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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 28, 1997
or
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 000-21745
CIAO CUCINA CORPORATION
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OHIO 31-1357862
(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
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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
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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. [ X ]
Issuer's revenues for its most recent fiscal year: $ 7,082,754
The aggregate market value of the Common Stock of the registrant held by
non-affiliates of the registrant was approximately $3,120,386 as of February 28,
1998.
The issuer had 3,120,386 shares of Common Stock outstanding as of February 28,
1998.
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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PART I
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Item 1 Description of Business 3
Item 2 Description of Property 11
Item 3 Legal Proceedings 11
Item 4 Submission of Matters to a Vote of Security Holders 12
PART II
Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters 12
Item 6 Management's Discussion and Analysis or
Plan of Operation 12
Item 7 Financial Statements 22
Item 8 Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure 22
PART III
Item 9 Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act 22
Item 10 Executive Compensation 25
Item 11 Security Ownership of Certain Beneficial Owners
And Management 27
Item 12 Certain Relationships and Related Transactions 28
Item 13 Exhibits and Reports on Form 8-K 30
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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 Cucina"
and "Ciao Baby Cucina," with locations in Washington, D.C., Cincinnati, Ohio
(two restaurants), Memphis, Tennessee and Cleveland, Ohio. The restaurants serve
authentic Mediterranean cuisine, primarily Northern Italian, with Greek, Spanish
and French influences.
The following table provides information about the Company's current
restaurants:
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SQUARE RESTAURANT
LOCATION FOOTAGE SEATS DATE OPENED
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Cincinnati, Ohio.................. 3,869 132 April 15, 1991
(Harper's Point)
Washington, DC.................... 7,147 165 August 30, 1993
Memphis, Tennessee................ 6,448 208 February 29, 1996
Cincinnati, Ohio.................. 7,925 212 March 19, 1996
(downtown)
Cleveland, Ohio...................
Restaurant 5,700 160 February 3, 1998
Banquet Facility 11,500 n/a February 6, 1998
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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. All outstanding shares of Preferred Stock converted
automatically to shares of Common
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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. 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. 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.
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
The Company was operating five restaurants at the beginning of 1997, two in
Cincinnati, Ohio, one in Memphis, Tennessee, one in Washington, DC and one in
Hackensack, New Jersey. The Company opened a sixth restaurant, located in
Northport Marketplace in Ft. Lauderdale, Florida, on September 26, 1997. The Ft.
Lauderdale restaurant was affected adversely by landlord delays in completing
and leasing the project to other tenants and reported substantial losses causing
the Company to implement a plan to close this unit. The Company closed this
restaurant on January 17, 1998. Also, the Company's New Jersey restaurant had
experienced a steady decline in revenues. The location had been problematic with
low mall traffic counts and a second floor location. The New Jersey restaurant
was closed on December 31, 1997. See "Management's Discussion and Analysis or
Plan of Operation."
During 1997, Ciao Playhouse, Inc., a wholly-owned subsidiary of the Company
("Ciao Playhouse"), finalized its lease with an affiliate of Playhouse Square
Foundation of Cleveland, Ohio, a nonprofit entity (together, "PSF"), to develop
a 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 restaurant and banquet facility opened in February 1998. The
agreement for the project estimated costs for completion, including improvements
and equipment, of $3,200,000. $2.5 million of this amount has been financed by
PSF, through one or more loans and tax credits, as a tenant improvement
allowance. The remaining $700,000 is to be paid $400,000 by Ciao Playhouse and
$300,000 by PSF, with any excess costs split between the parties. Although
actual expenses related to the construction and opening of the restaurant and
banquet facility have not been finalized, it currently appears that costs will
be approximately $350,000 above those originally projected, resulting in
additional expense to each party of approximately $175,000. Of the first $50,000
of any cost overruns, each of Ciao Playhouse and PSF must advance $25,000 in
cash. The remainder will be advanced by PSF, with Ciao Playhouse responsible for
repayment of its 50% share either from 50% of the Company's 5% management fee
for the project or from net income earned from operation of the project.
Interest will accrue
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at an annual rate of 8% on any balance outstanding beyond a twelve month period.
Under the lease, Ciao Playhouse will pay base rent in an amount necessary to
amortize the portion of the $2.5 million tenant improvement allowance that is 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, 1996 and 1997,
Cleveland Playhouse Square attracted approximately 1 million patrons each year
to its four theaters. A fifth theater is scheduled to open in October of 1998.
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.
During the first three quarters of 1997, the Company attempted to implement
its original growth strategy. By the end of 1997, it became obvious that the
Company's cash flows would not be sufficient to fund continued expansion and the
Company was not successful in acquiring financing needed to enable it to
continue its expansion plans. At the end of 1997 and the beginning of 1998, the
Company adopted a two-phase stabilization and recovery program. Phase 1 involved
the closing of the Ft. Lauderdale, Florida and Hackensack, New Jersey
restaurants, a moratorium on expansion, including negotiated termination of
lease arrangements for additional restaurant locations, and certain cost
reductions. Phase 2 will involve efforts to improve operations of the Company's
continuing restaurants, coupled with further cost reductions. The goal of the
stabilization and recovery program is to attain positive cash flow on a
Company-wide basis before additional expansion is pursued. The Company
anticipates that once operating profitability has been demonstrated, the Company
should be able to obtain additional financing to enable it to resume a growth
strategy based upon the opening of selected additional restaurant locations. See
"Management's Discussion and Analysis or Plan of Operation."
DEVELOPMENT STRATEGY
The Company's development strategy has been to locate its restaurants close
to arts and entertainment facilities, convention centers or other high traffic
generators which are expected 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 and the Cleveland Playhouse Square Center
location. As discussed above, the Company is not contemplating the opening of
additional restaurants at this time. If the Company's stabilization and recovery
program is successful, the Company intends to resume opening additional
restaurants. See "Management's Discussion and Analysis or Plan of Operation."
Development costs vary depending on the site of a restaurant. The Company
historically has been able to attract favorable financing in the form of tenant
improvements and other developer contributions. As indicated below, these have
substantially limited Company capital commitments for each restaurant.
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COST PER RESTAURANT(1)
----------------------
COMPANY DEVELOPER
CONTRIBUTION CONTRIBUTION
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EXISTING RESTAURANTS:
Cincinnati, Ohio $ 528,000 $ 84,600
(Harper's Point)
Washington, D.C. $ 646,500 (2)
Memphis, Tennessee $ 785,000 $ 705,000
Cincinnati, Ohio $ 1,240,000(3) $ 550,000
(downtown)
Cleveland, Ohio (4) $ 575,000 $ 2,975,000
- --------------------------
(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) Projected costs are based upon management's best current estimates. See
description of financing arrangements under "Current Year's Developments" above.
The Company anticipates that any future restaurants would be similar in size
to its two restaurants opened in 1996, ranging from approximately 6,000 to 8,000
square feet with indoor seating for 165 to 220 people. The Company's strategy
has been to utilize existing buildings for new units in lieu of free-standing
construction. Complete restaurant development typically takes eight to twelve
months and encompasses site selection, lease negotiation, restaurant design,
production of contract documents, licensing and permitting, contractor
selection, construction, installation of furniture, fixtures and equipment,
hiring and training of restaurant staff and various pre-opening activities. The
Company's senior management oversees all aspects of restaurant development and
works closely with the development community, the Company's designers,
architects, contractors and kitchen and bar equipment suppliers. To date, the
Company has utilized an unrelated Cincinnati, Ohio based construction firm as
either the construction manager or general contractor for all of its
restaurants.
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OPERATIONS
Ciao 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 restaurant in downtown Cincinnati features a store-front
style gourmet coffee shop and bakery which is open during breakfast hours.
Ciao 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 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 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 $7.25 to $10.00 for lunch and $9.95 to $22.00 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 a sous
chef 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
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), 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 license 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 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. When the Company discontinues the use of the "CIAO BABY" mark,
the Company believes it is not likely to have a material adverse effect. The
Company opened its Cleveland restaurant under the name "Ciao Cucina."
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EMPLOYEES
At March 18, 1998, the Company employed 240 persons, 101 of whom were employed
on a full-time basis (30 hours per week or more), including 33 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.
All of the Company's restaurants are located in leased premises. The table
below presents certain information concerning the Company's existing restaurant
leases. 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 newest
restaurants.
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SQUARE
LOCATION LEASE EXPIRATION FEET ANNUAL BASE RENT PERCENTAGE RENT
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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
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.
Cleveland, Ohio December 2007 17,200 $174,000 increasing 50% of net income after
to $275,064 5% management fee and
deduction for reserves for working
capital, capital repairs and
replacement
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
On August 20, 1997, suit was filed against the Company in Bergen County
Division of the Superior Court of New Jersey by the landlord for the Company's
New Jersey restaurant (JMB Income Properties, Ltd.-XI v. Ciao Cucina
Corporation, Civil Action #l-7946-97). The complaint alleged that the Company
had breached its lease by failing to pay its proportionate share of real estate
taxes for the location and failing to maintain the premises in accordance with
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the lease and also had anticipatorily breached the lease, by requesting a
restructuring or termination of the lease. The complaint was seeking unspecified
damages and an order requiring the Company to comply with the lease. The Company
and the landlord agreed to settle the suit as part of a lease settlement
agreement dated February 11, 1998. As a result of the settlement agreement the
law suit was dismissed pursuant to a Consent Order of Settlement filed with the
court on March 4, 1998.
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
The Company's Common Stock commenced trading on The Nasdaq SmallCap Market
("Nasdaq") under the symbol "CIAO" on November 27, 1996. The high and low sale
prices as reported by Nasdaq listed by quarter were as follows:
High Low
Fourth Quarter, 1996 7-3/4 5-1/4
First Quarter, 1997 5-7/8 3
Second Quarter, 1997 3-5/8 2-3/4
Third Quarter, 1997 3-1/2 3
Fourth Quarter, 1997 3-3/8 1
As a result of its 1997 losses and of costs and indebtedness incurred in
connection with its stabilization plan, the Company believes, based on its
fiscal year 1997 financial results, that it no longer meets the current criteria
for continued listing of the Common Stock on Nasdaq. Accordingly, in the absence
of an exception, the Company expects the Common Stock to be delisted from
Nasdaq. See "Management's Discussion and Analysis or Plan of Operation."
As of December 28, 1997, the Company had 35 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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
OVERVIEW
OTHER THAT THE STATEMENTS PROVIDING HISTORICAL INFORMATION, THE STATEMENTS
CONTAINED IN THIS OVERVIEW AND UNDER "LIQUIDITY AND CAPITAL RESOURCES" 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 ABILITY OF THE COMPANY TO CURTAIL COSTS AND COMPLETE ITS
STABILIZATION PLAN DESCRIBED BELOW, EXPOSURE TO COST FLUCTUATIONS, AVAILABILITY
OF LABOR, COMPETITION FROM OTHER RESTAURANTS, CHANGING TRENDS AND GOVERNMENT
REGULATION.
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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 1996 and 1997 fiscal years ended on December
29, 1996 and December 28, 1997, respectively.
During the first three quarters of 1997, the Company attempted to implement
its original growth strategy. This strategy was premised upon corporate overhead
expenses being overcome and Company-wide profitability reached through the
opening of additional profitable restaurants. The Company's plans originally
called for the opening of five additional restaurants during 1997. By the fourth
quarter of 1997, it became apparent to Management that a change in strategy
would be required as a result of a number of factors. Due to various reasons,
such as increased competition and delayed downtown development projects,
revenues of certain of the Company's existing restaurants decreased. Substantial
increased losses were incurred in the Company's New Jersey location.
Difficulties in obtaining leases delayed openings of other restaurants. Finally,
the Company's Ft. Lauderdale restaurant, which opened at the end of the third
quarter, was affected adversely by landlord delays in completing and leasing the
project to other tenants and reported substantial unexpected losses. By the end
of 1997, it became obvious that the Company's cash flows would not be sufficient
to fund its operating losses, any expansion plans in addition to the Cleveland
restaurant, and any settlement agreements being contemplated with the Company's
landlords. In addition, the Company was not successful in acquiring additional
financing.
The Company decided to engage an independent turnaround specialist, Parentis
Corporation, to assist in developing a recovery plan for the Company (see
"Certain Relationships and Related Party Transactions"). Parentis is an advisory
practice, primarily providing assistance to under performing companies. Parentis
is led by Stephen J. Kent, who specializes in turnaround management in addition
to providing on-going involvement in several operating companies he has
acquired. With the assistance of Parentis, the Company developed a two-phase
stabilization and recovery plan.
Phase 1, which is nearing completion, involved the closing of restaurants in
Hackensack, New Jersey, and Ft. Lauderdale, Florida, the reevaluation of all
future restaurant openings and related lease commitments, and an immediate
reduction in corporate office personnel and other corporate overhead expenses.
The two restaurant closings are complete and settlement agreements have been
reached with both landlords of the closed restaurants. In addition, a lease
settlement has been completed for one undeveloped project in Orlando, Florida,
and negotiations are continuing with two remaining landlords with leases for
locations in Coral Gables, Florida and Arlington, Virginia.
The termination agreement with the New Jersey landlord, dated February 11,
1998, requires the Company to make periodic payments to the landlord over a one
year period, calendar 1998, totaling $500,000, and allows the Company to remove
all furniture, fixtures and equipment from the restaurant. The lawsuit
previously filed against the Company was dismissed.
The termination agreement with the Ft. Lauderdale landlord, dated January 19,
1998, provides for an assignment to the landlord of all contents of the
restaurant; however, no additional payments are required.
13
<PAGE> 14
The termination agreement with the Orlando landlord, dated February 1998,
requires the Company to make periodic payments totaling $88,142.75 during 1998
to reimburse the landlord for its out-of-pocket expenses in addition to the sum
of $28,200 to be paid to the brokerage firm for its commission on the proposed
project.
In addition, as a part of Phase 1, short term financing has been acquired
from Blue Chip LP, as discussed in "Liquidity and Capital Resources." As part of
Phase 1, the Company attempted to terminate its lease for its corporate
headquarters with the intention of moving to smaller less costly office space.
The Company was not able to reach an agreement with the landlord and as part of
Phase 2 will seek the landlord's consent to sublet half of the corporate office
to Parentis, thereby decreasing occupancy costs by half.
The Company is engaged in discussions and negotiations with its Chief
Executive Officer, Carl A. Bruggemeier, which would provide for Mr. Bruggemeier
to resign as an employee but provide continued services to the Company as a
consultant for a period of approximately one year. Mr. Bruggemeier has indicated
his desire to pursue other business interests.
In the event of Mr. Bruggemeier's resignation, and while a replacement CEO is
being sought by the Company, an interim "Office of the CEO" would be created to
manage the Company. This office would be shared by Parentis, led by Mr. Stephen
J. Kent, and the Company's Chief Financial Officer, Catherine C. Jetter. Mr.
Kent and Ms. Jetter have been working together on the stabilization plan of the
Company since mid December 1997.
The goal of Phase 2 is to obtain positive cash flow on a Company-wide basis
by improving the operating results of existing restaurant locations and reducing
corporate overhead expenses. As discussed earlier, the Company has imposed a
moratorium on growth in an effort to create earnings and positive results before
adding additional restaurants. The Company believes it has developed a strong
restaurant concept with long term potential and that it needs to demonstrate the
ability to generate profits before seeking additional financing to open new
restaurants. The Company believes that, once such positive cash flow has been
obtained, it should be able to obtain additional financing which will enable it
to resume a growth strategy based upon the opening of selected additional
restaurant locations.
The Company is considering various forms of transactions for the purposes of
increasing revenues, reducing corporate overhead expenses further and obtaining
additional financing. Certain of these transactions, if completed, could involve
the issue of equity securities by the Company, resulting in dilution of
ownership to existing shareholders. There can be no assurance that any
transaction will be completed.
SELECTED FINANCIAL DATA
The selected historical financial data presented below as of December 25,
1994, December 31, 1995, December 29, 1996 and December 28, 1997 and for the
fiscal years 1994, 1995, 1996 and 1997 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 26,
1993 and for fiscal year 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.
14
<PAGE> 15
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
STATEMENT OF OPERATIONS DATA: 1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(dollars and shares in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Restaurant revenues $ 1,870 $ 3,273 $ 4,779 $ 7,787 $7,082
Restaurant costs and expenses (1,737) (3,008) (4,548) (7,154) (6,794)
Depreciation and amortization (90) (259) (460) (782) (671)
RESTAURANT OPERATIONS 43 6 (229) (149) (383)
Interest income (expense) (102) (259) (72) (469) 49
Other income (expense) 0 (52) 3 28 (20)
General and administrative (377) (365) (604) (985) (1,214)
Restructuring costs 0 0 0 (517) 0
Lease termination and site exit costs 0 0 0 (1,936)
Loss on disposal of assets 0 0 0 (47) 0
NET LOSS (436) (670) (902) (2,139) (3,504)
Net loss per common and
equivalent share (0.55) (1.16) (1.94) (2.96) (1.12)
Weighted average number of common
and equivalent shares outstanding 794 576 570 806 3,119
OPERATING DATA:
Number of restaurants open at period
end 2 3 3 5 6
Number of mature restaurants at period 1 1 2 3 5
end (1)
Average revenue per mature restaurant (2) $ 1,071 $ 1,139 $ 1,462 $ 1,345 $ 1,388
</TABLE>
(1) A mature restaurant is one which has been open at least 18 months.
(2) Includes the Company's first, and smallest, restaurant which opened in April
1991.
<TABLE>
<CAPTION>
AS OF FISCAL YEAR END
---------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
BALANCE SHEET DATA: (in thousands)
<S> <C> <C> <C> <C> <C>
Working capital $ (406) $(2,387) $ (850) $2,002 $(1,253)
Total assets 1,728 2,818 3,886 8,303 4,609
Long-term obligations, including
current portion 1,985 2,131 3,368 109 287
Shareholders' equity (deficit) (832) (1,508) (2,616) 4,429 974
</TABLE>
15
<PAGE> 16
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal years ended December 29, 1996
and December 28, 1997, 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 29, 1996 DECEMBER 28, 1997
-------- --- ---- -------- --- ----
<S> <C> <C>
RESTAURANT REVENUES (1) 100.0% 100.0%
OPERATING EXPENSES
Food and Beverage Costs 30.6 30.4
Restaurant Labor Costs (2) 33.6 35.1
Occupancy and Other Restaurant Expenses (3) 27.7 30.4
Depreciation and Amortization 10.0 9.5
---- ---
Total Operating Expenses 101.9 105.4
RESTAURANT OPERATIONS (1.9) (5.4)
Interest Income (Expense), net and Other (5.6) .4
General and Administrative Expenses (4) (12.7) (17.1)
Restructuring Costs (6.6) .0
Lease Termination and Site Exit Costs .0 (27.3)
Loss on Disposal of Assets (0.6) .0
NET LOSS (27.4)% (49.4)%
</TABLE>
(1) Revenues consist of restaurant food and beverage sales.
(2) Restaurant labor consists of hourly and management payroll, benefits and
taxes.
(3) Occupancy and other restaurant expenses include rent, utilities,
advertising, 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.
RESTAURANT REVENUES
Revenues of individual restaurants typically are affected by a number of
factors. 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 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.
16
<PAGE> 17
Restaurant revenues for the fourth quarter of fiscal 1997 increased from
$1,808,332 in 1996 to $1,833,617 in 1997, an increase of $25,285 or a percentage
increase of 1.4%. Year to date restaurant revenues decreased from $7,787,631 in
1996 to $7,082,754 in 1997, a decrease of $704,877 or a percentage decrease of
9.1%. The increase for the quarter was attributable to the sales for the Ft.
Lauderdale restaurant which was not open in 1996. On a year to date basis, the
decrease in revenues was primarily due to decreases in revenues in New Jersey
and Memphis. In addition, during 1996, both the Downtown Cincinnati and Memphis
restaurants were experiencing higher levels of sales as is typical during a new
restaurant's honeymoon period. During 1997, the New Jersey restaurant
experienced a decrease in revenues of $564,569, a percentage decrease of 43.7%.
Although the Memphis restaurant was open for only ten months in 1996, that
restaurant experienced a $292,087 decrease in revenues in 1997 or a percentage
decrease of 18.6%.
The Company had three mature restaurants for the full year 1997 and five
mature restaurants in the fourth quarter of 1997. Same store sales in fiscal
year 1997, for mature restaurants, decreased $765,712 or a percentage decrease
of 19.0% as compared to 1996. Same store sales for the fourth quarter of 1997
decreased $106,136 as compared to the fourth quarter of 1996 or a percentage
decrease of 5.9%. The New Jersey restaurant accounted for a decrease in same
store sales for 1997 of $564,569 or a percentage decrease of 43.7%. For the
fourth quarter 1997, the New Jersey restaurant accounted for a decrease in same
store sales of $80,443 or a percentage decrease of 33.7%. Exclusive of New
Jersey, same store sales for the fourth quarter were down 1.64%.
All three of the Company's mature restaurants experienced a decline in same
store sales in fiscal year 1997, as compared to fiscal year 1996. Four of the
five mature restaurants in the fourth quarter of 1997 experienced a decline in
same store sales, although the most significant decline was attributable to the
New Jersey restaurant. As discussed previously, the Company has exited this
location. As reported in previous filings, one of the mature restaurants has
experienced rapid growth in competition, a second restaurant is part of a
downtown redevelopment program which is behind schedule and the third
restaurant's sales levels are affected by theater schedules and experienced a
decline of 2.1% for the fourth quarter. One of the Company's mature restaurants,
which experienced a decline in same store sales earlier in the year because of
daily bomb threats to that restaurant causing evacuation of the restaurant
during its peak revenue generating period of the day, experienced an increase in
same store sales for the fourth quarter of 5.5%.
FOOD AND BEVERAGE COSTS
Food and beverage costs for fiscal year 1997 decreased from food and beverage
costs for fiscal year 1996 by $230,403 or a percentage decease of 9.7%. The 1997
decrease in food and beverage costs was attributable primarily to the decrease
in sales levels of 9.1%. As a percentage of sales, food and beverage costs
decreased from 30.6% to 30.4%. The decreases in food and beverage costs as a
percentage of revenues were attributable to efficiencies in purchasing achieved
by corporate controls, menu re-engineering and training of purchasing personnel.
Food and beverage costs for the fourth quarter of 1997 increased $27,550 or
5.1%. As a percentage of sales, food and beverage costs for the fourth quarter
increased from 30.0% to 31.1%, an increase of 1.1%. The dollar increase was
partially attributable to an increase in fourth quarter sales. The percentage
increase and the remainder of the dollar increase was attributable to a normal
seasonal adjustment.
17
<PAGE> 18
RESTAURANT LABOR
Restaurant labor for fiscal year 1997 decreased from restaurant labor costs
for fiscal year 1996 by $128,035 or 4.9%. The decrease for fiscal year 1997 was
attributable to the decrease in revenues for the year resulting in a decrease in
variable labor costs. As a percentage of revenues, restaurant labor costs for
fiscal year 1997 increased over 1996 from 33.6% to 35.1%, an increase of 1.5%.
The increase in labor cost percentage for the year was caused by fixed labor
costs of management personnel as compared to the decreased levels of revenues
generated, particularly in the New Jersey restaurant. For the fourth quarter of
1997, labor costs increased $24,883 or a percentage increase of 4.0%. As a
percentage of revenues, restaurant labor costs increased from 34.8% in 1996 to
35.6% in the fourth quarter of 1997, a percentage increase of .8%. The dollar
increase in restaurant labor costs for the fourth quarter was attributable to an
increased staffing level to support the increased level of revenues during the
quarter, which are due to the busy holiday season. The percentage increase for
the quarter was also affected by the fixed labor costs.
OCCUPANCY AND OTHER RESTAURANT EXPENSES
Occupancy and other restaurant expenses for fiscal year 1997 decreased from
$2,155,611 in fiscal 1996 to $2,154,134, a decrease of $1,477 or a percentage
decrease of 0.1%. As a percentage of sales, occupancy and other restaurant
expenses increased from 27.7% for fiscal year 1996 to 30.4% for fiscal year 1997
or an increase of 2.7%. The percentage increase for the year was attributable to
increased rents from annual escalations in leases (negotiated as part of the
original leases), increased repairs and maintenance expenses for mature
restaurants, increased advertising and promotion expenses in an effort to
increase sales, increased insurance costs and increases in property taxes.
Occupancy and other restaurant expenses decreased for the fourth quarter of 1997
as compared to the fourth quarter of 1996 by $108,179 or a percentage decrease
of 18.4%. As a percentage of revenues, occupancy and other restaurant expenses
for the fourth quarter decreased from 32.5% to 26.2%, a decrease of 6.3%. The
decrease for the quarter was largely attributable to rent concessions made by
landlords as part of the lease negotiations and settlements, in addition to
increased revenues for the quarter.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased $110,377 for fiscal year 1997 as
compared to fiscal year 1996 or a percentage decrease of 14.1%. As a percentage
of sales, depreciation and amortization for the year decreased from 10.0% to
9.5%, a decrease of .5%. The decreases were due to the decrease in amortization
of pre-opening costs. In 1996 pre-opening costs for two restaurants opened early
in 1996 were expensed for the majority of the year. Prior to 1998, pre-opening
costs were amortized over the first twelve months following the opening of a
restaurant unit.
RESTAURANT OPERATIONS
The Company's loss from restaurant operations of $148,242 in fiscal 1996
increased to a loss of $382,827 in fiscal 1997 or an increase of $234,585. As a
percentage of sales, the loss from restaurant operations for the year increased
from 1.9% in 1996 to 5.4% in 1997, an increase of 3.5%. The Company's loss from
restaurant operations for the fourth quarter of $94,474 in 1996 decreased to a
loss of $85,664 in the fourth quarter of 1997, a decrease of $8,810. The
increased loss from restaurant operations for the year was attributable to fixed
costs of occupancy and fixed labor as compared to a decline in restaurant
revenues.
18
<PAGE> 19
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses increased from $985,317 in fiscal 1996 to
$1,213,929 in fiscal 1997, an increase of $228,612, or a percentage increase of
23.2%. As a percentage of revenues general and administrative expenses increased
from 12.7% to 17.1%, a percentage increase of 4.4%. The year to date increase
primarily was due to the addition of a Chief Operating Officer, an increase in
compensation for the Chief Executive Officer, increases in travel expenses
needed to manage the increased number of restaurant units and the increased
costs of insurance, professional fees, shareholder relations and listing
expenses incurred by a public company.
General and administrative expenses decreased from $306,585 for the fourth
quarter of 1996 to $266,959 for the fourth quarter of 1997, a decrease of
$39,626, or a percentage decrease of 12.9%. The decrease for the fourth quarter
was attributable to the reduction of corporate staff and other corporate
overhead expenses as a result of the Company's planned reduction in corporate
overhead.
RESTRUCTURING COSTS
In 1996, the Company incurred certain restructuring costs associated with its
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 of 1996.
There were no restructuring costs in 1997.
LEASE TERMINATION AND SITE EXIT COSTS
As discussed above, the Company developed a plan, in 1997, to close two of
its under performing restaurant units and in addition to terminate all leases
for future locations. All expenses associated with the closings of the
Hackensack, New Jersey and Ft. Lauderdale, Florida restaurants and all lease
termination settlements, including payments due in 1998, professional fees
associated with these terminations and any write-down or write-off of assets are
included in the Lease Termination and Site Exit Costs line item. Also included
are certain actual and estimated costs associated with the negotiations with
landlords for the termination of leases in three other planned locations. There
were no such costs recorded in fiscal 1996.
INTEREST EXPENSE
Interest expense net of interest income decreased from a net expense of
$469,309 for fiscal year 1996 to a net interest income of $49,013 for fiscal
1997, a change of $518,322. For the fourth quarter, interest expense was a net
$263,357 in 1996 compared to a net interest income of $1,151 in the fourth
quarter of 1997, a change of $264,508. The decrease in interest expense was due
to the pay-off of debt from the proceeds of the initial public offering and the
investment in interest bearing instruments with the remaining proceeds of the
offering (see " Liquidity and Capital Resources").
19
<PAGE> 20
NET LOSS
The net loss, for fiscal year 1997, increased by $1,365,459 or 63.8%. The
increase was due to the lease termination and site exit costs of $1,936,435. As
a percentage of sales, the net loss increased from 27.4% in 1996 to 49.4% in
1997, an increase of 22.0%.
Eliminating the non-recurring item (lease termination and site exit costs),
the net loss would have been $1,568,117 for fiscal 1997, compared to $1,574,879
in 1996, eliminating 1996 non-recurring items (restructuring costs and the loss
on disposal of assets).
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. As of the end of the third quarter of 1996, the
Company's financing arrangements did not provide sufficient cash flow for
continuing operating losses and for the Company's 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 were
used for the development and opening of new restaurants and working capital.
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 the first quarter of 1997,
a $50,000 convertible subordinated debenture holder elected to convert the
debenture to Common Stock of the Company.
The Company's net cash flow decreased from a positive $2,591,667 in 1996 to a
negative cash flow of $2,242,442 for fiscal year 1997. This decrease was due to
the increase in net loss of $1,365,459 and the 1996 net proceeds of the
Company's initial public offering of $6.1 million . The Company historically has
had working capital deficiencies, which it believes are typical in the
restaurant industry. As of December 29, 1996, the Company's current assets
exceeded its current liabilities, resulting in positive working capital of
$2,001,558. The positive working capital was due to the cash balance of $2.7
million. As of December 28, 1997, the Company's current liabilities exceeded its
current assets, resulting in negative working capital of $1,253,043. Included in
the Company's current liabilities at December 28, 1997 was $1,095,293 in accrued
lease termination and site exit costs. In addition to the lease termination
costs, the deficiency in working capital was due to a decrease in cash of $2.2
million, used for capital expenditures to develop the Ft. Lauderdale restaurant
and to fund operations.
Net cash used by operating activities increased $1,439,006 for fiscal year
1997 as compared to fiscal year 1996. This increase was due primarily to lease
termination and site exit costs of $841,142, the increased loss from operations
of $234,585 and an increase in general and administrative expenses of $228,612.
Cash used by investing activities decreased from $2,221,445 in fiscal year
1996 to $81,269 in fiscal year 1997 or a decrease of $2,140,176. The decrease in
cash used by investing activities reflects the difference in capital
expenditures for two restaurants opened in 1996 versus one restaurant opened in
1997. The major portion of the Company's capital improvements for the Cleveland
restaurant occurred in 1998.
20
<PAGE> 21
Net cash provided by financing activities was $5,492,790 in fiscal year 1996
compared to net cash used by financing activities of $42,489 in fiscal year
1997. The change was attributable to the Offering in 1996. The net cash used for
financing activities in 1997 primarily reflected the repayments on a long term
lease obligation.
On January 20, 1998, the Company acquired short term financing from Blue Chip
LP, in the form of a promissory note for $500,000, to be drawn in incremental
amounts, with interest at 14% per annum. As of March 18, 1998, the Company had
borrowed $400,000 of this amount and anticipates borrowing the remainder in
April 1998. The promissory note is due and payable on December 31, 1998. As a
part of the financing arrangement with Blue Chip LP, the Company has issued a
warrant to Blue Chip LP for the purchase of up to 200,000 shares of Common Stock
at a price of $1.35 per share. The Blue Chip LP warrant is exercisable
immediately and expires in five years.
The Company currently believes that the cash generated by operations and
received from Blue Chip LP will be sufficient to enable it to meet its
obligations until December 1998, assuming that there are no significant costs
incurred in connection with the termination of the Company's Coral Gables,
Florida and Arlington, Virginia leases, that restaurant revenues remain stable
and that no significant unexpected needs for cash arise. The Company does not
expect to generate revenues which will be sufficient to repay the Blue Chip LP
loan when it becomes due in December 1998 and will need either to renegotiate
the loan at that time or, if possible, to obtain additional financing. As
previously noted (see "Overview"), the goal of Phase 2 of the Company's
stabilization plan is to obtain positive cash flow such that the Company will be
able to obtain additional financing. The Company continues to seek sources of
additional capital and to evaluate possible transactions to improve liquidity on
both a short term and long term basis. There can be no assurance that the
Company's stabilization plan will be completed successfully or that additional
capital can be obtained either at all or on terms that would not involve
significant dilution to or subordination of the equity position of the Company's
existing shareholders.
Based on its fiscal year 1997 financial results, the Company no longer meets
the current criteria for continued listing of the Common Stock on Nasdaq. As a
result, in the absence of an exception, the Company expects the Common Stock to
be delisted from Nasdaq. There can be no assurance that Nasdaq will grant an
exception permitting continued listing. If the Common Stock is delisted from
Nasdaq, trading will continue in the over-the-counter market.
The Company does not anticipate any material expenditures for the year 2000
computer issue or that the issue will materially affect the Company's products,
services or competitive conditions. This year 2000 issue is being addressed by
the Company's software providers and will be resolved with a software upgrade
which the Company believes will not have a material financial impact.
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 restaurant business is seasonal in 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 of a particular unit.
21
<PAGE> 22
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
The following financial statements are included in this report on Form 10-KSB: Page
<S> <C>
Report of Independent Accountants F-1
Consolidated Balance Sheets as of December 28, 1997 and December 29, 1996 F-2
Consolidated Statements of Operations for the Years Ended December 28, 1997,
December 29, 1996 and December 31, 1995 F-3
Consolidated Statements of Redeemable Equity and Shareholders' Equity (Deficit)
for the Years Ended December 28, 1997, December 29, 1996 and
December 31, 1995 F-4
Consolidated Statements of Cash Flows for the Years Ended December 28, 1997,
December 29, 1996 and December 31, 1995 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 five 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. 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 Star Line Cruise
Corporation headquartered in Chicago, Illinois. He has been a director of the
Company since 1990. Age 48.
22
<PAGE> 23
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 50.
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 57.
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 64.
JOHN H. WYANT Mr. Wyant has served as President of Blue Chip Venture Company,
a venture capital investment firm which manages $186 million of committed
capital for investment in privately held high growth companies, since its
formation in 1992. From 1991 to 1992, Mr. Wyant served as Executive Vice
President, Corporate Finance of Gradison & Co., a financial services firm, where
his primary activity was the development and formation of Blue Chip Venture
Company. Mr. Wyant was initially trained in marketing with the Procter & Gamble
Company and served in marketing and general management positions with Taft
Broadcasting Company. Subsequently, he was Chief Executive Officer of Home
Entertainment Network and Nutrition Technology Corporation, both venture
capital-backed companies. Mr. Wyant holds a Bachelor of Arts from Denison
University and a Juris Doctor from Salmon P. Chase College of Law. He has been a
director of the Company since 1995 and also is a director of Zaring Homes, Inc.,
and a number of privately held companies. Age 51.
Mr. Russell C. Wiles, who was a director of the Company since 1996, resigned as
a director effective March 16, 1998, in order to devote more time to other
business obligations.
23
<PAGE> 24
EXECUTIVE OFFICERS
The current executive officers of the Company are as follows:
Name Age Title
- ---- --- -----
Carl A. Bruggemeier 48 Chairman of the Board, President
and Chief Executive Officer
Catherine C. Jetter 50 Executive Vice President, Chief
Financial Officer, Treasurer, Assistant
Secretary and Director
Information about Mr. Bruggemeier and Ms. Jetter is given above.
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 1997.
24
<PAGE> 25
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, the Company's Chief Executive Officer, and to the only other
executive officer who earned salary and bonus in excess of $100,000 for 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
Securities All Other
Name and Principal Fiscal Other Annual Underlying Compensation
Position Year Salary ($) Bonus($) Compensation ($)(1) Options (#) ($)
-------- ---- ------ --- -------- ------------ ------ ------- --- ---
<S> <C> <C> <C> <C> <C> <C>
Carl A. Bruggemeier 1997 $175,000 - - - -
President and Chief 1996 $139,732 $100,000 - 14,250 -
Executive Officer 1995 $116,154 - - (2) -
Roger D. Taylor 1997 (3) $116,496 $ 20,000 - - -
</TABLE>
(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 $1.45 per share. This Employment
Agreement, including the options provided for (none of which was exercised), was
canceled at the time of the Offering.
(3) Mr. Taylor was employed by the Company from January until December 1997.
STOCK OPTIONS. The following table sets forth information regarding options held
by the persons named on the Summary Compensation Table at fiscal 1997 year end.
No options were granted in 1997. The Company has no outstanding stock
appreciation rights (SARs).
AGGREGATED OPTION EXERCISES IN LAST FISCAL
YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FY-END (#) FY-END ($)
SHARES
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
- ---- -------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Carl A. - - 14,250/ - - / -
Bruggemeier
Roger D. Taylor - - - / - - / -
</TABLE>
25
<PAGE> 26
DIRECTOR COMPENSATION
During 1997, directors who were not employees of the Company received $500
for each Board of Directors meeting attended (including Board meetings held by
telephone). Employee directors are not separately compensated for their services
as directors. The Company discontinued the payment of directors fees in the last
quarter of 1997.
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with Mr. Bruggemeier, entered into
effective August 1, 1996 for a three year term with automatic renewal for
successive one year terms unless terminated by either party upon 180 days
written notice. The agreement originally provided for a base annual salary of
$182,000, 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) and for
miscellaneous compensation in the form of insurance and other benefits. In the
event of specified changes of control of the Company, Mr. Bruggemeier has 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.
On February 9, 1998, the Company entered into an amended employment agreement
with Mr. Bruggemeier. The agreement provides for an annual base salary of
$130,000, a reduction in certain perquisites previously provided for and the
payment to Mr. Bruggemeier of $22,000 in salary under the August 1, 1996
agreement which Mr. Bruggemeier had voluntarily deferred. In addition the
amendment requires the forgiveness of $16,000 of a $48,000 loan made to Mr.
Bruggemeier by the Company.
Ms. Jetter has an employment agreement with the Company which commenced on
December 4, 1996 and which renews automatically for successive one year terms
unless terminated by either party upon 30 days notice prior to the expiration of
a term. 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. 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.
Mr. Taylor had an employment agreement with the Company which commenced on
December 2, 1996, for a three year term, and initially provided for an annual
base salary of $109,200, a signing bonus of $15,000 and miscellaneous other
compensation in the form of insurance and other benefits. 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. On December
15, 1997, the Company entered into an agreement with Mr. Taylor to terminate his
employment. The severance agreement provides for the payment to Mr. Taylor of
$4,242 in
26
<PAGE> 27
salary under the December 2, 1996 agreement which he had voluntarily deferred,
payment of the full amount of his base salary under the employment agreement
through March 15, 1998 and health insurance coverage and the use of a company
automobile until March 15, 1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 18, 1998, there were 3,120,386 shares of the Company's common
stock outstanding. The following table sets forth as of March 18, 1998, 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 current director and each
executive officer named on the Summary Compensation Table, individually, and
(iii) all current directors and executive officers of the Company as a group.
BENEFICIAL OWNERSHIP (1)
------------------------
NUMBER OF PERCENT OF
NAME AND ADDRESS SHARES TOTAL
- ---------------- ------ -----
Carl A. Bruggemeier (2) 292,007 9.3%
Catherine C. Jetter 5,750 *
Roger D. Taylor - -
Roger Lipton (2) 271,218 8.7%
Marvin Rosenberg 43,747 1.4%
John H. Wyant (2)(3) 1,166,983 34.1%
Blue Chip Capital Fund Limited
Partnership (2) 1,149,165 33.5%
All current directors and executive
officers as a group (5 persons) 1,780,705 51.7%
- ----------------------
* 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 18, 1998, in the following amounts: Mr. Bruggemeier, 14,250 shares;
Ms. Jetter, 5,750 shares; Mr. Wyant, 300,000 shares; Blue Chip LP, 300,000
shares; and all current directors and executive officers as a group, 320,000
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) All shares indicated as owned by Mr. Wyant are owned by Blue Chip LP or an
affiliate. Mr. Wyant disclaims beneficial ownership of all shares except to the
extent of his pro rata interest therein.
27
<PAGE> 28
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"),
28
<PAGE> 29
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.
On January 16, 1998, Blue Chip LP agreed to lend the Company up to $500,000
evidenced by a promissory note due December 31,1998 bearing interest at 14% per
annum. As of March 18, 1998, the Company had borrowed $400,000 of this amount.
As further consideration, the Company has issued a warrant to Blue Chip LP for
the purchase of up to 200,000 shares of Common Stock at a price of $1.35 per
share.
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
(a director of the Company until March 1998) is the President, sell beverage
products to the Company. During fiscal years 1996 and 1997, purchases by the
Company from these businesses were $225,555 and $206,696, 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 1996 and 1997 were $274,249 and $202,863, respectively. In July
1995, Towne Investment Company, a Limited Partnership, of which Mr.
29
<PAGE> 30
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.
In December 1997, the Company entered into a consulting agreement with
Parentis Corporation which provides for an hourly billing arrangement in
addition to a success fee based upon the gross reduction of the Company's
indebtedness achieved as a result of Parentis' negotiations. On March 16, 1998,
the Company's Board of Directors approved the payment to Parentis of success
fees to be paid $40,000 in cash over a four month period and the balance to be
satisfied with the issuance of 85,000 shares of the Company's Common Stock in
addition to warrants to purchase 80,000 additional shares of Common Stock at
$1.25 per share.
ITEM. 13 EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibit Index:
Exhibit
No. Description
------- -----------
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Code of Regulations (1)
10.1 Stock Purchase and Shareholder Agreement dated March 30, 1995
among Blue Chip Capital Fund Limited Partnership, the Company and
Carl A. Bruggemeier (1)
10.2 Convertible Subordinated Participating Income Note Series B dated
September 7, 1993 between the Company and Peter E. Salas (1)
10.4 Lease dated April 29, 1996 between Hibben Building, Ltd. and the
Company (1)
10.5 Lease dated February 7, 1994 between the Kroger Co. and the
Company (1)
10.6 Lease dated July 28, 1995 between Hibben Building Associates and
the Company (1)
10.7 Lease dated October 24, 1994 between Gayoso House L.P. and the
Company (1)
10.9 Lease dated March 22, 1993 between Washington Square Ltd.
Partnership and the Company (1)
10.10 Sublease dated November 14, 1990 between Towne Investment Co. and
Fire in the Kitchen, Inc. (1)
10.11 Warrant between the Company and Blue Chip Capital Fund Limited
Partnership (1)
10.12 Employment Agreement dated as of August 1, 1996 between the
Company and Carl A. Bruggemeier (1)
30
<PAGE> 31
10.13 Employment Agreement dated as of December 4, 1996 between the
Company and Catherine C. Jetter (2)
10.14 Employment Agreement dated as of December 2, 1996 between the
Company and Roger D. Taylor (2)
10.15 Lease between the Company and the City of Coral Gables, A
Municipal Corporation dated April 7, 1997 (3)
10.16 Lease between the Company and Loew's Building, Ltd. Dated
September 15, 1997 (4)
10.17 Lease between the Company and Ballston Common Mall dated October
27, 1997 (4)
10.18 Promissory Note between the Company and Blue Chip Capital Fund
Limited Partnership dated January 16, 1998
10.19 Warrant for the Purchase of Shares of Common Stock between the
Company and Blue Chip Capital Fund Limited Partnership dated
January 16, 1998
10.20 Registration Rights Agreement between the Company and Blue Chip
Capital Fund Limited Partnership dated January 16, 1998
10.21 Security Agreement between the Company and Blue Chip Capital Fund
Limited Partnership dated January 16, 1998
10.22 Note Purchase Agreement between the Company and Blue Chip Capital
Fund Limited Partnership dated January 16, 1998.
10.23 Amended Employment Agreement dated February 9, 1998 between the
Company and Carl A. Bruggemeier
10.24 Mutual Release between the Company and Roger D. Taylor dated
December 15, 1997
21. Subsidiaries of the registrant
24. Power of Attorney
27. Financial Data Schedule **
- -------------------
1) Filed as an exhibit to the Company's Registration Statement on Form SB-2, No.
333-5674 and incorporated herein by reference.
2) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
year ended December 29, 1996 and incorporated herein by reference.
3) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for the
quarter ended April 20, 1997 and incorporated herein by reference.
4) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for the
quarter ended October 5, 1997 and incorporated herein by reference.
** EDGAR filing only.
31
<PAGE> 32
b. Reports on Form 8-K: None
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 2nd day of April 1998.
CIAO CUCINA CORPORATION
By: /s/ Catherine C. Jetter
------------------------
Catherine C. Jetter
Executive Vice President/Chief Financial 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 2nd day of April 1998.
/s/ CARL A. BRUGGEMEIER Chairman of the Board,
- ------------------------------ President and Chief Executive
Carl A. Bruggemeier Officer
/s/ CATHERINE C. JETTER Director, Executive Vice
- ------------------------------ President/Chief Financial
Catherine C. Jetter Officer and Treasurer
/s/ GARY A. SALAZAR Controller
- ------------------------------
Gary A. Salazar
/s/* ROGER LIPTON Director
- ------------------------------
Roger Lipton
/s/* MARVIN ROSENBERG Director
- ------------------------------
Marvin Rosenberg
/s/* JOHN H. WYANT Director
- ------------------------------
John H. Wyant
* By Power of Attorney
/s/ CATHERINE C. JETTER
- ------------------------------
Catherine C. Jetter, Attorney in-Fact
<PAGE> 33
CIAO CUCINA CORPORATION AND SUBSIDIARY
CONTENTS
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS F-1
CONSOLIDATED BALANCE SHEETS F-2
CONSOLIDATED STATEMENTS OF OPERATIONS F-3
CONSOLIDATED STATEMENT OF REDEEMABLE EQUITY
AND SHAREHOLDERS' EQUITY F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS F-5/6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7/18
<PAGE> 34
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 29, 1996 and December 28, 1997, and
the related consolidated statements of operations, redeemable equity and
shareholders' equity and cash flows for each of the three years in the period
ended December 28, 1997. 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 29, 1996 and December 28, 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended December 28, 1997, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As discussed in Note 2 to the
financial statements, the company has suffered recurring losses and has a
working capital deficiency at December 28, 1997, and these matters raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Joseph Decosimo & Company, PLL
Cincinnati, Ohio
March 6, 1998
F-1
<PAGE> 35
CIAO CUCINA CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 28,
1996 1997
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 2,729,327 $ 486,885
Certificate of Deposit 144,434 -
Accounts Receivable 42,377 117,282
Due from Officer - 48,000
Inventories 87,203 120,702
Prepayments 243,840 175,693
--------- ---------
Total Current Assets 3,247,181 948,562
EQUIPMENT AND IMPROVEMENTS, net 4,528,200 3,183,654
INTANGIBLE ASSETS, net 130,690 80,948
SECURITY DEPOSITS AND OTHER ASSETS 396,560 395,434
--------- ---------
TOTAL ASSETS $ 8,302,631 $ 4,608,598
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current Portion of Long-Term Debt $ 103,006 $ 52,305
Current Portion of Capitalized Lease Obligation - 85,349
Accounts Payable 544,416 516,843
Accrued Expenses 598,201 451,815
Accrued Lease Termination and Site Exit Costs - 1,095,293
--------- ---------
Total Current Liabilities 1,245,623 2,201,605
--------- ---------
LONG-TERM LIABILITIES
Notes Payable 6,007 3,701
Capitalized Lease Obligation - 145,730
Accrued Rentals 509,085 181,245
Deferred Lease Incentives 2,112,524 1,101,477
--------- ---------
Total Long-Term Liabilities 2,627,616 1,432,153
--------- ---------
SHAREHOLDERS' EQUITY
Common Stock - no par value, 10,000,000 shares authorized;
3,104,848 shares
issued for 1996 and 3,120,386 shares
issued for 1997 9,179,195 9,229,195
Additional Paid-In Deficit (1,647,372) (1,647,372)
Accumulated Deficit (3,102,431) (6,606,983)
--------- ---------
Total Shareholders' Equity 4,429,392 974,840
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,302,631 $ 4,608,598
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE> 36
CIAO CUCINA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, DECEMBER 29, DECEMBER 28,
1995 1996 1997
<S> <C> <C> <C>
RESTAURANT REVENUES $ 4,778,742 $ 7,787,631 $ 7,082,754
--------- --------- ---------
OPERATING EXPENSES
Food and Beverage Costs 1,409,422 2,382,357 2,151,954
Restaurant Labor Costs 1,548,678 2,616,162 2,488,127
Occupancy and Other Restaurant Expenses 1,589,833 2,155,611 2,154,134
Depreciation and Amortization 459,549 781,743 671,366
--------- --------- ---------
5,007,482 7,935,873 7,465,581
--------- --------- ---------
RESTAURANT OPERATIONS (228,740) (148,242) (382,827)
Interest Income (Expense), net (72,510) (469,309) 49,013
Other Income (Expense) 3,083 27,989 (20,374)
General and Administrative Expenses (604,490) (985,317) (1,213,929)
Restructuring Costs - (517,464) -
Lease Termination and Site Exit Costs - - (1,936,435)
Loss on Disposal of Assets - (46,750) -
--------- --------- ---------
NET LOSS (902,657) (2,139,093) (3,504,552)
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 $(1,107,234) $(2,387,880) $(3,504,552)
========= ========= =========
NET LOSS PER COMMON SHARE $(1.94) $(2.96) $(1.12)
========= ========= =========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 569,910 806,041 3,118,550
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 37
CIAO CUCINA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF REDEEMABLE EQUITY
AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<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 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 - - - - -
Conversion of Debenture to
Common Stock
------ --------- ------ --------- -----
Net Loss
BALANCE - December 28, 1997 - $ - - $ - $ -
====== ========= ====== ========= =====
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 38
- --------------------------------------------------------------------------------
<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> <C>
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
15,538 50,000 50,000
(3,504,552) (3,504,552)
--------- --------- --------- --------- --------- ---------
3,120,386 $ 9,229,195 $(1,647,372) $(6,606,983) $ - $ 974,840
========= ========= ========= ========= ========= =========
</TABLE>
<PAGE> 39
CIAO CUCINA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, DECEMBER 29, DECEMBER 28,
1995 1996 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(902,657) $(2,139,093) $(3,504,552)
Adjustments to Reconcile Net Loss to Net
Cash Used by Operating Activities -
Depreciation 275,259 469,492 577,752
Amortization 184,290 312,251 93,614
Amortization of Lease Incentives (122,083) (189,091) (218,727)
Other Non-Cash Expenses - 50,000 18,141
Loss on Disposal of Assets - 46,750 -
Loss on Disposal of Asset Included in
Lease Termination and Site Exit Costs - - 409,851
Write-Off of Deferred Financing Costs - 219,319 -
Changes in Operating Assets and Liabilities -
Decrease (Increase) in -
Receivables 11,254 (13,688) (74,905)
Advances to Officer - - (48,000)
Inventories 1,622 (41,129) (33,499)
Prepayments 38,223 (221,004) 68,147
Increase (Decrease) in -
Accounts Payable (44,515) 285,019 (27,573)
Accrued Expenses (131,845) 405,575 (146,386)
Accrued Lease Termination and
Site Exit Costs - - 1,095,293
Accrued Rentals 172,679 135,921 (327,840)
--------- --------- ---------
NET CASH USED BY OPERATING ACTIVITIES (517,773) (679,678) (2,118,684)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale (Purchase) of Certificate of Deposit - (144,434) 144,434
Capital Expenditures (123,620) (1,766,080) (411,173)
Proceeds from Sale of Equipment - - 252,420
Cash Paid for Intangible Assets (145,936) (258,545) (43,872)
Cash Paid for Security Deposits and
Other Assets (125,071) (52,386) (23,078)
--------- --------- ---------
NET CASH USED BY INVESTING ACTIVITIES (394,627) (2,221,445) (81,269)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in Bank Overdraft (22,555) - -
Issuance of Long-Term Debt 628,038 2,257,200 -
Repayment of Long-Term Debt (675,286) (2,882,160) (3,007)
Payments on Capitalized Lease Obligation - - (39,482)
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 (USED) BY
FINANCING ACTIVITIES 1,016,196 5,492,790 (42,489)
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 40
CIAO CUCINA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, DECEMBER 29, DECEMBER 28,
1995 1996 1997
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ 103,796 $ 2,591,667 $(2,242,442)
CASH AND CASH EQUIVALENTS - beginning of year 33,864 137,660 2,729,327
--------- --------- ---------
CASH AND CASH EQUIVALENTS - end of year $ 137,660 $ 2,729,327 $ 486,885
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING
ACTIVITIES
Deferred Landlord Incentives Used to
Purchase Leasehold Improvements
and Equipment $ 1,079,506 $ 175,786 $ 619,584
Capitalized Lease Obligation Incurred
in Exchange for Restaurant Equipment $ - $ - $ 270,561
Conversion of Short-Term Note Into
Series A Convertible Preferred Stock $ 350,000 $ - $ -
Conversion of Subordinated 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 Debenture to Common Stock $ - $ 150,000 $ 50,000
Warrants Issued for Stock Issuance
Costs $ - $ 70,000 $ -
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash Paid for Interest $ 210,292 $ 503,800 $ 74,966
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 41
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 Cucina and Ciao Baby. 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 28,
1997, 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 Owned and operating
Cleveland, Ohio 1998 (est.) Under development
</TABLE>
In December, 1997, the board of directors approved a plan for closing the
Hackensack, New Jersey and Fort Lauderdale, Florida restaurants based on their
current and projected operating performance. These restaurants were closed on
December 31, 1997 and January 17, 1998, respectively.
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 1997. 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.
F-7
<PAGE> 42
CIAO CUCINA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Equipment and Improvements - Equipment and improvements are stated at cost.
Expenditures for repairs and maintenance are charged to expense as incurred and
additions and improvements that significantly extend the lives of assets are
capitalized. Upon sale or other retirement of depreciable property, the cost and
accumulated depreciation are removed from the related accounts and any gain or
loss is reflected in operations.
Depreciation is 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. Effective in fiscal 1998, the Company will expense preopening costs
upon the opening of each new restaurant.
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 $381,413 as
of December 28, 1997 and 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 $448,662 as of December 28, 1997 and
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 $84,277 for 1995, $226,200 for 1996 and $180,790 for
1997.
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.
F-8
<PAGE> 43
CIAO CUCINA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
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.
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.
F-9
<PAGE> 44
CIAO CUCINA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - LIQUIDITY AND OPERATIONS
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. However, the Company has incurred net losses
totaling $902,657, $2,139,093 and $3,504,552 and net cash used by operating
activities of $517,773, $679,678 and $2,118,684 for fiscal years 1995, 1996 and
1997, respectively. Current liabilities exceed current assets by $1,203,043, and
accumulated deficit totals $6,606,983 as of December 28, 1997. The Company has
negotiated lease termination agreements with three landlords providing for
substantial cash payments during fiscal year 1998, and is currently negotiating
with two lessors for the termination of lease agreements. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management has developed a comprehensive plan to allow the Company to become
profitable, including terminating the leases of unprofitable restaurants,
negotiating lease termination agreements with lessors for locations at which
construction has not commenced, obtaining short-term shareholder financing,
increasing operating profitability at the Company's remaining restaurants and
reducing restaurant and corporate office expenses.
The Hackensack, New Jersey and Fort Lauderdale, Florida restaurants were closed
on December 31, 1997 and January 15, 1998, respectively. In February, 1998, the
Company reached a lease termination agreement with its Hackensack landlord
calling for the abandonment of certain leasehold improvements, payment under the
Company's $100,000 letter of credit and additional payments of $400,000 from
February through December, 1998. In January, 1998, the Company reached a lease
termination agreement with its Fort Lauderdale, Florida landlord calling for the
abandonment of certain leasehold improvements and restaurant equipment.
In February, 1998, the Company reached a lease termination agreement with the
Orlando, Florida landlord, a location at which construction had not commenced,
calling for total payments of $88,142 from March through July, 1998. The
Hackensack and Orlando lease termination agreements provide penalties of
$1,634,000 and $2,892,000, or approximately the total remaining payments under
the original lease provisions, in the event of non-compliance with the lease
termination agreements. The Company is currently negotiating with its landlords
at Coral Gables, Florida and Arlington, Virginia, two locations at which
construction has not commenced, to terminate these two lease agreements. Default
provisions under the Coral Gables, Florida and Arlington, Virginia leases call
for payments of $2,489,444 and $2,979,900 in the event of lease default. Current
liabilities include $1,095,293 for lease termination and site exit costs at
December 28, 1997, relating to these two existing restaurants and five lease
agreements.
On January 15, 1998, the Company obtained a loan with a shareholder providing
for maximum available borrowings of $500,000, of which $200,000 was drawn on
January 15, 1998. This loan bears interest at 14%, is secured by substantially
all assets of the Company and matures on December 31, 1998. The loan agreement
provides for the issuance of warrants to purchase up to 200,000 shares of the
Company's common stock at $1.35 per share, the market price of the Company's
common stock as of January 15, 1998.
F-10
<PAGE> 45
CIAO CUCINA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - LIQUIDITY AND OPERATIONS - continued
The Company opened its Cleveland, Ohio restaurant and banquet facility in
February, 1998, and anticipates that this location will generate net income from
restaurant operations during fiscal year 1998.
Management has devoted substantial time and attention to reducing restaurant and
general and administrative costs during 1997, and is continuing to do so in
1998. These plans include elimination of a senior management position, a
substantial reduction in the president's salary, reduction of corporate office
staffing and an intensive focus on improving restaurant operations and
profitability.
Management believes that its plans will allow the Company to become profitable
and continue as a going concern. Accordingly, the consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amount and classification of
liabilities or any other adjustments that might be necessary should the Company
be unable to continue as a going concern.
NOTE 3 - EQUIPMENT AND IMPROVEMENTS
Equipment and improvements consist of the following major classifications:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Leasehold Improvements $ 3,747,206 $ 2,828,704
Restaurant Furniture and Equipment 1,300,577 1,006,051
Computer Equipment 229,493 232,597
Office Furniture and Equipment 123,747 156,856
China, Glassware and Flatware 79,601 63,222
Construction in Progress 52,434 -
--------- ---------
5,533,058 4,287,430
Accumulated Depreciation (1,004,858) (1,103,776)
--------- ---------
$ 4,528,200 $ 3,183,654
========= =========
</TABLE>
NOTE 4 - INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Licenses $ 81,125 $ 101,627
Preopening Costs 381,165 404,535
------- -------
462,290 506,162
Accumulated Amortization (331,600) (425,214)
------- -------
$ 130,690 $ 80,948
======= =======
</TABLE>
F-11
<PAGE> 46
CIAO CUCINA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
10% Series B Convertible Subordinated
Participating Income Notes $ 50,000 $ 50,000
10% Series A Convertible Subordinated
Participating Income Notes 50,000 -
Equipment Notes Payable - payable $378 monthly including
interest 9,013 6,006
------- -------
109,013 56,006
Less Current Portion 103,006 52,305
------- -------
$ 6,007 $ 3,701
======= =======
</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 were included in the current portion of
long-term debt at December 29, 1996 and December 28, 1997, as they were in
default due to nonpayment of interest. In February, 1997, Series A Convertible
Participating Income Notes were converted into 15,538 shares of common stock.
Aggregate maturities of long-term debt for the years subsequent to December 28,
1997, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
<S> <C>
December 27, 1998 $ 2,305
December 26, 1999 51,624
December 31, 2000 1,904
December 29, 2001 173
---------
$ 56,006
=========
</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 $94,459 for 1995, $502,352 for 1996 and $47,007 for
1997.
F-12
<PAGE> 47
CIAO CUCINA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 - INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C> <C>
Deferred Provision $(107,000) $ 87,500 $(963,000)
Tax Benefit of Net Operating Loss Carryforward (162,000) (830,000) (407,000)
Valuation Allowance 269,000 742,500 1,370,000
--------- --------- ---------
$ - $ - $ -
========= ========= =========
</TABLE>
The provision for income taxes differs from the amounts computed by applying the
federal statutory rate to book income for the years ended December 31, 1995,
December 29, 1996 and December 28, 1997, as follows:
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C> <C> <C>
Income Tax at Federal Statutory Rate $(230,000) $(727,000) $(1,192,000)
State Income Taxes, net of federal benefit (40,000) (85,000) (210,000)
Valuation Allowance 269,000 742,500 1,370,000
Other 1,000 69,500 32,000
--------- --------- ---------
$ - $ - $ -
========= ========= =========
</TABLE>
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 $220,000 was
recorded during 1995 along with an offsetting valuation allowance of $220,000.
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.
F-13
<PAGE> 48
CIAO CUCINA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 - INCOME TAXES - continued
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>
1996 1997
<S> <C> <C>
Accrued Expenses $ 4,000 $ 443,000
Deferred Rent 204,000 72,000
Net Operating Loss Carryforwards 992,000 1,399,000
Asset Depreciation and Amortization, net of
deferred lease incentive 31,000 687,000
--------- ---------
1,231,000 2,601,000
Valuation Allowance (1,231,000) (2,601,000)
--------- ---------
Net Deferred Tax Asset $ - $ -
========= =========
</TABLE>
No benefit for income taxes has been recorded due to losses reported in 1995,
1996 and 1997 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 $3,499,000 which is
available to offset future taxable income through the years 2010 to 2012.
NOTE 7 - LEASE COMMITMENTS
The Company leases restaurant facilities and administrative offices under
operating lease agreements with 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-14
<PAGE> 49
CIAO CUCINA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 - 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 28, 1997,
including the lease commitment for the Cleveland, Ohio location opened
subsequent to December 28, 1997, but excluding the Hackensack, New Jersey, Fort
Lauderdale, Florida and Orlando, Florida lease commitments for which lease
termination agreements were reached subsequent to December 28, 1997, are as
follows:
<TABLE>
<CAPTION>
LEASES
THIRD RELATED SUB-LEASE PENDING
PARTIES PARTIES RENTALS TERMINATION TOTAL
<S> <C> <C> <C> <C> <C>
YEAR ENDING
December 27, 1998 $ 639,288 $ 286,676 $(44,862) $ 72,612 $ 953,714
December 26, 1999 704,930 286,676 (11,324) 310,847 1,291,129
December 31, 2000 719,788 286,676 - 310,847 1,317,311
December 30, 2001 726,723 231,309 - 310,847 1,268,879
December 29, 2002 732,582 222,370 - 310,847 1,265,799
Thereafter 3,225,657 1,461,212 - 4,153,344 8,840,213
--------- --------- --------- --------- ----------
$ 6,748,968 $ 2,774,919 $(56,186) $ 5,469,344 $ 14,937,045
========= ========= ========= ========= ==========
</TABLE>
Rent expense totaled $527,060 for 1995, $590,326 for 1996 and $710,200 for 1997.
Contingent rental expense, computed principally on the basis of sales in excess
of specified threshold amounts, totaled $116,331 for 1995, $38,800 for 1996 and
$23,930 for 1997.
The Company leases certain restaurant equipment under capitalized lease
agreements. Future minimum lease payments under noncancelable capitalized leases
with initial or remaining terms in excess of one year at December 28, 1997, are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING
<S> <C>
December 27, 1998 $ 105,324
December 26, 1999 105,324
December 31, 2000 52,662
-------
Total Minimum Lease Payments 263,310
Less: Amounts Representing Interest 32,231
-------
Present Value of Minimum Lease Payments $ 231,079
=======
</TABLE>
NOTE 8 - 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 $37,500 for 1995 and $45,500 for 1996
under this arrangement.
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.
F-15
<PAGE> 50
CIAO CUCINA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - RELATED PARTY TRANSACTIONS - continued
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 $0 at
December 29, 1996. Interest expense on this note totaled $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 $76,111 for 1995, $274,249 for 1996 and $260,460 for 1997. Additionally,
the Company owed this landlord $43,295 in accrued and other rents at December
29, 1996 and $59,597 at December 28, 1997.
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 $82,766 for 1995, $225,555 for 1996 and $206,696 for 1997.
The Company paid directors' fees of $5,000 to its outside directors for their
services during 1997.
The Company had a consulting agreement with one of its directors and
shareholders which provided for consulting and financial advisory fees. This
contract was terminated by the board of directors during 1997 after payments of
$12,000 under its terms were made.
The Company has advanced $48,000 to its president, to be repaid in accordance
with the terms of his revised employment agreement. A portion of the chief
executive officer's and chief financial officer's salary, totaling $18,308 at
December 28, 1997, has been voluntarily deferred.
NOTE 9 - 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.
F-16
<PAGE> 51
CIAO CUCINA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9 - STOCK OPTIONS AND WARRANTS - continued
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 and Chief Financial Officer. 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 and 1997.
<TABLE>
<CAPTION>
EXERCISE
SHARES PRICE
<S> <C> <C>
Outstanding at January 1, 1996 - N/A
Warrants Granted 249,990 $7.00
Warrants Granted 100,000 $8.40
Options Granted 20,000 $7.00
Outstanding at December 29, 1996 369,990 $7.38
Warrants Granted - -
Options Granted - -
Outstanding at December 28, 1997 369,990 $7.38
</TABLE>
NOTE 10 - SUBSEQUENT EVENTS
On December 31, 1997, the Company closed its New Jersey restaurant. As part of
the February, 1998, negotiated lease settlement, the Company is required to pay
settlement costs of $400,000 during 1998, was required to cede its interest in
the lease deposit letter of credit with a value of $100,000 and was required to
transfer title to all restaurant leasehold improvements to the landlord. The
total expense for closing this unit was estimated at $575,000 and recognized as
lease termination and site exit costs for the year ended December 28, 1997.
On January 17, 1998, the Company closed its Fort Lauderdale restaurant. As part
of the negotiated lease settlement, the Company was required to transfer title
to all restaurant leasehold improvements, furniture, fixtures and equipment to
the landlord. The total expense for closing this unit was approximately
$1,030,000, and was recognized as lease termination and site exit costs for the
year ended December 28, 1997.
F-17
<PAGE> 52
CIAO CUCINA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - SUBSEQUENT EVENTS - continued
In early 1998, the Company has negotiated a settlement of the Orlando, Florida
lease and is in the process of negotiating settlements for leases to which it is
a party for restaurants under development located in Arlington, Virginia and
Coral Gables, Florida. The costs of effecting a termination of these three
leases have been estimated at $335,000 and are included in lease termination and
site exit costs and accrued lease termination and site exit costs at December
28, 1997. The Company does not currently have sufficient capitalization to
build, equip and operate restaurants at these locations. The default provisions
of the lease agreements provide for total payments of $2,489,444 for Coral
Gables and $2,979,900 for Arlington in the event that the Company is unable to
comply with the terms of the lease agreements.
Lease termination and site exit costs consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Property and Equipment $ 2,445,657
Lease Settlements 893,202
Deferred Lease Incentives (1,411,904)
Accrued Rent (310,385)
Other Assets 255,807
Other Costs 64,058
---------
$ 1,936,435
=========
</TABLE>
It is reasonably possible that the actual lease termination and site exit costs
could differ materially from these estimates.
Operations of the closed restaurants are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, DECEMBER 29, DECEMBER 28,
1995 1996 1997
<S> <C> <C> <C>
Revenues $ 1,790,138 $ 1,292,532 $ 871,700
Operating Expenses 1,971,068 1,603,608 1,259,884
--------- --------- ---------
Operating Losses $( 180,930) $( 311,076) $( 388,184)
========= ========= =========
</TABLE>
F-18
<PAGE> 1
EXHIBIT 10.18
- -------------
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT").
BY THE ACCEPTANCE HEREOF, THE PURCHASER OF THIS NOTE REPRESENTS THAT THIS NOTE
IS BEING ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION AND THAT
THIS NOTE MAY NOT BE OFFERED, SOLD OR OTHERWISE PLEDGED, HYPOTHECATED OR
TRANSFERRED UNLESS SUCH TRANSACTION IS REGISTERED UNDER THE ACT, AN APPLICABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT IS AVAILABLE OR AN
OPINION OF LEGAL COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT
REQUIRED IS RECEIVED.
CIAO CUCINA CORPORATION
PROMISSORY NOTE
U.S. $500,000 Cincinnati, Ohio
January 16, 1998
1. FOR VALUE RECEIVED, the undersigned CIAO CUCINA CORPORATION, an Ohio
corporation (the "Company"), hereby promises to pay to the order of Blue Chip
Capital Fund Limited Partnership, a Delaware limited partnership (including any
successor holder hereof, the "Purchaser"), the principal sum of Five Hundred
Thousand Dollars (U.S. $500,000) or, if less, the principal amount outstanding
under this Note. Interest on the principal amount hereof shall accrue from the
date advanced to the date paid at the rate of 14% per annum (provided that upon
and during the continuance of an Event of Default (as defined below), interest
shall accrue at the rate of 18% per annum or, if less, at the highest rate
permitted by law). The outstanding principal amount hereof, together with all
interest accrued thereon, shall be payable on December 31, 1998 or earlier as
provided herein. Upon and during the continuance of an Event of Default and at
and after maturity, interest shall be payable on demand. Principal and interest
shall be paid in lawful money of the United States at the principal office of
the Purchaser or at such other address of which the Purchaser shall have
notified the Company in writing. This Note is issued pursuant to the terms of
the Note Purchase Agreement of even date herewith (the "Note Purchase
Agreement") between the Company and the Purchaser and is entitled to the benefit
thereof and of the security documents referred to therein.
2. The Company agrees that until this Note is paid in full:
(a) CORPORATE EXISTENCE AND COMPLIANCE WITH LAWS. The Company
shall preserve and maintain its corporate existence in good standing under the
laws of the State of Ohio and comply in all material respects with all laws,
regulations, governmental orders and authorizations, and court orders material
to the continuing conduct of the Company's business or to the Company's
performance of its obligations under this Note. The Company shall not amend its
Articles of Incorporation or Code of Regulations.
- 1 -
<PAGE> 2
EXHIBIT 10.18
- -------------
(b) MERGER OR TRANSFER OF ASSETS. The Company shall not be a
party to any merger or consolidation or sell, transfer, lease or convey all or
substantially all of its property.
(c) FINANCIAL REPORTING. The Company shall supply to the
Purchaser such financial and operating information as the Purchaser may
reasonably request.
(d) DIVIDENDS AND REDEMPTIONS. The Company shall not pay any
dividend or make any distribution with respect to its stock or redeem or
purchase any shares of its stock or make any loan to a shareholder, other than
customary expense advances.
(e) CHANGE IN BUSINESS. The Company shall not engage in any
business other than the business being conducted by it on the date hereof.
(f) TRANSACTIONS WITH AFFILIATES. The Company shall not enter
into any transaction with any shareholder, director, officer, employee, agent or
affiliate other than in the ordinary course of business and on terms no less
favorable to the Company than a similar transaction with an unaffiliated third
party.
(g) USE OF PROCEEDS. The Company shall use the proceeds of the
loan made hereunder for working capital.
(h) LIENS AND ENCUMBRANCES. The Company shall not create or
permit any lien or encumbrance upon any of its assets to secure any indebtedness
for borrowed money or any deferred payment obligation for goods or services.
3. LIMITED TRANSFERABILITY. This Note has not been registered under the
Securities Act of 1933 and may be transferred only pursuant to an effective
registration thereunder or an exemption from registration thereunder and in
compliance with applicable state securities laws. This Note may not be
transferred if such transfer would require any registration or qualification
under, or cause the loss of exemption from registration or qualification under,
such Act or any applicable state securities law with respect to the Note. This
Note shall bear an appropriate legend with respect to such restrictions on
transfer. This Note is transferable only upon the books which the Company shall
cause to be maintained for such purpose. Any assignment or transfer may be made
by surrendering this Note to the Company together with the attached assignment
form properly executed by the assignor or transferor. Upon such surrender the
Company will execute and deliver, in the case of an assignment or transfer in
whole, a new Note in the name of the assignee or transferee or, in the case of
an assignment or transfer in part, a new Note in the name of the assignee or
transferee named in such instrument of assignment or transfer and a new Note in
the name of the assignor or transferor covering the portion of this Note not
assigned or transferred to the assignee or transferee.
- 2 -
<PAGE> 3
EXHIBIT 10.18
- -------------
The Holder may not assign or transfer this Note, other than to an affiliate or
one of its partners, without the consent of the Company, which shall not be
unreasonably withheld.
4. LOSS, ETC. OF NOTE. Upon receipt of evidence satisfactory to the
Company of the loss, theft, destruction or mutilation of this Note, and of
indemnity in form and amount reasonably satisfactory to the Company, if lost,
stolen or destroyed, and upon surrender and cancellation of this Note, if
mutilated, and upon reimbursement of the Company's reasonable incidental
expenses, the Company shall execute and deliver to the Holder a new Note of like
date, tenor and denomination.
5. EVENTS OF DEFAULT. (a) The unpaid principal and interest hereof may
be accelerated and immediate payment hereof may be demanded by the Purchaser
upon the occurrence of an Event of Default as defined below (provided, in the
case of an Event of Default described in clause (ii) below, such acceleration
shall be automatic without any action by the Purchaser). The following are the
Events of Default:
(i) The Company fails to pay the principal of this Note when
due.
(ii) The Company or any guarantor of this Note is the debtor
in a bankruptcy, receivership, Chapter XI or other insolvency
proceeding, is generally unable to pay its debts when due, or makes
an assignment for the benefit of creditors.
(iii) The Company violates in any material respect any other
covenant, agreement or condition contained in this Note or in the Note
Purchase Agreement or any document executed pursuant thereto.
(iv) The Company does not pay any principal or interest on any
borrowed money obligation or capitalized lease with an aggregate unpaid
principal amount of $10,000 or more when due and any applicable grace
period expires or the holder of such other obligation is entitled to
declare such obligation due prior to its stated maturity because of the
occurrence of an event of default by the Company with respect thereto.
(v) Any representation or warranty made by the Company in the
Note Purchase Agreement or any document executed pursuant thereto was
incorrect in any material respect when made.
(vi) The Company is liquidated, dissolved or ceases to operate
its business.
- 3 -
<PAGE> 4
EXHIBIT 10.18
- -------------
(vii) The Company is in default under the terms of any other
agreement to which it is a party, which default is reasonably likely to have a
material adverse effect on the Company's assets, business, results of
operations, financial condition or prospects.
(viii) Any final judgment of a court in excess of $25,000 is
rendered against the Company and is not stayed or discharged within 30
days.
(ix) Any person or group of persons other than the
shareholders of the Company on the date hereof acquires more than 25%
of the voting power of the Company.
(x) Carl A. Bruggemeier shall not be serving as chief
executive officer of the Company.
(xi) In the good faith opinion of the Purchaser, there shall
occur any material adverse change in the earnings, assets, financial
condition, business or prospects of the Company or the Purchaser shall
deem itself to be insecure.
(b) The Company shall immediately give notice to the Purchaser
in writing upon the occurrence of an Event of Default or any event which, with
notice or lapse of time or both, would become an Event of Default.
6. MISCELLANEOUS. (a) This Note shall be governed by and construed in
accordance with the laws of the State of Ohio applicable to agreements made and
to be performed therein.
(b) The Company waives presentment, protest and notice of
dishonor of this Note.
(c) If the Purchaser commences any action to enforce its
rights under this Note, the Company shall pay to the Purchaser all reasonable
attorneys' fees and expenses incurred by the Purchaser in connection with such
action.
(d) The Company may at any time prepay this Note in full or in
part, on not less than five business days' prior notice. Any such prepayment
shall be accompanied by accrued interest on the principal so repaid to the date
of payment. Any amount so prepaid may not be reborrowed.
(e) If from any circumstances whatsoever the fulfillment of
any provision of this Note involves transcending the limit of validity
prescribed by any applicable usury statute or any other applicable law, with
regard to obligations of like character and amount, then the obligation to be
fulfilled will be reduced to the limit of such validity as provided in such
statute or law, so that in no event shall any exaction of interest be possible
under this Note in excess of the limit of such validity.
- 4 -
<PAGE> 5
EXHIBIT 10.18
- -------------
In no event shall the Company be bound to pay interest of more than the legal
limit for the use, forbearance or detention of money and the right to demand any
such excess is hereby expressly waived by the holder.
(f) No delay or omission of the Purchaser to exercise any
right or power arising from any default shall impair any such right or power or
be considered to be a waiver of any such default or any acquiescence therein nor
shall the action or non-action of the holder in case of default on the part of
the Company impair any right or power resulting therefrom.
(g) Wherever possible each provision of this Note shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Note shall be prohibited by or invalid under such
law, such provision shall be ineffective to the extent of such prohibition or
invalidity without invalidating the remainder of such provision or the remaining
provisions of this Note.
(h) THE COMPANY AGREES THAT ANY ACTION, SUIT OR PROCEEDING IN
RESPECT OF OR ARISING OUT OF THIS NOTE, ITS VALIDITY OR PERFORMANCE, AT THE SOLE
OPTION OF THE PURCHASER, ITS SUCCESSORS AND ASSIGNS, SHALL BE INITIATED AND
PROSECUTED AS TO ALL PARTIES AND THEIR HEIRS, SUCCESSORS AND ASSIGNS AT
CINCINNATI, OHIO. THE PURCHASER AND THE COMPANY EACH CONSENTS TO AND SUBMITS TO
THE EXERCISE OF JURISDICTION OVER HIS OR ITS PERSON BY ANY COURT SITUATED AT
CINCINNATI, OHIO HAVING JURISDICTION OVER THE SUBJECT MATTER, WAIVES PERSONAL
SERVICE OF ANY AND ALL PROCESS UPON HIM OR IT AND CONSENTS THAT ALL SUCH SERVICE
OF PROCESS BE MADE BY CERTIFIED MAIL DIRECTED TO THE COMPANY AND THE PURCHASER
AT THEIR RESPECTIVE ADDRESSES AS SET FORTH ABOVE (OR SUCH OTHER ADDRESS AS A
PARTY MAY FROM TIME TO TIME DESIGNATE FOR ITSELF BY NOTICE TO THE OTHER PARTY)
OR AS OTHERWISE PROVIDED UNDER THE LAWS OF THE STATE OF OHIO. THE COMPANY AND
THE PURCHASER EACH WAIVES TRIAL BY JURY, ANY OBJECTION BASED ON FORUM NON
CONVENIENS, AND ANY OBJECTION TO VENUE OF ANY ACTION INSTITUTED HEREUNDER, AND
CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED
APPROPRIATE BY THE COURT.
IN WITNESS WHEREOF, this Note has been duly executed by the Company as
of the 16th day of January, 1998.
CIAO CUCINA CORPORATION
By: /S/ CATHERINE C. JETTER
----------------------------
Executive Vice President/CFO
- 5 -
<PAGE> 6
EXHIBIT 10.18
- -------------
ASSIGNMENT
FOR VALUE RECEIVED ___________________ hereby sells, assigns and
transfers unto ______________________ the foregoing Note and all rights
evidenced thereby, and does irrevocably constitute and appoint
____________________, attorney, to transfer said Note on the books of CIAO
CUCINA CORPORATION _________ hereby agrees to be bound by the terms of the Note
as defined therein.
--------------- N ---------------
- 6 -
<PAGE> 7
EXHIBIT 10.18
- -------------
SCHEDULE A
----------
<TABLE>
<CAPTION>
Principal
Balance
Date Amount Advanced Amount Repaid Outstanding
---- --------------- ------------- -----------
<S> <C> <C>
January 16, 1998 $200,000 $200,000
</TABLE>
ciao2.nte
<PAGE> 1
EXHIBIT 10.19 011698
- -------------
THE WARRANT REPRESENTED BY THIS CERTIFICATE AND ANY SHARES
THAT MAY BE ISSUED UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED
PURSUANT TO THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAW. NEITHER THIS
SECURITY NOR ANY PORTION HEREOF OR INTEREST HEREIN MAY BE SOLD, ASSIGNED,
PLEDGED OR OTHERWISE DISPOSED OF UNLESS THE SAME IS REGISTERED UNDER SAID ACT
AND ANY APPLICABLE STATE SECURITIES LAW, OR UNLESS AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE AND THE COMPANY SHALL HAVE RECEIVED, AT THE EXPENSE OF
THE HOLDER HEREOF, EVIDENCE OF SUCH EXEMPTION REASONABLY SATISFACTORY TO THE
COMPANY (WHICH MAY INCLUDE, AMONG OTHER THINGS, AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY).
CIAO CUCINA CORPORATION
Warrant for the Purchase of Shares of Common Stock
Dated: January 16, 1998
FOR VALUE RECEIVED, CIAO CUCINA CORPORATION (the
"Corporation"), an Ohio corporation, hereby certifies that Blue Chip Capital
Fund Limited Partnership or its assignee (the "Holder") is entitled to purchase
from the Corporation from and after the date hereof and on or before the fifth
anniversary of the date hereof (the "Termination Date"), a number of fully paid
and non-assessable shares of the Common Stock, no par value ("Common Stock") of
the Corporation equal to the number obtained by multiplying 200,000 by a
fraction, the numerator of which is the aggregate principal amount loaned by
Holder to the Corporation from time to time pursuant to the Note Purchase
Agreement and Promissory Note of even date herewith and the denominator of which
is $500,000, at a price of $1.35 per share. Hereinafter, (i) said Common Stock,
together with any other equity securities which may be issued by the Corporation
in addition thereto or in substitution therefor, is referred to as "Common
Stock", (ii) the shares of Common Stock purchasable hereunder are referred to as
the "Warrant Shares", (iii) the aggregate purchase price payable hereunder for
the Warrant Shares is referred to as the "Aggregate Warrant Price" and (iv) the
price payable hereunder for each of the Warrant Shares is referred to as the
"Per Share Warrant Price". The Per Share Warrant Price is subject to adjustment
as hereinafter provided.
1. EXERCISE OF WARRANT. From and after the date hereof and on
or before the Termination Date this Warrant may be exercised in whole or in part
by the Holder by the surrender of this Warrant (with the subscription form at
the end hereof duly executed) at the principal office of the Corporation,
together with proper payment of the Aggregate Warrant Price. Payment for Warrant
Shares shall be made by check payable to the order of the Corporation. Upon such
surrender of this Warrant the Corporation will issue a certificate or
certificates in the name of the
- 1 -
<PAGE> 2
EXHIBIT 10.19
- -------------
Holder for the largest number of whole shares of Common Stock to which the
Holder shall be entitled and, in lieu of any fractional share of Common Stock to
which the Holder shall be entitled, cash equal to the fair value of such
fractional share (determined in such manner as the Board of Directors of the
Corporation shall reasonably determine).
2. RESERVATION OF WARRANT SHARES. The Corporation will at all
times reserve and keep available, solely for issuance or delivery upon the
exercise of this Warrant, the shares of Common Stock and Other Securities (as
defined below) receivable upon the exercise of this Warrant, free and clear of
all restrictions on sale or transfer and free and clear of all pre-emptive
rights.
3. FULLY PAID STOCK; TAXES. The Corporation agrees that the
shares of Common Stock represented by each and every certificate for Warrant
Shares or Other Securities delivered on the exercise of this Warrant and payment
of the Aggregate Warrant Price shall, at the time of such delivery, be validly
issued and outstanding, fully paid and non-assessable. The Corporation further
covenants and agrees that it will pay, when due and payable, all federal and
state stamp, original issue or similar taxes, if any, which are payable in
respect of the issue of this Warrant and/or any Warrant Share or certificates
therefor but excluding any federal, state or local taxes based on the income of
the Holder.
4. ADJUSTMENTS OF PER SHARE WARRANT PRICE. (a) If after the
date hereof shares of the Common Stock are issued as a dividend or other
distribution on Common Stock, the Per Share Warrant Price in effect at the
opening of business on the business day next succeeding the date fixed for the
determination of the shareholders entitled to receive such dividend or other
distribution shall be decreased to the Per Share Warrant Price determined by
multiplying said Per Share Warrant Price so in effect by a fraction, the
numerator of which shall be the number of shares of Common Stock issued and
outstanding at the close of business on the date fixed for such determination
and the denominator of which shall be the sum of said number of shares issued
and outstanding at the close of business on the date fixed for such
determination and the number of shares constituting such dividend or other
distribution, such decrease becoming effective immediately after the opening of
business on the business day next succeeding the date fixed for such
determination.
(b) If after the date hereof outstanding shares of Common
Stock shall be subdivided into a greater number of shares or outstanding shares
shall be combined into a smaller number of shares, the Per Share Warrant Price
in effect at the opening of business on the business day next succeeding the day
upon which such subdivision or combination becomes effective shall be
- 2 -
<PAGE> 3
EXHIBIT 10.19
- -------------
decreased or increased, as the case may be, to the Per Share Warrant Price
determined by multiplying said Per Share Warrant Price so in effect by a
fraction, the numerator of which shall be the number of shares of Common Stock
outstanding immediately before such subdivision or combination becomes effective
and the denominator of which shall be the number of such shares outstanding at
the opening of business on the business day next succeeding the day upon which
such subdivision or combination becomes effective.
(c) If at any time after the date hereof the Corporation shall
issue shares of Common Stock (other than pursuant to any employee stock option
plan in effect on the date hereof) or securities convertible into Common Stock
or rights, options or warrants containing the right to subscribe for or purchase
shares of Common Stock for a price per share of Common Stock, in the case of
issuance of Common Stock, or for a price per share of Common Stock initially
deliverable upon conversion, exchange or exercise of such convertible securities
or rights, options or warrants (other than pursuant to any employee stock option
plan in effect on the date hereof) (including all consideration paid to acquire
such convertible securities or rights, options or warrants) (the "Issue Price")
less than the then current Per Share Warrant Price on the date (the "Record
Date") the Corporation fixed the offering, conversion, exchange or exercise
price of such shares, then the Per Share Warrant Price shall be adjusted by
multiplying it by a fraction, the numerator of which is the number of shares of
Common Stock outstanding immediately prior to the Record Date plus the number
derived by dividing (x) the product of the number of shares of Common Stock to
be issued upon such offering, conversion, exchange or exercise and the Issue
Price by (y) the then current Per Share Warrant Price and the denominator of
which is the number of shares of Common Stock outstanding immediately prior to
the Record Date plus the number of shares of Common Stock to be issued upon such
offering, conversion, exchange or exercise. Such adjustment shall be made
whenever such shares, convertible securities, rights, options or warrants are
issued, and shall become effective immediately after the effective date of such
event, retroactive to the Record Date, if any, for such event.
(d) If after the date hereof the Corporation shall distribute
to all or substantially all holders of Common Stock either (i) evidences of
indebtedness or assets (excluding cash dividends or distributions) or (ii) any
other securities of the Corporation or any rights, warrants, options to
subscribe for, purchase or otherwise acquire securities of the Corporation (any
of which are referred to herein as "Other Securities"), then and in any such
case the Corporation shall either distribute such Other Securities to the Holder
of this Warrant or reserve for the benefit of the Holder of this Warrant such
amount of such Other Securities as the Holder of this Warrant would have owned
or been
- 3 -
<PAGE> 4
EXHIBIT 10.19
- -------------
entitled to receive immediately following such action had this Warrant been
exercised for shares of Common Stock immediately prior thereto. In addition, the
Corporation shall either distribute to, or reserve for the benefit of, the
Holder of this Warrant any principal, interest, dividends or other property
payable with respect to such Other Securities as and when such interest,
dividends or other property is distributed to the holders of Common Stock. If
such a reserve is made, as and when this Warrant is exercised, the Holder shall
be entitled to receive from the Corporation such Holder's share of such Other
Securities together with the principal, interest, dividends or other property
payable with respect thereto.
(e) Upon each adjustment of the Per Share Conversion Price
pursuant to this Section 4, the Holder shall thereafter (until another such
adjustment) be entitled to receive upon conversion hereof, at the adjusted Per
Share Warrant Price applicable at the date conversion rights hereunder are
exercised, the number of Warrant Shares, calculated to the nearest full share,
obtained by:
(A) multiplying(1)the number of Warrant
Shares deliverable upon exercise of this
Warrant at the close of business on the
business day next preceding the business
day on which the Per Share Warrant Price is
so adjusted by (2) the Per Share Warrant
Price in effect at the close of business on
such next preceding business day; and
(B) by dividing (3) the Per Share Warrant
Price as adjusted into (4) the amount
determined pursuant to the foregoing clause
(e)(A).
(f) Upon any adjustment of the Per Share Warrant Price the
Corporation shall promptly obtain a certificate of a firm of independent public
accountants of recognized standing selected by its Board of Directors (who may
be the regular auditors of the Corporation) setting forth the adjusted Per Share
Warrant Price and a brief statement of the facts accounting for such adjustment
and shall cause a brief summary thereof to be mailed to the Holder of this
Warrant.
(g) In case of any reclassification of Common Stock of the
Corporation, other than a subdivision or combination of the outstanding Common
Stock, or of any consolidation or merger to which the Corporation or any
subsidiary of the Corporation is a
- 4 -
<PAGE> 5
EXHIBIT 10.19
- -------------
party and for which approval of shareholders of the Corporation is required or
of the sale or transfer of all or substantially all of the assets of the
Corporation or of the voluntary or involuntary dissolution, liquidation or
winding up of the Corporation, the Corporation shall cause to be mailed to the
Holder of this Warrant, at least 20 days prior to the applicable date
hereinafter specified, a notice stating the date on which such reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation or winding up is
expected to become effective, and the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their shares for
securities or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation or winding up.
(h) If, on or prior to the Termination Date, the Corporation
shall consolidate with or merge into another corporation, or another corporation
shall merge into the Corporation in a merger in which shares of Common Stock are
converted into a right to receive cash, property or other securities, or the
Corporation shall sell or transfer all or substantially all of the assets of the
Corporation, the Corporation shall take such action so that the Holder will
thereafter receive upon the exercise hereof the securities or property to which
a holder of the number of shares of Common Stock then deliverable upon the
exercise of such Warrant would have been entitled to receive upon such
consolidation, merger, sale or transfer if such Warrant had been exercised in
full immediately prior to such transaction.
(i) All calculations under this Section 4 shall be made to the
nearest one-hundredth of a cent or to the nearest one thousandth of a share, as
the case may be. No adjustment shall be required unless such adjustment would
result in an increase or decrease of at least one (1%) percent of the Per Share
Warrant Price; provided, however, that any adjustments which by reason of this
paragraph (i) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment.
(j) If at any time, as a result of an adjustment made pursuant
to paragraph (d) above, the Holder shall become entitled to purchase any Other
Securities, thereafter the number of such Other Securities purchasable upon
exercise of this Warrant and the price of the Other Securities shall be subject
to adjustment from time to time and in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to this Warrant
contained in paragraphs (a) through (i), inclusive above.
(k) Upon the expiration of any rights, options, warrants or
conversion of exchange privileges which caused an adjustment to the Per Share
Warrant Price to be made, if any thereof shall not have been exercised, the Per
Share Warrant
- 5 -
<PAGE> 6
EXHIBIT 10.19
- -------------
Price shall, upon such expiration, be readjusted and shall thereafter be such as
it would have been had it been originally adjusted (or had the original
adjustment not been required, as the case may be) as if (i) the only shares of
Common Stock so issued were the shares of Common Stock, if any, actually issued
or sold upon the exercise of such rights, options, warrants or conversion or
exchange privileges and (ii) such shares of Common Stock, if any, were issued or
sold for the consideration actually received by the Corporation upon such
exercise plus the aggregate consideration, if any, actually received by the
Corporation for the issuance, sale or grant of all such rights, options,
warrants or conversion or exchange privileges, whether or not exercised;
provided further, that no such readjustment shall have the effect of decreasing
the Per Share Warrant Price by an amount in excess of the amount of the
adjustment initially made in respect to the issuance, sale or grant of such
rights, options, warrants or conversion or exchange privileges.
(l) Upon any exercise of this Warrant at a time when there are
dividends or distributions declared but unpaid (whether as to Common Stock or
Other Securities or other property payable with respect hereto) and as to which
the dividend date or other date fixed for payment has passed, then, (i) to the
fullest extent permitted by law, such unpaid dividends or distributions shall be
paid by the Corporation contemporaneously with the exercise of this Warrant, and
(ii) to the extent payment of such unpaid dividends or distributions is not
legally permitted, then the Per Share Warrant Price shall be further adjusted by
increasing the number of shares of Common Stock or Other Securities or property
issuable upon conversion to take into account the value of such unpaid dividends
or other distributions in determining the amount of Common Stock or Other
Securities to be issued upon exercise of this Warrant.
5. LIMITED TRANSFERABILITY. (a) This Warrant and the Warrant
Shares have not been registered under the Securities Act of 1933 and may be
transferred only pursuant to an effective registration thereunder or an
exemption from registration thereunder and in compliance with applicable state
securities laws. This Warrant may not be transferred if such transfer would
require any registration or qualification under, or cause the loss of exemption
from registration or qualification under, such Act or any applicable state
securities law with respect to the Warrants or the Warrant Shares. This Warrant
and any Warrant Shares shall bear an appropriate legend with respect to such
restrictions on transfer. This Warrant is transferable only upon the books which
the Corporation shall cause to be maintained for such purpose. Any assignment or
transfer may be made by surrendering this Warrant to the Corporation together
with the attached assignment form properly executed by the assignor or
transferor. Upon such surrender the Corporation will execute and deliver, in the
case of an assignment or transfer in whole, a new
- 6 -
<PAGE> 7
EXHIBIT 10.19
- -------------
Warrant in the name of the assignee or transferee or, in the case of an
assignment or transfer in part, a new Warrant in the name of the assignee or
transferee named in such instrument of assignment or transfer and a new Warrant
in the name of the assignor or transferor covering the number of Warrant Shares
in respect of which this Warrant shall not be assigned or transferred to the
assignee or transferee.
(b) The Corporation may treat the registered holder of this
Warrant as it appears on its books at any time as the Holder and the owner of
this Warrant for all purposes. The Corporation shall permit the Holder of this
Warrant or his duly authorized attorney, upon written request during ordinary
business hours, to inspect and copy or make extracts from its books showing the
Holders of Warrants. All Warrants will be dated the same date as this Warrant.
6. LOSS, ETC. OF WARRANT. Upon receipt of evidence
satisfactory to the Corporation of the loss, theft, destruction or mutilation of
this Warrant, and of indemnity in form and amount reasonably satisfactory to the
Corporation, if lost, stolen or destroyed, and upon surrender and cancellation
of this Warrant, if mutilated, and upon reimbursement of the Corporation's
reasonable incidental expenses, the Corporation shall execute and deliver to the
Holder a new Warrant of like date, tenor and denomination.
7. WARRANT HOLDER NOT A SHAREHOLDER. This Warrant does not
confer upon the Holder any right to vote or to consent or to receive notice as a
shareholder of the Corporation, as such, in respect of any matters whatsoever,
or any other rights or liabilities as a shareholder, prior to the exercise
hereof.
8. COMMUNICATION. No notice or other communication under this
Warrant shall be effective unless, but any notice or other communication shall
be effective and shall be deemed to have been given if, the same is in writing
and is mailed by first-class mail, postage prepaid, addressed to
(a) the Corporation at 700
Walnut Street, Suite 300, Cincinnati,
Ohio 45202, or such other address as
the Corporation has designated in
writing to the Holder, or
(b) the Holder at the address
shown on the Corporation's books as
described above.
9. HEADINGS. The headings of this Warrant have been inserted
as a matter of convenience, and shall not affect the construction hereof.
- 7 -
<PAGE> 8
EXHIBIT 10.19
- -------------
10. AMENDMENTS. This Warrant may be amended only by written
agreement of the Corporation and the Holder.
11. APPLICABLE LAW. This Warrant shall be governed by and
construed in accordance with the laws of the State of Delaware applicable to
agreements made and to be performed therein.
IN WITNESS WHEREOF, CIAO CUCINA CORPORATION has executed this
Warrant as of the date set forth on the first page hereof.
CIAO CUCINA CORPORATION
By /s/ CATHERINE C. JETTER
------------------------------
Executive Vice President/CFO
- 8 -
<PAGE> 9
EXHIBIT 10.19
- -------------
SUBSCRIPTION
The undersigned, ____________________, pursuant to the
provisions of the foregoing Warrant, hereby agrees to subscribe for and purchase
______ shares of Common Stock, no par value, of CIAO CUCINA CORPORATION covered
by said Warrant, and makes payment therefor in full at the price per share
provided by said Warrant.
Dated: Signature
---------------- -----------------------------
Address
-------------------------------
--------------- N ---------------
ASSIGNMENT
FOR VALUE RECEIVED ___________________ hereby sells, assigns
and transfers unto ______________________ the foregoing Warrant and all rights
evidenced thereby, and does irrevocably constitute and appoint
____________________, attorney, to transfer said Warrant on the books of CIAO
CUCINA CORPORATION _________ hereby agrees to be bound by the terms of the
Warrant as defined therein.
--------------- N ---------------
ciao2.war
- 9 -
<PAGE> 1
EXHIBIT 10.20
- -------------
REGISTRATION RIGHTS AGREEMENT
-----------------------------
Registration Rights Agreement dated as of January 16, 1998 between Blue
Chip Capital Fund Limited Partnership, a Delaware limited partnership ("Blue
Chip"), and Ciao Cucina Corporation, an Ohio corporation ("Ciao").
Blue Chip and Ciao are parties to a Note Purchase Agreement of even
date herewith, pursuant to which Blue Chip has made certain loans to Ciao, and
Ciao has issued a common stock purchase warrant to Blue Chip. Capitalized terms
used herein without definition shall have the respective meanings ascribed to
them in such Note Purchase Agreement. Pursuant to Section 1 of such Note
Purchase Agreement, Blue Chip and Ciao have agreed to enter into this Agreement.
Accordingly, the parties hereby agree as follows:
1. REGISTRATION.
------------
(a)(i) PROPOSED REGISTRATION. If Ciao should propose to
register any of its shares of Common Stock ("Common Stock") or other equity
securities of Ciao or any successor thereto for sale under the Securities Act of
1933 (the "Act"), including any registration made pursuant to the "small
business issuer" registration forms available under the Act, or to carry out an
offer of any such Common Stock or other equity securities pursuant to Regulation
A of the Act, Ciao shall give written notice to Blue Chip of such intention and,
upon the written request of Blue Chip given within thirty (30) calendar days
after such notice is given, Ciao shall use its best efforts to cause the Common
Stock held by Blue Chip or any other equity securities issued by Ciao or any
successor thereto which are owned by Blue Chip ("Registrable Shares") and of
which Blue Chip has requested registration to be included under the proposed
registration in accordance with the proposed method thereof stated in Blue
Chip's request; provided, however, that Ciao may, in lieu of including any or
all of such shares or such other securities under the proposed registration,
elect to effect a separate registration thereof if its proposed registration
relates to an underwritten public offering and the underwriters thereof object
to the inclusion of any or all of such shares or such other securities under
such registration. If Ciao shall elect to effect a separate registration in
accordance with the provisions of the preceding sentence, Ciao shall use its
best efforts to cause such separate registration to become effective not later
than ninety (90) days after the effectiveness of the originally proposed
registration. If Ciao determines, prior to the effectiveness of its originally
proposed registration, not to proceed with such registration, Ciao shall have no
further obligation under this Section 1(a) to register any such shares or other
equity securities under that registration statement.
(ii) DEMAND REGISTRATION. At any time when Ciao
has a class of equity securities registered pursuant to Section
- 1 -
<PAGE> 2
EXHIBIT 10.20
- -------------
12 of the Securities Exchange Act of 1934 or is subject to the reporting
requirements of Section 15 of such Act, Blue Chip may give notice to Ciao
requesting the registration under the Act of any or all of the Common Stock held
or to be held upon exercise of the Warrant by Blue Chip. Upon receipt of such
notice, Ciao shall use its best efforts to effect as promptly as possible the
registration under the Act of the shares of Common Stock that Ciao has been
requested to register pursuant to this Section 1(a)(ii). Ciao shall not be
obligated to file more than one registration statement under this Section
1(a)(ii) or to keep such registration statement effective for more than one
hundred twenty (120) days. Ciao shall not be obligated to effect any
registration pursuant to this Section 1(a)(ii) if such registration would
require an audit of Ciao as of a date other than its fiscal year end. Ciao may
defer once in any twelve (12) month period the filing of a registration
statement under this Section 1(a)(ii) for a period of up to ninety (90) days
based on the good faith judgment of the Board of Directors that such delay is
needed (x) to avoid premature disclosure of a matter if the Board has determined
that such disclosure would not be in the best interests of Ciao or (y) to avoid
conflict with another public offering by Ciao. Any registration statement
prepared pursuant to this Section 1 shall be subject to such restrictions or
limitations as may be applicable by law to the sales price or sales method of
the Common Stock.
(iii) OTHER REGISTRATION RIGHTS. If Ciao grants
any rights of the nature contained in this Section 1(a) to any other Person,
this Section 1 shall be deemed amended, at the option of Blue Chip, to grant to
Blue Chip rights equivalent to the most favorable rights granted to any other
Person.
(b) REGISTRATION PROCEDURES. If and whenever Ciao is required
by the provisions of this Section 1 to effect the registration of any of Blue
Chip's shares of Common Stock or other securities under the Act, Ciao shall, as
expeditiously as possible:
(i) Prepare and file with the Securities and Exchange
Commission (the "Commission") a registration statement with respect to such
shares or other securities and use all reasonable efforts to cause such
registration statement to become effective as promptly as possible;
(ii) Prepare and file with the Commission such
amendments and supplements to such registration statement as may be necessary to
keep such registration statement effective for one hundred twenty (120) days
from the date of its effectiveness;
(iii) Furnish to Blue Chip such number of copies of
the prospectus forming a part of such registration statement (including each
preliminary prospectus) as the Blue Chip may reasonably request;
- 2 -
<PAGE> 3
EXHIBIT 10.20
- -------------
(iv) Use its best efforts to register or qualify
such shares or other securities covered by such registration statement under the
securities or blue sky laws of such jurisdictions as Blue Chip shall reasonably
request, and do any and all other acts and things which may reasonably be
necessary or advisable to enable Blue Chip to consummate the disposition of
such shares or such other securities during the period provided in Section
1(b)(ii) above; and
(v) Notify Blue Chip during the period when a prospectus
relating thereto is required to be delivered under the Act, of the happening of
any event which causes the prospectus forming a part of such registration
statement to include an untrue statement of a material fact or to omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances under which
they were made, and at the request of Blue Chip prepare and furnish Blue Chip a
reasonable number of copies of the supplement to or any amendment of such
prospectus necessary so as to render such prospectus, as amended or
supplemented, in compliance with the provisions of the Act.
(c) EXPENSES. All expenses incurred by Ciao in complying with
this Section 1, including without limitation all registration and filing fees,
printing expenses, expenses of complying with securities or blue sky laws, fees
and disbursements of counsel for Ciao and Blue Chip and counsel for any
underwriters of the offering and any accountants' fees and expenses incident to
or required by any such registration, shall be borne by Ciao to the maximum
extent permitted by law. All underwriting fees and commissions incurred by Blue
Chip shall be borne by Blue Chip.
(d) INDEMNIFICATION.
(i) In the event of any registration of Blue Chip's shares
of Common Stock or other securities under this Section 1, Ciao shall defend,
indemnify and hold harmless Blue Chip, its officers, directors, partners,
affiliates, each underwriter thereof and each person which controls Blue Chip or
such underwriter within the meaning of the Act, against any losses, claims,
damages or liabilities and any action in respect thereof, joint or several, to
which Blue Chip or any such officer, director, underwriter or controlling person
may become subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue or alleged untrue statement of any material fact contained in
any registration statement under which such securities were registered under the
Act, any preliminary prospectus or final prospectus contained therein, or any
amendment or supplement thereto, or any omission
- 3 -
<PAGE> 4
EXHIBIT 10.20
- -------------
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, other than
that which is based upon information supplied by Blue Chip in writing, and Ciao
shall reimburse each of Blue Chip and such officers, directors, underwriters and
controlling persons for any legal or other expenses reasonably incurred by any
of them in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that Ciao shall not be liable in
any such case to the extent that any such loss, claim, damage, liability or
action arises out of or is based upon information provided in writing to Ciao by
Blue Chip or any such officer, director, underwriter or controlling person; and
provided further that no Shareholder shall have any liability for any claims
arising out of such registration that occurs after such Shareholder ceases to be
a director of Ciao. This indemnity shall be in addition to any liability which
Ciao and the Shareholder may otherwise have. Nothing herein shall be deemed to
prohibit any Shareholder from seeking any indemnification from Ciao to which
such Shareholder is otherwise entitled.
(ii) In the event of any registration of such shares or other
securities under this Section 1, Blue Chip shall indemnify Ciao and the
Shareholder against any losses, claims, damages or liabilities and any action
in respect thereof, joint or several, to which Ciao or the Shareholder may
become subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon any untrue or alleged untrue statement of any material fact
contained in any registration statement under which such securities were
registered under the Act, any preliminary prospectus or final prospectus
contained therein, or any amendment or supplement thereto, or any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, which is based upon
information supplied by Blue Chip in writing, and Blue Chip shall reimburse
Ciao and the Shareholder for any legal or other expenses reasonably incurred by
Ciao or the Shareholder in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that Blue Chip
shall not be liable in any such case to the extent that any such loss, claim,
damage, liability or action arises out of or is based upon information provided
to Ciao by Ciao or the Shareholder. This indemnity shall be in addition to any
liability which Blue Chip may otherwise have.
(iii) If for any reason any indemnification described in
Section 1(d)(i) or 1(d)(ii) above may not be provided by the party or parties
required therein to provide such indemnification (the "Indemnifying Parties"),
in lieu of providing such indemnification, the Indemnifying Parties shall
contribute to the amount paid or payable by the party or parties to be provided
such indemnification (the "Indemnified Parties") as a result of such losses,
claims, damages, liabilities or
- 4 -
<PAGE> 5
EXHIBIT 10.20
- -------------
actions, in such proportion as is appropriate to reflect the relative fault of
the parties in connection with any statement or omission which resulted in such
losses, claims, damages, liabilities or actions, as well as any other relevant
equitable considerations. The relative fault of the Indemnifying Parties and the
Indemnified Parties shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by one of the
Indemnifying Parties or by one of the Indemnified Parties, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The amount paid or payable by a party as a
result of the losses, claims, damages and liabilities referred to above shall be
deemed to include any legal or other fees or expenses reasonably incurred by
such party in connection with investigating or defending any action or claim.
The parties agree that it would not be just and equitable if contribution
pursuant hereto were determined by pro rata allocation or by any other method of
allocation which does not take account of the equitable considerations referred
to herein. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
(iv) Promptly after receipt by an indemnified
party under Section 1(d)(i) or 1(d)(ii) of notice of the commencement of any
action, such indemnified party shall notify the indemnifying party of the
commencement thereof. If any such action shall be brought against an indemnified
party and it shall give notice to the indemnifying party of the commencement
thereof, the indemnifying party shall be entitled to participate therein and to
assume the defense thereof with counsel satisfactory to such indemnified party.
After notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such Section for any fees of other
counsel or any other expenses, in each case subsequently incurred by such
indemnified party in connection with the defense thereof. If an indemnifying
party assumes the defense of such an action, (a) no compromise or settlement
thereof may be effected by the indemnifying party without the indemnified
party's consent and (b) the indemnifying party shall have no liability with
respect to any compromise or settlement thereof effected without its consent. If
notice is given to an indemnifying party of the commencement of any action and
it does not, within ten days after the indemnified party's notice is given, give
notice to the indemnified party of its election to assume the defense thereof,
the indemnifying party shall be bound by any determination made in such action
or any compromise or settlement thereof effected by the indemnified party.
- 5 -
<PAGE> 6
EXHIBIT 10.20
- -------------
2. NOTICES.
-------
All notices, consents and other communications under this agreement
shall be in writing and shall be deemed to have been duly given when (a)
delivered by hand or (b) sent by telecopier (with receipt confirmed), provided
that a copy is mailed by Federal Express or other express delivery service, in
each case to the appropriate addresses and telecopier numbers set forth below
(or to such other addresses, and telecopier numbers as a party may designate as
to itself by notice to the other parties).
(a) If to Blue Chip:
c/o Blue Chip Venture Company
2000 PNC Center
201 East Fifth Street
Cincinnati, Ohio 45202
Telecopy No.: 513-723-2306
Attention: John H. Wyant
with a copy to:
Taft, Stettinius & Hollister LLP
1800 Star Bank Center
425 Walnut Street
Cincinnati, Ohio 45202
Telecopier No.: 513-381-0205
Attention: Gerald S. Greenberg, Esq.
(b) If to Ciao:
Ciao Cucina Corporation
700 Walnut Street
Suite 300
Cincinnati, Ohio 45242
Telecopier No.: 513-___-____
with a copy to:
Katz, Greenberger & Norton
105 East Fourth Street
Suite 900
Cincinnati, Ohio 45202
Attention: Scott P. Kadish, Esq.
Telecopier No.: 513-621-9285
3. MISCELLANEOUS.
-------------
3.1 EXPENSES. Each party shall bear its own expenses incident
to the preparation, negotiation, execution and delivery of this Agreement and
the performance of its obligations hereunder; except that Ciao shall reimburse
Blue Chip for legal,
- 6 -
<PAGE> 7
EXHIBIT 10.20
- -------------
accounting and other out-of-pocket expenses incurred by it in connection with
the preparation and negotiation of this Agreement.
3.2 CAPTIONS. The captions in this Agreement are for
convenience of reference only and shall not be given any effect in the
interpretation of this agreement.
3.3 NO WAIVER. The failure of a party to insist upon strict
adherence to any obligation of this Agreement shall not be considered a waiver
or deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement. Any waiver must be in writing.
3.4 COUNTERPARTS. This Agreement will be executed in two (2)
or more counterparts each of which shall be considered an original.
3.5 GOVERNING LAW. This Agreement shall be governed by the
internal law of the State of Ohio, without regard to the conflicts of law
principles thereof.
3.6 ATTORNEY'S FEES. In any action or proceeding brought by a
party to enforce any provision of this Agreement, the prevailing party shall be
entitled to recover the reasonable costs and expenses incurred by it in
connection with that action or proceeding (including, but not limited to,
attorney's fees).
3.7 DESIGNATION OF FORUM AND CONSENT TO JURISDICTION. The
parties hereto (a) designate the United States District Court for the Southern
District of Ohio, Western Division, or the Court of Common Pleas, Hamilton
County, Ohio, as the forum where all matters pertaining to this Agreement may be
adjudicated, and (b) by the foregoing designation, consent to the exclusive
jurisdiction and venue of such Court for the purpose of adjudicating all matters
pertaining to this Agreement. The parties hereby waive trial by jury in any such
action.
BLUE CHIP:
BLUE CHIP CAPITAL FUND LIMITED PARTNERSHIP
By: BLUE CHIP VENTURE COMPANY
its General Partner
By:/s/ John H. Wyant
----------------------------------------
Its:President
---------------------------------------
CIAO:
CIAO CUCINA CORPORATION
By: /s/ Catherine C. Jetter
----------------------------------------
Its:Executive Vice President/CFO
---------------------------------------
bcciao.rra
- 7 -
<PAGE> 1
EXHIBIT 10.21
- -------------
SECURITY AGREEMENT
January 16, 1998
Ciao Cucina Corporation, an Ohio corporation (the "Debtor"), in
consideration of loans or other financial accommodations at any time made to the
Debtor by Blue Chip Capital Fund Limited Partnership, a Delaware limited
partnership (the "Lender"), hereby grants to the Lender security interests in
all of the Debtor's assets and rights described in PARAGRAPH 2 below or
elsewhere in this Security Agreement (as amended, restated, supplemented, and/or
renewed from time to time, this "Agreement"), and all proceeds and products
thereof, to secure the payment of all indebtedness and liabilities of the Debtor
to the Lender, whether direct or indirect, absolute or contingent, due or to
become due, now existing or hereafter arising, including any extensions or
renewals thereof, and whether incurred alone or with others, as maker, endorser,
guarantor or surety, plus interest thereon and all costs of collection,
reasonable legal expenses and attorneys' fees paid or incurred by the Lender in
administering, collecting, and/or enforcing any of such indebtedness or
liabilities or realizing on the security given hereby or otherwise (all such
indebtedness, liabilities, interest, costs, fees, and expenses being hereinafter
collectively called the "Obligations"). The parties further agree as follows:
1. The Debtor's Places of Business. The Debtor warrants that the Debtor's only
places of business and mailing addresses are those listed on SCHEDULE 1,
attached hereto and incorporated herein. The Debtor will notify the Lender
promptly in writing of any change in the location of any place of business or
mailing address or the establishment of any new place of business or mailing
address.
2. Secured Property Listing and Definition. "Collateral" collectively
shall mean all personal property of the Debtor, tangible or intangible,
including without limitation, all of the Debtor's "Inventory", "Accounts
Receivable", "Equipment", "Fixtures and Furniture", and "General Intangibles"
(all as defined below), all of which Collateral, together with other items made
subject to the Lender's security interests by this Agreement, shall be included
in the Lender's security interest:
"Inventory," which means goods, merchandise and other personal
property, now owned or hereafter acquired by the Debtor, which are held for sale
or lease or are furnished or to be furnished under a contract of service or are
raw materials, work in process, or materials used or consumed or to be used or
consumed in the Debtor's business, and whether in the Debtor's possession or in
the custody or possession of a third party for the account of the Debtor or the
Lender, and all accessions, proceeds and products thereof.
"Accounts Receivable," which means all of the Debtor's accounts, open
accounts receivable, book debts, contract rights, notes, drafts, acceptances,
instruments, chattel paper, and other forms of obligations or receivables now
existing or hereafter acquired by the Debtor, and all proceeds thereof, plus any
and all goods returned or rejected by, or repossessed from the Debtor's
customers.
"Equipment," which means all of the Debtor's machinery, parts, tools,
accessories, attachments, additions, and other goods and accessions now owned
and hereafter acquired and used in the Debtor's business, and including all
replacements, accessions and proceeds thereof.
"Fixtures and Furniture," which means all fixtures and furniture of
any kind and type now owned and hereafter acquired by the Debtor located at all
places of business or elsewhere and including all replacements, accessions and
all proceeds thereof.
- 1 -
<PAGE> 2
EXHIBIT 10.21
- -------------
"General Intangibles" which means all contract rights, including all
rights under any existing and future leases (to the extent permitted by terms
thereof), documents and instruments, choses in action, causes of action and all
other intangible personal property of the Debtor of every kind and nature (other
than Accounts Receivable), now owned and hereafter acquired, including, without
limitation, corporate or other business records, inventions, designs, patents,
patent applications, service marks, service mark applications, service names,
trademarks, trademark applications, tradenames, trade secrets, goodwill,
registrations, copyrights, all intellectual property used by the Debtor in the
operation of computers and associated hardware and other equipment, licenses
(including, to the extent permitted by law, liquor licenses), franchises,
customer lists, tax refunds, tax refund claims, pension plan refunds and
reversions, rights and claims against carriers and shippers, rights to
indemnification and other contractual rights of the Debtor.
3. Evidence of Collateral. The Debtor agrees to deliver to the Lender
such evidence of the Debtor's interests in the Collateral and of its
availability for use as collateral as the Lender may from time to time request.
The parties agree that the security interest granted pursuant hereto is
expressly subject to the prior lien in favor of the lessors under certain of
the leases listed on Schedule 2. The Debtor further agrees to use its best
efforts to obtain any and all third party consents necessary for the Debtor to
grant the security interests in the Collateral as contemplated by this
Agreement (including without limitation, consents required under the leases
listed on Schedule 2, attached hereto and incorporated herein) and to provide
evidence of each such third party's consent upon receipt. At the request of the
Lender, the Debtor shall stamp its books and the ledger cards of all Accounts
Receivable, or other evidence thereof, to show the assignment and pledge to the
Lender.
4. Inventory; Processing and Sales. If the Debtor is not in default of
any of the provisions of this Agreement, the Debtor shall have the right to
process and sell Inventory in the regular course of business, but the Lender's
security interest hereunder shall attach to all proceeds of all sales or other
dispositions of such Inventory. Upon the occurrence of any Event of Default (as
defined below), (i) the Debtor will immediately deliver to the Lender the
proceeds of any such sale of Inventory either in the identical form received or,
at the Lender's option, pay to the Lender an amount equal to such proceeds; (ii)
any payment, guarantee, security, property or right received by the Debtor in
connection with the Inventory shall be received as the agent of and on behalf of
the Lender, will be kept separate and apart from all other property of the
Debtor, will be capable of identification, and will be delivered and paid
immediately to Lender as additional Collateral hereunder; and (iii) Inventory
shall not be sold, taken or removed from the Debtor's places of business, or
shifted between places of business, except with the prior written consent of the
Lender.
5. Accounts Receivable; Processing and Collection. Upon the occurrence
of any Event of Default, (i) immediately upon receipt of all checks, drafts,
cash and other remittances in payment of or on account of the Debtor's Accounts
Receivable, the Debtor will deposit the same in a special account maintained at
a commercial bank acceptable to the Lender over which only the Lender shall have
power of withdrawal; (ii) the funds in said account shall be held by the Lender
as Collateral for the Obligations and the Lender may apply said funds as payment
on such of the Obligations as it may determine or release said funds to the
Debtor's account for the Debtor's use; (iii) said proceeds shall be deposited in
precisely the form received, except for endorsement of the applicable Debtor
where necessary to permit collection of items, which endorsement the Debtor
agrees to make, and which the Lender is authorized to make on the Debtor's
behalf as its attorney-in-fact; (iv) pending such deposit, the Debtor agrees not
to commingle any such checks, drafts, cash, or other remittances with any of the
Debtor's funds or property, but the Debtor will hold them separately in trust
for the Lender until deposit thereof with a commercial bank acceptable to the
Lender; (v) the Lender shall have the right to notify the account debtors
obligated on any or all of the Debtor's Accounts Receivable to make payment
directly to the Lender and the Lender shall have the right in its own name or in
the name of
- 2 -
<PAGE> 3
EXHIBIT 10.21
- -------------
the Debtor to demand, collect, receive, receipt for, sue for, compound and give
acquittance for any and all amounts due or to become due on the Accounts
Receivable and to endorse any name of the Debtor as its attorney-in-fact on all
commercial paper given in payment or part payment or in evidence thereof or
related thereto, and in its discretion to file any claim or to take any other
action or proceeding which the Lender may deem necessary or appropriate to
protect and preserve and realize upon the security interest of the Lender in the
Accounts Receivable and the proceeds thereof, which right the Lender may
exercise at any time whether or not the Debtor is then in default or was making
collections thereon; (vi) until such time as the Lender elects to exercise such
right by notifying the Debtor, the Debtor is authorized, as agent of the Lender,
to collect and enforce said Accounts Receivable; and (vii) all costs of such
collection and enforcement, including attorneys' fees and out-of-pocket
expenses, shall be borne solely by the Debtor, whether incurred by the Lender or
the Debtor.
6. Insurance. With respect to the Collateral, the Debtor shall use its
best efforts to maintain at all times insurance against risks of fire with
extended coverage, sprinkler leakage and all other risks customarily insured
against by companies engaged in similar businesses to those of the Debtor, in
amounts, containing such terms, in such form, for such periods, and written by
such companies as may be satisfactory to the Lender. At the Lender's request,
all such policies shall contain lenders loss payable clauses or endorsements to
the Lender as its interest may appear and shall provide for written notice to
the Lender prior to any cancellation. In the event of any failure by the Debtor
to provide or maintain insurance as herein provided, the Lender may, at its
option, provide such insurance and add the costs thereof to the Obligations. The
Debtor shall furnish to the Lender upon its request certificates or other
evidence satisfactory to the Lender of compliance with the foregoing provisions.
Proceeds from any loss under such insurance policies shall be paid first to the
Lender and applied on such of the Obligations as the Lender shall determine. If
any such proceeds shall be paid by check, draft or other instrument payable to
the Debtor and the Lender jointly, the Lender is authorized and empowered by the
Debtor to endorse the Debtor's name as the Debtor's attorney-in-fact and to take
such other action as it deems advisable to reduce the same to cash.
7. Warranties and Further Covenants. a) The Debtor represents and
warrants that: (1) each Account Receivable and all papers and documents relating
thereto are genuine and in all respects what they purport to be; (2) each
Account Receivable is valid and arises out of a bona fide sale of goods sold and
delivered by the Debtor to, or in the process of being delivered to, or out of
and for, services actually rendered by the Debtor to the account debtor named in
the Account Receivable; (3) the amount of the Account Receivable represented as
owing is the correct amount actually and unconditionally owing, except for
normal cash discounts, and is not disputed and, except for such normal cash
discounts, is not subject to any set-offs, credits, deductions, or
counter-charges; (4) no surety bond was required or given in connection with
said Account Receivable or the contract or purchase order out of which the same
arose; and (5) the Debtor is the owner of all of the Collateral free and clear
of all claims, liens, encumbrances, rights of set-off, and security interests of
any nature whatsoever (except this security interest) and there are no financing
statements covering the same on file at any public office.
b) The Debtor hereby represents and warrants the existence of
all necessary power to enter into and execute this Agreement, and that this
Agreement is not in violation of its Articles of Incorporation, Code of
Regulations or other organizational documents, as applicable, or of any federal,
state, or local laws or judicial rulings, or of any contractual obligation with
any third party, and that this Agreement is enforceable against the Debtor in
accordance with its terms.
c) The Debtor shall execute and deliver to the Lender such
lists, descriptions, and designations of the Collateral as the Lender may
require from time to time. The Debtor shall at all reasonable
- 3 -
<PAGE> 4
EXHIBIT 10.21
- -------------
times and from time to time allow the Lender, by or through any of its officers,
agents, attorneys, or accountants, to examine, inspect, or make extracts from
the Debtor's books and records and to examine and verify the Collateral wherever
kept. So long as any of the Obligations remains outstanding, the Lender, without
cost to it, shall have a right of ingress to and egress from any of the Debtor's
places of business (or other places at which the Collateral may be located) and
may use any lifts, hoists, trucks and other of the Debtor's facilities to
examine, handle or remove the Collateral. The Debtor further agree to provide to
the Lender, upon demand, statements and information with respect to the Debtor's
businesses, including, but not limited to, profit and loss reports, balance
sheets, and other financial statements. All such financial data and listings of
the Collateral shall be compiled in accordance with generally accepted
accounting principles consistently applied.
d) The Debtor shall keep the Collateral in good order and
repair. The Debtor shall not sell, offer to sell, or otherwise transfer the
Collateral, nor pledge, mortgage, or create, or suffer to exist, any claim,
lien, encumbrance, right of set-off, or security interest of any kind whatsoever
(other than those in favor of lessors as provided in Section 3 hereof) in or
against any of the Collateral or the proceeds or products thereof in favor of
any person other than the Lender without the prior written consent of the
Lender. The Debtor shall pay promptly when due all taxes, assessments, and
governmental charges upon or against the Debtor or the property of the Debtor.
At its option, the Lender may discharge taxes, liens, or other encumbrances at
any time levied or placed on the Collateral and pay for the maintenance and
repair of the same should the Debtor fail to do so. The Debtor agrees to
reimburse the Lender on demand for any payment so made and until such
reimbursement any amount so paid by the Lender shall be added to the principal
amount of the Obligations secured hereby.
e) The Debtor shall immediately notify the Lender in writing
of any information which the Debtor has or may receive with regard to the
Collateral which might in any manner affect the value thereof or the rights of
the Lender with respect thereto.
f) The Debtor agrees to execute and deliver financing
statements under the Uniform Commercial Code, and statements or amendments
thereof or supplements thereto, and such other instruments as the Lender may
from time to time require in order to evidence, perfect, secure, preserve,
protect, and enforce the security interests hereby granted. If any Collateral is
or will be attached to real estate, the Debtor will upon demand by the Lender
furnish the Lender with an appropriate disclaimer or waiver signed by all
persons having an interest in the real estate of any interest in such Collateral
which may be prior to the Lender's security interests hereunder. The Lender is
irrevocably appointed as attorney-in-fact for the Debtor in all matters
pertaining to all such perfection, preservation, protection, and enforcement.
g) The Debtor agrees to pay all costs of filing financing,
continuation, and termination statements with respect to the Collateral. The
Debtor also agree to pay all other expenses, including attorneys' fees, incurred
by the Lender in the protection or enforcement of its rights in the Collateral
and this Agreement.
8. Further Security. Any deposits or other sums at any time credited by
or due from the Lender to the Debtor which are in the possession of the Lender
may at all times be held and treated as Collateral for the payment of the
Obligations and the Lender may apply or set off such deposits or other sums
against the Obligations to the extent any of the Obligations are due and
payable. Further, the Debtor also gives to and creates in favor of the Lender an
additional security interest in any other property, and the proceeds and
products thereof, now or hereafter in the possession of or pledged to the Lender
belonging to the Debtor or in which the Debtor has any interest. The Debtor will
at any time at the Lender's request sign financing
- 4 -
<PAGE> 5
EXHIBIT 10.21
- -------------
statements, trust receipts, security agreements, or other documents evidencing
and perfecting such security interest.
9. Events of Default; Acceleration; Use and Operation of Secured
Property. Any one or more of the following shall constitute events of default
(an "Event of Default") under this Agreement: (a) default by the Debtor in the
payment or performance, when due or payable, of any of the Obligations, or
default by any endorser, guarantor, or surety for any of the Obligations, or the
occurrence of any default or event of default under or in connection with any of
the documents, agreements, or instruments (including, without limitation, any
loan agreement, promissory note, warrant or guaranty) evidencing or relating to
any of the Obligations; (b) failure of the Debtor to pay any tax or any premium
on any insurance policy pursuant to this Agreement after the same has been due
and unpaid for at least thirty (30) days; (c) the making by the Debtor of any
material misrepresentation to the Lender hereunder or otherwise for the purpose
of obtaining credit or an extension of credit; (d) failure of the Debtor after
request by the Lender to furnish financial information or to permit the
inspection of the Debtor's books or records within a reasonable time after such
request was made; (e) failure of the Debtor to perform or observe in all
material respects any of the provisions of this Agreement or of any other
instrument pertaining to the Obligations; (f) issuance of an injunction or
attachment against any property of the Debtor; or (g) appointment of a receiver
for any part of the property of the Debtor or the commencement by or against the
Debtor of any proceeding under any bankruptcy, arrangement, reorganization,
insolvency, or similar law for the relief of debtors, or by or against any
endorser, guarantor, or surety for any of the Obligations. Upon the occurrence
of any Event of Default, any or all of the Obligations shall, at the option of
the Lender and notwithstanding any time or credit allowed by any instrument
evidencing a liability, be immediately due and payable without notice or demand.
The Lender may exercise any one or more of the rights and remedies granted
pursuant to this Agreement and also exercise any or all of the rights and
remedies afforded to a secured party under the Uniform Commercial Code as
enacted in the State in which the principal office of the Lender is located,
including, without limitation, the right upon default to take possession of and
sell, lease, or otherwise dispose of any of the Collateral, and/or to operate,
use, or exercise any rights of ownership pertaining to the Collateral as the
Lender deems necessary or appropriate to preserve the value and receive the
benefits of such Collateral. For such purpose, the Lender may, so far as the
Debtor can give authority therefor, enter upon any premises on which the
Collateral or any part thereof may be situated and take possession of and remove
the Collateral therefrom. The Lender may require the Debtor to make the
Collateral available to the Lender at a place to be designated by the Lender
which is reasonably convenient to both parties. Upon repossession or recovery of
the Collateral by the Lender, it may, after reasonable notification to the
Debtor, sell the Collateral at public or private sale, at which sale the Lender
may become the purchaser. Pending any such action, the Lender may liquidate the
Accounts Receivable and continue to operate, use, and exercise rights of
ownership pertaining to the Collateral. Out of the proceeds arising from any
such liquidation and sale, the Lender may pay all costs and expenses incurred in
connection with retaking, removing, holding, restoring to saleable condition
(including finishing to manufacture), keeping, storing, operating, using,
advertising, and selling the Collateral, and then pay the amount due and owing
to the Lender on the Obligations. The balance, if any, remaining may then be
applied by the Lender to the satisfaction of known indebtedness secured by any
subordinate security interest in the Collateral, accounting to the Debtor
jointly for the surplus, if any, remaining in possession of the Lender after all
such security interests, liens, claims, and charges have been paid. The Debtor
shall be liable to the Lender for any deficiency that may result upon such
liquidation and sale of the Collateral and the Debtor waives all claims for
damages by reason of any seizure, repossession, retention, operation, use, or
sale of the Collateral. The requirement of reasonable notice, if necessary,
shall be met if such notice is mailed, postage prepaid, to the address of the
Debtor listed in PARAGRAPH 13(G) of this Agreement at least ten (10) days before
the time of the sale or other disposition. While exercising its rights as a
secured party hereunder, including operation, use, and receipt of benefits from
the Collateral, the Lender shall not be liable in any fashion to the Debtor or
any
- 5 -
<PAGE> 6
EXHIBIT 10.21
- -------------
third party (including, without limitation, the Debtor's employees, invitees,
customers, or suppliers) for any damages arising from such operation and use, or
any obligations, duties, or liabilities of the Debtor in connection therewith
(including, without limitation, the Debtor's contracts, agreements, guarantees,
commitments, or warranties).
10. Waivers; Continued Liability. The Lender shall not be deemed to
have waived any of its rights in this Agreement or to the Collateral unless such
waiver is in writing and signed by the Lender and such waiver shall not operate
as a waiver of any other default or of the same default on a subsequent
occasion. No renewal or extension of time of payment of the Obligations at any
rate of interest, no release, surrender, exchange, or modification of the
Collateral, no release of any person primarily or secondarily liable on the
Obligations (including any maker, endorser, guarantor, or surety), no delay in
enforcement of payment of any of the Obligations, and no delay, omission, or
forbearance in exercising any right or power with respect to any of the
Obligations, the Collateral, or this Agreement shall affect the liability of the
Debtor to the Lender. The Debtor waives presentment, protest, demand, notice of
dishonor or default, notice of acceptance of this Agreement, notice of any loans
made, renewals, or extension granted, notice of any Collateral released,
surrendered, exchanged, or modified, and to the extent permitted by law, notice
of any other action taken in reliance hereon and all demands and notices of any
kind in connection with the Collateral, the Obligations, or this Agreement.
11. Further Assurances. The Debtor agrees at its expense to do such
acts, and to make, execute, deliver, file and record all notices, instruments,
stock powers, financing or like statements as the Lender reasonably deems
necessary to vest in and assure to the Lender its security interests in any of
the Collateral or to give effect to the rights, powers and remedies of the
Lender hereunder.
12. Duration. The term of this Agreement shall commence with the date
hereof and end on the date when the Debtor has paid in full all of the
Obligations secured hereby and the Lender gives notice to the Debtor that no
further loans are to be made hereunder. Until such termination, this Agreement
shall be a continuing one.
13. General.
(A) This Agreement shall be subject to other provisions in any
notes, agreements, instruments, or other documents signed by the Debtor in any
capacity concerning the Obligations which are not inconsistent with the
provisions contained herein.
(B) This Agreement shall inure to the benefit of the Lender
and bind the Debtor, and their respective successors and assigns or legal
representatives and heirs, as the case may be.
(C) Each provision of this Agreement shall be interpreted in
such manner as to be valid under applicable law, but if any provision hereof
shall be invalid under applicable law, such provision shall be ineffective to
the extent of such invalidity, without invalidating the remainder of such
provision or the remaining provisions hereof.
(D) This Agreement has been delivered and accepted at and
shall be deemed to have been made at Cincinnati, Ohio. This Agreement shall be
interpreted and the rights and liabilities of the parties hereto determined in
accordance with the laws of the State of Ohio and all other laws of mandatory
application.
- 6 -
<PAGE> 7
EXHIBIT 10.21
- -------------
(E) AS A SPECIFICALLY BARGAINED INDUCEMENT FOR THE LENDER TO
ENTER INTO THIS AGREEMENT AND EXTEND CREDIT TO THE DEBTOR, THE DEBTOR AGREES
THAT ANY ACTION, SUIT OR PROCEEDING IN RESPECT OF OR ARISING OUT OF THIS
AGREEMENT, ITS VALIDITY OR PERFORMANCE, AT THE SOLE OPTION OF THE LENDER, ITS
SUCCESSORS AND ASSIGNS, AND WITHOUT LIMITATION ON THE ABILITY OF THE LENDER, ITS
SUCCESSORS AND ASSIGNS, TO EXERCISE ALL RIGHTS AS TO THE COLLATERAL AND OTHER
SECURITY FOR THE OBLIGATIONS OR INITIATE AND PROSECUTE IN ANY APPLICABLE
JURISDICTION ACTIONS RELATED TO REPAYMENT OF THE OBLIGATIONS, SHALL BE INITIATED
AND PROSECUTED AS TO ALL PARTIES AND THEIR SUCCESSORS AND ASSIGNS AT CINCINNATI,
OHIO. EACH OF THE LENDER AND THE DEBTOR CONSENTS TO AND SUBMITS TO THE EXERCISE
OF JURISDICTION OVER ITS PERSON BY ANY COURT SITUATED AT CINCINNATI, OHIO HAVING
JURISDICTION OVER THE SUBJECT MATTER, WAIVES PERSONAL SERVICE OF ANY AND ALL
PROCESS UPON IT AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE BY
CERTIFIED MAIL DIRECTED TO THE DEBTOR AND THE LENDER AT THEIR RESPECTIVE
ADDRESSES SET FORTH IN SUBSECTION (G) BELOW OR AS OTHERWISE PROVIDED UNDER THE
LAWS OF THE STATE OF OHIO. THE DEBTOR WAIVES ANY OBJECTION BASED ON FORUM NON
CONVENIENS, AND ANY OBJECTION TO VENUE OF ANY ACTION INSTITUTED HEREUNDER, AND
CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED
APPROPRIATE BY THE COURT.
(F) AS A SPECIFICALLY BARGAINED INDUCEMENT FOR THE LENDER TO
ENTER INTO THIS AGREEMENT AND EXTEND CREDIT TO THE DEBTOR, EACH OF THE LENDER
AND THE DEBTOR WAIVES TRIAL BY JURY WITH RESPECT TO ANY ACTION, CLAIM, SUIT OR
PROCEEDING IN RESPECT OF OR ARISING OUT OF THIS AGREEMENT AND/OR THE CONDUCT OF
THE RELATIONSHIP BETWEEN THE LENDER AND THE DEBTOR.
(G) Any notice required, permitted or contemplated hereunder
shall be in writing and addressed to the party to be notified at the address set
forth below or at such other address as each party may designate for itself from
time to time by notice hereunder, and shall be deemed validly given (i) three
days following deposit in the U.S. mails, with proper postage prepaid, or (ii)
the next business day after such notice was delivered to a regularly scheduled
overnight delivery carrier with delivery fees either prepaid or an arrangement,
satisfactory with such carrier, made for the payment thereof, or (iii) upon
receipt of notice given by telecopy, mailgram, telegram, telex or personal
delivery:
To Blue Chip: Blue Chip Capital Fund Limited Partnership
C/O Blue Chip Venture Company
2000 PNC Center
201 East Fifth Street
Cincinnati Ohio 45202
Telecopy No.: 513-723-2316
To Debtor: Ciao Cucina Corporation
700 Walnut Street
Suite 300
Cincinnati, Ohio 45202
Telecopy No.: 513-___-____
- 7 -
<PAGE> 8
EXHIBIT 10.21
- -------------
BLUE CHIP CAPITAL FUND CIAO CUCINA CORPORATION, as the Debtor
LIMITED PARTNERSHIP, as the Lender
By: /s/ Catherine C. Jetter
-----------------------------------
By: Blue Chip Venture Company Name: Catherine C. Jetter
its general partner Its: Vice President-Finance
By: /s/ John H. Wyant
------------------------------
Name: John H. Wyant
Its: President
- 8 -
<PAGE> 9
EXHIBIT 10.21
- -------------
SCHEDULE 1
PLACES OF BUSINESS OF THE DEBTOR
1. 700 Walnut Street, Suite 300, Cincinnati, Ohio, 45202
2. 106 East Seventh Street, Cincinnati, Ohio 45202
3. 11384 Montgomery Road, Cincinnati, Ohio 45249
4. 135 South Main Street, Memphis, Tennessee 38103
5. 1736 L. Street, N.W., Washington, D.C., 20036
6. 1515 Euclid Avenue, Cleveland, Ohio 44115
9
<PAGE> 10
EXHIBIT 10.21
- -------------
SCHEDULE 2
LEASES REQUIRING CONSENT
1. Lease for office space at 700 Walnut Building, Cincinnati, Ohio,
dated April 29, 1996
2. Lease for restaurant space at 700 Walnut Building, Cincinnati, Ohio,
dated July 28, 1995
3. Sublease for Harper's Point, Cincinnati, Ohio, dated November 14,
1990
4. Lease for Gayoso House, Memphis, Tennessee, dated October 24, 1994
5. Lease for Washington Square, Washington, D.C., dated March 22, 1993
6. Sublease for Cleveland, Ohio, dated September 15, 1997
10
<PAGE> 1
EXHIBIT 10.22
- -------------
NOTE PURCHASE AGREEMENT
-----------------------
This NOTE PURCHASE AGREEMENT (the "Agreement") is made between CIAO
CUCINA CORPORATION, an Ohio corporation (the "Company"), and BLUE CHIP CAPITAL
FUND LIMITED PARTNERSHIP, a Delaware limited partnership ("Purchaser") effective
as of January 16, 1998. The parties hereby agree as follows:
1. GENERAL. This Agreement sets forth the terms upon which the
Purchaser will purchase a promissory note in the form attached hereto as Exhibit
A (the "Note") from the Company providing for loans (the "Loans") of up to
$500,000 principal amount to the Company. The obligations of the Company under
the Note and the Loans have been secured by a security agreement of even date
herewith (the "Security Agreement") executed by the Company in favor of the
Purchaser. As partial consideration for the Loans and to induce Purchaser to
enter into this Agreement, Company is delivering to Purchaser a common stock
purchase warrant of even date herewith (the "Warrant") executed by the Company
in favor of Purchaser. As soon as practicable after the date hereof, the Company
and Purchaser shall enter into a registration rights agreement (the
"Registration Rights Agreement") with respect to any shares issuable upon
exercise of the Warrant (the "Warrant Shares") providing for one "demand" and
unlimited "piggyback" rights and otherwise on such terms or conditions as
Purchaser may specify. The Note, the Security Agreement, the Warrant, and the
Registration Rights Agreement are collectively referred to herein as the "Loan
Documents". Simultaneously with the execution of this Agreement, counsel to the
Company is delivering its opinion to Purchaser with respect to certain of the
matters set forth in Sections 3.1, 3.2, 3.3, 3.4 and 3.5 hereof, and the Company
is delivering to Purchaser certified resolutions of the Company's Board of
Directors with respect to the transactions contemplated hereby.
2. LOANS. Upon the terms set forth in this Agreement and the Loan
Documents, Purchaser may make loans to the Company in an aggregate principal
amount of up to $500,000. On the date hereof, Purchaser is making a loan in the
principal amount of $200,000. Any further loans by Purchaser hereunder shall be
discretionary and Purchaser has no commitment or obligation to make such loans.
All further loans, if any, shall be made in response to a written request
therefor from the Company, which request must be received on or before December
30, 1998.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to the Purchaser that, except as set forth in Exhibit 3
hereto.
3.1 INCORPORATION OF THE COMPANY. The Company is a
corporation duly organized and validly existing under the laws of
- 1 -
<PAGE> 2
EXHIBIT 10.22
- -------------
the State of Ohio with full corporate power and authority to execute, deliver
and perform this Agreement and the Loan Documents to which the Company is a
party, to conduct its business and to own its properties. This Agreement and the
Loan Documents to which the Company is a party have been duly authorized by all
necessary corporate action of the Company and constitute legal, valid and
binding obligations of the Company enforceable against it in accordance with
their terms.
3.2 NO CONFLICT. Neither the execution and delivery of this
Agreement and the Note nor the completion of the transactions contemplated
hereby or thereby will contravene or violate (a) any provision of the Articles
of Incorporation or the Code of Regulations of the Company or any of its
affiliates, (b) any agreement or commitment to which the Company, or any of its
affiliates is a party or (c) any law or order of any court or governmental
agency applicable to the Company, or any of its affiliates.
3.3 CAPITALIZATION. The authorized stock of the Company
consists of 10,000,000 shares of Common Stock, of which ________ shares are duly
issued and outstanding, and 100,000 shares of preferred stock, none of which are
outstanding. None of the outstanding shares of Common Stock of the Company has
been issued in violation of any federal or state securities laws. There are no
outstanding commitments of any kind (including options, warrants and rights)
relating to the issuance or transfer of any capital stock of the Company. The
shares of Common Stock to be issued upon exercise of the Warrant will be validly
authorized, duly issued and outstanding, fully paid and non-assessable and
issued free and clear of all encumbrances and have been reserved for issuance.
None of the outstanding capital stock of the Company was issued in violation of
applicable law, preemptive right or agreement.
3.4 ORGANIZATION OF THE COMPANY. The Company has no
subsidiaries and does not own, or have any agreement or commitment to acquire,
any stock of any person or any direct or indirect equity or ownership interest
in any other business. The Company is duly qualified as a foreign corporation
and in good standing in each jurisdiction where the nature of its activities or
ownership of property requires it to be so qualified.
3.5 APPROVALS. No approval or authorization of, or filing
with, any governmental agency, and no consent or approval of any person, is
required to be obtained or made by the Company in connection with the execution,
delivery or performance of this Agreement or any Loan Document or any
transactions contemplated hereby or thereby.
3.6 FINANCIAL STATEMENTS. The Company has delivered
to Purchaser true and correct copies of the financial statements
of the Company as at December 31, 1996 and for the year then
- 2 -
<PAGE> 3
EXHIBIT 10.22
- -------------
ended and as at October 31, 1997 (the balance sheet of the Company as of October
31, 1997 is hereinafter referred to as the "Balance Sheet") and for the period
then ended. Such financial statements fairly present the assets, liabilities,
financial condition and results of operations of the Company at such date and
for such period, all in accordance with generally accepted United States
accounting principles consistently applied throughout the periods involved.
3.7 NO UNDISCLOSED LIABILITIES. The Company does not have any
liabilities or obligations of any nature that were not fully reflected or
reserved against in the Balance Sheet, of a nature required to be so reflected
or reserved in accordance with the United States generally accepted accounting
principles consistently applied, except for immaterial liabilities and
obligations incurred in the ordinary course of business and consistent with past
practice since the respective dates thereof. All reserves reflected in the
Balance Sheet are adequate.
3.8 COMPLIANCE WITH LAW. The operations of the Company have
been conducted in accordance with all applicable laws and regulations. The
Company has not received any notification of any asserted present or past
failure to comply with any such law or regulation. The Company has all licenses,
permits and approvals from governmental agencies required for the conduct of its
businesses and is not in violation of any of them. Each is in full force and
effect, and no suspension or cancellation has been threatened. All required
filings by the Company with the Securities and Exchange Commission or any state
securities agency have been made. All of such filings comply in all material
respects with the rules and regulations relating thereto, and none of such
filings contains any misstatement of material fact or omits any material fact
required to be stated therein or necessary to make the statements therein not
materially misleading.
3.9 BROKERAGE FEES, ETC. No person has any claim for brokerage
fees, commissions or similar payments with respect to the transactions
contemplated hereby based upon any agreement or understanding made by the
Company or any of its shareholders.
4. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser represents
and warrants to, and agrees with, the Company as
follows:
(a) This Agreement constitutes its legal, valid and binding obligation
enforceable against it in accordance with its terms.
(b) The Note, the Warrant and the Warrant Shares will be acquired for
investment for its own account, not as a nominee or agent, and not with a view
to the distribution thereof.
- 3 -
<PAGE> 4
EXHIBIT 10.22
- -------------
(c) Purchaser acknowledges that the Note, the Warrant and the Warrant
Shares have not been registered under the Securities Act of 1933, as amended
(the "Act"), and, therefore, cannot be resold unless subsequently registered
under such Act or unless an exemption from such registration is available.
(d) Purchaser or its representatives have been provided the opportunity
to ask questions of and receive answers from one or more officers of the Company
concerning the terms and conditions of this transaction and to obtain
information concerning the Company.
5. MISCELLANEOUS.
-------------
(a) The representations, warranties and covenants of the Company and
Purchaser contained herein or made pursuant to this Agreement shall survive the
execution and delivery hereof and delivery of the Note.
(b) The terms and conditions of this Agreement shall inure to the
benefit of and be binding upon the respective successors, heirs and assigns of
the parties. Nothing in this Agreement, express or implied, is intended to
confer upon any party other than the parties hereto or their respective
successors and assigns any rights, remedies, obligations, or liabilities under
or by reason of this Agreement, except as expressly provided in this Agreement.
(c) This Agreement shall be governed by and construed under the
internal laws of the State of Ohio as applied to agreements entered into and to
be performed entirely within the State of Ohio.
(d) This Agreement may be executed in counterparts, each of which shall
be deemed an original, but all of which together shall constitute one and the
same instrument.
(e) The titles and subtitles used in this Agreement are used for
convenience only and are not to be considered in construing or interpreting this
Agreement.
(f) This Agreement, together with the Loan Documents, constitutes the
entire agreement of the parties with respect to its subject matter.
(g) Any term of this Agreement may be amended and the observance of any
term of this Agreement may be waived (either generally or in a particular
instance and either retroactively or prospectively), only with the written
consent of the Company and the Purchaser.
(h) The Company shall reimburse Purchaser for all legal fees and
expenses incurred by it in connection with the
- 4 -
<PAGE> 5
EXHIBIT 10.22
- -------------
preparation and registration of this Agreement and the Loan
Documents. Purchaser may offset such fees and expenses against
any of the Loans.
BLUE CHIP CAPITAL FUND
LIMITED PARTNERSHIP
By: Blue Chip Venture
Company, its General
Partner
By: /s/ John H. Wyant
--------------------------
Name: John H. Wyant
Title: President
CIAO CUCINA CORPORATION
By: /s/ Catherine C. Jetter
--------------------------
Name: Catherine C. Jetter
Title: Vice President-Finance
- 5 -
<PAGE> 1
EXHIBIT 10.23
- -------------
AMENDMENT TO EMPLOYMENT AGREEMENT
---------------------------------
This AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment"),
dated as of February 9, 1998, is between CIAO CUCINA CORPORATION (the
"Corporation") and CARL A. BRUGGEMEIER ("Executive").
RECITALS:
---------
WHEREAS, the Corporation and Executive entered into an
Employment Agreement dated August 1, 1996 (the Agreement"); and
WHEREAS, the Corporation and Executive wish to amend the
Agreement as provided herein;
NOW, THEREFORE, the parties hereby agree as follows:
1. Paragraph 2 of the Agreement is hereby deleted and replaced
with the following:
The term of Executive's employment under this Agreement shall
terminate at 12:00 PM EST on December 31, 1998.
2. Paragraph 3(a) of the Agreement is hereby deleted and
replaced with the following:
The Corporation shall pay Executive during the term of this
Agreement an annual base salary of $130,000.00, payable
biweekly.
3. Paragraph 3(d) of the Agreement is hereby deleted and
replaced with the following:
Effective March 1, 1998, and for the remainder of the terms of
this Agreement, Executive shall receive a monthly car
allowance of $450.00.
4. In consideration for the Agreements of Executive herein,
the Corporation shall pay Executive simultaneously with Executive's execution
hereof an amount equal to $23,500, representing: (a) deferred and unpaid salary
of $22,000 due Executive under the Agreement for the period September 8, 1997
through February 8, 1998; and (b) deferred and unpaid car allowance of $1,500
for the months of September, October, November and December of 1997, and January
and February of 1998.
5. Except as amended hereby, the Agreement shall remain in
full force and effect. In the event of any inconsistency between the terms of
this Amendment and the terms of the Agreement, the terms of this Amendment shall
control.
- 1 -
<PAGE> 2
EXHIBIT 10.23
- -------------
IN WITNESS WHEREOF, the parties have executed this Amendment
as of the date first set forth above.
Witnessed By: CIAO CUCINA CORPORATION
/s/ Gary Salazar By: /s/ Catherine C. Jetter
- ------------------------- ------------------------------
/s/ Laura K. Robinson Title: Exec. Vice President/CFO
- ------------------------- -------------------------------
EXECUTIVE:
/s/ Laura Robinson
- -------------------------
/s/ Carl A. Bruggemeier
------------------------------------
CARL A. BRUGGEMEIER
/s/ Gary Salazar
- -------------------------
kgn 21373-1
- 2 -
<PAGE> 1
EXHIBIT 10.24
- -------------
MUTUAL RELEASE
THIS MUTUAL RELEASE (the "Release"), dated December 15, 1997, is
between CIAO CUCINA CORPORATION ("Employer") and ROGER TAYLOR ("Employee").
RECITALS:
---------
WHEREAS, Employee was formerly employed by Employer pursuant to an
Employment Agreement dated December 2, 1996, as amended (the "Agreement"); and
WHEREAS, Employer and Employee wish to amicably terminate the
Agreement on the terms contained herein;
NOW, THEREFORE, the parties hereto agree as follows:
1. The parties agree that the Agreement is hereby terminated effective
the date hereof without further liability or obligation to either party, except
for the agreements and obligations contained herein.
2. Employee hereby resigns from his position as a Director and Officer
of Employer as of the date hereof.
3. Employer has herewith paid Employee $4,242.01, representing all
accrued but unpaid salary through the date hereof, less applicable taxes,
receipt of which Employee hereby acknowledges.
4. Employer shall pay Employee as severance the full amount of base
salary due him under the Agreement (without deduction for deferred salary)
through the pay period ending March 15, 1998, when and as Employer pays payroll
to employees generally. Employer shall continue to pay 100% of Employee's health
insurance premium and 50% of family coverage for the months of January, February
and March, 1998.
5. Employee shall continue to have use of the automobile leased by
Employer for Employee until March 15, 1998, at which time Employee shall, at his
option: (a) assume the lease and provide Employer reasonable assurance that
Employer has been released from any further obligation under the lease or other
meaningful indemnification; (b) purchase the automobile such that Employer shall
be released from any further obligation under the lease; or (c) return the
automobile to Employer in the same condition the automobile is in on the date
hereof, reasonable wear and tear excepted. Employee shall indemnify Employer and
hold Employer harmless from and against any and all claims, causes of action,
demands, debts, suits, duties, costs, liabilities, expenses and damages relating
to Employee's use of the automobile from and after the date hereof, excluding
only payments due under the lease which Employer has agreed to pay hereunder.
<PAGE> 2
EXHIBIT 10.24
- -------------
6. Employee hereby releases and forever discharges Employer, and its
shareholders, directors, officers and employees (current and former) from any
and all claims, causes of action, demands, debts, suits, duties, costs,
liabilities, expenses and damages arising prior to the date hereof, including
but not limited to any claim under the Agreement or relating to his employment
with the Company or termination thereof, and including such claims as may be
known or unknown, contingent or otherwise, and as may now or hereafter exist,
excluding only claims arising under this Release. Employee hereby represents and
warrants that none of the claims which are the subject matter of the foregoing
release has been assigned or transferred to any other person or entity.
7. Employer hereby releases and forever discharges Employee from any
and all claims, causes of action, demands, debts, suits, duties, costs,
liabilities, expenses and damages arising prior to the date hereof, including
but not limited to any claim under the Agreement or relating to his employment
with the Company or termination thereof, and including such claims as may be
known or unknown, contingent or otherwise, and as may now or hereafter exist,
excluding only claims arising under this Release. Employer hereby represents and
warrants that none of the claims which are the subject matter of the foregoing
release has been assigned or transferred to any other person or entity.
8. Each party warrants that before executing this Release, it has fully
informed itself or himself of the terms and conditions hereof, that it or he has
had the opportunity to seek the advice of legal counsel and that it or he has
acted voluntarily and of its his own free will in executing this Release.
9. This Release is entered into as a compromise and settlement of
disputed claims and without any admission by any party of any liability or
wrongdoing.
10. Neither this Release, nor the subject matter, terms or any part
hereof, nor the negotiations leading hereto nor discussions or communications,
written or oral relating hereto or any part thereof, shall at any time for any
reason be considered as an admission by any party that any other party has any
valid claim, right, cause of action or demand against such party or had any
loss, damage or injury as a result of any act of or omission by such party of
any kind or nature, or that any of the subsequent claims or allegations of any
party at any time had any validity or that any party at any time had any
liability to any other party of any kind whatsoever.
<PAGE> 3
EXHIBIT 10.24
- -------------
11. The parties agree to keep the substance of this Release strictly
confidential and not to disclose its substance to any third party except those
with a need to know after taking reasonable precautions to require such third
parties to keep such information confidential. Employee further agrees that all
Trade Secrets of the Employer are valuable, proprietary assets of Employer and
Employer requires that its Trade Secrets be kept confidential and be used only
for the benefit of Employer. Employee shall not, directly or indirectly, without
the prior written consent of the President of Employer: (a) disclose any Trade
Secrets of Employer learned by him to any party outside of Employer; (b) use any
Trade Secrets of Employer learned by him for any purpose other than for the
exclusive benefit of Employer; or (c) take with him any document or paper
containing Trade Secrets of Employer. As used in this letter, the term "Trade
Secrets" means all non-public information, plans, drawings, renderings,
programs, client lists, vendor or supplier lists, and other technical, economic,
financial and business data of Employer, and including all other items defined
as Trade Secrets under Ohio law.
12. Employer shall provide a positive recommendation promptly to any
prospective employer inquiring about Employee. Each party agrees to refrain from
making derogatory comments about the other, and to cooperate in transitioning
Employee's responsibilities.
13. Each party hereto expressly warrants and represents that none of
the claims, causes of action, suits, demands, losses or damages, which are the
subject matter hereof have been assigned or transferred to any other person or
entity and, accordingly, each party hereto agrees to indemnify and hold each
other party hereto harmless from any such claims of third parties claiming by,
through or under the indemnifying party.
14. This Release represents the entire agreement among the parties
related to the subject matter hereof and supersedes all prior or contemporaneous
agreements, including without limitation, the Agreement.
15. This Release may not be changed, modified, discharged or abandoned,
in whole or in part, except pursuant to the expressed written consents of both
parties hereto.
16. This Settlement Agreement shall be construed under and in
accordance with the laws of the State of Ohio applicable to contracts entered
into in Ohio by Ohio residents to be performed wholly in Ohio.
17. This Release may be executed in counterparts which taken together
shall constitute one binding agreement, not withstanding the fact that all
parties have not signed the same copy.
<PAGE> 4
EXHIBIT 10.24
- -------------
18. This Release shall be binding upon and shall inure to the benefit
of each of the parties hereto and their respective successors and assigns.
IN WITNESS WHEREOF, the undersigned have executed this Release as of
the date and year first set forth above.
Witnessed by:
/s/ Laura Robinson /s/ R. D. Taylor
- ---------------------------- -----------------------------------------
Roger Taylor
/s/ Catherine C. Jetter
- ----------------------------
CIAO CUCINA CORPORATION
/s/ CATHERINE C. JETTER By: /s/ Carl A. Bruggemeier
- ---------------------------- -------------------------------------
Carl A. Bruggemeier
/s/ SCOTT P. KADISH President
- ----------------------------
<PAGE> 1
EXHIBIT 21
- ----------
SUBSIDIARIES OF THE REGISTRANT
- ------------------------------
Name of Subsidiary State of Incorporation d/b/a
Ciao Playhouse, Inc. Ohio Ciao Cucina
<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 28, 1997 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
27th day of March, 1998.
SIGNATURE TITLE
- --------- -----
/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/ JOHN H. WYANT Director
- ------------------------------
John H. Wyant
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> DEC-28-1997
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<CASH> 486,885
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<CURRENT-ASSETS> 948,562
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0
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<COMMON> 9,229,195
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