receipts or other
reasonable evidence, the Company shall reimburse Executive for all reasonable
travel and other expenses incurred by him in the performance of her obligations
under this Agreement.
(d) Car Allowance. The Company shall provide Executive with a car
allowance of $ 400.00 per month. In addition, the Company shall reimburse
Executive for parking, gas and insurance ; provided, that the Company shall not
be responsible for: (i) any parking, moving or other violations incurred by
Executive, or any increased insurance costs as a result thereof; or (ii) any
costs or expenses arising out of the negligence or misconduct of Executive.
4. Vacation and Sick Leave.
(a) During the term of her employment under this Agreement,
Executive shall be entitled to an annual vacation, without loss of pay, of 4
weeks. Unused vacation time shall not accrue to subsequent years, and upon any
termination of her employment hereunder for any reason, all unused vacation
time shall immediately be canceled.
- 2 -
<PAGE> 3
(b) Executive shall be entitled to sick leave in the form of salary
continuation as established by the Company from time to time for salaried
employees of the Company.
5. Other Fringe Benefits. Executive shall further be entitled to such
other fringe benefits as may be established by the Company from time to time
for salaried employees of the Company. 6. Early Termination.
(a) The term of Executive's employment under this Agreement may be
terminated by the Company prior to the date on which it would otherwise expire
only for "cause" (as hereinafter defined) or upon the following conditions:
(i) If because of illness, physical or mental disability, or
other incapacity Executive shall (A) fail for a period or periods aggregating
six (6) months in any calendar year to render the services provided for herein
in any material respect, or (B) become in the good faith judgement of the
Company permanently unable to perform the services provided hereby, then the
Company may terminate Executive's employment under this Agreement by written
notice to Executive, effective upon the provision of such notice without any
further obligation on the part of the Company, except that the Company shall
pay Executive at the time of such termination such portion of her base salary
and bonus provided for hereunder as may be accrued but unpaid at the end of the
month of her termination.
(ii) If Executive dies while employed hereunder, this Agreement
shall terminate without any further obligation on the part of the Company,
except that the Company shall pay Executive's estate within 10 days after death
such portion of her base salary provided for hereunder as may be accrued but
unpaid at the end of the month of her death.
(b) If the Company terminates Executive's employment under this
Agreement for "cause" (as hereinafter defined), or if Executive terminates her
employment
- 3 -
<PAGE> 4
hereunder for any reason other than "good reason" (as defined herein),
Executive's employment under this Agreement shall automatically terminate
without any further obligation on the part of the Company other than to pay any
base salary earned through the date of termination.
(c) If a "good reason" (as defined herein) exists for Executive to
terminate her employment hereunder, Executive may terminate her employment
hereunder by providing written notice to the Company. If Executive terminates
her employment hereunder for "good reason" (as defined herein), the Company
shall pay to Executive within 10 days after notice of termination is received
by the Company an amount equal to the sum of all base salary to which she would
otherwise have been entitled for a period of twelve months. As used herein, and
in addition to the provisions of Paragraph 3(e) hereof, "good reason" means:
(i) the failure or inability of the Company to pay Executive the salary
required hereunder; (ii) the dissolution of the Company; (iii) a cessation by
the Company of business operations; or (iv) an Event of Bankruptcy, which is
defined as the Company doing any of the following: (1) makes an assignment for
the benefit of creditors; (2) files a voluntary petition in bankruptcy; (3) is
adjudicated a bankrupt or insolvent; (4) files a petition or answer in any
reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief proceeding under any law or rule that seeks for
itself any of those types of relief; (5) files an answer or other pleading
admitting or failing to contest the material allegations of a petition filed
against it in any proceeding seeking the relief described in clause (4) herein;
(6) a period of 120 days has elapsed after the commencement against the Company
of any proceedings seeking the relief described in clause (4) above, and the
proceeding has not been dismissed; (7) a period of 90 days has elapsed after
the appointment of a trustee, receiver, or liquidator for the Company or for
all or any substantial part of its properties without the Company's consent to
acquiescence, and the appointment has not been vacated or stayed; or (8) a
period of 90 days has elapsed after the expiration of that stay, and the
appointment has not been vacated.
- 4 -
<PAGE> 5
(d) If the Company terminates Executive's employment under this
Agreement for any reason other than: (i) for "cause" (as hereinafter defined),
or (ii) pursuant to Paragraph 6(a) above, the Company shall pay to Executive
upon such termination an amount equal to the sum of all base salary to which
she would otherwise have been entitled for the remainder of the then applicable
term, plus any bonus related to the then fiscal year.
(e) As used herein, the term "cause" means: (i) the breach by
Executive of any material term hereof; (ii) willful misconduct; (iii)
conviction of a felony; (iv) habitual intoxication; (v) drug addiction; (vi)
adjudication as an incompetent; (vii) misappropriation of corporate funds or
commission of any other act of dishonesty with respect to her performance
hereunder; (viii) dereliction of duties; or (ix) the intentional refusal to
comply with a reasonable directive of the President or the Board.
7. Sale of Company. If and to the extent all or substantially all
assets of the Company are sold or the Company consummates a merger and is not
the surviving entity, the purchaser or surviving entity shall assume all
obligations under this Agreement; provided, that Executive shall have the
option, exercisable by providing written notice to the Company within 60 days
after the closing of such purchase or merger, to terminate this Agreement and
such termination shall be deemed to be for a "good reason" as hereinafter
defined; provided, however, that the twelve month severance payment required
under Paragraph 6(c) hereof shall be calculated as of such closing, and shall
be reduced by any salary received after the date of such closing.
8. Federal Income Tax Withholding. The Company shall withhold from any
benefits payable under this Agreement all federal, state, city, or other taxes
required to be withheld pursuant to any law or governmental regulation or
ruling.
9. Entire Agreement. This Agreement contains the entire understanding
between the parties with respect to the subject matter hereof and supersedes
and replaces any and all prior or contemporaneous written or oral employment
agreements or understandings between
- 5 -
<PAGE> 6
the Company and Executive, all of which prior and contemporaneous agreements
being terminated and void without further liability to any party.
10. Binding Agreement. This Agreement shall be binding upon, and inure
to the benefit of, Executive and the Company and their respective permitted
successors and assigns.
11. Modification and Waiver.
(a) Amendment of Agreement. This Agreement may not be modified or
amended except by an instrument in writing signed by both parties.
(b) Waiver. No term or condition of this Agreement will be deemed
to have been waived, nor will there be an estoppel against the enforcement of
any provision of this Agreement, except by written instrument of the party
charged with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver unless specifically stated therein, and each waiver shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than that specifically waived.
12. Severability. If, for any reason, any provision of this Agreement
is held invalid, such invalidity shall not affect any other provision of this
Agreement not held invalid, and each such other provision shall, to the full
extent consistent with law, continue in full force and effect. If any provision
of this Agreement is held invalid in part, such invalidity shall not affect the
rest of such provision ,which, together with all other provisions of this
Agreement, shall continue in full force and effect to the full extent
consistent with law.
13. Headings. The headings of Paragraphs herein are included solely
for convenient reference and shall not affect the meaning or interpretation of
any of the provisions of this Agreement.
- 6 -
<PAGE> 7
IN WITNESS WHEREOF, the Company has caused this Agreement to
be executed by its officer thereunto duly authorized, and Executive has signed
this Agreement, all as of the day and year first above written.
Witnessed By: CIAO CUCINA CORPORATION
/s/ SUZANNE R. DECHANT By:/s/ CARL A. BRUGGEMEIER
Carl A. Bruggemeier
/s/ LAURA ROBINSON President
EXECUTIVE:
/s/ SUZANNE R. DECHANT /s/ CATHERINE C. JETTER
CATHERINE C. JETTER
/s/ LAURA ROBINSON
KGN 5034-1
- 7 -
<PAGE> 1
EXHIBIT 10.14
EMPLOYMENT AGREEMENT DATED AS OF DECEMBER 2, 1996 BETWEEN THE COMPANY
AND ROGER D. TAYLOR
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement"), dated as of December 2,
1996, is between CIAO CUCINA CORPORATION (the "Company") and ROGER TAYLOR
("Executive").
RECITALS:
WHEREAS, the Company wishes to assure itself of the substantial skill
and abilities of Executive for the term provided in this Agreement, and
Executive is willing to be employed by the Company on a full-time basis for such
term; and
WHEREAS, the Board of Directors of the Company (the "Board") has
determined that the best interests of the Company would be served by employing
Executive on the terms of this Agreement;
NOW, THEREFORE, the parties hereby agree as follows:
1. Employment and Position. The Company shall employ Executive and
Executive shall serve as Executive Vice-President and Chief Operating Officer
for the term stated in Paragraph 2, upon the terms and conditions of this
Agreement. Executive shall report to the President of the Company and perform
those services consistent with such position and as may further be determined
from time to time by the Board. The Company shall during the term of this
Agreement include Executive on the slate of directors submitted to the
shareholders for vote, and shall recommend their vote in favor of Executive as
director. During the term of his employment, Executive will devote substantially
all of his business time and efforts to the performance of his duties under this
Agreement.
2. Term. The term of Executive's employment under this Agreement shall
commence as of the date hereof, and shall terminate on the third anniversary of
such date; provided that if this Agreement has not been earlier terminated as
provided herein, the term of this
<PAGE> 2
Agreement and Executive's employment hereunder shall automatically be extended
for consecutive one year terms unless either party notifies the other to the
contrary in writing at least 90 days prior to the expiration of the then
applicable term.
3. Compensation.
(a) Base Salary. The Company shall pay Executive during the term of
this Agreement a minimum annual base salary of $109,200.00, payable biweekly.
This salary may be increased in the discretion of the Board based upon the
Company's achievement of net earning goals reasonably established by the Board.
(b) Bonus. Upon the execution hereof, Executive has received a
bonus of $15,000 as compensation for lost benefits resulting from his acceptance
of his position with the Company. In addition, Executive shall receive a cash
bonus if and to the extent the Company achieves the budgeted net earning levels
reasonably established by the Board. Such bonus, if any, shall at a minimum
equal 25% of Executive's then annual base salary and shall be paid at least
annually payable within 45 days after the end of each fiscal year.
(c) Reimbursement of Expenses. Upon delivery of receipts or other
reasonable evidence, the Company shall reimburse Executive for all reasonable
travel and other expenses incurred by him in the performance of his obligations
under this Agreement.
(d) Car Allowance. The Company shall provide Executive with the use
of an automobile reasonably acceptable to Executive during the term of this
Agreement. All costs and expenses related thereto, including parking, gas,
maintenance and insurance (property and general liability) shall be paid by the
Company; provided, that the Company shall not be responsible for: (i) any
parking, moving or other violations incurred by Executive, or any increased
insurance costs as a result thereof; or (ii) any costs or expenses arising out
of the negligence or misconduct of Executive.
-2-
<PAGE> 3
4. Vacation and Sick Leave.
(a) During the term of his employment under this Agreement,
Executive shall be entitled to an annual vacation, without loss of pay, of 4
weeks. Unused vacation time shall not accrue to subsequent years, and upon any
termination of his employment hereunder for any reason, all unused vacation time
shall immediately be canceled.
(b) Executive shall be entitled to sick leave in the form of salary
continuation as established by the Company from time to time for salaried
employees of the Company.
5. Other Fringe Benefits. Executive shall further be entitled to such
other fringe benefits as may be established by the Company from time to time
for salaried employees of the Company.
6. Early Termination.
(a) The term of Executive's employment under this Agreement may be
terminated by the Company prior to the date on which it would otherwise expire
only for "cause" (as hereinafter defined) or upon the following conditions:
(i) If because of illness, physical or mental disability, or
other incapacity Executive shall (A) fail for a period or periods aggregating
six (6) months in any calendar year to render the services provided for herein
in any material respect, or (B) become in the good faith judgement of the
Company permanently unable to perform the services provided hereby, then the
Company may terminate Executive's employment under this Agreement by written
notice to Executive, effective upon the provision of such notice without any
further obligation on the part of the Company, except that the Company shall pay
Executive at the time of such termination such portion of his base salary and
bonus provided for hereunder as may be accrued but unpaid at the end of the
month of his termination.
-3-
<PAGE> 4
(ii) If Executive dies while employed hereunder, this Agreement
shall terminate without any further obligation on the part of the Company,
except that the Company shall pay Executive's estate within 10 days after death
such portion of his base salary provided for hereunder as may be accrued but
unpaid at the end of the month of his death.
(b) If the Company terminates Executive's employment under this
Agreement for "cause" (as hereinafter defined), or if Executive terminates his
employment hereunder for any reason other than "good reason" (as defined
herein), Executive's employment under this Agreement shall automatically
terminate without any further obligation on the part of the Company other than
to pay any base salary earned through the date of termination.
(c) If a "good reason" (as defined herein) exists for Executive to
terminate his employment hereunder, Executive may terminate his employment
hereunder by providing written notice to the Company. If Executive terminates
his employment hereunder for "good reason" (as defined herein), the Company
shall pay to Executive within 10 days after notice of termination is received by
the Company an amount equal to the then present value (using a discount rate of
6%) of the sum of all base salary to which he would otherwise have been entitled
for the remainder of the then applicable term, plus any bonus related to the
then fiscal year. As used herein, and in addition to the provisions of Paragraph
3(e) hereof, "good reason" means: (i) the failure or inability of the Company to
pay Executive the salary required hereunder; (ii) the dissolution of the
Company; (iii) a cessation by the Company of business operations; or (iv) an
Event of Bankruptcy, which is defined as the Company doing any of the following:
(1) makes an assignment for the benefit of creditors; (2) files a voluntary
petition in bankruptcy; (3) is adjudicated a bankrupt or insolvent; (4) files a
petition or answer in any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief proceeding under any
law or rule that seeks for itself any of those types of relief; (5) files an
answer or other pleading admitting or failing to contest the material
allegations of a petition filed against it in any
-4-
<PAGE> 5
proceeding seeking the relief described in clause (4) herein; (6) a period of
120 days has elapsed after the commencement against the Company of any
proceedings seeking the relief described in clause (4) above, and the proceeding
has not been dismissed; (7) a period of 90 days has elapsed after the
appointment of a trustee, receiver, or liquidator for the Company or for all or
any substantial part of its properties without the Company's consent to
acquiescence, and the appointment has not been vacated or stayed; or (8) a
period of 90 days has elapsed after the expiration of that stay, and the
appointment has not been vacated.
(d) If the Company terminates Executive's employment under this
Agreement for any reason other than: (i) for "cause" (as hereinafter defined),
or (ii) pursuant to paragraph 6(a) above, the Company shall pay to Executive
upon such termination an amount equal to the then present value (using a
discount rate of 6%) of the sum of all base salary to which he would otherwise
have been entitled for the remainder of the then applicable term, plus any bonus
related to the then fiscal year.
(e) As used herein, the term "cause" means: (i) the breach by
Executive of any material term hereof; (ii) willful misconduct; (iii) conviction
of a felony; (iv) habitual intoxication; (v) drug addiction; (vi) adjudication
as an incompetent; (vii) misappropriation of corporate funds or commission of
any other act of dishonesty with respect to his performance hereunder; (viii)
dereliction of duties; or (ix) the intentional refusal to comply with a
reasonable directive of the President or the Board.
7. Sale of Company. If and to the extent all or substantially all
assets of the Company are sold or the Company consummates a merger and is not
the surviving entity, the purchaser or surviving entity shall assume all
obligations under this Agreement; provided, that Executive shall have the
option, exercisable by providing written notice to the Company within 60 days
after the closing of such purchase or merger, to terminate this Agreement and
such termination shall be deemed to be for a "good reason" as hereinafter
defined.
-5-
<PAGE> 6
8. Federal Income Tax Withholding. The Company shall withhold from any
benefits payable under this Agreement all federal, state, city, or other taxes
required to be withheld pursuant to any law or governmental regulation or
ruling.
9. Entire Agreement. This Agreement contains the entire understanding
between the parties with respect to the subject matter hereof and supersedes any
prior or contemporaneous written or oral agreements or understandings between
the Company and Executive.
10. Binding Agreement. This Agreement shall be binding upon, and inure
to the benefit of, Executive and the Company and their respective permitted
successors and assigns.
11. Modification and Waiver.
(a) Amendment of Agreement. This Agreement may not be modified or
amended except by an instrument in writing signed by both parties.
(b) Waiver. No term or condition of this Agreement will be deemed
to have been waived, nor will there be an estoppel against the enforcement of
any provision of this Agreement, except by written instrument of the party
charged with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver unless specifically stated therein, and each waiver shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than that specifically waived.
12. Severability. If, for any reason, any provision of this Agreement
is held invalid, such invalidity shall not affect any other provision of this
Agreement not held invalid, and each such other provision shall, to the full
extent consistent with law, continue in full force and effect. If any provision
of this Agreement is held invalid in part, such invalidity shall not affect the
rest of such provision ,which, together with all other provisions of this
Agreement, shall continue in full force and effect to the full extent consistent
with law.
-6-
<PAGE> 7
13. Headings. The headings of Paragraphs herein are included solely
for convenient reference and shall not affect the meaning or interpretation of
any of the provisions of this Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its officers thereunto duly authorized, and Executive has signed
this Agreement, all as of the day and year first above written.
Witnessed By: CIAO CUCINA CORPORATION
/s/ Russ Wiles By: /s/ Carl A. Bruggemeier
- ------------------- ---------------------------
Carl A. Bruggemeier
/s/ Tom Kneer President
- -------------------
EXECUTIVE:
/s/ Russ Wiles /s/ Roger Taylor
- ------------------- -----------------------------
ROGER TAYLOR
/s/ Tom Kneer
- -------------------
-7-
<PAGE> 1
EXHIBIT 21
- ----------
SUBSIDIARIES OF THE REGISTRANT
- ------------------------------
<TABLE>
<CAPTION>
Name of Subsidiary State of Incorporation d/b/a
<S> <C> <C>
Ciao Playhouse, Inc. Ohio Ciao Cucina
</TABLE>
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
We the undersigned directors of Ciao Cucina Corporation (the "Company")
hereby appoint Carl A. Bruggemeier and Catherine C. Jetter or either of them,
with full power of substitution, our true and lawful attorneys and agents, to do
any and all acts and things in our name and on our behalf as directors of the
Company which said attorneys and agents, or either of them, may deem necessary
or advisable to enable the Company to comply with the Securities Exchange Act of
1934, as amended, and any rules, regulations or requirements of the Securities
and Exchange Commission, in connection with the filing of the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 29, 1996 including,
without limitation, signing for us, or any of us, in our names as directors of
the Company, such Form 10-KSB and any and all amendments thereto, and we hereby
ratify and confirm all that said attorneys and agents, or either of them, shall
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder, this Power of Attorney has
been signed below by the following persons in the capacities indicated as of the
21st day of March, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------- -----
<S> <C>
/s/ Carl A Bruggemeier Director
- ---------------------------------
Carl A. Bruggemeier
/s/ Catherine C. Jetter Director
- ---------------------------------
Catherine C. Jetter
/s/ Roger Lipton Director
- ---------------------------------
Roger Lipton
/s/ Marvin Rosenberg Director
- ---------------------------------
Marvin Rosenberg
/s/ Russell C. Wiles Director
- ---------------------------------
Russell C. Wiles
/s/ John H. Wyant Director
- ---------------------------------
John H. Wyant
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-29-1996
<CASH> 2,729,327
<SECURITIES> 0
<RECEIVABLES> 42,377
<ALLOWANCES> 0
<INVENTORY> 87,203
<CURRENT-ASSETS> 3,247,181
<PP&E> 5,533,058
<DEPRECIATION> 1,004,858
<TOTAL-ASSETS> 8,302,631
<CURRENT-LIABILITIES> 1,245,623
<BONDS> 0
<COMMON> 9,179,195
0
0
<OTHER-SE> (4,749,803)
<TOTAL-LIABILITY-AND-EQUITY> 8,302,631
<SALES> 7,787,631
<TOTAL-REVENUES> 7,787,631
<CGS> 2,382,357
<TOTAL-COSTS> 7,935,873
<OTHER-EXPENSES> 1,521,512
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 469,309
<INCOME-PRETAX> (2,139,093)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,139,093)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,139,093)
<EPS-PRIMARY> (2.96)
<EPS-DILUTED> (2.96)
</TABLE>
