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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-5674
CIAO CUCINA CORPORATION
CIAO CUCINA CORPORATION LOGO
1,000,000 SHARES OF COMMON STOCK
All of the 1,000,000 shares of Common Stock, no par value (the "Common
Stock"), offered hereby (the "Offering") are being offered by Ciao Cucina
Corporation ("Ciao" or the "Company"). Prior to the Offering, there has not been
any public market for the Common Stock of the Company. For factors considered in
determining the initial public offering price, see "Underwriting." The Common
Stock has been approved for listing on the Nasdaq SmallCap Market under the
symbol "CIAO."
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THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. PURCHASERS WILL
EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION FROM THE INITIAL PUBLIC OFFERING
PRICE. AT DECEMBER 31, 1995 AND JULY 14, 1996, THE COMPANY HAD ACCUMULATED
SHAREHOLDERS' DEFICITS OF APPROXIMATELY $2.6 MILLION AND $3.4 MILLION,
RESPECTIVELY. SEE "RISK FACTORS" BEGINNING ON PAGE 8 AND "DILUTION" ON PAGE 17.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT(1) COMPANY(2)
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Per Share $7.00 $0.63 $6.37
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Total(3) $7,000,000 $630,000 $6,370,000
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(1) Does not include additional underwriting compensation payable to Glaser
Capital Corporation (the "Managing Underwriter") comprised of (a) a
nonaccountable expense allowance equal to 1% of the total Offering proceeds,
including proceeds from any sale of shares pursuant to the Underwriters'
over-allotment option, and (b) warrants to purchase 100,000 shares of Common
Stock at an exercise price of $8.40 per share. The Company has agreed to
indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses of the Offering, estimated at $262,500 (including
the nonaccountable expense allowance).
(3) Certain shareholders of the Company (the "Selling Shareholders") have
granted to the Underwriters a 30-day option to purchase up to an additional
150,000 shares of Common Stock, solely to cover over-allotments, if any. The
Company will not receive any of the proceeds from the sale of shares by the
Selling Shareholders. If such option is exercised in full, the total Price
to Public, Underwriting Discount, Proceeds to Company and Proceeds to
Selling Shareholders will be $8,050,000, $724,500, $6,370,000 and $955,500,
respectively. In such an event, the Selling Shareholders will bear their
proportionate share of the expenses of the Offering. See "Underwriting." The
Selling Shareholders may be deemed to be statutory underwriters with respect
to the shares to be sold by them. See "Selling Shareholders."
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The shares of Common Stock are offered by the several Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that certificates
for the shares will be available for delivery in Cincinnati, Ohio, on or about
November 27, 1996.
GLASER CAPITAL CORPORATION
November 22, 1996
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[Picture of store-front style specialty gourmet coffee operations]
[Picture of interior of restaurant]
Downtown Cincinnati Main Dining Room
[Picture of food item]
Carpaccio
[Picture of food item]
Sundried Tomato & Artichoke Pizza
[Picture of food item]
Tiramisu
[Picture of food items]
Grilled Atlantic Halibut
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety and should be read in
conjunction with the more detailed information and Financial Statements and the
Notes thereto appearing elsewhere in this Prospectus. Unless otherwise
indicated, the information in this Prospectus gives effect to a 345.3:1 split of
the Company's Common Stock (in the form of a stock dividend) and assumes that
the Underwriters' over-allotment option will not be exercised. As used in this
Prospectus, the terms "Ciao" and the "Company" mean Ciao Cucina Corporation
unless the context indicates otherwise. The Company's fiscal year generally is
divided into 13 four-week periods. The Company's 1991 through 1995 fiscal years
ended on December 29, December 27, December 26, December 25 and December 31,
respectively, and its fiscal 1995 and 1996 first two quarters (twenty-eight
weeks) ended on July 9 and July 14, respectively.
THE COMPANY
The Company owns and operates five restaurants under the name "Ciao Baby
Cucina," with locations in Washington, D.C., Hackensack, New Jersey, Cincinnati,
Ohio (two restaurants) and Memphis, Tennessee. The restaurants serve authentic
Mediterranean cuisine, primarily Northern Italian, with Greek, Spanish and
French influences. Annual revenues for the Company have grown from $957,000 in
1991 to $4.8 million in 1995. For further information concerning the history of
the Company, see "History of the Company."
The Company seeks to differentiate its concept by creating restaurants that
couple the ambience, food quality and personal service associated with an
individual upscale, "white tablecloth" restaurant with the efficiencies and cost
effective management techniques of a centrally managed restaurant chain. The
Company's management believes that its restaurants represent the "next
generation" of restaurant chains which will be demanded by, and will be
necessary to satisfy, the discriminating dining public in the twenty-first
century. In this regard, the Company's strategy is to emulate privately-held
restaurant chains such as Il Fornaio and Houston's. The Company's operating and
development strategies include orienting Company restaurants to the casual
sophistication favored by the growing "baby boom" customer market and locating
restaurants in proximity to arts and entertainment facilities, convention
centers or other high traffic generators which are frequented by these targeted
customers.
OPERATING STRATEGY
The Company's operating strategy is to combine successfully the "art and
science" aspects of restaurant operations. The key elements of this strategy,
which have been successfully developed and implemented in the Company's existing
restaurants, are as follows:
- Dining Ambience. The Company intends to have its restaurants share a
common contemporary decor which is sophisticated but warm. The use of
stone, marble, unique ceiling treatments, lighting, white tablecloths, an
open display kitchen and a personal style of service are combined to
provide the feeling of a fine dining restaurant experience in a casual
medium-priced restaurant atmosphere. Each restaurant strives to become a
place "to see and be seen" in its market area.
- Corporate-Controlled Menus Enhanced By Local Chef Creativity. Each
restaurant's kitchen is managed by a full-time chef who has received
culinary training and who is well-versed in the art of food preparation. In
addition, all dishes are prepared in accordance with exact recipes that
have been tested, approved and carefully documented at the corporate level
as to ingredients, cost and presentation. Chefs are encouraged to develop
dishes with a local flair or taste, and approximately 20% of the items on
each restaurant's menu fall into this category. Before these items achieve
a place on the restaurant's menu, they are presented as "specials" to the
Company's customers to determine public acceptance and profitability.
Senior executives work directly with restaurant general managers and
executive chefs on a daily basis to emphasize menu development, control of
food, beverage and labor costs, marketing, special promotions and revenue
enhancement.
- Financial Controls. The Company utilizes its "By the Numbers"(C)
reporting system which incorporates both proprietary and industry standard
elements. Management believes that the breadth of
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its generation of key operating indices on a daily basis is unusual in the
restaurant industry and allows the Company's management to promote its
sales efforts and control its costs, including food, beverage and labor, on
a more immediate basis to better ensure profitable operations at each
location. The Company's point-of-sale systems are all completely
computerized. All of the accounting systems, including accounts payable,
accounts receivable, payroll and generation of financial statements, are
centralized at the corporate headquarters, thereby ensuring greater
accuracy and limiting the Company's potential for loss.
- Value-Added Services. The Company's newest restaurants include
store-front style specialty gourmet coffee operations that are also open
during breakfast hours and feature house-made pastries and European-style
breads, cappuccino and espresso and carry-out items from the restaurant's
regular menu, as well as Ciao Espresso logo merchandise. This feature will
be incorporated in all future Ciao Baby restaurants.
- Key Customer Marketing. Both the Company's top management and the
unit manager of each restaurant strive to develop personal relationships
with the Company's most faithful and significant customers. This is
accomplished by various programs, including the "red phone," an unlisted
telephone number for use by approximately the most frequent 500 customers
of each restaurant; personalized thank-you notes; the establishment of an
extensive data base of customers in each restaurant who receive periodic
personal mailings; and a dining room system referred to as "table touch,"
which means the Company's restaurant managers attempt to communicate with
each table in their restaurant at every meal period on a personal basis.
This special treatment is designed to build a sense of loyalty and to
ensure both repeat business and referrals.
EXPANSION STRATEGY; RECENT DEVELOPMENTS
Two of the Company's five restaurants opened during the first quarter of
1996. The Company plans to open two more restaurants in early 1997, three
additional restaurants later in 1997 and five in 1998, with a goal of expanding
to a total of 30 restaurants by year-end 2000. The Company's expansion strategy
is to establish restaurants in medium-sized cities within two hours' travel time
from the Company's headquarters. Management believes that the casual atmosphere,
food quality and moderate prices offered by the restaurants appeal to a growing
customer market.
On July 1, 1996, the Company entered into a lease for a 6,755 square foot
restaurant in Ft. Lauderdale, Florida. The restaurant will be located in
Northport Marketplace Center, in close proximity to the Broward County
Convention Center and the Port Everglades Cruise Port. Costs to open the
restaurant are expected to be approximately $1.35 million, of which the landlord
will contribute approximately $675,500 in tenant improvements. The landlord also
will lend the Company approximately $169,000 toward the total costs. The Company
currently expects the facility to open prior to March 1, 1997.
The Company is engaged in negotiations to lease space from the Playhouse
Square Foundation of Cleveland, Ohio, a nonprofit entity, or an affiliate
(together, "PSF"), to develop an approximately 5,700 square foot restaurant and
11,500 square foot banquet facility at Cleveland's Playhouse Square Center, the
heart of the redeveloped theater district. The currently projected opening
budget is approximately $3.2 million. It is anticipated that the Company will be
responsible for $400,000 of the opening costs. It also is anticipated that PSF
will contribute $300,000 as a tenant improvement allowance and obtain the
remaining $2.5 million through one or more loans and tax credits, which $2.5
million also will be advanced as an additional tenant improvement allowance.
Ciao Playhouse, Inc., a wholly-owned subsidiary of the Company ("Ciao
Playhouse"), will be the tenant and will pay base rent in an amount necessary to
amortize the portion of the $2.5 million tenant improvement allowance that was a
loan to PSF. Ciao Playhouse also will pay PSF percentage rent equal to 50% of
Ciao Playhouse's net income, after deducting base rent and a management fee
payable to the Company equal to 5% of gross sales. During 1995 Cleveland
Playhouse Square attracted over 1 million patrons to its four theaters. A fifth
theater is scheduled to open in late 1997. The Company currently anticipates
that, assuming consummation of a definitive lease agreement (as to which there
can be no assurance), both the restaurant and the banquet facility will open in
April 1997.
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The Company is evaluating a proposal from a developer to lease space for a
7,515 square foot restaurant in Baton Rouge, Louisiana. If a definitive
agreement is reached, the restaurant will be located in the Mall of Louisiana, a
comprehensive shopping facility currently under construction which is modeled
after the Mall of America. Costs to open the restaurant are expected to be
approximately $1.3 million of which, under the proposal, the landlord would
contribute approximately $750,000 in tenant improvements. The proposal provides
for a lease term of 20 years. Rent would be computed by adding a base rent,
which would increase during the term of the lease, to a percentage rent
determined by the amount of gross sales in excess of certain break point
figures. The Company currently expects the restaurant would open by November 1,
1997.
Other locations under active consideration for future Company restaurants
include Birmingham, Alabama; Ft. Myers, Florida; Hilton Head, South Carolina;
and Kansas City, Missouri. The Company does not expect to enter into future
restaurant leases with related parties. See "Business -- Expansion Strategy."
DEVELOPMENT STRATEGY
The Company's development strategy is to locate its restaurants in close
proximity to arts and entertainment facilities, convention centers or other high
traffic generators, which provide a readily accessible customer base, and to
utilize existing buildings for new units in lieu of free-standing construction.
To date, the Company has been successful in negotiating favorable lease
arrangements and significant tenant improvement allowances from its landlords
which, as shown below, have substantially limited Company capital commitments
for each restaurant. For further information concerning leases, see
"Business -- Properties."
COST PER RESTAURANT(1)
------------------------------ TRAILING TRAILING
COMPANY DEVELOPER 3-PERIOD 13-PERIOD
CONTRIBUTION CONTRIBUTION REVENUES(2) REVENUES(2)
------------ ------------ -------- ----------
EXISTING RESTAURANTS:
Cincinnati, Ohio........................ $ 528,000 $ 84,600 $336,602 $1,295,630
(Harper's Point)
Washington, D.C......................... $ 646,500 (3) $743,869 $2,069,193
Hackensack, New Jersey.................. $ 597,000 $ 1,138,000 $514,868 $1,798,348
Memphis, Tennessee...................... $ 785,000 $ 705,000 $569,168 n/a
Cincinnati, Ohio........................ $ 1,240,000(4) $ 550,000 $705,111 n/a
(downtown)
PROPOSED RESTAURANTS:
Cleveland, Ohio(5)...................... $ 400,000 $ 2,800,000 n/a n/a
Ft. Lauderdale, Florida(5).............. $ 539,500(6) $ 675,500 n/a n/a
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(1) Consists of leasehold improvements, restaurant equipment, computer
equipment, furniture and fixtures, china, flatware and glassware and
pre-opening expenses. See Notes 1 and 4 to Financial Statements.
(2) "Trailing 3-Period Revenues" and "Trailing 13-Period Revenues" consist of
revenues for an individual restaurant for the three four-week periods and 13
four-week periods, respectively, immediately following the opening of that
particular restaurant.
(3) The Company took over a fully-equipped restaurant location in Washington,
D.C., with no "key-money." Therefore, total developer costs are not
quantifiable in this instance.
(4) Includes $150,000 of developer-provided financing.
(5) The Company has entered into a lease for the Ft. Lauderdale restaurant. The
Cleveland restaurant is contingent upon successful lease negotiations, which
may not occur. Projected costs are based upon management's best current
estimates; actual costs could vary significantly. See "Risk
Factors -- Adverse Effect of Unanticipated Costs of Expansion."
(6) Includes $169,000 of developer-provided financing.
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THE OFFERING
Common Stock Offered by the Company............. 1,000,000 Shares
Common Stock to be Outstanding after the 3,149,766 Shares(1)
Offering......................................
Use of Proceeds................................. To repay outstanding indebtedness of the
Company, to finance the development of new
restaurants and for working capital
purposes.
Nasdaq SmallCap Market Symbol................... CIAO
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(1) Excludes 249,990 shares of Common Stock issuable upon exercise of warrants
held by persons who have provided certain debt financing to the Company (the
"Bridge Financing Warrants") and 100,000 shares issuable upon exercise of
warrants to purchase Common Stock to be granted to Glaser Capital
Corporation at the time of the closing of the Offering (the "Underwriter's
Warrants") (see "Underwriting"). Includes 1,365,799 shares of Common Stock
issuable upon the conversion, at the time of the closing of the Offering, of
all outstanding shares of the Company's Series A Convertible Preferred Stock
(the "Series A Preferred Stock") and Series B Convertible Preferred Stock
(the "Series B Preferred Stock") (together, the "Preferred Stock"), 53,866
shares issuable upon conversion of $100,000 principal amount of the
Company's Series A and B Convertible Subordinated Participating Income Notes
(the "Series A/B Notes"), 81,352 shares issuable upon conversion of a note
payable to Towne Investment Company, a Limited Partnership (the "Towne
Note") and 78,839 shares (based upon amounts outstanding at September 30,
1996) of Common Stock issuable at the time of the closing of the Offering in
payment of certain deferred consulting fees and Preferred Stock dividends.
See "Certain Transactions." Also excludes outstanding options to purchase
21,645 shares of Common Stock at the initial public offering price held by
the Company's Chief Executive Officer, its Vice President -- Finance and one
other employee. The Company will not grant options or other rights to
purchase or acquire shares for a period of one year after the Offering if,
as a result, all outstanding options or rights would entitle their holders
to acquire in excess of 12% of the shares outstanding upon completion of the
Offering.
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SUMMARY FINANCIAL DATA
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
FIRST TWO
FISCAL YEAR QUARTERS
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STATEMENT OF OPERATIONS DATA: 1991 1992 1993 1994 1995 1995 1996
----- ------ ------ ------ ------ ------ ------
Revenues............................... $ 957 $1,080 $1,870 $3,273 $4,779 $2,555 $4,130
Loss from operations................... (147) (32) (334) (359) (833) (448) (528)
Interest expense, net.................. (43) (54) (102) (259) (72) (30) (177)
Other income (expense)................. 0 (23) 0 (52) 3 (28) (11)
Net loss............................... (190) (109) (436) (670) (903) (507) (716)
Net loss per share..................... (0.24) (0.14) (0.55) (1.16) (1.94) (1.02) (1.51)
Weighted average common and common
equivalent shares (1)................ 794 794 794 576 570 570 570
OPERATING DATA:
Number of restaurants open at period
end.................................. 1 1 2 3 3 3 5
Number of mature restaurants(2)........ 0 1 1 1 2 2 3
Average revenue per mature
restaurant(3)........................ n/a $1,080 $1,071 $1,139 $1,462 $ 747 $ 772
JULY 14, 1996
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ACTUAL AS ADJUSTED(4)
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BALANCE SHEET DATA:
Working capital..................................................... $ (903) $3,191
Total assets........................................................ 5,585 8,698
Long-term obligations, including current portion.................... 2,604 10
Shareholders' equity (deficit)...................................... (3,429) 5,649
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(1) See Note 1 to Financial Statements for an explanation of the method used to
determine the number of shares used to compute per share amounts.
(2) A mature restaurant is one which has been open at least 18 months.
(3) Includes the Company's first, and smallest, restaurant which opened in April
1991. The Company's mature restaurants do not include the value-added
features incorporated in the Company's two newest restaurants. See
"Business" and "Business -- Operating Strategy."
(4) Adjusted to give effect to the sale of 1,000,000 shares of Common Stock
offered by the Company hereby, the conversion of all outstanding shares of
Preferred Stock into 1,365,799 shares of Common Stock, the conversion of the
Series A/B Notes into 53,866 shares of Common Stock, the conversion of the
Towne Note into 81,352 shares of Common Stock, the issuance of 78,839 shares
(based on amounts outstanding at September 30, 1996) of Common Stock in
payment of certain deferred consulting fees and Preferred Stock dividends
and the application of the estimated net proceeds of the Offering as
described under "Use of Proceeds." See also "Capitalization," "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "Certain Transactions."
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RISK FACTORS
An investment in the shares of Common Stock being offered by this
Prospectus involves a high degree of risk. Accordingly, prospective investors
should consider carefully the following risk factors, in addition to other
information concerning the Company and its business contained in this
Prospectus, before purchasing the shares of Common Stock offered hereby.
HISTORY OF LOSSES; WORKING CAPITAL DEFICIT; ACCUMULATED DEFICIT;
INDEPENDENT AUDITORS' "GOING CONCERN" OPINION. For fiscal 1995 and for the
first two quarters of 1996, the Company reported operating losses of
approximately $833,000 and $528,000, respectively. To date, the Company has not
achieved company-wide profitability on a quarterly basis, and there can be no
assurance that the Company's operations will be profitable in the future. The
Company will recognize certain substantial one-time restructuring and financing
fees, estimated at $245,000 and $325,000, respectively, during the last two
quarters of 1996, and the Company expects to report a loss for the last two
quarters of 1996 greater than that reported for the first two quarters of 1996.
The Company's operating expenses have increased and can be expected to increase
significantly in connection with the Company's proposed expansion. The Company's
future profitability will depend upon, among other things, corresponding
increases in revenues from operations. In addition, unfavorable economic
conditions, including downturns in the economy, resulting in decreased
restaurant dining, could adversely affect the Company's future operating
results. There can be no assurance that the Company's rate of revenue growth
will continue in the future or that the Company's operations will be profitable.
At July 14, 1996, the Company had a working capital deficit of approximately
$0.9 million and an accumulated shareholders' deficit of approximately $3.4
million. The Company's independent auditors have included an explanatory
paragraph in their report on the Company's financial statements, stating that
they have been prepared assuming that the Company will continue as a going
concern and that the Company's recurring losses from operations, net working
capital deficiency, and total shareholders' deficiency raise substantial doubt
about the Company's ability to continue as a going concern. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operation -- Liquidity and Capital Resources" and the Financial Statements and
Notes thereto included herein.
LIMITED OPERATING HISTORY AND RESTAURANT BASE. The Company has a limited
operating history upon which investors may evaluate its performance. The Company
has only five restaurants, the first of which opened in 1991 and two of which
opened in 1996. In view of its limited operating history, the Company remains
vulnerable to a variety of business risks associated with young, growing
companies. The results achieved to date by the Company's relatively small
restaurant base may not be indicative of the prospects or market acceptance of a
larger number of restaurants. Consequently, operating results achieved to date
by the Company's existing restaurants may not be indicative of the results that
may be achieved by existing or new restaurants in the future. In the event of
prolonged periods of unfavorable operating results at existing or future
restaurants, the Company may be required to close or relocate restaurants. In
light of the Company's small restaurant base, the lack of success of any of its
restaurants, or the unsuccessful operation of a new restaurant, could have a
material adverse effect on the Company's financial condition, results of
operations and cash flows.
REQUIREMENTS FOR ADDITIONAL CAPITAL TO COMPLETE EXPANSION PROGRAM;
DEPENDENCE ON PROCEEDS OF OFFERING. The Company's capital requirements have
been and will continue to be significant. The Company is dependent upon the
proceeds of this Offering to repay outstanding indebtedness and to finance new
restaurants. The Company has entered into a ten-year lease, requiring minimum
annual rental payments of $202,650, for the Ft. Lauderdale facility in the
expectation that sufficient Offering proceeds will be available to complete and
open this restaurant. The Company's goal is to expand to 30 restaurants by
year-end 2000. A portion of the expenditures budgeted for this expansion program
will be satisfied by the net proceeds from this Offering and projected cash flow
from operations. However, to complete its expansion program the Company will
need to arrange for additional bank or other financing and obtain developer
contributions for new restaurants comparable to those obtained in the past.
While the Company believes that, following this Offering, such financing will be
available and such developer contributions can be obtained, there can be no
assurance that the Company will be able to obtain additional capital or
developer contributions when needed on satisfactory terms or at all. Any
inability to obtain additional financing or developer contributions when
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required is likely to result in the Company having to curtail its expansion
efforts and could have a material adverse effect on the Company's financial
condition, results of operations and cash flows. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Business -- Expansion Strategy."
IMPORTANCE OF EXPANSION STRATEGY TO COMPANY SUCCESS. At December 31, 1995
and July 14, 1996, the Company owned and operated three and five restaurants,
respectively. The Company plans to increase significantly the number of
Company-owned restaurants to as many as 30 by year-end 2000. In addition to the
capital requirements which will need to be met, the opening and success of
restaurants will depend on various factors, including availability of suitable
sites; the negotiation of acceptable leases for new locations; regulatory
compliance; the ability to meet construction schedules; the ability of the
Company to manage successfully its anticipated expansion and hire and train
personnel; interest rates; real estate markets; competition; and general
economic and business conditions. Many of the foregoing factors are not within
the control of the Company. There can be no assurance that the Company will be
able to achieve its expansion goals. Furthermore, concept restaurants, such as
those of the Company, may prove successful in one geographical or socio-economic
area and unsuccessful in another. At present, the Company has no specific plans,
proposals, arrangements or understandings with respect to future additional
restaurants, except for the proposed Cleveland, Ohio and Baton Rouge, Louisiana
locations. See "Business -- Expansion Strategy."
ADVERSE EFFECT OF UNANTICIPATED COSTS OF EXPANSION. The opening of a new
restaurant involves substantial work to prepare the facility after a lease has
been entered into and certain fixed expenditures (primarily lease payments) have
begun. During the preparation phase, unanticipated costs and/or delays may be
encountered due to construction, regulatory or other problems. These problems
may result in either or both additional out-of-pocket expenditures and the loss
of profits which would have been realized had the facility opened as scheduled.
Construction delays sometimes may be alleviated by overtime hours involving
additional costs, which must be offset against potential lost revenue. Any of
these factors could have a material adverse effect on the Company's financial
condition, results of operations and cash flows.
SERVICE MARK PROTECTION AND PROPRIETARY INFORMATION. The Company believes
that its service marks have significant value and are important to its ability
to create demand for and awareness of its restaurants. The Company has
registered the trade name "CIAO BABY" with the Ohio Secretary of State and has
acquired the registered service mark "CIAO!" in the State of Tennessee. The
Company has not obtained federal registration of any name or mark. The Company's
registrations in Ohio and Tennessee place on record the Company's claimed dates
of first use of the marks registered in those states. The Company may bring an
action against a third party using a confusingly similar mark for restaurant
services in the geographic area served by the Company and, assuming the third
party cannot establish superior rights pursuant to federal registration or prior
use, enjoin such third party from using the mark. However, Hampden, Inc., a
Colorado corporation unaffiliated with the Company, operates a restaurant in
Denver, Colorado using the "Ciao! baby" name and registered the servicemark
"Ciao! baby" with the U.S. Patent and Trademark Office on November 10, 1992. As
a result, and assuming the validity of its registration, under federal law
Hampden possesses the right to enjoin the Company's use of "Ciao! baby" in any
geographical market where the Company operates a restaurant if and when Hampden
enters that market. Currently, Hampden has not entered a geographical market in
which the Company presently operates or plans to open a restaurant.
Any entity that can demonstrate the use of "Ciao! baby" in interstate
commerce prior to Hampden's first use may petition the U.S. Patent and Trademark
Office to cancel Hampden's federal registration of the "Ciao! baby" service
mark. Under federal law, any such petition to cancel Hampden's registration
based on prior use must be filed on or before November 10, 1997. The Company is
attempting to determine if it can demonstrate that it used "CIAO BABY" in
interstate commerce prior to Hampden's first use. Based upon the results of this
review, the Company may file a petition seeking to cancel Hampden's federal
registration. There can be no assurance, however, that the Company will be
successful in these efforts or that Hampden will not attempt to enjoin the
Company's use of "CIAO BABY" in existing or future markets in which the Company
operates. If the Company were prevented from using the "CIAO BABY" mark, it
could have a material adverse effect on the Company's financial condition,
results of operations and cash flows.
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The Company also relies on trade secrets and proprietary know-how and
employs various methods to protect its concepts and recipes. However, such
methods may not afford complete protection and there can be no assurance that
others will not independently develop similar know-how or obtain access to the
Company's know-how, concepts and recipes. See "Business -- Service Marks and
Proprietary Information."
POSSIBLE ADVERSE EFFECTS IF GROWTH IS NOT MANAGED PROPERLY. The Company's
operational strategy is heavily dependent upon daily review of information from,
and discussions with, its restaurant managers. While the Company has designed
its corporate operations to support expansion, the Company's proposed growth
strategy may require expansion of both the restaurant management staff and
corporate office support staff beyond that currently contemplated, as well as
the enhancement of operational and financial systems. Failure to implement these
systems and add these resources could have a material adverse effect on the
Company's financial condition, results of operations and cash flows. There can
be no assurance that the Company will be able to manage its expanding operations
effectively or that it will be able to maintain or accelerate its growth.
EXPOSURE TO COST FLUCTUATIONS. An increase in operating costs could have a
material adverse effect on the Company's financial condition, results of
operations and cash flows. Factors such as inflation, increased food costs,
increased labor and employee benefit costs, labor conflicts and the availability
of qualified management and hourly employees may adversely affect operating
costs as a percentage of restaurant sales. Many of these costs are beyond the
control of the Company. Dependence on frequent deliveries of fresh food products
also subjects restaurant businesses such as the Company to the risk that
shortages or interruptions in supply caused by adverse weather or other
conditions could adversely affect the availability, quality and cost of
ingredients. The Company's results of operations are highly sensitive to
increases in operating costs that cannot always be passed on to its customers in
the form of higher prices. The Company generally has been able to anticipate and
react to fluctuations in food costs through selected menu price adjustments and
promoting certain alternative menu selections (in response to price and
availability of supply). However, there can be no assurance that the Company
will be able to continue to anticipate and respond to such supply and price
fluctuations in the future or that the Company will not be subject to
significantly increased costs in the future.
ADVERSE EFFECTS OF POSSIBLE LABOR SHORTAGES. The possibility of labor
shortages, particularly of hourly workers available to work at or near the
minimum wage, exists in virtually all of the geographical areas where the
Company has opened or plans to open restaurants. The Company may be required to
(i) delay the opening of restaurants, which could negatively impact the
Company's financial condition, results of operations and cash flows and delay
its expansion plans, (ii) offer higher wages and benefits to attract qualified
workers, which could negatively impact profit margins or necessitate charging
higher prices, which could in turn negatively impact sales, or (iii) operate
with fewer employees, which could adversely impact the quality of service and,
ultimately, sales. There can be no assurance that the Company will be able to
attract the hourly workers necessary to open restaurants when scheduled or to
operate such restaurants in the manner desired.
DEPENDENCE UPON KEY PERSONNEL. The loss of the services of Carl A.
Bruggemeier, the founder, Chairman and Chief Executive Officer of the Company,
would have a significant adverse effect on the Company. There can be no
assurance that an adequate replacement could be found for Mr. Bruggemeier in the
event of his unavailability. Although Mr. Bruggemeier has entered into an
employment agreement with the Company, there can be no assurance that he will
continue in his present capacity with the Company for any specified period of
time. The Company is the beneficiary of life insurance in the amount of $3
million on the life of Mr. Bruggemeier, but there can be no assurance that such
insurance will be available in the future or that such insurance would be
adequate to compensate the Company for the loss of his services. As the Company
expands its operations, the success of its business will increasingly depend
upon the Company's ability to attract and retain skilled restaurant managers and
other management personnel. See "Business -- Employees."
COMPETITION FROM OTHER RESTAURANTS. The restaurant business is highly
competitive with respect to price, service, location and food quality and is
often affected by changes in consumer taste, economic conditions and travel
patterns. The Company competes in the casual dining segment for (i) customers,
10
11
(ii) management personnel and labor and (iii) restaurant sites. A number of
competitors operate or franchise more restaurants, have significantly greater
resources and have a longer operating history than the Company. No assurance can
be given that the restaurants owned by the Company will be positioned to compete
successfully in any or all of the markets in which they now operate or may
operate in the future. Existing competitors may expand or modify operations to
compete successfully in the same market targeted by the Company. In addition, if
the Company's restaurants are perceived as being successful or its concept is
received favorably in the industry, new competitors, including national food
service chains with significantly greater resources than the Company, may be
formed to operate restaurants similar in concept to those of the Company.
Potential employees may desire to seek employment from competitors of the
Company that have a more established market presence than the Company. See
"Business -- Competition."
EVENTS WHICH MAY AFFECT THE RESTAURANT INDUSTRY: CHANGING TRENDS AND OTHER
FACTORS AFFECTING MULTI-UNIT RESTAURANT BUSINESSES. Multi-unit restaurant
businesses such as the Company can be substantially adversely affected by
publicity resulting from food quality, illness, injury or other health concerns
or operating issues attributable to one restaurant or a limited number of
restaurants. In addition, public tastes can often change dramatically,
particularly with regard to restaurant selection. Concept restaurants or
restaurant chains may achieve initial success but thereafter suffer declines as
public tastes change. Restaurant customers are often attracted to new
restaurants and new restaurant concepts and abandon older restaurants. No
assurance can be given that the Company's restaurants will achieve long-term
success, even if initial profitability is achieved.
RISK RELATED TO RESTAURANT LOCATIONS. The Company's strategy is to locate
its restaurants in proximity to arts and entertainment facilities, convention
centers and other high traffic generators. Although the restaurant industry in
general is seasonal, this strategy may result in variations to normal
seasonality patterns based on the schedules of such facilities. If the
facilities are not well "booked" or do not offer events or attractions which
draw large audiences, the Company's financial condition, results of operation
and cash flows could be materially and adversely affected.
POTENTIAL CONFLICTS OF INTEREST. Two of the Company's nominees for
director after the Offering are principals or officers of entities which,
respectively, lease space and sell beverages to the Company. To date, all
transactions with these entities have been arms length, third-party
transactions. Subsequent to the Offering, however, it is possible that conflicts
of interest could arise as a result of these persons' dual capacities as
directors of the Company and as principals or officers of entities having
significant business relationships with the Company. See "Certain Transactions."
CONTROL BY MANAGEMENT. After the Offering, the Company's executive
officers and directors will control approximately 49.2% of the Company's
outstanding Common Stock and will be able to significantly influence most
matters requiring approval by shareholders, including the election of directors.
This could have the effect of delaying or preventing a change in control of the
Company and, accordingly, could limit the price that investors might be willing
to pay for the Common Stock. See "Description of Capital Stock" and "Holdings of
Management and Principal Shareholders."
POSSIBLE ADVERSE EFFECTS OF GOVERNMENT REGULATION. The restaurant industry
is subject to numerous Federal, state and local government regulations,
including those relating to the preparation and sale of food, the sale of
alcoholic beverages and building and zoning requirements. Additionally, the
Company is subject to laws governing its relationship with employees, including
minimum wage requirements, overtime, working conditions and citizenship
requirements. The failure to obtain or retain food licenses or alcoholic
beverage licenses could adversely affect the Company. Also, although to date the
majority of the Company's employees either are not subject to or are paid at
levels above the minimum wage, the future enactment, adoption or amendment of
laws or regulations, such as a further increase in the minimum wage, mandatory
health insurance coverages for employees or other costs associated with
employees, could adversely affect the restaurant industry in general and could
have a material adverse effect on the Company's financial condition, results of
operations and cash flows.
11
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PRODUCT AND OTHER LIABILITY. The preparation and serving of food
necessarily involves the risk that harmful micro-organisms may be transferred to
the Company's customers. These micro-organisms may be present in the raw
materials purchased by the Company or transmitted by employees of the Company.
Resulting illness of a customer may subject the Company to monetary liability
and may also damage the reputation of the Company's restaurants. In addition,
customers may suffer other injuries on the Company's premises. The Company
carries general liability policies in the amount of $1,000,000 per occurrence
and $4,000,000 in the aggregate. Although the Company has not yet incurred any
liability as a result of customer illness, there can be no guarantee that such
an event will not occur in the future.
PRODUCT LIABILITY FOR SALE OF ALCOHOLIC BEVERAGES. The Company is subject
to "dram-shop" statutes, which generally provide a person injured by an
intoxicated person with the right to recover damages from an establishment that
wrongfully served alcoholic beverages to the intoxicated person. The laws of
many states provide that a vendor of alcoholic beverages may be held liable in a
civil cause of action for injury or damage caused by or resulting from the
intoxication of a minor (under 21 years of age) if the vendor willfully,
knowingly and unlawfully sells or furnishes alcoholic beverages to the minor and
knows that the minor will soon thereafter be driving a motor vehicle. A vendor
can be similarly held liable if it knowingly provides alcoholic beverages to a
person who is in a noticeable state of intoxication, knows that the person will
soon thereafter be driving a motor vehicle and injury or damage is caused by
that person. In addition, significant national attention is focused on the
problem of drunk driving, which could result in the adoption of additional
legislation and increased potential liability of the Company for damage or
injury caused by its customers. See "Business -- Governmental Regulation."
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of the Common Stock offered
hereby will experience immediate and substantial dilution of $5.24
(approximately 75%) per share in the net tangible book value from the initial
public offering price per share. See "Dilution."
NO ASSURANCE OF PUBLIC MARKET; DETERMINATION OF PUBLIC OFFERING PRICE;
POSSIBLE VOLATILITY OF COMMON STOCK PRICE; UNDERWRITERS' POTENTIAL INFLUENCE ON
THE MARKET. Prior to this Offering, there has been no public trading market for
the Common Stock. Consequently, the initial public offering price of the Common
Stock has been determined by negotiations between the Company and the Managing
Underwriter and does not necessarily reflect the Company's book value or other
established criteria of value. Moreover, the initial public offering price may
bear no relationship to the price at which the Common Stock will trade after the
completion of the Offering (which price could be lower than the initial public
offering price). The market price of the Common Stock following the consummation
of this Offering may be highly volatile as has been the case with the securities
of many emerging companies. Factors such as the Company's financial results,
quarter-to-quarter variations in operating results, announcements by the Company
or its competitors, general market trends and various factors affecting the
restaurant industry generally may have a significant impact on the market price
of the Common Stock. In addition, in recent years, the stock market has
experienced a high level of price and volume volatility and market prices for
the stock of many companies have experienced wide price fluctuations which have
not necessarily been related to the operating performances of such companies.
Although the Common Stock has been approved for listing on the Nasdaq SmallCap
Market, no assurance can be given that an active market for the Common Stock
will develop or, if developed, will continue. The Managing Underwriter has
advised the Company that it intends to make a market in the Common Stock and may
otherwise effect transactions in these securities, although it has no obligation
to do so. As a result, the Managing Underwriter may exert a dominating influence
on the market for the Common Stock. There also can be no assurance that the
Managing Underwriter will be willing or able to continue its market making
activities and these activities may be discontinued at any time. The price and
liquidity of the Common Stock may be significantly affected by the degree, if
any, of the Managing Underwriter participation in the market for the Common
Stock. See "Underwriting."
POSSIBLE DELISTING OF SECURITIES FROM NASDAQ; DISCLOSURE RELATING TO
LOW-PRICED STOCKS. The Common Stock has been approved for listing on the Nasdaq
SmallCap Market ("Nasdaq") upon the consummation of this Offering. However, in
order to continue to be included on Nasdaq, a company must maintain $2,000,000
in total assets, a $200,000 market value of the public float and $1,000,000 in
total capital
12
13
and surplus. In addition, continued inclusion requires two market makers and a
minimum bid price of $1.00 per share; except that if a company falls below this
minimum bid price, the company will remain eligible for continued inclusion on
Nasdaq if the market value of the public float is at least $1,000,000 and the
company has $2,000,000 in capital and surplus. Failure to meet these maintenance
criteria in the future may result in the delisting of the Common Stock from
Nasdaq. Thereafter, trading, if any, in the Common Stock would be conducted
outside Nasdaq in the over-the-counter market. As a result, an investor might
find it more difficult to dispose of, or to obtain accurate quotations as to the
market value of, the Company's securities. In addition, if the Common Stock were
delisted from trading on Nasdaq and the trading price of the Common Stock were
less than $5.00 per share, trading in the Common Stock would also be subject to
certain rules promulgated under the Securities Exchange Act of 1934, which
require additional disclosure by broker-dealers in connection with any trades
involving a stock defined as a penny stock (generally, any equity security
outside Nasdaq that has a market price of less than $5.00 per share). Such rules
require the delivery, prior to any penny stock transaction, of a disclosure
schedule explaining the penny stock market and the risks associated therewith,
and impose various sales practice requirements on broker-dealers who sell penny
stock to persons other than established customers and accredited investors
(generally institutions). For these types of transactions, the broker-dealer
must make a special suitability determination for the purchaser and have
received the purchaser's written consent to the transactions prior to sale. The
additional burdens imposed upon broker-dealers by such requirements may
discourage them from effecting transactions in the Common Stock, thereby
severely limiting the market liquidity of the Common Stock and the ability of
purchasers in this offering to sell the Common Stock in the secondary market.
SHARES ELIGIBLE FOR FUTURE SALE. Future sales pursuant to Rule 144 under
the Securities Act of 1933 (the "Securities Act") of the shares of Common Stock
held by existing shareholders of the Company could have an adverse effect on the
price of the Common Stock. After the Offering, approximately 1,176,000 shares of
Common Stock will be eligible for sale under Rule 144 commencing 90 days after
the date of this Prospectus; however, each of the Company's officers and
directors and certain other shareholders, who together will hold an aggregate of
1,645,665 shares of Common Stock, have agreed not to offer or otherwise dispose
of such shares for 180 days after the date of this Prospectus without the
consent of the Managing Underwriter. Additionally, outstanding warrants to
purchase 249,990 shares of Common Stock become immediately exercisable upon the
closing of the Offering, and the holders of these warrants have registration
rights which will be exercisable after the expiration of the 180-day "lock-up"
period. Registration and sale of these shares also could effect adversely the
price of the Common Stock. See "Certain Transactions" and "Shares Eligible for
Future Sale."
BENEFITS OF THE OFFERING TO CURRENT SHAREHOLDERS, DIRECTORS AND OFFICERS OF
THE COMPANY. The Company intends to use a portion of the net proceeds of the
Offering to pay approximately $2.7 million in outstanding indebtedness held by
Blue Chip Capital Fund Limited Partnership, one of the Selling Shareholders, and
certain other persons who provided bridge financing. Approximately $202,000 of
the Offering proceeds will be used to repay bank debt which is personally
guaranteed by Mr. Bruggemeier. If the over-allotment option is exercised, the
Selling Shareholders (including Mr. Roger Lipton, a director of the Company)
will receive the net proceeds of any shares of Common Stock sold by them. The
Offering also may provide existing shareholders with liquidity through the
creation of a public market. See "Use of Proceeds" and "Underwriting."
ABSENCE OF DIVIDENDS. The Company has never paid dividends on its Common
Stock and does not anticipate paying any dividends in the foreseeable future.
See "Dividend Policy."
POTENTIAL ANTI-TAKEOVER EFFECT AND POTENTIAL ADVERSE IMPACT ON MARKET PRICE
OF CERTAIN CHARTER PROVISIONS AND THE OHIO GENERAL CORPORATION LAW. Certain
provisions of the Company's Restated Articles of Incorporation and of the Ohio
Revised Code (the "Ohio GCL"), together or separately, could discourage
potential acquisition proposals, delay or prevent a change in control of the
Company and limit the price that certain investors might be willing to pay in
the future for the Common Stock.
13
14
Pursuant to the Company's Restated Articles of Incorporation, upon the
closing of the Offering, the Board of Directors of the Company will have the
authority to issue up to 100,000 preferred shares without further shareholder
approval. Such preferred shares could have dividend, liquidation, conversion,
voting and other rights and privileges that are superior or senior to the Common
Stock. Issuance of preferred shares could result in the dilution of the voting
power of the Common Stock, adversely affect holders of the Common Stock in the
event of liquidation of the Company or delay, defer or prevent a change in
control of the Company.
In addition, Sections 1701.01 and 1701.831 of the Ohio GCL contains
provisions that require shareholder approval of any proposed "control share
acquisition" of any Ohio corporation at any of three ownership thresholds: 20%,
33 1/3% and 50%; and Chapter 1704 of the Ohio GCL contains provisions that
restrict certain business combinations and other transactions between an Ohio
corporation and interested shareholders. See "Description of Capital
Stock -- Provisions Affecting Business Combinations and Changes in Control."
14
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HISTORY OF THE COMPANY
Ciao Cucina Corporation is an Ohio corporation formed by Carl A.
Bruggemeier and others to develop and own moderately-priced, contemporary
restaurants serving Mediterranean cuisine. The Company's original name was Don
Carlo Inc. In late 1993, Fire In The Kitchen, Inc. ("FITK"), an Ohio corporation
controlled by Mr. Bruggemeier, was merged into the Company, with the FITK
shareholders receiving an aggregate of 103,762.7 shares of the Company's Common
Stock in exchange for all outstanding shares of FITK common stock. FITK owned
and operated the Cincinnati, Ohio, Harper's Point restaurant, which was acquired
by the Company in the merger.
In March 1995, the Company issued 15,000 shares of Series A Preferred Stock
to Blue Chip Capital Fund Limited Partnership ("Blue Chip LP") in exchange for
cancellation of $350,000 of outstanding indebtedness and an additional
investment of $1,150,000 by Blue Chip LP. At the same time, the holders of
$1,092,960 aggregate principal amount of other outstanding indebtedness
exchanged notes held by them for 1,584 shares of the Company's Series B
Preferred Stock. The conversion ratios were determined by arms length
negotiations among Blue Chip LP, the Company and certain representatives of the
outstanding noteholders and were agreed to by the Company and by all but two
noteholders (the notes issued to such noteholders are still outstanding). All
outstanding shares of Preferred Stock will convert automatically to shares of
Common Stock at the closing of the Offering on the basis of 54.235 and 348.7
shares of Common Stock, respectively, for each outstanding share of Series A and
Series B Preferred Stock, or approximately $1.84 and $1.98 per share of Common
Stock, respectively. During 1996 Blue Chip LP and other investors loaned the
Company an aggregate of an additional $2,300,000 to finance the Company's
expansion and operations in contemplation of the Offering and received five-year
warrants to purchase 249,990 shares of Common Stock at a price of $7.00 per
share (the "Bridge Financing Warrants"). See "Certain Transactions."
The Company was incorporated on August 5, 1992. The Company's executive
offices are located at 700 Walnut Street, Suite 300, Cincinnati, Ohio 45202, and
its telephone number is (513) 241-9161.
15
16
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock in the
Offering, after deducting the underwriting discount and estimated offering
expenses, will be approximately $6.1 million. The following table sets forth the
expected use of the net proceeds of the Offering, based upon amounts of
indebtedness outstanding at October 8, 1996:
USE PROCEEDS
------------------------------------------------------------------------- ----------
Repayment of 12% bridge loans............................................ $1,115,000(1)
Repayment of 10.35% bridge loans (held by Blue Chip LP).................. 1,525,000(1)(2)
Repayment of indebtedness to The Provident Bank bearing interest from 9%
to prime plus 2%....................................................... 202,000(3)
Development and opening of new restaurants............................... 2,620,000(4)
Balance to be used for working capital................................... 638,000
- ---------------
(1) Represents principal and accrued interest. Amounts outstanding at July 14,
1996 were approximately $1,079,000 of 12% loans and $1,135,000 of 10.35%
loans. These obligations mature on the earlier of March 8, 1998 or within
ten days of closing of this Offering. Proceeds from these loans were used
for working capital and to help fund the opening of the Company's two newest
restaurants.
(2) The principal amount of the loan represents $1,250,000 of funds loaned to
the Company by Blue Chip LP and a $200,000 financing fee payable to Blue
Chip LP.
(3) Represents principal and accrued interest. The amount outstanding at July
14, 1996 was approximately $212,000. These obligations mature through May
1997 and are personally guaranteed by Mr. Bruggemeier.
(4) Estimated based upon the assumed opening of five additional restaurants
during 1997. The Company estimates that approximately $370,000 of proceeds
will be used to develop and open the Ft. Lauderdale, Florida restaurant,
$400,000 to develop and open the Cleveland, Ohio restaurant and $550,000 to
open the Baton Rouge, Louisiana restaurant (assuming a lease is signed). The
two remaining restaurants have not been finally identified, but the Company
estimates that $650,000 in proceeds will be used to develop and open each of
these restaurants.
There can be no assurance that such allocations will not be changed to
respond to changes in the Company's business or future conditions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." Pending such uses, the Company
intends to invest the net proceeds from this Offering in short-term investment
grade instruments.
DIVIDEND POLICY
The Company presently intends to retain any earnings for use in its
business and does not anticipate paying cash dividends in the foreseeable
future.
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CAPITALIZATION
The following table sets forth the pro forma capitalization of the Company
as of July 14, 1996, and as adjusted to reflect (i) the sale of 1,000,000 shares
of Common Stock offered by the Company hereby and the application of the
estimated net proceeds as set forth under "Use of Proceeds," (ii) the conversion
at the closing of the Offering of all outstanding shares of Preferred Stock into
Common Stock on the basis of 54.235 shares of Common Stock for each share of
Series A Preferred Stock and 348.7 shares of Common Stock for each share of
Series B Preferred Stock (and the elimination of fractional shares), and (iii)
the issuance of 53,866 shares of Common Stock upon conversion of the Series A/B
Notes, 81,352 shares of Common Stock upon conversion of the Towne Note and
78,839 shares (based upon amounts outstanding at September 30, 1996) of Common
Stock issuable at the closing of the Offering in payment of certain deferred
consulting fees and preferred stock dividends. See "Certain Transactions."
JULY 14, 1996
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(in thousands)
Short-term obligations:
Current maturities of long-term obligations.......................... $ 342 $ 4
======= =======
Long-term obligations:
Long-term debt....................................................... $ 2,262 $ 6
------- -------
Redeemable equity:
10% Series A Convertible Preferred Stock -- $100 par value, 15,000
shares authorized; 15,000 shares outstanding; no shares
outstanding, as adjusted.......................................... 1,647 0
10% Series B Convertible Preferred Stock -- $690 par value, 1,740
shares authorized; 1,584 shares outstanding; no shares
outstanding, as adjusted.......................................... 1,234 0
------- -------
Total redeemable equity........................................... 2,881 0
------- -------
Shareholders' equity (deficit):
Common Stock -- no par value, 10,000,000 shares authorized, 794,355
shares outstanding; 3,149,766 shares outstanding as adjusted(1)... 1 9,375
Treasury stock -- 224,445 shares, stated at cost..................... (135) (135)
Accumulated and paid-in deficit...................................... (3,295) (3,591)
------- -------
Total shareholders' equity (deficit).............................. (3,429) 5,649
------- -------
Total capitalization................................................... $ 1,714 $ 5,655
======= =======
- ---------------
(1) Excludes 21,645 shares issuable at the initial public offering price upon
exercise of outstanding stock options, 249,990 shares issuable upon exercise
of the Bridge Financing Warrants and 100,000 shares issuable upon exercise
of the Underwriter's Warrants.
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DILUTION
The net tangible book value of the Company's Common Stock as of July 14,
1996, giving effect to the transactions described in Note (1) below, was
$(570,263), or $(0.27) per share. Net tangible book value per share is equal to
the Company's total tangible assets less total liabilities, divided by the total
number of shares of Common Stock outstanding. After giving effect to the sale of
the 1,000,000 shares of Common Stock offered by the Company hereby (and
deducting the underwriting discount and estimated offering expenses), the net
tangible book value of the Company as of July 14, 1996 would have been
$5,537,237, or $1.76 per share. This represents an immediate dilution of $5.24
per share to new investors purchasing shares in the Offering. The following
table illustrates this per share dilution in net tangible book value per share
to new investors at July 14, 1996:
Initial public offering price per share........................... $7.00
Net tangible book value per share before this Offering(1)....... $(0.27)
Increase in net tangible book value per share attributable to
new investors................................................ 2.03
------
Pro forma net tangible book value per share after this Offering... 1.76
-----
$5.24
Dilution of net tangible book value per share to new investors.... =====
The following table sets forth on a pro forma basis as of July 14, 1996,
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by the existing
shareholders and by the purchasers of the shares of Common Stock in this
Offering (at the initial public offering price of $7.00 per share and before
deduction of the estimated underwriting discount and offering expenses payable
by the Company):
TOTAL CASH
SHARES PURCHASED CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
Existing
Shareholders(1)................... 2,149,766 68.3% $ 3,267,720 31.8% $1.52
New Investors..................... 1,000,000 31.7 7,000,000 68.2 $7.00
--------- ----- ----------- -----
Total............................. 3,149,766 100.0% $10,267,720 100.0%
========= ===== =========== =====
- ---------------
(1) Assumes that all outstanding shares of Preferred Stock have been converted
into 1,365,799 shares of Common Stock, 53,866 shares of Common Stock have
been issued upon conversion of the Series A/B Notes, 81,352 shares of Common
Stock have been issued upon conversion of the Towne Note and 78,839 shares
(based on amounts outstanding at September 30, 1996) of Common Stock have
been issued in payment of certain deferred consulting fees and preferred
stock dividends. Does not include 21,645 shares issuable at the initial
public offering price upon exercise of outstanding stock options, 249,990
shares issuable upon the exercise of the Bridge Financing Warrants at an
exercise price of $7.00 per share and 100,000 shares issuable upon exercise,
at $8.40 per share, of the Underwriter's Warrants. See "Certain
Transactions."
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SELECTED FINANCIAL DATA
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected historical financial data presented below as of December 31,
1995 and for fiscal years 1994 and 1995 are derived from the financial
statements of the Company which have been audited by Joseph Decosimo and
Company, PLL, independent certified public accountants. The financial data as of
December 29, 1991, December 27, 1992, December 26, 1993 and July 14, 1996, and
for fiscal years 1991 through 1993 and the first two quarters of fiscal 1995 and
1996, are derived from the Company's unaudited financial statements. In the
opinion of management, the financial data reflect all adjustments, consisting
only of normal recurring adjustments, necessary for a fair statement of such
data and are not necessarily indicative of results to be expected for the full
year. The selected financial data should be read in conjunction with the
Financial Statements and Notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
FIRST TWO
FISCAL YEAR QUARTERS
-------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
----- ------ ------ ------- ------ ------ --------
STATEMENT OF OPERATIONS DATA:
Restaurant revenues................ $ 957 $1,080 $ 1,870 $ 3,273 $ 4,779 $2,555 $ 4,130
Restaurant costs and expenses...... (854) (935) (1,737) (3,008) (4,548) (2,445) (3,631)
General and administrative......... (112) (91) (377) (365) (604) (318) (641)
Depreciation and amortization...... (138) (86) (90) (259) (460) (241) (386)
Loss from operations............... (147) (32) (334) (359) (833) (448) (528)
Interest expense................... (43) (54) (102) (259) (72) (30) (177)
Other income (expense)............. 0 (23) 0 (52) 3 (28) (11)
Net loss........................... (190) (109) (436) (670) (903) (507) (716)
Net loss per common and equivalent
share............................ (0.24) (0.14) (0.55) (1.16) (1.94) (1.02) (1.51)
Weighted average number of common
and equivalent shares
outstanding...................... 794 794 794 576 570 570 570
OPERATING DATA:
Number of restaurants open at
period end....................... 1 1 2 3 3 3 5
Number of mature restaurants(1).... 0 1 1 1 2 2 3
Average revenue per mature restau-
rant(2).......................... n/a $1,080 $1,071 $ 1,139 $1,462 $ 747 $ 772
AS OF
AS OF FISCAL YEAR END JULY 14,
-------------------------------------------------- --------
1991 1992 1993 1994 1995 1996
----- ------ ------ ------- ------ --------
BALANCE SHEET DATA:
Working capital...................... $(85) $(165) $ (406) $(2,387) $ (850) $ (903)
Total assets......................... 585 594 1,728 2,818 3,886 5,585
Long-term obligations, including
current portion.................... 529 457 1,985 2,131 634 2,604
Shareholders' equity (deficit)....... (42) (116) (832) (1,508) (2,616) (3,429)
- ---------------
(1) A mature restaurant is one which has been open at least 18 months.
(2) Includes the Company's first, and smallest, restaurant which opened in April
1991. The Company's mature restaurants do not include the value-added
features incorporated in the Company's two newest restaurants. See
"Business" and "Business -- Operating Strategy."
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20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company opened its first restaurant in April 1991. Three of the
Company's five restaurants have been in operation for at least one year while
two restaurants were opened in February and March 1996. As a result, the Company
has a limited operating history and the results achieved to date by the
Company's restaurants may not be indicative of actual future results. This
discussion should be read in conjunction with the selected financial information
of the Company and the Financial Statements and Notes thereto of the Company
included elsewhere in this Prospectus.
RESULTS OF OPERATIONS
The following table shows selected components of the Company's operating
income as a percentage of revenues:
FIRST TWO
FISCAL YEAR QUARTERS
--------------------------------------------- ---------------
1991 1992 1993 1994 1995 1995 1996
----- ----- ----- ----- ----- ----- -----
Restaurant revenues (1)..................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses
Food and beverage costs................... 33.6 33.6 31.9 28.9 29.5 28.6 30.9
Restaurant labor costs (2)................ 35.5 31.2 31.7 32.1 32.4 28.1 33.4
Occupancy and other restaurant expenses
(3)..................................... 20.2 21.8 29.9 31.0 33.3 39.0 23.6
General and administrative expenses (4)... 11.7 8.5 20.2 11.1 12.6 12.4 15.5
Depreciation and amortization............. 14.4 7.9 4.8 7.9 9.6 9.4 9.4
----- ----- ----- ----- ----- ----- -----
Total operating expenses.............. 115.4 103.0 118.5 111.0 117.4 117.5 112.8
----- ----- ----- ----- ----- ----- -----
Loss from operations........................ (15.4) (3.0) (18.5) (11.0) (17.4) (17.5) (12.8)
Interest expense, net and other............. (4.5) (7.1) (5.4) (9.5) (1.5) (2.3) (4.5)
----- ----- ----- ----- ----- ----- -----
Net loss.................................. (19.9)% (10.1)% (23.9)% (20.5)% (18.9)% (19.8)% (17.3)%
===== ===== ===== ===== ===== ===== =====
Number of restaurants open at period end.... 1 1 2 3 3 3 5
Number of mature restaurants (5)............ 0 1 1 1 2 2 3
- ---------------
(1) Revenues consist of restaurant food and beverage sales.
(2) Restaurant labor consists of hourly and management payroll, benefits and
taxes.
(3) Occupancy and other restaurant expenses include rent, utilities,
advertising, repair and maintenance and operating supplies.
(4) General and administrative expenses include corporate salaries, benefits and
taxes, rent, insurance, professional services and other expenses.
(5) A mature restaurant is one which has been open at least 18 months.
TWO QUARTERS ENDED JULY 14, 1996 COMPARED TO TWO QUARTERS ENDED JULY 9, 1995
Restaurant revenue increased to $4,130,369 in the two quarters ended July
14, 1996 from $2,554,841 in the two quarters ended July 9, 1995, an increase of
$1,575,528 or 61.7%. The addition of two restaurants during the first quarter of
fiscal 1996 accounted for the majority of this increase. The Company believes
that these restaurants are the prototype restaurants for future expansion as
they embody all of the concepts that the Company has explained elsewhere in this
Prospectus.
During the two quarters ended July 14, 1996, food and beverage costs
increased 2.3% as a percentage of restaurant revenue from 28.6% in the two
quarters ended July 9, 1995 to 30.9% in the two quarters ended July 14, 1996.
The increase was lower than inflation due mainly to the Company implementing
more efficient cost containment procedures on a per restaurant basis and
achieving economies of scale that allow for cost effective purchases of
non-perishable items on a corporate-wide basis.
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21
Restaurant labor increased $661,016, or 92.2%, as a result of opening two
new restaurants. As a percentage of restaurant revenue, restaurant labor
increased from 28.1% in the two quarters ended July 9, 1995 to 33.4% in the two
quarters ended July 14, 1996 primarily as the result of additional work hours
incurred due to training and labor inefficiencies of newly hired personnel
during the initial 120 days of operations of the two newly opened restaurants in
Cincinnati, Ohio and Memphis, Tennessee.
Occupancy and other operating expenses declined from 39.0% of revenue in
the two quarters ended July 9, 1995 to 23.6% in the two quarters ended July 14,
1996, due to higher monthly sales volumes as compared to monthly rents at the
two newly opened restaurants. Occupancy and other operating expenses were
$977,887 in the two quarters ended July 14, 1996 and $997,798 in the two
quarters ended July 9, 1995, a decrease of $19,911 or 2.0%. This decrease was
primarily due to reductions in advertising and relocation expenses for mature
restaurants.
General and administrative expenses increased 101.9% from $317,599 in the
two quarters ended July 9, 1995 to $641,155 in the two quarters ended July 14,
1996. This increase reflects the addition of personnel and related costs needed
to support the Company's expansion. As a percentage of revenue, general and
administrative expenses increased from 12.4% for the two quarters ended July 9,
1995 to 15.5% for the two quarters ended July 14, 1996. Except as noted
elsewhere in this Prospectus relating to the hiring of a Chief Operating
Officer, a Director of Human Resources and a Director of Purchasing, management
believes that the infrastructure, in terms of corporate overhead, is in place to
support a substantial increase in the number of locations and expects that such
expenses, as a percentage of revenue, will decline as new locations are opened.
Depreciation and amortization increased $145,721 or 60.6%, from $240,510 in
the two quarters ended July 9, 1995 to $386,231 in the two quarters ended July
14, 1996. This increase was primarily due to the addition of the two restaurants
during the first quarter of fiscal 1996, offset by lower amortization of pre-
opening costs in the two quarters ended July 14, 1996. Depreciation and
amortization were flat as a percent of revenue at 9.4%.
Losses from operations increased 17.7% to $527,558 in the two quarters
ended July 14, 1996 from $448,125 in the two quarters ended July 9, 1995. As a
percentage of revenue, the loss from operations decreased from 17.5% in two
quarters ended July 9, 1995 to 12.8% in the two quarters ended July 14, 1996.
This improvement, as a percent of revenue, resulted from strong sales at the
Washington, D.C. location and the opening of the two new restaurants. However,
this improvement was materially and adversely affected by the straight-line
accounting treatment of lease expenses as discussed in the Notes to Financial
Statements. Cash flows used by operating activities increased from $530,078 to
$532,156 primarily due to increases in accounts payable, accrued expenses, and
accrued rentals totaling $396,478 as opposed to decreases in accounts receivable
and inventories of $93,753. These relationships reflect management's ability to
enter into relationships with vendors that provide favorable payment terms.
There can be no assurance that management will be able to negotiate such
favorable arrangements in the future.
Interest expense increased $148,586 from the two quarters ended July 9,
1995 to the two quarters ended July 14, 1996 mainly as a result of the issuance
of $2,050,000 in bridge financing during the two quarters ended July 14, 1996.
Net loss for the two quarters ended July 14, 1996 of $716,048 represent an
increase of $209,053, or 41.2%, over the net loss of $506,995 in the two
quarters ended July 9, 1995.
The Company has incurred substantial one-time fees and expenses in
connection with the obtaining of bridge financing. See "Certain Transactions."
These fees and expenses (equal to approximately $325,000), along with additional
restructuring expenses (equal to approximately $245,000) incurred in
contemplation of this Offering, will be recognized primarily in the last quarter
of 1996 and will affect adversely the Company's reported results of operations
for that period. The Company expects to report a loss for the last two quarters
of 1996 greater than that reported for the first two quarters of 1996.
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22
FISCAL 1995 COMPARED TO FISCAL 1994
Restaurant revenues increased to $4,778,742 in fiscal 1995 from $3,273,083
in fiscal 1994, an increase of $1,505,659, or 46.0%. This increase reflects the
fact that fiscal 1995 includes a full year of revenues for three restaurants
while 1994 reflects a full year of revenues for only two restaurants and one and
one-half months of the New Jersey restaurant.
Food and beverage expenses increased $464,829, or 49.2% from $944,593 in
fiscal 1994 to $1,409,422 in fiscal 1995. This increase is due to a full year of
operations in fiscal 1995 for the New Jersey restaurant versus one and one-half
months in fiscal 1994. As a percentage of revenues, food and beverage costs
increased from 28.9% in fiscal 1994 to 29.5% in fiscal 1995 which is due to
normal economic forces in food and beverage prices from vendors while the
Company held the line on its menu pricing.
Restaurant labor increased to $1,548,678 in fiscal 1995 from $1,049,802 in
fiscal 1994, an increase of $498,876, or 47.5%. As a percentage of restaurant
revenue, restaurant labor increased from 32.1% in fiscal 1994 to 32.4% in fiscal
1995. The Company believes that it achieved its goals in managing restaurant
labor costs while opening a new restaurant and holding menu pricing.
Occupancy and other operating expenses increased to $1,589,833 in fiscal
1995 from $1,013,734 in fiscal 1994, an increase of $576,099 or 56.8%. As a
percentage of restaurant revenues, the increase approximated 2.3% and was
attributable to the New Jersey restaurant, increased advertising and promotional
activities and contract maintenance. As further discussed in the Notes to
Financial Statements, generally accepted accounting principles require that
minimum lease payments be charged to expense on a straight-line basis over the
term of the lease. The straight-line averaging accounted for rent expenses in
excess of base amounts required to be paid per the lease agreements of $172,678
in fiscal 1995 and $69,158 in fiscal 1994. The straight-line accounting
treatment of the leases in effect at July 14, 1996 will record base rent expense
for fiscal 1996 of $563,000 which is $145,595 above the base rents required to
be paid by the lease agreements and will result in lower base rent expense than
base rent payments contractually required in years 1997 through 2006 as they
relate to these leases. Management does not currently intend to enter into
future leases that will require straight-line accounting treatment.
General and administrative expenses increased $239,641, or 65.7%, from
$364,849 in fiscal 1994 to $604,490 in fiscal 1995, due mainly to the additional
internal infrastructure needed to support the expansion. As a percentage of
restaurant revenues, these expenses increased slightly to 12.6% in fiscal 1995
from 11.2% in fiscal 1994. The Company intends to add a Chief Operating Officer,
a Director of Human Resources and a Director of Purchasing in order to
facilitate its expansion strategy and enhance operating efficiencies. Management
believes that this corporate infrastructure will support its growth plans
through the year 2000 with only the addition of lower level clerical and
accounting personnel. Accordingly, management expects that general and
administrative expenses will decrease as a percentage of revenue as more
restaurants are opened.
Depreciation and amortization increased to $459,549 in fiscal 1995 from
$259,044 in fiscal 1994. As a percentage of restaurant revenues, these expenses
increased from 7.9% in fiscal 1994 to 9.6% in fiscal 1995. This is primarily due
to the accounting treatment the Company has elected for leasehold incentives.
Management has been successful in negotiating significant leasehold incentives
from landlords. The Company has elected to record these incentives in equipment
and improvements, net, and to recognize an offsetting deferred leasehold
incentive liability.
Loss from operations increased to $833,230 in fiscal 1995 from $358,939 in
fiscal 1994, an increase of $474,291 or 132.1%. As a percentage of restaurant
revenue, loss from operations increased to 17.5% in fiscal 1995 from 11.0% in
fiscal 1994. This was mainly due to the amortization of pre-opening expenses for
the New Jersey location (the Company amortized pre-opening costs over 12
months), the expansion of the corporate management team to accommodate and
support future growth, and impact of the straight-line lease accounting for the
New Jersey restaurant.
Interest expense decreased $173,675, or 64.8%, from $268,134 in fiscal 1994
to $94,459 in fiscal 1995. This decrease is a result of using the proceeds from
the March 1995 issuance of preferred stock to retire indebtedness.
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23
As a result of the above, the net loss increased to $902,657 in fiscal 1995
from $670,290 in fiscal 1994, an increase of $232,367, or 34.7%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements are for restaurant development
and operations. Each of the Company's restaurants operates in leased premises.
For information concerning leases, see "Business--Properties." To date, the
Company has been dependent primarily on the sale of equity and borrowings from
third parties and shareholders to fund capital requirements.
The Company historically has working capital deficiencies, which it
believes are typical in the restaurant industry. As of July 14, 1996, the
Company's current liabilities of $1,292,863 exceeded its current assets of
$390,276, resulting in a working capital deficiency of $902,587. These
deficiencies are due primarily to the Company's practice of using vendors which
provide favorable terms and its aggressive growth strategy.
Net cash used by operating activities was $638,833 in 1995, an increase of
$440,678 from $198,155 in 1994. This increase was primarily due to an increase
of $232,367 in net loss for the year, along with an increase of $121,060 in
pre-opening costs, and decreases totaling $176,360 in accounts payable and
accrued expenses, offset by increased depreciation and amortization and accrued
rentals.
Net cash used by operating activities was $532,156 in the two quarters
ended July 14, 1996, as compared to $530,078 for the two quarters ended July 9,
1995. The $209,053 increase in net loss for the period was substantially offset
by increased depreciation and amortization and other changes in operating assets
and liabilities.
Purchases of equipment and improvements, intangible assets and security
deposits resulted in cash used by investing activities of $273,567 in 1995 as
compared to $394,581 during 1994, when the Company opened one new restaurant.
Purchases of equipment and improvements related to two restaurants opened
during the two quarters ended July 14, 1996 primarily resulted in cash used by
operations of $1,483,927 for the period, as compared to $232,031 for the two
quarters ended July 9, 1995 during which no restaurants were opened.
Financing activities provided cash of $1,016,196 for 1995, primarily
through the issuance of $1,150,000 in redeemable preferred stock, as compared
with cash provided by financing activities of $168,579 for 1994.
Financing activities provided cash of $1,913,390 for the two quarters ended
July 14, 1996, primarily from $2,007,200 proceeds of notes payable offset by the
payment of notes payable.
The Company opened one restaurant during the year ended December 25, 1994
and two restaurants during the two quarters ended July 14, 1996, resulting in
capital expenditures and cash paid for security deposits of $292,447 for 1994
and $1,460,317 for 1996. Additionally, the Company received lease incentives
from landlords for $1,128,618 for 1994, $1,079,506 for 1995 and $169,972 and
$90,087 for the two quarters ended July 9, 1995 and July 14, 1996, respectively,
which were used for leasehold improvements and to purchase restaurant furniture
and equipment.
The Company's operating cash flow losses and investing activities have been
financed by the issuance of bridge notes, preferred stock, bank notes,
convertible subordinated notes, common stock warrants and a bank overdraft.
During the two quarters ended July 14, 1996, the Company issued $2,150,000 in
face amount 10.35% to 12% bridge notes which mature on March 8, 1998 or within
ten days of closing of the Company's initial public offering. During 1995, the
Company issued $1,150,000 in Series A Preferred Stock, $350,000 in short-term
notes subsequently converted to Series A Preferred Stock, $150,000 in a 10%
convertible subordinated note to a landlord and related party, $125,000 in 9% to
prime plus 2% bank notes and $3,038 in equipment notes. The Company's payments
on bank notes and equipment notes totalled $231,148 for 1994, $151,879 for 1995
and $88,811 for the two quarters ended July 14, 1996. Additionally, the Company
repaid $425,000 in short-term notes for 1995, $98,407 to an officer and
shareholder in 1995 and $54,459 for the two quarters ended July 14, 1996, and
$343,403 in equipment and subordinated notes for 1994.
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24
The Company expects to open five restaurants during fiscal 1997 and
estimates that approximately $2,620,000 will be needed for the opening of these
restaurants. The Company also expects that through the end of 1997 it will spend
approximately $200,000 for capital improvements to its existing restaurants. The
Company believes its net proceeds from this Offering, along with cash flow from
operations, and developer allowances, will be sufficient both to meet operating
expenses and capital expenditures for the rest of 1996 and for 1997 and to fund
the costs associated with the opening of these five restaurants.
In the longer term, the Company's goal is to expand to 30 restaurants by
year-end 2000. The Company anticipates that additional bank or other financing
will be needed to fund the costs associated with the opening of these
restaurants. The Company believes it will be able to obtain such financing in
view of its improved financial condition following this Offering. If such
financing is not available, or if the Company's assumptions regarding cash flow
or developer contributions prove incorrect, the Company would be required to
curtail its expansion plans.
The Company has incurred substantial net losses during its operating
history, due in part to the costs of developing the prototype restaurant design,
plans and operating strategies and developing the management infrastructure that
will allow for the Company's planned expansion. During 1996, the Company opened
two additional restaurants, which have been operating profitably since their
opening. As previously discussed, the Company plans to open an additional five
restaurants during 1997; the lease for one restaurant has been signed and the
lease agreements for two locations are in the negotiation process. Upon the
conclusion of the Company's initial public offering, interest-bearing debt is
expected to be less than $10,000, preferred stock will be converted into common
equity, and the consulting agreements with directors will be terminated. Based
on the opening of additional restaurants in 1996 and 1997, the working capital
provided by the initial public offering and the elimination of interest expense
and consulting fees upon closing of the initial public offering, management
believes that positive cash flows from operations in 1997 and subsequent years
will allow for continued growth and expansion.
SEASONALITY
The restaurant industry in general is seasonal. The Company's strategy of
locating its restaurants in proximity to arts and entertainment facilities,
convention centers or other high traffic generators may vary normal seasonality
based on the schedules of such facilities.
INFLATION
The Company believes that inflation has not had a material impact on its
operations to date. Substantial increases in labor, employee benefits, food and
beverage and other operating expenses could adversely affect the operations of
the Company.
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25
BUSINESS
The Company has developed the "Ciao Baby Cucina" restaurant concept. Ciao
Baby Cucinas serve authentic Mediterranean cuisine, primarily Northern Italian,
with Greek, Spanish and French influences. The Company distinguishes itself by
coupling the ambience, food quality and personal service associated with an
individual upscale, "white tablecloth" restaurant with the efficiencies and cost
effective management techniques of a centrally-managed restaurant chain. In this
regard, the Company's goal is to emulate privately-held restaurant chains such
as Il Fornaio and Houston's. The Company's operating and development strategies
include orienting Company restaurants to the casual sophistication favored by
the growing "baby boom" customer market and locating restaurants in proximity to
arts and entertainment facilities, convention centers or other high traffic
generators which are frequented by these target customers.
Five Ciao Baby Cucina restaurants are now open. The Company plans to
develop additional Ciao Baby Cucina restaurants with a portion of the proceeds
from the sale of this Offering.
The following table provides information about the Company's current
restaurants:
SQUARE RESTAURANT
LOCATION FOOTAGE SEATS DATE OPENED
-------------------------- ------- ---------- ------------------
Cincinnati, Ohio.......... 3,869 132 April 15, 1991
(Harper's Point)
Washington, D.C........... 7,147 165 August 30, 1993
Hackensack, New Jersey.... 8,074 206 November 16, 1994
Memphis, Tennessee........ 6,448 208 February 29, 1996
Cincinnati, Ohio.......... 7,925 212 March 19, 1996
(downtown)
Ciao Baby Cucinas are moderately priced full-service restaurants. All
restaurants are open six or seven days a week for dinner and Monday through
Friday for lunch. The Company's newest, prototype restaurants in downtown
Cincinnati and Memphis feature store-front style gourmet coffee shops and
bakeries which are open during breakfast hours.
Ciao Baby Cucinas feature a wide array of appetizers, salads, pizzas,
pastas, entrees and other dishes. The Company offers its patrons high quality
food consistently prepared, generous portions and a level of service typical of
much higher priced fine dining restaurants. Gourmet pizzas, available with a
variety of toppings including veal sausage, proscuitto, wild mushrooms, goat
cheese, grilled radicchio, sun dried tomatoes, grilled eggplant, pine nuts and
fresh basil, and homemade pasta dishes are the signature items of the Ciao Baby
Cucina restaurants.
Ciao Baby Cucina ambience equates to casual comfort with understated
sophistication. Its focal point is the exhibition kitchen, readily visible from
the dining areas to allow patrons to watch the chefs at work. This decor offers
a blend of classic and modern features, incorporating cypress wood and tiled
floors, granite-topped bars, copper and mosaics and soft green and terra-cotta
colors, to provide a contemporary Mediterranean atmosphere. Bottles of infused
olive oil form centerpieces for the tables and a variety of freshly baked breads
is furnished shortly after a customer is seated.
Freshness, quality and creativity are emphasized. Menu modifications are
made as new dishes are added to pique customers' interest. Entree prices
typically range from $6.95 to $11.95 for lunch and $8.95 to $18.95 for dinner
(with the exception of somewhat higher prices in the Washington, D.C. market).
The Company's restaurants offer an extensive variety of premium American and
Italian wines both by the bottle and by the glass. Each restaurant offers a
minimum of 40 premium wines by the glass, which is highly unusual for similar
restaurant operations and is a cornerstone of the Company's concept. This
substantial variety of wines by the glass has significant customer appeal. Each
restaurant also offers an extensive array of premium alcoholic and non-alcoholic
beverages.
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OPERATING STRATEGY
The Company's operating strategy is to combine successfully the "art and
science" aspects of restaurant operations. The key elements of this strategy,
which have been successfully developed and implemented in the Company's existing
restaurants, are as follows:
Dining Ambience. Over the past five years, the Company has refined its
decor. The Company's newest restaurants (in downtown Cincinnati and in Memphis)
share a common decor, inspired by the newest trattorias of Milan, Italy, which
the Company intends to replicate in its future restaurants. Lighting, white
tablecloths and unobtrusive but personal service are combined to provide the
feeling of a fine dining, upscale restaurant. Each restaurant strives to become
a place "to see and be seen" in its market area. The decor is designed to
reflect the sophistication and excitement that might typically be encountered in
a restaurant in one of the "trendier" areas of New York City, Los Angeles or San
Francisco.
Corporate-Controlled Menus Enhanced By Local Chef Creativity. The Company
recognizes that, in essence, restaurants are about food. With that in mind, each
restaurant's kitchen is managed by a full-time chef who has received culinary
training and who is experienced in the art of food preparation. At the same
time, the Company is focused on the importance of reliability and consistency in
the quality of foods presented in its restaurants. To this end, before it is
offered, each dish has been tested and evaluated at the corporate level, an
exact recipe has been prepared, cost has been calculated, a plate design made
and a photograph taken. Chefs are responsible both for preparation of dishes
according to the corporate format and for the development of new dishes which
may be added to the menus. All suggested new dishes also are evaluated by
corporate management for taste, attractiveness and potential profitability. A
new dish which passes this evaluation typically is offered as a special item and
then, if successful, may be incorporated as a regular menu item. Chefs are
encouraged to propose dishes with a local flair or taste, and approximately 20%
of the items on each restaurant's menu fall into this category.
Financial Controls. The Company utilizes its "By the Numbers"(C) reporting
system, developed by its President Carl A. Bruggemeier, which requires each
restaurant manager to calculate, on a daily basis, such factors as daily sales,
weekly sales to date, comparable sales in prior periods, food costs as a
percentage of food sales and labor costs as a percentage of sales, etc. In
addition, the profit contribution of each of the various dishes served in the
restaurant is calculated on a regular basis. This data is compared daily with
weekly projected numbers and allows management to determine immediately whether
expectations are being met. Management believes that the breadth of its
generation of key operating indices on a daily basis is unusual in the
restaurant industry and allows the Company's management to evaluate and, if
necessary, adjust operations on an immediate basis to better ensure
profitability.
Value-Added Services. In recent years, fresh bakery and gourmet coffee
shops have been among the fastest growing segments of the restaurant industry.
The Company also believes that significant potential exists to capitalize on the
growth in demand for carry-out, "home meal replacement" foods. The Company's two
newest restaurants in downtown Cincinnati and Memphis include store-front style
specialty gourmet coffee operations that feature house-made pastries and
European-style breads, cappuccino and espresso and carry-out items from the
restaurant's regular menu, as well as Ciao Espresso logo merchandise. This
feature will be incorporated in all future Ciao Baby restaurants.
Key Customer Marketing. Both the Company's top management and the unit
manager of each restaurant strive to develop personal relationships with the
Company's most faithful and significant customers. Selected customers are given
a "red phone card" which provides an unlisted restaurant telephone number. By
calling this number, the customer is provided with preferred seating at the
restaurant and receives the personal attention of restaurant management. The
Company also provides informal concierge services to "red phone card" customers,
such as finding tickets to entertainment or sporting events or making
reservations at late night entertainment clubs. This special treatment is
designed to build a sense of loyalty and to ensure both repeat business and
referrals. The thank you note, "table touch" system and customer data bases in
each
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27
restaurant allow the Company to establish personal relationships with its
customers and track customer frequency and dining habits to better ensure repeat
business and customer loyalty.
EXPANSION STRATEGY
The Company believes that the casual, contemporary atmosphere, food quality
and moderate prices offered by its restaurants appeal to the growing customer
market for this niche and are, therefore, suitable for replication at additional
locations.
The Company plans to open two additional restaurants, in Ft. Lauderdale,
Florida and, contingent upon successful completion of lease negotiations, in
Cleveland, Ohio, in early 1997. While there can be no guarantees, an additional
three restaurants are planned later in 1997, five in 1998, six in 1999 and nine
in 2000. At present, the Company intends that all of its restaurants will be
located east of the Mississippi River and effectively within two hours' travel
time from the Company's headquarters in Cincinnati, Ohio. This proximity is
central to the Company's management philosophy which requires that the Company's
top management visit the Company's restaurants on a regular basis and, indeed,
even work at various jobs in those restaurants to ensure that the Company's
standards are being met.
On July 1, 1996, the Company entered into a lease for a 6,755 square foot
restaurant facility in Ft. Lauderdale, Florida. The restaurant will be located
in Northport Marketplace Center. The lease is for a ten year term with two
five-year renewal terms. Costs to open the restaurant are expected to be
approximately $1.35 million, of which the landlord will contribute approximately
$675,500 in tenant improvements. The landlord also will lend the Company
approximately $169,000 toward the total costs. Rent is to be computed by adding
a base rent of $202,650 per year to a percentage rent determined by the amount
of gross sales in excess of certain break point figures. The Company currently
expects the restaurant to open prior to March 1, 1997.
The Company is engaged in negotiations to lease space from the Playhouse
Square Foundation of Cleveland, Ohio, a nonprofit entity, or an affiliate
(together, "PSF"), and, to develop an approximately 5,700 square foot restaurant
and 11,500 square foot banquet facility at Cleveland's Playhouse Square Center,
the heart of the redeveloped theater district. These are the only restaurant
facilities currently planned for Playhouse Square Center. The currently
projected opening budget is approximately $3.2 million. It is anticipated that
the Company will be responsible for $400,000 of the opening costs. It also is
anticipated that PSF will contribute $300,000 as a tenant improvement allowance
and obtain the remaining $2.5 million through one or more loans and tax credits,
which $2.5 million also will be advanced as an additional tenant improvement
allowance. Ciao Playhouse will be the tenant and will pay base rent in an amount
necessary to amortize the portion of the $2.5 million tenant improvement
allowance that was a loan to PSF. Ciao Playhouse also will pay PSF percentage
rent equal to 50% of Ciao Playhouses net income, after deducting base rent and a
management fee payable to the Company equal to 5% of gross sales. During 1995
Cleveland Playhouse Square attracted over 1 million patrons to its four
theaters. A fifth theater is scheduled to open in late 1997. The Company
currently anticipates that, assuming consummation of a definitive lease
agreement (as to which there can be no assurance), both the restaurant and the
banquet facility will open in April 1997.
The Company is evaluating a proposal from a developer to lease space for a
7,515 square foot restaurant in Baton Rouge, Louisiana. If a definitive
agreement is reached, the restaurant will be located in the Mall of Louisiana, a
comprehensive shopping facility currently under construction which is modeled
after the Mall of America. Costs to open the restaurant are expected to be
approximately $1.3 million of which, under the proposal, the landlord would
contribute approximately $750,000 in tenant improvements. The proposal provides
for a lease term of 20 years. Rent would be computed by adding a base rent,
which would increase during the term of the lease, to a percentage rent
determined by the amount of gross sales in excess of certain break point
figures. The Company currently expects the restaurant would open by November 1,
1997.
In selecting additional markets for expansion, the Company plans to focus
on secondary or tertiary markets which are not currently served by large numbers
of fine dining restaurants. By entering these markets, the Company, ideally,
will seek to fill a void and become perceived as the most significant upscale,
sophisticated, but moderately priced, restaurant in that market. Locations
currently under active consideration include Birmingham, Alabama; Ft. Myers,
Florida; Hilton Head, South Carolina; and Kansas City, Missouri.
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The Company actively evaluates potential business opportunities and
concepts in addition to its Ciao Baby Cucina format. Future expansion via the
acquisition or development of complementary businesses is a possibility,
although the Company has no immediate plans in this connection.
DEVELOPMENT STRATEGY
The Company's development strategy is to locate its restaurants close to
arts and entertainment facilities, convention centers or other high traffic
generators which provide a readily accessible customer base. Examples to date
are the location of the Memphis, Tennessee restaurant near the Orpheum Theater
and Beale Street (which are projected to draw approximately 750,000 visitors
during 1996), the downtown Cincinnati site across the street from the Aronoff
Entertainment Center (which is expected to draw approximately 800,000 visitors
during 1996), the projected Cleveland Playhouse Square Center location and the
Ft. Lauderdale, Florida location (which is in very close proximity to the
Broward County Convention Center and the Port Everglades Cruise Port). The
Company utilizes the services of a nationally-known real estate firm to assist
with site selections and lease negotiations. Together, the Company and the firm
have developed computer-driven site selection profiles for both urban and
suburban locations for the Company's restaurants; these profiles evaluate
approximately 100 different criteria, such as area demographics, traffic
patterns and neighboring businesses.
Development costs vary depending on the site of the restaurant. Management
believes that its reputation among the developer community has enabled it to
attract favorable financing offers from developers of premier real estate
projects and, based upon discussion to date, that it will be able to enter into
similarly advantageous future arrangements. As set forth below, to date the
Company has been successful in obtaining tenant improvements and other developer
contributions which have substantially limited Company capital commitments for
each restaurant. For further information concerning leases, see
"Business -- Properties".
COST PER RESTAURANT(1)
----------------------------- TRAILING
COMPANY DEVELOPER 3-PERIOD REVENUES TRAILING 13-PERIOD
CONTRIBUTION CONTRIBUTION (2) REVENUES (2)
------------ ------------ ----------------- ------------------
Existing Restaurants:
Cincinnati, Ohio $ 528,000 $ 84,600 $336,602 $1,295,630
(Harper's Point)
Washington, D.C. $ 646,500 (3) $743,869 $2,069,193
Hackensack, New Jersey $ 597,000 $1,138,000 $514,868 $1,798,348
Memphis, Tennessee $ 785,000 $ 705,000 $569,168 n/a
Cincinnati, Ohio $1,240,000(4) $ 550,000 $705,111 n/a
(downtown)
Proposed Restaurants:
Cleveland, Ohio(5) $ 400,000 $2,800,000 n/a n/a
Ft. Lauderdale,
Florida(5) $ 539,500(6) $ 675,500 n/a n/a
- ---------------
(1) Consists of leasehold improvements, restaurant equipment, computer equipment
and furniture, fixtures, china, flatware and glassware and pre-opening
expenses. See Notes 1 and 4 to Financial Statements.
(2) "Trailing 3-Period Revenues" and "Trailing 13-Period Revenues" consist of
revenues for an individual restaurant for the three four-week periods and 13
four-week periods, respectively, immediately following the opening of that
particular restaurant.
(3) The Company took over a fully equipped restaurant location in Washington,
D.C., with no "key-money." Therefore, total developer costs are not
quantifiable in this instance.
(4) Includes $150,000 of developer-provided financing.
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(5) The Company has entered into a lease for the Ft. Lauderdale restaurant. The
Cleveland restaurant is contingent upon successful lease negotiations, which
may not occur. Projected costs are based upon management's best current
estimates; actual costs could vary significantly. See "Risk
Factors -- Adverse Effect of Unanticipated Costs of Expansion."
(6) Includes $169,000 of developer-provided financing.
The Company anticipates that future restaurants will be similar in size to
its two newest restaurants, ranging from approximately 6,000 to 8,000 square
feet with indoor seating for 165 to 220 people. The Company's strategy is to
utilize existing buildings for new units in lieu of free-standing construction.
Complete restaurant development typically takes eight to twelve months and
encompasses site selection, lease negotiation, restaurant design, production of
contract documents, licensing and permitting, contractor selection,
construction, installation of furniture, fixtures and equipment, hiring and
training of restaurant staff and various pre-opening activities. The Company's
senior management oversees all aspects of restaurant development and works
closely with the development community, the Company's designers, architects,
contractors and kitchen and bar equipment suppliers. To date, the Company has
utilized an unrelated Cincinnati, Ohio based construction firm as either the
construction manager or general contractor for all of its restaurants; the
Company currently expects to maintain this relationship for future restaurants.
OPERATIONS
The Company has extensive policies and procedures regarding the operations
of individual restaurants. Senior executives work directly with restaurant
general managers and executive chefs on a daily basis to emphasize menu
development, control of food, beverage and labor costs, marketing, special
promotions and revenue enhancement. In addition to their daily oversight
activities, the corporate officers conduct formal, quarterly management
operational reviews of each restaurant. These reviews encompass food quality,
bar operations, wine list, staffing, training, housekeeping standards,
preventative maintenance programs and profit and loss analysis. The bonus
programs for general managers and executive chefs are based, in part, upon the
results of these reviews.
Each restaurant is managed by a general manager who has direct
responsibility for the financial performance of the restaurant and who oversees
restaurant operations, including the kitchen, personnel, marketing and
compliance with Company procedures. Period sales and purchasing forecasts are
produced by the general manager for review by the corporate office. Within the
guidelines established by corporate headquarters, the general manager has broad
authority for day-to-day operations. The general manager is assisted by up to
three assistant managers.
The executive chef in each restaurant is responsible for operation of the
kitchen, including training, food preparation, purchasing, inventory management
and periodic analysis of labor and food costs. In addition, the executive chef
is involved each day in the creation of daily specials in each menu category for
both lunch and dinner. The executive chef is assisted in kitchen management by
up to two sous chefs and a head baker. Members of management meet with the
executive chefs of Ciao Baby Cucina on a regular basis to develop new menu
items.
PURCHASING
The Company has firmly established corporate purchasing policies, both to
control costs and to ensure the quality of the Company's menu offerings.
Non-perishable supplies are purchased on a Company-wide basis after receipt of
competitive bids. Perishable supplies are purchased locally by individual
restaurants on essentially a daily basis under the direction of the restaurant's
chef. These purchases are made from a list of approved vendors who are required
each Friday morning to bid prices at which they will supply products to the
Company for the following week. The Company has established payment procedures
with its vendors which, in effect, call for the Company to pay invoices an
average of 35 days after receipt. The Company intends to hire a Director of
Purchasing, who will be responsible for overseeing and coordinating all
purchasing activities;
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the Company also believes that its expanding base of restaurants will result in
procurement efficiencies which lower unit costs.
EMPLOYEE TRAINING
Consistent with management's commitment to providing exceptional customer
service, employees at Ciao Baby Cucina receive extensive training. Prior to the
opening of a new Ciao Baby Cucina restaurant, a team of Company employees
conducts a two week intensive training program for the staff of the new
restaurant. The Company generally fills key positions in new restaurants, such
as the chef and general manager, with employees who have been working at
existing Company restaurants. This transfer of trained and experienced Company
employees provides consistency among the Company's restaurants. Newly hired
waiters and waitresses must complete a two week training program before they are
allowed to serve customers.
The Company also conducts ongoing training programs for its employees. The
Company has implemented its "Customer Comes First" program, a twelve month
customer service training program that focuses each month on different aspects
of customer service, such as phone etiquette, greeting customers and challenges
in providing superior customer service. Each month during the program, members
of corporate staff meet with Ciao Baby Cucina employees to discuss restaurant
operations.
The Company has relocated its executive offices to the building which
houses its downtown Cincinnati restaurant. This has facilitated the training of
unit managers and chefs by permitting the Company to combine classroom-style
training in the Company's new corporate training facilities with practical
hands-on experience in the Company's flagship restaurant located in the same
building. Additionally, in order to facilitate its expansion, enhance employee
training programs and maximize opportunities for the recruiting of culinary
personnel, the Company plans to hire a Director of Human Resources.
MARKETING
The Company's marketing thrust is to create and sustain a reputation for
highly innovative cuisine, personal service, excellent value and an ambience of
high visibility and congeniality for its guests. The target customers of Ciao
Baby Cucina restaurants are professional/business people, working couples, young
adults and pre- and post-theater diners seeking a light meal or dessert.
The Company focuses its marketing efforts more heavily on public relations
than on paid advertising. A new Ciao Baby Cucina typically hosts a charity event
prior to or shortly after opening to build community relationships and to
attract customers to the restaurant. Through its corporate office the Company
directs national press relations and in-house marketing activities and
coordinates the activities of public relations firms as needed for each
restaurant.
The Company has an in-house marketing program at both the restaurant and
corporate levels. Each restaurant's management is responsible for promoting the
restaurant through the use of "red phone cards," frequent contacts with local
hotels and their concierges, development of relationships with area businesses
and organizations and the creation and implementation of individualized
promotions targeted to holidays and local special events. These activities are
supplemented by corporate-wide promotions, such as incentives for restaurant
servers and for private party bookings, and marketing tools such as guest check
inserts, mini menus and comment cards. As the Company's restaurant base expands,
it expects to realize lower costs as a percentage of sales from its centralized
marketing activities.
CONTROLS
The Company devotes considerable attention to controlling cash receipts and
cost of food, beverage and labor, and utilizes a system with both proprietary
and industry standard components to provide management with precise sales and
cost analysis on a daily basis.
Computerized processing of customer orders is used to enhance customer
service, minimize the possibility of loss from employee theft or spoilage,
control labor costs and provide information on the sales volume and overall
profitability of each food and beverage item on the menu. To obtain food from
the kitchen
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or a beverage from the bar, a dining room server must enter the order into
computer terminals conveniently located throughout the dining area. The order
prints in the kitchen or the bar, identified by table and seat number. The
computer accumulates orders by server which must be accounted for at the end of
the dining period with either cash or signed credit card receipts.
Employees also clock in and out on these computer terminals. Each
employee's department and rate of pay are maintained in the computer enabling
management to review labor by department, including hours and dollars spent on a
daily, weekly or bi-weekly basis. The daily labor reports assist managers in
controlling labor costs.
The Company maintains financial and accounting controls for each of its
restaurants through the use of a personal computer network which accumulates all
sales information and labor costs for each day from dining area computer
terminals. These data are transferred daily to the Company's centralized
accounting department for review and updating of the Company's general ledger.
Credit card receipts are controlled through daily electronic deposits to the
Company's central operating account. Cash deposits are made to local bank
accounts, the balances of which are controlled by the Company's financial staff.
As a result of the accounting controls and systems, each restaurant
management team has current and precise information on sales, cost of sales and
labor cost on a daily basis, which allows fine tuning of operations. Less
profitable items on a menu can be quickly identified and, if desired, replaced
with more profitable selections. The restaurant's role in the accounting cycle
is that of data entry and processing of sales transactions, labor hours and
labor dollars expended as well as the daily tracking of food and beverage costs.
The Company's financial staff prepares period-end financial statements for each
restaurant, manages payables and monitors accounting practices at all
restaurants. Restaurant performance is evaluated relative to budgets which,
depending on the revenue or cost category, are based on weekly or period
standards.
COMPETITION
In general, the restaurant business is highly competitive and can be
affected by changes in the public's eating habits and preferences, local and
national economic conditions, consumer spending habits, population trends and
traffic patterns. Key competitive factors in the industry are the quality and
value of the food products offered, quality of service, price, dining
experience, restaurant location and the cleanliness and attractiveness of
facilities. The Company faces competition from a number of restaurants, both
locally-owned and those operated by national chains, some of which have greater
financial resources than the Company. The Company's strategy is to differentiate
itself from its competitors by coupling the ambience, food quality and personal
service associated with an individual upscale, "white tablecloth" restaurant
with the efficiencies and cost-effective management techniques of a centrally
managed restaurant chain.
EMPLOYEES
At September 1, 1996, the Company employed approximately 265 persons,
approximately 139 of whom were employed on a full-time basis (30 hours per week
or more), including approximately 30 management personnel. The Company has an
experienced core executive and administrative team, to which it intends to add a
Chief Operating Officer, a Director of Human Resources and a Director of
Purchasing in order to facilitate its expansion strategy and enhance operating
efficiencies. Management believes that this corporate infrastructure will
support its growth plans through the year 2000 with only the addition of lower
level clerical and accounting personnel as new restaurants come on line. The
Company's continued success will depend to a large degree on its ability to
attract and retain qualified on-site managers, chefs and employees. None of the
Company's employees is covered by a collective bargaining agreement. The Company
considers its employee relations to be good.
GOVERNMENT REGULATION
Each of the Company's restaurants is subject to licensing and regulation by
a number of governmental authorities, which include alcoholic beverage control
and health, safety and fire agencies in the state, county and municipality in
which each restaurant is located. Difficulties in obtaining or failures to
obtain the required
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licenses or approvals could delay or prevent the opening of a new restaurant in
a particular area. The Company earns substantial revenues from the sale of
alcoholic beverages. Alcoholic beverage control regulations require each of the
Company's restaurants to apply to a state authority and, in certain locations,
county or municipal authorities for a license or a permit to sell alcoholic
beverages on the premises and to provide service for extended hours and on
Sundays. Typically, licenses must be renewed annually and may be revoked or
suspended for cause at any time, and the consent of the licensing authority must
be obtained before certain changes in ownership and/or control of the licensee
may occur. Alcoholic beverage control regulations relate to numerous aspects of
the daily operations of the Company's restaurants, including minimum age of
patrons and employees, hours of operation, advertising, wholesale purchasing,
inventory control and handling, storage and dispensing of alcoholic beverages.
Failure of a restaurant to obtain or retain liquor or food service licenses
would adversely affect the restaurant's operations.
The Company may be subject in certain states to "dram shop" statutes which
generally provide a person injured by an intoxicated person the right to recover
damages from an establishment which wrongfully served alcoholic beverages to the
intoxicated person. The Company has never been named in a lawsuit involving
"dram shop" statutes. The Company carries general liability policies in the
amount of $1,000,000 per occurrence and $4,000,000 in the aggregate. This
coverage is deemed by management to be sufficient.
The Company's restaurant operations are also subject to federal and state
minimum wage laws governing such matters as working conditions, overtime and tip
credits. Significant numbers of the Company's food service and preparation
personnel are paid at rates related to the federal minimum wage and,
accordingly, further increases in the minimum wage could increase the Company's
labor costs.
SERVICE MARKS AND PROPRIETARY INFORMATION
The Company believes that its service marks have significant value and are
important to its ability to create demand for and awareness of its restaurants.
The Company has registered the trade name "CIAO BABY" with the Ohio Secretary of
State and has acquired the registered service mark "CIAO!" in the State of
Tennessee. The Company has not obtained federal registration of any name or
mark. The Company's registrations in Ohio and Tennessee place on record the
Company's claimed dates of first use of the marks registered in those states.
The Company may bring an action against a third party using a confusingly
similar mark for restaurant services in the geographic area served by the
Company and, assuming the third party cannot establish superior rights pursuant
to federal registration or prior use, enjoin such third party from using the
mark. However, Hampden, Inc., a Colorado corporation unaffiliated with the
Company, operates a restaurant in Denver, Colorado using the "Ciao! baby" name
and has registered the service mark "Ciao! baby" with the U.S. Patent and
Trademark Office. As a result, and assuming the validity of its registration,
under federal law Hampden possesses the right to enjoin the Company's use of
"Ciao! baby" in any geographical market where the Company operates a restaurant
if and when Hampden enters that market. Currently, Hampden has not entered a
geographical market in which the Company presently operates or plans to open a
restaurant.
Any entity that can demonstrate the use of "Ciao! baby" in interstate
commerce prior to Hampden's first use may petition the U.S. Patent and Trademark
Office to cancel Hampden's federal registration of the "Ciao! baby" service
mark. Under federal law, any such petition to cancel Hampden's registration
based on prior use must be filed on or before November 10, 1997. The Company is
attempting to determine if it can demonstrate that it used "CIAO BABY" in
interstate commerce prior to Hampden's first use. Based upon the results of this
review, the Company may file a petition seeking to cancel Hampden's federal
registration. There can be no assurance, however, that the Company will be
successful in these efforts or that Hampden will not attempt to enjoin the
Company's use of "CIAO BABY" in existing or future markets in which the Company
operates. If the Company were prevented from using the "CIAO BABY" mark, the
adverse effect on the Company could be material.
The Company also relies on trade secrets and proprietary know-how and
employs various methods to protect its concepts and recipes. However, such
methods may not afford complete protection and there can be
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no assurance that others will not independently develop similar know-how or
obtain access to the Company's know-how, concepts and recipes.
PROPERTIES
Effective July 1, 1996, the Company relocated its executive offices to
approximately 5,300 square feet of newly leased space in the building that also
houses its downtown Cincinnati restaurant. Approximately 2,900 square feet of
space previously occupied by the Company as administrative offices has been
sublet for the remainder of the term of the lease, which expires in 1999.
As of the date of this prospectus, the Company operates a total of five
restaurants, all of which are located in leased premises. Two of these
restaurants are located in Cincinnati, Ohio, one at Harper's Point, the other in
downtown Cincinnati. The remaining restaurants are situated in Washington, D.C.,
Hackensack, New Jersey, and Memphis, Tennessee. In addition, the Company has
entered into a lease for a site in Ft. Lauderdale, Florida. The table below
presents certain information concerning the Company's existing restaurant
leases. In addition, the Company is negotiating leases restaurants in Cleveland,
Ohio, and Baton Rouge, Louisiana. See "Business -- Expansion Strategy" on page
27 of this Prospectus for information regarding the proposals under
consideration. All of the Company's restaurant facilities are well maintained
and suitable for their current and reasonably foreseeable uses. During early
1997 the Company plans to renovate its original Cincinnati (Harper's Point)
restaurant to update its decor in line with the Company's two newest
restaurants; the cost of this modernization is expected to be approximately
$75,000.
DEVELOPER
LOCATION LEASE EXPIRATION SQUARE FEET ANNUAL BASE RENT PERCENTAGE RENT CONTRIBUTION
- ----------------- ------------------------ ----------- ----------------------- ----------------------- ---------------------
Cincinnati, Ohio February 2001 3,869 $69,642 6% of gross sales $84,600
(Harper's Point) (no renewal option) over specified
breakpoint
Washington, D.C. March 2004 7,147 $261,104 increasing 6% of gross sales Landlord delivered
(no renewal option) to $299,784 over increasing fully-equipped
breakpoints restaurant
Hackensack, October 2004 8,074 $201,850 6% of gross sales $1,138,000
New Jersey (5-year renewal option) over specified
breakpoint
Memphis, February 2012 6,448 $128,960 increasing 4.99% of gross sales $705,000
Tennessee (no renewal option) to $199,888 over increasing
breakpoints
Cincinnati, Ohio January 2011 7,925 $149,000 increasing 6% of gross sales $550,000
(downtown) (5-year renewal option) to $230,950, plus 20% over increasing
of operating income breakpoints
(after deducting 5% of
gross sales) up to a
maximum of $600,000
over the lease term
Ft. Lauderdale, 10-year term commencing 6,755 $202,650 (subject to 7% of gross sales over $675,500, plus loan
Florida 120 days after annual CPI increase) specified breakpoint; of up to $169,000
certificate of occupancy 8% of gross sales over repayable over lease
obtained (two 5-year specified breakpoint term with interest at
renewal 10%
options)
LEGAL PROCEEDINGS
In August 1996, the Company was added as a defendant in an Amended
Counterclaim in litigation pending in the Superior Court of the District of
Columbia, Notte Luna Limited Partnership et al. v. Capital Management and
Development Corporation et al. (Civ. Div. No. 0007600-95). Notte Luna, a
Washing-
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ton, D.C. restaurant, engaged Capital Management and Development Corporation
("CMDC") to manage its restaurant. Alleging poor performance and defaults in the
management agreement, Notte Luna terminated the CMDC management agreement,
engaged the Company to manage the restaurant and sued CMDC. The Company managed
the restaurant from March 4, 1995 to April 21, 1996. CMDC has now brought a
counterclaim against the Company alleging conspiracy to induce Notte Luna to
terminate its contract with CMDC, as well as slander and interference with
contract and business relationships, and claiming $6,000,000 in compensatory and
$6,000,000 in punitive damages. The litigation is in the early stages of
proceedings. Accordingly, the Company is unable to predict the effect of the
ultimate resolution of the matter, although an unfavorable decision could have a
material adverse effect upon the Company's results of operations, financial
condition and liquidity. The Company believes it has meritorious defenses and
intends to defend the action vigorously.
EXECUTIVE OFFICERS, DIRECTORS AND NOMINEES
The following table sets forth certain information with respect to the
directors, executive officers and nominees for director of the Company:
NAME AGE POSITION
----------------------------------------- --- ---------------------------
Carl A. Bruggemeier...................... 46 Chairman of the Board,
President and Chief
Executive Officer
Catherine C. Jetter...................... 49 Nominee for Director,
Vice President -- Finance,
Secretary and Treasurer
Roger Lipton............................. 55 Director(1)
Marvin Rosenberg......................... 62 Nominee for Director(2)
Russell C. Wiles......................... 57 Nominee for Director(2)
John H. Wyant............................ 50 Director
- ---------------
(1) Will become a member of the Audit and the Compensation Committees after this
Offering.
(2) Will become a director of the Company and a member of the Audit and
Compensation Committees after this Offering.
Mr. Bruggemeier is a founder of the Company and was responsible for the
development of the Ciao Baby Cucina concept. He has been President and Chief
Executive Officer of the Company since its formation in 1992 and was President
and Chief Executive Officer of Fire In The Kitchen from 1990 until 1993. Mr.
Bruggemeier has over 25 years of hospitality industry experience in both
high-volume single unit operations and multiple unit concepts. Immediately prior
to forming the Company, Mr. Bruggemeier was the President and Chief Operating
Officer of Phoenix Food Service Corporation, a multi-dimensional food service
company in Cincinnati, Ohio. Mr. Bruggemeier has also operated such high-volume,
high-visibility restaurants as Tavern on the Green in New York City, the Potomac
in Washington, D.C., Commander's Palace and Mr. B's Bistro in New Orleans,
Brennan's of Houston and the Star Line Cruise Corporation headquartered in
Chicago, Illinois. He is the recipient of many prestigious hospitality industry
awards, including The Hall of Fame Dining Award from Nations Restaurant News and
The Ivy Award presented by Restaurant and Institutions Magazine.
Ms. Jetter has served as the Company's Vice President -- Finance and
Secretary since 1993 and as its Treasurer since 1996. She also was Secretary of
Fire In The Kitchen, Inc. prior to its merger with the Company. Ms. Jetter was
formerly in public accounting and worked primarily as a consultant to small
businesses including, but not limited to, several restaurant companies. Prior to
her employment with the Company, she acted as a consultant to the Company since
its inception in 1990. Prior to her employment in public accounting, Ms. Jetter
served as an Assistant Treasurer of a publicly traded real estate investment
trust.
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She has over 25 years' experience in both public accounting and private
industry. Ms. Jetter is a Certified Public Accountant and holds a Bachelor of
Science in Accounting from Florida Institute of Technology.
Mr. Lipton has been a director of the Company since August 1992. Since
February 1995, he has been President of Lipton Financial Services, Inc., an
investment banking firm specializing in the restaurant, franchising and
retailing industries, and also has been employed by Axiom Capital Management,
Inc., an NASD broker/dealer, where he is a Managing Director. From 1981 until
February 1995 he was Managing Director of the Lipton Financial Services Division
of Ladenburg, Thalmann & Co., Inc., also an investment banking firm. Mr. Lipton
earned a Bachelor's Degree in Mechanical Engineering from Rensselaer Polytechnic
Institute (1962), and earned an MBA at the Harvard Graduate School of Business
Administration (1965). He has been in the investment banking industry since
1967, with the exception of 1976-1980 when he financed and operated a chain of
fifteen fast food restaurants. Mr. Lipton assists the Company with strategic
financial planning and other related issues.
Mr. Rosenberg is a principal in Towne Properties, a Cincinnati, Ohio real
estate development business which he founded with others in 1961. He is a former
Chairman and member of the Board of Directors of the Cincinnati Branch of the
Federal Reserve Bank of Cleveland. Among other activities, he currently is a
member of the Board of Directors of Acordia of Cincinnati, Inc., the Board of
Visitors of the University of Cincinnati College of Law and the Board of
Overseers of Hebrew Union College. Mr. Rosenberg is a graduate of the University
of Illinois and the University of Cincinnati College of Law.
Mr. Wiles has been President of Heidelberg Distributing Company, a
distributor of premium beers and wines, since 1993 and President of Ohio Valley
Wine Co. Inc., a distributor of fine wines, of which he was a co-founder, since
1989. He is also the majority owner and general partner of C&W Investments,
which is primarily involved in owning and managing commercial warehousing in the
Cincinnati, Ohio market. Mr. Wiles is a founder and chairman of the Cincinnati
International Wine Festival, a nonprofit organization which raises funds for
Cincinnati area charities, a director of public radio station WGUC and a member
of the governing boards of other private companies and associations.
Mr. Wyant has served as President of Blue Chip Venture Company, a venture
capital investment firm which manages $56 million of committed capital for
investment in privately held high growth companies, since its formation in 1992.
From 1991 to 1992, Mr. Wyant served as Executive Vice President, Corporate
Finance of Gradison & Co., a financial services firm, where his primary activity
was the development and formation of Blue Chip Venture Company. Mr. Wyant was
initially trained in marketing with The Procter & Gamble Company and served in
marketing and general management positions with Taft Broadcasting Company.
Subsequently, he was Chief Executive Officer of Home Entertainment Network and
Nutrition Technology Corporation, both venture capital-backed companies. Mr.
Wyant holds a Bachelor of Arts from Denison University and a Juris Doctor from
Salmon P. Chase College of Law. He has been a director of the Company since 1995
and also is a director of Zaring Homes, Inc., DIGEX, Incorporated and a number
of privately held companies.
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COMPENSATION
The following table sets forth the compensation of the Company's Chief
Executive Officer for fiscal 1995. No other executive officer earned over
$100,000 in salary and bonus for fiscal 1995.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
ANNUAL COMPENSATION -----------
--------------------------------------------- SECURITIES ALL OTHER
NAME AND PRINCIPAL FISCAL OTHER ANNUAL UNDERLYING COMPENSATION
POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#) ($)
- --------------------- ------ ---------- --------- ---------------- ----------- ------------
Carl A. Bruggemeier,
President, Chief
Executive Officer 1995 $116,154 -- (1) (2) --
- ---------------
(1) None, other than perquisites which did not exceed the lesser of $50,000 or
10% of salary and bonus.
(2) In March 1995 Mr. Bruggemeier entered into an amended Employment Agreement
with the Company which provided for the grant of options to purchase 138,120
shares of Common Stock at the price of $1.45 per share. This Employment
Agreement, including the options provided for (none of which have been or
will be exercised), will be cancelled at the time of the closing of the
Offering and replaced by the Employment Agreement described below.
The Company has entered into an Employment Agreement dated as of August 1,
1996 with Carl A. Bruggemeier, President of the Company. The Agreement, which is
conditioned upon the closing of the Offering, provides for a base annual salary
of $182,000 and for raises and cash bonuses (equal to at least 25% of base
salary) as determined by the Company's Board of Directors depending upon the
Company's achieving certain sales and profit goals established by the Board. The
Employment Agreement also provides for miscellaneous compensation in the form of
insurance and other benefits. The Employment Agreement is for a three year term
and renews automatically for successive one year periods unless terminated by
either party upon 180 days prior written notice. In the event of specified
changes of control of the Company, Mr. Bruggemeier will have the right to
terminate his employment and to receive a lump sum settlement equivalent to the
then current value of the base salary payments to which he otherwise would be
entitled for the remainder of the term of the agreement plus any bonus related
to the then current fiscal year. Mr. Bruggemeier's right to be employed by or be
engaged, directly or indirectly, by a person or entity in a "competitive
business" (defined as any casual-themed restaurant located within 50 miles of a
Company restaurant and having specified average customer check prices) is
restricted during the term of the Agreement and, under certain circumstances,
for a year thereafter.
Ms. Jetter has an Employment Agreement with the Company which commenced on
December 1, 1995 and automatically extends from year-to-year unless terminated
by either party upon 30 days' written notice prior to the expiration of any
annual term. The Agreement provides for a base annual salary of $60,000,
increased by $2,500 per year for each new restaurant opened or managed by the
Company, for an annual bonus of 20% of salary if certain corporate objectives
are achieved (25%, if these objectives are exceeded by a set percentage) and for
miscellaneous compensation in the form of insurance and other benefits. For
1996, Ms. Jetter's base salary under the Agreement is $67,500.
STOCK OPTIONS
The Company has granted options to Mr. Bruggemeier, Ms. Jetter and one
other employee to purchase 14,250, 5,750 and 1,645 shares of Common Stock,
respectively, at the initial public offering price. The Company will not grant
options or other rights to purchase or acquire shares for a period of one year
after the Offering if, as a result, all outstanding options or rights would
entitle their holders to acquire in excess of 12% of the shares outstanding upon
completion of the Offering.
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DIRECTOR COMPENSATION
Directors who are not employees of the Company will receive $5,000 per year
for serving as directors and members of committees, plus $500 for each Board of
Directors meeting attended (including Board meetings held by telephone).
Committee members will receive $500 per meeting attended, unless the meeting
occurs on the same day as a Board meeting, in which case no separate fee will be
paid. Employee directors will not be separately compensated for their services
as directors.
CERTAIN TRANSACTIONS
The Board of Directors of the Company has adopted a policy requiring that
after the Offering any transactions, including loans, between the Company and
its officers, directors, principal shareholders and their affiliates be on terms
no less favorable to the Company than could be obtained from unrelated third
parties and that any such transactions be approved by a majority of the
disinterested members of the Company's Board of Directors.
Described below are certain transactions and relationships between the
Company and certain of its officers, directors and shareholders which have
occurred during the last three fiscal years. The Company believes that the
material terms of the various transactions were as favorable to the Company as
could have been obtained from unrelated third parties.
Carl A. Bruggemeier, Roger Lipton and Donald A. Karas, a shareholder and
former director of the Company, may be deemed founders of the Company.
Shortly after the Company's incorporation, Messrs. Lipton and Karas each
loaned the Company $50,000. These loans have been repaid in full. In December
1993 the Company exercised options it held to repurchase 17,265 and 129,487.5
shares of Common Stock, respectively, from Messrs. Lipton and Karas. Messrs.
Lipton and Karas received $20,000 and $150,000, respectively, for these shares.
In February 1994, the Company exercised an option to repurchase 77,692.5
shares of Common Stock from Mr. Bruggemeier for a price of $90,000; in payment,
Mr. Bruggemeier accepted a demand promissory note in that amount, bearing
interest at a bank's prime commercial rate plus 2%. In March 1995, this note was
canceled and, in consideration of an additional $90,000 loaned to the Company by
Mr. Bruggemeier, a new promissory note for $180,000, bearing interest at the
prime commercial rate, was issued to him. The $34,000 principal balance owing on
this note, which accrues interest at 9%, is due on February 1, 1997.
Mr. Lipton has a consulting arrangement with the Company pursuant to which
he is entitled to fees of $50,000 per year. The amount of the consulting fee was
determined by negotiations between the Company and Mr. Lipton. The services
provided by Mr. Lipton have included advice regarding the structuring of the
Company's debt and equity financings and assistance in the development of the
Company's concept and operating and expansion strategies. This consulting
arrangement will terminate upon the completion of this Offering.
In January 1995 Blue Chip LP loaned the Company $350,000 in return for a
promissory note bearing interest at 10% per annum. This promissory note was
personally guaranteed by Mr. Bruggemeier. On March 30, 1995, the Company, Blue
Chip LP and Mr. Bruggemeier entered into a Stock Purchase and Shareholder
Agreement (the "Shareholder Agreement") pursuant to which the Company issued
15,000 shares of its Series A Preferred Stock to Blue Chip LP in exchange for
cancellation of the January 1995 promissory note and guaranty (after payment of
$7,188 of accrued interest) and an additional investment by Blue Chip LP of
$1,150,000. The Series A Preferred Stock has a cumulative dividend rate of
$10.00 per share per annum and is convertible into 813,529 shares of Common
Stock. For fiscal 1995 and the first two quarters of 1996, dividends of $112,500
and $80,769, respectively, were accrued in respect of the Series A Preferred
Stock. Upon consummation of the Offering, all outstanding shares of Series A
Preferred Stock will be converted to 813,529 shares of Common Stock.
Pursuant to the Shareholder Agreement, the Company and Mr. Bruggemeier
agreed to take all action necessary for the Company's Board of Directors to
consist of three members, one of whom would be named by
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Blue Chip LP and the others of whom would be Messrs. Bruggemeier and Lipton. In
accordance with this agreement, Mr. Wyant became a director of the Company on
March 30, 1995. Also in accordance with the Shareholder Agreement, the Company
entered into a Consulting Agreement with Blue Chip Venture Company, an Ohio
corporation and the general partner of Blue Chip LP ("Blue Chip Venture"), on
March 30, 1995, pursuant to which Blue Chip Venture has advised the Company with
respect to financial matters, including the obtaining of additional debt and
equity capital and the structuring of this Offering. Blue Chip Venture is
entitled to receive fees of $18,750 per quarter for its services. The amount of
the consulting fee was determined by arms length negotiations. The Consulting
Agreement terminates on the earliest of the sale by Blue Chip of all Company
securities held by it, the Company's consummation of an initial public offering
or December 31, 1999. Mr. Wyant is President and a 50% stockholder of Blue Chip
Venture and a limited partner in Blue Chip LP.
The consulting fees to Mr. Lipton and Blue Chip Venture under the
arrangements described above and the dividends with respect to the Series A and
Series B Preferred Stock are in arrears. The Company, Mr. Lipton, Blue Chip
Venture and the holders of such Preferred Stock have agreed that, upon the
consummation of the Offering, all such arrearages will be paid by the issuance
by the Company of shares of Common Stock at a price of $7.00 per share. The
following table shows the number of shares of Common Stock to be issued pursuant
to such Agreement, assuming that the Offering were consummated on September 30,
1996.
NUMBER OF SHARES
ARREARAGE AT OF COMMON STOCK
OBLIGATION SEPTEMBER 30, 1996 TO BE ISSUED
- ------------------------------------------------------- ------------------ ----------------
Consulting Fees - Lipton............................... $ 50,500 7,214
Consulting Fees - Blue Chip Venture.................... $112,500 16,071
Dividends - Series A Preferred Stock................... $225,000 32,142
Dividends - Series B Preferred Stock................... $163,944 23,412
In addition, the Shareholder Agreement (i) grants Blue Chip LP certain
rights of first refusal in the event of a third-party offer to purchase shares
of the Company's Common Stock from any shareholder; (ii) grants Blue Chip LP
certain preemptive rights to purchase securities issued by the Company; (iii)
requires the prior written consent of Blue Chip LP before the Company may pay
any dividends on its capital stock (other than the Series A Preferred Stock),
amend its Articles of Incorporation, engage in any other business or in any
material transaction outside of the ordinary course of business, and enter into
other specified transactions; and (iv) grants Blue Chip LP the right to register
shares in the Company's initial and subsequent public offerings (which right has
been waived with respect to the initial public offering) and, on two occasions
subsequent to such offering, to demand registration of shares of Common Stock
held by it. Blue Chip has agreed to waive and release, upon the consummation of
the Offering, all of its rights under the Shareholder Agreement except for the
registration rights.
On February 7, 1996, Blue Chip LP loaned the Company $750,000 evidenced by
a promissory note due March 8, 1996 bearing interest at 15% per annum. Blue Chip
LP made subsequent loans to the Company of $250,000 on each of March 11, 1996
and July 29, 1996. Effective as of August 1, 1996, Blue Chip exchanged the
principal amount of all three loans, plus $200,000 in loan fees owed by the
Company, for a $1,450,000 principal amount secured note bearing interest at
10.35% per annum and due on the earlier of March 8, 1998 or within 10 days after
the closing of the Company's initial public offering. As further consideration,
the Company also issued Bridge Financing Warrants to Blue Chip to purchase
100,000 shares of Common Stock, exercisable at $7.00 per share for a period of
five years after the closing of such initial public offering. Accrued interest
on the three loans to August 1, 1996 is payable upon maturity of the secured
note. The secured promissory note is convertible at Blue Chip's option upon
default into shares of a new class of preferred stock to be created. However,
because the secured promissory note will be paid by use of a portion of the
proceeds from this Offering, the Company will not issue any of the shares of
this class of preferred stock if the Offering is completed.
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The Company has promissory notes with The Provident Bank, in the aggregate
outstanding amount at October 8, 1996 of approximately $202,000, which are
personally guaranteed by Mr. Bruggemeier. This indebtedness will be repaid in
full with a portion of the proceeds of the Offering.
Payment of the Company's obligations under the lease for its Cincinnati,
Ohio restaurant at Harper's Point is personally guaranteed by Mr. Bruggemeier.
Heidelberg Distributing Company and Ohio Valley Wine Co., of which Mr.
Wiles is the President, sell beverage products to the Company. During fiscal
years 1994 and 1995 and the first two quarters of fiscal 1996, purchases by the
Company from these businesses were $75,470, $82,766 and $105,361, respectively.
Mr. Rosenberg is a principal of the entities from which the Company leases
the space occupied by its executive offices and its two Cincinnati, Ohio
restaurants. Aggregate lease payments by the Company for these properties during
1993, 1994, 1995 and the first two quarters of 1996 were $91,012, $58,035,
$75,645 and $104,291, respectively. In July 1995, Towne Investment Company, a
Limited Partnership, of which Mr. Rosenberg is a partner, advanced the Company
$150,000 for tenant improvements to its downtown Cincinnati, Ohio restaurant in
exchange for a promissory note (the "Towne Note") convertible into 81,352 shares
of the Company's Common Stock. The Towne Note will be so converted at the time
of the closing of the Offering.
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HOLDINGS OF MANAGEMENT
AND PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of Company's Common Stock and Preferred Stock at November 1, 1996, by
its directors and nominees for director, Mr. Bruggemeier, all directors,
nominees and executive officers as a group and, giving effect to the Offering,
each person owning over 5% of the outstanding Common Stock. At the time of
consummation of the Offering, each outstanding share of Series A Preferred Stock
and Series B Preferred Stock will be converted into 54.235 and 348.7 shares of
Common Stock, respectively.
PREFERRED STOCK(1)
COMMON STOCK(1) ------------------
---------------------------------------------
BEFORE AFTER
BEFORE OFFERING AFTER OFFERING OFFERING OFFERING
------------------ ------------------------ -------- -------
NO. OF PERCENT NO. OF PERCENT NO. OF NO. OF
SHARES OF CLASS SHARES OF CLASS SHARES SHARES
------- -------- --------- -------- -------- -------
Carl A. Bruggemeier(2)............ 276,757 48.6% 291,007(3) 9.2% -- --
Catherine C. Jetter............... -- -- 5,750(3) * -- --
Roger Lipton(2)................... 103,590 18.2 268,358(4)(5) 8.5 433.5(5) --
Marvin Rosenberg.................. 2,071 * 83,423(6) 2.6 -- --
Russell C. Wiles.................. -- -- -- -- -- --
John H. Wyant(2).................. -- -- 961,742(4)(7) 29.6 15,000.0(7) --
Blue Chip Capital Fund Limited
Partnership(2).................... -- -- 945,671(4)(8) 29.1 15,000.0(8) --
All directors, nominees and
executive officers as a group
(6 persons)....................... 382,418 67.1 1,610,280(4)(9) 49.2 15,433.5 --
- ---------------
* Less than 1%.
(1) Beneficial ownership includes sole or shared voting or investment power with
respect to a security or the right to acquire beneficial ownership of a
security within 60 days. The numbers of shares indicated are owned with sole
voting and investment power unless otherwise noted.
(2) The address of Mr. Bruggemeier is 700 Walnut Street, Suite 300, Cincinnati,
Ohio 45202; the address of Mr. Lipton is 399 Park Avenue, New York, New York
10022; and the address of Mr. Wyant and Blue Chip LP is 201 East Fifth
Street, Cincinnati, Ohio 45202.
(3) Common Stock after the Offering includes shares which may be acquired upon
the exercise of outstanding options at the initial offering price as
follows: Mr Bruggemeier, 14,250 shares and Ms. Jetter, 5,750 shares.
(4) If the Underwriters' over-allotment option is exercised in full, after the
Offering shares beneficially owned will be as follows: Mr. Lipton, 193,358
(6.1%), Mr. Wyant, 886,742 (27.3%), Blue Chip LP, 870,671 (26.8%), and all
directors, nominees and executive officers as a group, 1,460,280(44.7%). See
"Selling Shareholders" and "Underwriting."
(5) Common Stock after the Offering includes 151,145 shares to be received upon
conversion of Series B Preferred Stock, 6,409 shares to be received in
payment of deferred dividends on Series B Preferred Stock (based on amounts
outstanding at September 30, 1996) and 7,214 shares to be received in
payment of deferred consulting fees (based on amounts outstanding at
September 30, 1996). Includes 70,600 shares of Common Stock to be held by an
Individual Retirement Account ("IRA") for the benefit of Mr. Lipton and
122,395 shares to be held by RHL Associates, LP, a limited partnership of
which Mr. Lipton is the general partner and a 20% limited partner ("RHL
Associates'). Preferred Stock before the Offering represents 433.5 shares
(27.4%) of Series B Preferred Stock, of which 194.25 shares are held by Mr.
Lipton's IRA and 194.25 shares are held by RHL Associates. See "Certain
Transactions."
(6) Includes 81,352 shares issuable upon conversion of the Towne Note. See
"Certain Transactions."
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(7) Common Stock after the Offering includes 813,529 shares to be received by
Blue Chip LP upon conversion of Series A Preferred Stock, 32,142 shares to
be received by Blue Chip LP in payment of deferred dividends on Series A
Preferred Stock (based on amounts outstanding at September 30, 1996), 16,071
shares to be received by Blue Chip Venture in payment of deferred consulting
fees (based on amounts outstanding at September 30, 1996) and 100,000 shares
which may be acquired upon exercise of Bridge Financing Warrants held by
Blue Chip LP. Preferred Stock before the Offering represents 15,000 shares
(100%) of Series A Preferred Stock, all of which is held by Blue Chip LP.
Mr. Wyant disclaims beneficial ownership of all such shares of Common and
Preferred Stock except to the extent of his pro rata interest therein. See
"Certain Transactions."
(8) Common Stock after the Offering includes 813,529 shares to be received upon
conversion of Series A Preferred Stock, 32,142 shares to be received in
payment of deferred dividends on Series A Preferred Stock (based on amounts
outstanding at September 30, 1996) and 100,000 shares which may be acquired
upon exercise of Bridge Financing Warrants held. Preferred Stock before the
Offering represents 15,000 shares (100%) of Series A Preferred Stock. See
"Certain Transactions."
(9) See Notes (3) through (8) for information concerning shares, options and
warrants included and the effect of the exercise of the Underwriters'
over-allotment option.
SELLING SHAREHOLDERS
The Selling Shareholders, Blue Chip LP and Roger H. Lipton, have granted
the Underwriters an option, expiring 30 days from the date of this Prospectus,
to purchase up to 150,000 shares of Common Stock beneficially owned by them.
Blue Chip LP is a Cincinnati, Ohio based venture capital limited partnership
organized under Delaware law. The Underwriters may exercise this option solely
to cover over-allotments, if any, made in connection with the sale of Common
Stock. If the Underwriters' over-allotment option is exercised in full, 75,000
shares will be sold by Blue Chip LP and 75,000 shares will be sold by Mr.
Lipton. Of the up to 75,000 shares which may be sold by Mr. Lipton, 37,500 are
owned by an Individual Retirement Account for his benefit and 37,500 are owned
by RHL Associates. Information on shares held by each of the Selling
Shareholders, prior to and giving effect to the Offering, is provided above
under "Holdings of Management and Principal Shareholders."
Each of the Selling Shareholders is a director and/or affiliate of the
Company. See "Executive Officers, Directors and Nominees" and "Certain
Transactions." In view of their affiliation with the Company, it is possible
that the Selling Shareholders may be deemed to be statutory underwriters under
the provisions of the Securities Act of 1933.
DESCRIPTION OF CAPITAL STOCK
Under the Company's Amended and Restated Articles of Incorporation, the
Company's authorized capital stock consists of 10,000,000 shares of Common
Stock, without par value, 15,000 shares of Series A Convertible Preferred Stock,
$100 par value, 1,740 shares of Series B Convertible Preferred Stock, $690 par
value, and 100,000 shares of undesignated preferred stock, without par value.
The following description of certain matters relating to the capital stock of
the Company is a summary and is qualified in its entirety by the provision of
the Company's Amended and Restated Articles of Incorporation and Code of
Regulations and by the provisions of the Ohio General Corporation Law.
COMMON STOCK
The Company had 569,910 shares of Common Stock outstanding on the date of
this Prospectus. Holders of Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of shareholders. Shareholders
do not have the right to cumulate their votes in the election of directors.
Subject to preferences which have been and may be granted to holders of
preferred stock, holders of Common Stock are entitled to share in such dividends
as the Board of Directors, in its discretion, may validly declare from funds
legally available. In the event of liquidation, each outstanding share of Common
Stock
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entitles its holder to participate ratably in the assets remaining after payment
of liabilities and any preferred stock liquidation preferences.
Shareholders have no preemptive or other rights to subscribe for or
purchase additional shares of any class of stock or any other securities of the
Company. There are no redemption or sinking fund provisions with regard to the
Common Stock. All outstanding shares of Common Stock are fully paid, validly
issued, and non-assessable.
The vote of holders of a majority of all outstanding shares of Common Stock
is required to amend the Articles of Incorporation and to approve mergers,
reorganizations, and similar transactions.
PREFERRED STOCK
The Company's Amended and Restated Articles of Incorporation authorize
15,000 shares of Series A Preferred Stock, all of which were outstanding before
the Offering, 1,740 shares of Series B Preferred Stock, of which 1,584 were
outstanding before the Offering, and 100,000 shares of currently undesignated
preferred stock. At the time of consummation of the Offering, each outstanding
share of Series A Preferred Stock and Series B Preferred Stock will be converted
into 54.235 and 348.7 shares of Common Stock, respectively, and fractional
shares will be eliminated. The Series A Preferred Stock and Series B Preferred
Stock will not be reissued.
Following consummation of the Offering, all of the authorized shares of
undesignated preferred stock will be available for issue from time to time in
series having such designations, preferences and rights, qualifications, and
limitations as the Board of Directors may determine without any approval of
shareholders. Preferred stock could be given rights, including voting and/or
conversion rights, which would adversely affect the voting power and equity of
holders of Common Stock and could have preference to Common Stock with respect
to dividend and liquidation rights. Issuance of preferred stock could have the
effect of acting as an anti-takeover device to prevent a change of control of
the Company.
PROVISIONS AFFECTING BUSINESS COMBINATIONS AND CHANGES IN CONTROL
Ohio law governs the rights of shareholders of the Company. Chapter 1704 of
the Ohio Revised Code may be viewed as having an anti-takeover effect. This
statute, in general, prohibits an "issuing public corporation" (the definition
of which would include the Company) from entering into a "Chapter 1704
Transaction" with the beneficial owner (or affiliates of such beneficial owner)
of 10% or more of the outstanding shares of the corporation (an "interested
shareholder") for at least three years following the date on which the
interested shareholder attains such 10% ownership, unless the board of directors
of the corporation approves, prior to such person becoming an interested
shareholder, either the transaction or the acquisition of shares resulting in a
10% ownership. A "Chapter 1704 Transaction" is broadly defined to include, among
other things, a merger or consolidation with, a sale of substantial assets to,
or the receipt of a loan, guaranty or other financial benefit (which is not
proportionately received by all shareholders) from the interested shareholder.
Following the expiration of such three-year period, a Chapter 1704 Transaction
with the interested shareholder is permitted only if either (i) the transaction
is approved by the holders of at least two-thirds of the voting power of the
corporation (or such different proportion as is set forth in the corporation's
articles of incorporation), including a majority of the outstanding shares,
excluding those owned by the interested shareholder, or (ii) the business
combination results in the shareholders other than the interested shareholder
receiving a prescribed "fair price" for their shares. One significant effect of
Chapter 1704 is to cause an interested shareholder to negotiate with the board
of directors of a corporation prior to becoming an interested shareholder.
In addition, Section 1707.043 of the Ohio Revised Code requires a person or
entity that makes a proposal to acquire the control of a corporation to repay to
that corporation any profits made from trades in the corporation's stock within
18 months after making the control proposal.
Section 1701.831 of the Ohio GCL (the "Control Share Acquisition Statute")
requires shareholder approval of any proposed "control share acquisition" of an
Ohio corporation. A "control share acquisition" is
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the acquisition, directly or indirectly, by any person (including any
individual, partnership, corporation, limited liability company, society,
association or two or more persons who have a joint or common interest) of
shares of a corporation that, when added to all other shares of the corporation
that may be voted, directly or indirectly, by the acquiring person, would
entitle such person to exercise or direct the exercise of 20% or more (but less
than 33 1/3%) of the voting power of the corporation in the election of
directors or 33 1/3% or more (but less than a majority) of such voting power or
a majority or more of such voting power. Under the Control Share Acquisition
Statute, the control share acquisition must be approved in advance by the
holders of a majority of the outstanding voting shares represented at a meeting
at which a quorum is present and by the holders of a majority of the portion of
the outstanding voting shares represented at such a meeting excluding the voting
shares owned by the acquiring shareholder and certain "interested shares,"
including shares owned by officers elected or appointed by the directors of the
corporation and by directors of the corporation who are also employees of the
corporation.
The purpose of the Control Share Acquisition Statute is to give
shareholders of Ohio corporations a reasonable opportunity to express their
views on a proposed shift in control, thereby reducing the coercion inherent in
an unfriendly takeover. The provisions of the Control Share Acquisition Statute
grant to the shareholders of the Company the assurance that they will have
adequate time to evaluate the proposal of the acquiring person, that they will
be permitted to vote on the issue of authorizing the acquiring person's purchase
program to go forward in the same manner and with the same proxy information
that would be available to them if a proposed merger of the Company were before
them and, most importantly, that the interests of all shareholders will be taken
into account in connection with such vote and the probability will be increased
that they will be treated equally regarding the price to be offered for their
common shares if the implementation of the proposal is approved.
The Control Share Acquisition Statute applies not only to traditional
tender offers but also to open market purchases, privately negotiated
transactions and original issuances by an Ohio corporation, whether friendly or
unfriendly. The procedural requirements of the Control Share Acquisition Statute
could render approval of any control share acquisition difficult in that the
transaction must be authorized at a special meeting of shareholders, at which a
quorum is present, by the affirmative vote of the majority of the voting power
represented and by a majority of the portion of such voting power excluding
"interested shares." It is recognized that any corporate defense against persons
seeking to acquire control may have the effect of discouraging or preventing
offers which some shareholders might find financially attractive. On the other
hand, the need on the part of the acquiring person to convince the shareholders
of the Company of the value and validity of his offer may cause such offer to be
more financially attractive in order to gain shareholder approval.
While the Company believes that these provisions are in its best interests,
potential shareholders should be aware that such provisions could be
disadvantageous to them because the overall effect of these statutes may be to
render more difficult or discourage the removal of incumbent management or the
assumption of effective control by other persons.
TRANSFER AGENT AND REGISTRAR
The registrar and transfer agent for the Company's Common Stock is Star
Bank, National Association, Cincinnati, Ohio.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
3,149,766 shares of Common Stock. The 1,000,000 shares sold in the Offering and
any of the up to 150,000 shares sold upon exercise of the Underwriters'
over-allotment option, will be freely tradeable by persons other than
"affiliates" of the Company, as that term is defined in Rule 144 under the Act,
without restriction or registration under that Act. The remaining 2,149,766
shares (the "Restricted Shares") will continue to be held by the Company's
current shareholders (assuming no exercise of the over-allotment option). The
Restricted Shares may not be sold unless they are registered under the Act or
sold pursuant to an applicable exemption from registration, including an
exemption pursuant to Rule 144.
Rule 144 governs the public sale in ordinary trading transactions of
"restricted securities" and of securities owned by "affiliates." Restricted
securities are securities acquired directly or indirectly from an issuer in a
transaction not involving a public offering. In general, under Rule 144, if a
period of at least two years has elapsed since the date the restricted
securities were acquired from the Company, then the holder of such restricted
securities (including an affiliate of the Company) is entitled, subject to
certain conditions, to sell within any three-month period a number of shares
which does not exceed the greater of (i) 1% of the Company's then outstanding
shares of Common Stock or (ii) the shares' average weekly trading volume during
the four calendar weeks preceding such sale. Sales under Rule 144 are also
subject to certain manner-of-sale provisions and requirements as to notice and
the availability of current public information about the Company.
Upon completion of the Offering, approximately 1,176,000 of the Restricted
Shares will be eligible for sale in the public market in compliance with Rule
144 beginning 90 days after the date of this Prospectus. However, each of the
Company's officers and directors and certain other holders of the Company's
Common Stock, who together will hold an aggregate of 1,645,665 Restricted
Shares, have agreed not to offer, sell or otherwise dispose of any of the
Restricted Shares upon completion of the Offering for a period of 180 days from
the date of this Prospectus, without the prior written consent of the Managing
Underwriter.
Blue Chip LP has the right, on two occasions subsequent to the Offering, to
require the Company to register shares of Common Stock held by it and the right
to participate in any subsequent public offering initiated by the Company. In
addition, the Company has outstanding warrants to purchase 249,990 shares of
Common Stock which become exercisable upon the closing of the Offering. Each
holder of these warrants has the right to require the Company to register the
shares of Common Stock which may be acquired upon warrant exercise and the right
to participate in any subsequent registration of the Company's securities. Blue
Chip LP and each warrant holder have agreed not to exercise their respective
registration rights during the 180-day lock-up period.
Prior to the Offering, there has been no public market for the Common
Stock, and no prediction can be made as to the effect, if any, that market sales
of shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of
Common Stock in the public market could adversely affect prevailing market
prices and the Company's ability to raise capital at favorable prices. The
Common Stock has been approved for listing on the Nasdaq under the symbol
"CIAO." There can be no assurance, however, that the Company will be able to
maintain its Nasdaq listing.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to each of the underwriters named
below (the "Underwriters"), for whom Glaser Capital Corporation is acting as
Managing Underwriter, and each of the Underwriters has severally agreed to
purchase from the Company, the respective number of shares of Common Stock set
forth opposite its name below:
UNDERWRITER NUMBER OF SHARES
- ----------------------------------------------------------------------------- ----------------
The Glaser Capital Corporation............................................... 600,000
H.J. Meyers & Co., Inc....................................................... 100,000
R.T.G. Richards and Company, Inc............................................. 100,000
Suncoast Capital Group, Ltd.................................................. 100,000
Sterling Foster & Company, Inc............................................... 100,000
---------
Total...................................................................... 1,000,000
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all 1,000,000 shares of
Common Stock offered hereby if any such shares of Common Stock are purchased. In
the event of a default by any Underwriter, the Underwriting Agreement provides
that, in certain circumstances, purchase commitments of the non-defaulting
Underwriters may be increased or the Underwriting Agreement may be terminated.
The Company has been advised by the Managing Underwriter that the several
Underwriters propose initially to offer such shares of Common Stock to the
public at the public offering price set forth on the cover page of this
Prospectus, and to certain dealers at such price less a concession not in excess
of $0.37 per share. The Underwriters may allow and such dealers may re-allow a
concession not in excess of $0.10 per share to other dealers. After the initial
public offering, the public offering price and such concessions may be changed.
The Selling Shareholders have granted to the Underwriters an option,
expiring 30 days from the date of this Prospectus, to purchase up to 150,000
additional shares of Common Stock at the initial public offering price less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriters may exercise such option solely to cover over-allotments, if any,
made in connection with the sale of shares of Common Stock that the Underwriters
have agreed to purchase. To the extent the Underwriters exercise such option,
each of the Underwriters will have a firm commitment, subject to certain
conditions, to purchase a number of option shares proportionate to such
Underwriter's initial commitment. The Company will not receive any of the
proceeds from the sale of shares by the Selling Shareholders.
The Company has agreed in connection with the Offering of the Common Stock
to issue to the Managing Underwriter five-year warrants (the "Underwriter's
Warrants"), at a price of $.01 per warrant, to purchase up to an aggregate of
100,000 shares of Common Stock at an exercise price of 120% of the initial
public offering price of the shares of Common Stock offered hereby (subject to
certain adjustments pursuant to antidilution provisions). The Company also has
agreed to grant to the Managing Underwriter certain registration rights with
respect to the Underwriter's Warrants and the shares of Common Stock issuable
upon the exercise thereof, including one "demand" registration and one
"piggyback" registration. The Company will bear the costs, with exceptions, of
the "piggyback" registration. Furthermore, in addition to the underwriting
discount set forth on the cover page of this Prospectus, the Company has agreed
to pay the Managing Underwriter a nonaccountable expense allowance equal to 1%
of the total Offering proceeds, including proceeds from any sale of shares
pursuant to the Underwriters' over-allotment option. Of this amount, up to
$30,000 (which has been advanced) is payable for out-of-pocket expenses whether
or not the Offering is completed.
During the first two quarters of 1996 the Managing Underwriter assisted the
Company in securing $1,050,000 of bridge financing. The Managing Underwriter
received $52,500 in fees in connection with these services.
45
46
The Company, each of its officers and directors and certain other holders
of the Company's Common Stock have agreed that they will not sell, without the
consent of the Managing Underwriter, any Common Stock or any securities
convertible into Common Stock, during the 180 days following the date of this
Prospectus except for the Common Stock offered in this Offering. Additionally,
certain warrant holders of the Company have agreed not to exercise, during the
180-day period, registration rights for shares of Common Stock purchasable upon
exercise of the warrants. The Managing Underwriter will not consent to any
shortening of such period unless, in its judgment, the timing of the sales and
the number of shares of Common Stock sold as a result of any said consent would
not have a material adverse effect on the market of the Common Stock. In such
event, such sales would not necessarily be preceded by a public announcement of
the Company or the Managing Underwriter that such consent has been given.
The initial public offering price for the shares of Common Stock included
in this Offering has been determined by negotiation among the Company, the
Selling Shareholders and the Managing Underwriter. Among the factors considered
in determining such price were the history of and prospects for the Company's
business and the industry in which it operates, an assessment of the Company's
management, past and present revenues and earnings of the Company, the prospects
for growth of the Company's revenues and earnings and currently prevailing
conditions in the securities markets, including current market valuations of
publicly traded companies which are comparable to the Company.
The Underwriting Agreement provides that the Company and the Selling
Shareholders (if the over-allotment option is exercised) will indemnify the
Underwriters against certain liabilities under the Act, or contribute to
payments the Underwriters may be required to make in respect thereof.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Taft, Stettinius & Hollister, Cincinnati, Ohio. Certain legal matters
in connection with this Offering will be passed upon for the Underwriters by
Dinsmore & Shohl, Cincinnati, Ohio.
EXPERTS
The financial statements of Ciao Cucina Corporation included in this
Prospectus have been audited by Joseph Decosimo and Company, PLL, independent
certified public accountants as set forth in their report thereon included
herein. Such financial statements have been included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Act with respect to the Common
Stock offered hereby. The Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and such Common Stock, reference
is hereby made to such Registration Statement and to the exhibits and schedules
thereto. The Registration Statement can be inspected without charge at the
office of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies may be obtained from the Commission at prescribed rates.
The Commission also maintains an Internet web site at http://www.sec.gov that
contains reports, proxy statements and other information.
46
47
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants..................................................... F-2
Balance Sheets at December 25, 1994 and December 31, 1995 and at July 14, 1996
(unaudited)......................................................................... F-3
Statements of Operations for the years ended December 25, 1994 and December 31, 1995
and for the two quarters ended July 9, 1995 (unaudited) and July 14, 1996
(unaudited)......................................................................... F-4
Statement of Redeemable Equity and Shareholders' Deficit for the years ended December
25, 1994 and December 31, 1995 and for the two quarters ended July 14, 1996
(unaudited)......................................................................... F-5
Statements of Cash Flows for the years ended December 25, 1994 and December 31, 1995
and for the two quarters ended July 9, 1995 (unaudited) and July 14, 1996
(unaudited)......................................................................... F-6
Notes to Financial Statements......................................................... F-8
F-1
48
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Ciao Limited, Inc.
Cincinnati, Ohio
We have audited the accompanying balance sheets of Ciao Limited, Inc. as of
December 31, 1995 and December 25, 1994 and the related statements of
operations, redeemable equity and shareholders' deficit and cash flows for the
years then ended. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ciao Limited, Inc. as of
December 31, 1995 and December 25, 1994 and the results of its operations and
cash flows for the years then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As discussed in the Liquidity and
Operations note, the company's recurring losses from operations, net working
capital deficiency and total shareholders' deficit raise substantial doubt about
its ability to continue as a going concern. Management's plans concerning these
matters are also described in the Liquidity and Operations note. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Joseph Decosimo and Company, PLL
Cincinnati, Ohio
September 5, 1996,
except for Note 13, as to which the date is November 22, 1996
F-2
49
CIAO LIMITED, INC.
BALANCE SHEETS
DECEMBER DECEMBER
25, 31, JULY 14,
ASSETS 1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
CURRENT ASSETS
Cash and Cash Equivalents........................... $ 33,864 $ 137,660 $ 35,508
Accounts Receivable................................. 39,943 28,689 61,365
Inventories......................................... 47,696 46,074 107,151
Prepayments......................................... 61,059 22,836 186,252
----------- ----------- -----------
Total Current Assets............................. 182,562 235,259 390,276
EQUIPMENT AND IMPROVEMENTS, NET....................... 2,174,709 3,102,576 4,440,653
INTANGIBLE ASSETS, NET................................ 242,069 203,715 408,136
SECURITY DEPOSITS AND OTHER........................... 219,103 344,174 345,593
----------- ----------- -----------
TOTAL ASSETS.......................................... $ 2,818,443 $ 3,885,724 $ 5,584,658
=========== =========== ===========
LIABILITIES, REDEEMABLE EQUITY AND SHAREHOLDERS'
DEFICIT
CURRENT LIABILITIES
Bank Overdraft...................................... $ 22,555 $ -- $ --
Current Portion of Long-Term Debt................... 1,742,503 449,638 342,141
Accounts Payable.................................... 296,872 259,397 404,462
Accrued Expenses.................................... 507,843 375,998 546,260
----------- ----------- -----------
Total Current Liabilities........................ 2,569,773 1,085,033 1,292,863
----------- ----------- -----------
LONG-TERM LIABILITIES
Notes Payable....................................... 388,718 184,335 2,262,012
Accrued Rentals..................................... 200,485 373,164 454,315
Deferred Lease Incentives........................... 1,168,406 2,125,829 2,124,153
----------- ----------- -----------
Total Long-Term Liabilities...................... 1,757,609 2,683,328 4,840,480
----------- ----------- -----------
REDEEMABLE EQUITY--
10% Series A Convertible Preferred Stock--$100 par
value, 15,000 shares authorized and issued for
1995............................................. -- 1,558,604 1,646,628
10% Series B Convertible Preferred Stock--$690 par
value, 1,740 shares authorized, 1,584 shares
issued for 1995.................................. -- 1,174,932 1,233,784
----------- ----------- -----------
Total Redeemable Equity.......................... -- 2,733,536 2,880,412
----------- ----------- -----------
SHAREHOLDERS' DEFICIT
Common Stock--no par value, 10,000,000 shares
authorized, 794,355 shares issued................ 750 750 750
Additional Paid-In Capital (Deficit)................ 127,327 (1,767,372) (1,717,372)
Accumulated Deficit................................. (1,502,016) (714,551) (1,577,475)
Treasury Stock--224,445 shares, stated at cost...... (135,000) (135,000) (135,000)
----------- ----------- -----------
Total Shareholders' Deficit...................... (1,508,939) (2,616,173) (3,429,097)
----------- ----------- -----------
TOTAL LIABILITIES, REDEEMABLE EQUITY AND SHAREHOLDERS'
DEFICIT............................................. $ 2,818,443 $ 3,885,724 $ 5,584,658
=========== =========== ===========
The accompanying notes are an integral part of the financial statements.
F-3
50
CIAO LIMITED, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED
------------------------- TWO QUARTERS ENDED
DECEMBER DECEMBER ------------------------
25, 31, JULY 9, JULY 14,
1994 1995 1995 1996
---------- ----------- ---------- ----------
(UNAUDITED)
RESTAURANT REVENUES........................ $3,273,083 $ 4,778,742 $2,554,841 $4,130,369
---------- ----------- ---------- ----------
OPERATING EXPENSES--
Food and Beverage Costs.................. 944,593 1,409,422 730,266 1,274,845
Restaurant Labor Costs................... 1,049,802 1,548,678 716,793 1,377,809
Occupancy and Other Restaurant
Expenses.............................. 1,013,734 1,589,833 997,798 977,887
General and Administrative Expenses...... 364,849 604,490 317,599 641,155
Depreciation and Amortization............ 259,044 459,549 240,510 386,231
---------- ----------- ---------- ----------
Total Operating Expenses.............. 3,632,022 5,611,972 3,002,966 4,657,927
---------- ----------- ---------- ----------
LOSS FROM OPERATIONS....................... (358,939) (833,230) (448,125) (527,558)
---------- ----------- ---------- ----------
OTHER INCOME (EXPENSE)--
Interest Expense......................... (268,134) (94,459) (40,772) (189,358)
Interest Income.......................... 9,180 21,949 10,293 12,488
Other Income (Expense), net.............. (52,397) 3,083 (28,391) (11,620)
---------- ----------- ---------- ----------
Total Other Expense................... (311,351) (69,427) (58,870) (188,490)
---------- ----------- ---------- ----------
NET LOSS................................... (670,290) (902,657) (506,995) (716,048)
Accretion of Dividends on Preferred
Stock................................. -- (194,472) (70,590) (139,621)
Accretion of Discount on Preferred
Stock................................. -- (10,105) (3,668) (7,255)
---------- ----------- ---------- ----------
NET LOSS APPLICABLE TO COMMON STOCK........ $ (670,290) $(1,107,234) $ (581,253) $ (862,924)
========== =========== ========== ==========
NET LOSS PER COMMON SHARE.................. $(1.16) $(1.94) $(1.02) $(1.51)
========== =========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING.............................. 576,384 569,910 569,910 569,910
========== =========== ========== ==========
The accompanying notes are an integral part of the financial statements.
F-4
51
CIAO LIMITED, INC.
STATEMENT OF REDEEMABLE EQUITY AND SHAREHOLDERS' DEFICIT
REDEEMABLE EQUITY TOTAL SHAREHOLDERS' DEFICIT
--------------------------------------------------------- --------------------------------
SERIES A CONVERTIBLE SERIES B COMMON STOCK
CONVERTIBLE ----------------- ADDITIONAL
PREFERRED STOCK PREFERRED STOCK TOTAL NUMBER PAID-IN
-------------------- ------------------- REDEEMABLE OF CAPITAL
SHARES AMOUNT SHARES AMOUNT EQUITY SHARES AMOUNT (DEFICIT)
------ ---------- ----- ---------- ---------- ------- ------ -----------
BALANCE--
DECEMBER 26, 1993......... -- $ -- -- $ -- $ -- 794,355 $750 $ 127,327
Issuance of Note Payable
for 77,692 Shares of
Treasury Stock............
Net Loss................... -- -- -- -- -- -- -- --
------ ---------- ----- ---------- ---------- ------- ---- -----------
BALANCE--
DECEMBER 25, 1994......... -- -- -- -- -- 794,355 750 127,327
Issuance of Redeemable
Equity.................... 15,000 1,435,999 1,584 1,092,960 2,528,959
Reclassification of S
Corporation Accumulated
Deficit to Additional
Paid-In Deficit........... (1,894,699)
Dividends Accrued on
Redeemable Equity......... 112,500 81,972 194,472
Accretion of Discount on
Redeemable Equity......... 10,105 10,105
Net Loss................... -- -- -- -- -- -- -- --
------ ---------- ----- ---------- ---------- ------- ---- -----------
BALANCE--
DECEMBER 31, 1995......... 15,000 1,558,604 1,584 1,174,932 2,733,536 794,355 750 (1,767,372)
Issuance of Warrants to
Noteholders............... 50,000
Dividends Accrued on
Redeemable Equity
(unaudited)............... 80,769 58,852 139,621
Accretion of Discount on
Redeemable Equity
(unaudited)............... 7,255 7,255
Net Loss (unaudited)....... -- -- -- -- -- -- -- --
------ ---------- ----- ---------- ---------- ------- ---- -----------
BALANCE--
JULY 14, 1996
(UNAUDITED)............... 15,000 $1,646,628 1,584 $1,233,784 $2,880,412 794,355 $750 $(1,717,372)
====== ========== ===== ========== ========== ======= ==== ===========
TOTAL
ACCUMULATED TREASURY SHAREHOLDERS'
DEFICIT STOCK DEFICIT
----------- --------- -----------
BALANCE--
DECEMBER 26, 1993......... $ (831,726) $ (45,000) $ (748,649)
Issuance of Note Payable
for 77,692 Shares of
Treasury Stock............ (90,000) (90,000)
Net Loss................... (670,290) -- (670,290)
----------- --------- -----------
BALANCE--
DECEMBER 25, 1994......... (1,502,016) (135,000) (1,508,939)
Issuance of Redeemable
Equity.................... --
Reclassification of S
Corporation Accumulated
Deficit to Additional
Paid-In Deficit........... 1,894,699 --
Dividends Accrued on
Redeemable Equity......... (194,472) (194,472)
Accretion of Discount on
Redeemable Equity......... (10,105) (10,105)
Net Loss................... (902,657) -- (902,657)
----------- --------- -----------
BALANCE--
DECEMBER 31, 1995......... (714,551) (135,000) (2,616,173)
Issuance of Warrants to
Noteholders............... 50,000
Dividends Accrued on
Redeemable Equity
(unaudited)............... (139,621) (139,621)
Accretion of Discount on
Redeemable Equity
(unaudited)............... (7,255) (7,255)
Net Loss (unaudited)....... (716,048) -- (716,048)
----------- --------- -----------
BALANCE--
JULY 14, 1996
(UNAUDITED)............... $(1,577,475) $(135,000) $(3,429,097)
=========== ========= ===========
The accompanying notes are an integral part of the financial statements.
F-5
52
CIAO LIMITED, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED
------------------------ TWO QUARTERS ENDED
DECEMBER DECEMBER -------------------------
25, 31, JULY 9, JULY 14,
1994 1995 1995 1996
---------- ---------- ---------- -----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES--
Net Loss.................................. $(670,290) $(902,657) $ (506,995) $ (716,048)
Depreciation.............................. 132,335 275,259 126,662 233,691
Amortization.............................. 126,709 184,290 113,848 152,540
Amortization of Lease Incentives.......... (22,916) (122,083) (64,497) (91,764)
Accretion of Notes Payable Discount....... -- -- -- 6,250
Changes in Operating Assets and
Liabilities--
Decrease (Increase) in--
Accounts Receivable.................. 6,624 11,254 7,523 (32,676)
Inventories.......................... (22,502) 1,622 (63,765) (61,077)
Prepayments.......................... (46,182) 38,223 9,469 (163,416)
Preopening Costs..................... (188,512) (121,060) (23,225) (256,134)
Increase (Decrease) in--
Accounts Payable..................... 126,577 (44,515) (13,523) 145,065
Accrued Expenses..................... 290,844 (131,845) (208,805) 170,262
Accrued Rentals...................... 69,158 172,679 93,230 81,151
--------- --------- ---------- -----------
NET CASH USED BY OPERATING
ACTIVITIES........................... (198,155) (638,833) (530,078) (532,156)
--------- --------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES--
Purchase of Equipment and Improvements.... (330,500) (123,620) (112,532) (1,481,681)
Cash paid for Intangible Assets........... -- (24,876) -- (827)
Cash paid for Security Deposits........... (64,081) (125,071) (119,499) (1,419)
--------- --------- ---------- -----------
NET CASH USED BY INVESTING
ACTIVITIES........................... (394,581) (273,567) (232,031) (1,483,927)
--------- --------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES--
Increase (Decrease) in Bank Overdraft..... 22,555 (22,555) (22,555) --
Proceeds from Issuance of Redeemable
Equity................................. -- 1,150,000 1,150,000 --
Proceeds from Issuance of Warrants........ -- -- -- 50,000
Payment of Preferred Stock Issuance
Costs.................................. -- (64,001) (64,001) --
Proceeds from Notes Payable............... 720,575 628,038 475,000 2,007,200
Payments of Notes Payable................. (574,551) (675,286) (571,061) (143,270)
--------- --------- ---------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES........................... 168,579 1,016,196 967,383 1,913,930
--------- --------- ---------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................... (424,157) 103,796 205,274 (102,152)
CASH AND CASH EQUIVALENTS--
BEGINNING OF PERIOD....................... 458,021 33,864 33,864 137,660
--------- --------- ---------- -----------
CASH AND CASH EQUIVALENTS--
END OF PERIOD............................. $ 33,864 $ 137,660 $ 239,138 $ 35,508
========= ========= ========== ===========
The accompanying notes are an integral part of the financial statements.
F-6
53
CIAO LIMITED, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED
------------------------ TWO QUARTERS ENDED
DECEMBER DECEMBER -----------------------
25, 31, JULY 9, JULY 14,
1994 1995 1995 1996
---------- ---------- ---------- ---------
(UNAUDITED)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Deferred landlord incentives received used
to purchase leasehold improvements and
equipment................................ $1,128,618 $1,079,506 $ 168,972 $ 90,087
========== ========== ========== ========
Purchase of Treasury Stock for note
payable.................................. $ 90,000 -- -- --
========== ========== ========== ========
Conversion of short-term note into Series A
Convertible Preferred Stock.............. -- $ 350,000 $ 350,000 --
========== ========== ========== ========
Conversion of Series A and B Convertible
Subordinated Participating Income Notes
into Series B Convertible Preferred
Stock.................................... -- $1,092,960 $1,092,960 --
========== ========== ========== ========
Dividends accrued on Series A and B
Convertible Preferred Stock.............. -- $ 194,472 $ 70,590 $139,621
========== ========== ========== ========
Accretion of discount on Series A
Convertible Preferred Stock.............. -- $ 10,105 $ 3,668 $ 7,255
========== ========== ========== ========
Accretion of discount on issuance of
Bridge Notes............................. -- -- -- $ 6,250
========== ========== ========== ========
Issuance of Bridge Note for Deferred
Financing Costs.......................... -- -- -- $100,000
========== ========== ========== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest..................... $ 168,565 $ 210,292 $ 111,098 $130,096
========== ========== ========== ========
The accompanying notes are an integral part of the financial statements.
F-7
54
CIAO LIMITED, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies and practices followed by the Company
are as follows:
Description of Business--The Company develops, owns and operates certain
restaurants which operate under the name Ciao Baby Cucina. The Company also
managed a restaurant in Washington D.C. under another name.
Restaurants operated, managed or under development as of December 31, 1995
are summarized as follows:
YEAR
LOCATION OPENED STATUS
---------------------------------------- ------ ---------------------------------
Cincinnati, Ohio (Harper's Point) 1991 Owned and operating
Washington, D.C. 1993 Owned and operating
Hackensack, New Jersey 1994 Owned and operating
Washington, D.C. 1995 Managed and operated (agreement
terminated in April, 1996)
Memphis, Tennessee 1996 Owned and operating
Cincinnati, Ohio (downtown) 1996 Owned and operating
Cash and Cash Equivalents--The Company considers all money market accounts
and highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents. The Company maintains at a single financial
institution cash and cash equivalent accounts which may exceed federally insured
amounts at times and which may at times significantly exceed balance sheet
amounts due to outstanding checks.
Inventories--Inventories consist primarily of food, liquor and supplies and
are stated at the lower of cost or market. Cost is determined using the
first-in, first-out (FIFO) method.
Equipment and Improvements--Equipment and improvements are stated at cost.
Expenditures for repairs and maintenance are charged to expense as incurred and
additions and improvements that significantly extend the lives of assets are
capitalized. Upon sale or other retirement of depreciable property, the cost and
accumulated depreciation are removed from the related accounts and any gain or
loss is reflected in operations.
Depreciation is calculated on the straight-line method over the following
estimated useful lives:
Leasehold Improvements Remaining lease term, principally 10 years
Restaurant Equipment 7 to 10 years
Office Furniture and Equipment 5 to 7 years
Computer Equipment 5 years
Intangible Assets--The costs of intangible assets are amortized on the
straight-line basis over the following estimated useful lives:
Licenses........................................................ 15 years
Preopening Costs................................................ 12 months
Organizational and Startup Costs................................ 5 years
Preopening costs consist primarily of payroll, training and other direct
costs incurred prior to the opening of a new restaurant and are amortized using
the straight-line method over the twelve month period subsequent to the date of
opening.
The Company evaluates the recoverability of intangible assets at each
balance sheet date based on forecasted future operations and undiscounted cash
flows exclusive of capital investments and other subjective
F-8
55
CIAO LIMITED, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
criteria. Based upon this information management believes that the carrying
amount of these intangible assets will be realized over the respective
amortization periods.
Security Deposits--The Company has certificates of deposit totaling
$337,500 at a single financial institution which are pledged to the Company's
principal financial institution as collateral for three letters of credit
totaling $397,000. These letters of credit are provided to the Company's
landlords in accordance with certain lease agreements.
Revenue Recognition--The Company recognizes revenues from its restaurant
operations as earned on the close of each day's business.
Advertising--The Company expenses the costs of advertising as incurred.
Advertising expense totaled $101,405 for 1994, $84,277 for 1995 and $41,544
(unaudited) for the two quarters ended July 14, 1996.
Income Taxes--Income taxes are computed based on the provisions of SFAS
109, "Accounting for Income Taxes." Deferred tax assets and liabilities are
recognized for the estimated future tax effects attributed to temporary
differences between book and tax bases of assets and liabilities and for
carryforward items. The measurement of current and deferred tax assets and
liabilities is based on enacted tax law.
Prior to March 30, 1995, the Company, with the consent of its shareholders,
had elected to be taxed as an S corporation under the provisions of Section 1362
of the Internal Revenue Code. The shareholders were personally liable for their
proportionate share of the Company's federal and state taxable income;
therefore, no provision or liability for federal and state income taxes was
reflected in the financial statements.
Leases--The Company leases its restaurant facilities under operating lease
agreements that generally provide for a base amount and a percentage of sales
over a base amount. Generally these leases provide for escalating base lease
payments over the terms of the leases and corresponding increases in the base
amount applicable for the computation of percentage rents. For financial
reporting purposes, the total amount of base rentals over the terms of the
leases is charged to expense on the straight-line method over the lease terms.
Rental expense in excess of lease payments is recorded as a deferred rental
liability.
The Company generally receives substantial lease incentives from its
landlords upon signing of its lease agreements. The proceeds of these lease
incentives are principally used to purchase leasehold improvements for the
leased location, and certain lease agreements provide that the proceeds from
these incentives may be used to purchase restaurant furniture, fixtures and
equipment, preopening costs and certain other items. These lease incentives are
classified as a long-term liability and are amortized as a reduction of rent
expense on a straight-line basis over the lease term.
Fiscal Year--The Company's fiscal year ends on the last Sunday in December,
which includes 53 weeks in fiscal year 1995 and 52 weeks in fiscal year 1994.
The first quarter consists of four periods and each of the remaining three
quarters consists of three periods, with the first, second and third quarters
ending 16 weeks, 28 weeks and 40 weeks, respectively, into the fiscal year.
Estimates and Assumptions--The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Unaudited Interim Financial Statements--In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair presentation of the Company's financial statements as of
July 14, 1996 and for the two quarters ended July 9, 1995 and the two quarters
ended July 14, 1996, have been reflected in the accompanying interim financial
statements. Operating results for the two quarters are not necessarily
indicative of results of the entire year.
F-9
56
CIAO LIMITED, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Net Loss Per Common Share--Net loss per common share is computed using the
weighted average number of shares of common stock outstanding. The Company's
weighted average number of common shares outstanding of 569,910 reflect issued
shares of 794,355 less treasury stock shares of 224,445. The weighted average
number of common shares outstanding do not reflect the conversion of Series A
preferred stock, Series B preferred stock, cumulative unpaid Series A and B
preferred stock dividends, cumulative unpaid consulting fees, Series A and B
Convertible Participating Income Notes, the 10% Convertible Subordinated Note
Payable and the common stock warrant issuable to the underwriter upon closing of
the initial public offering, as these common stock equivalents are
anti-dilutive.
Recent Accounting Pronouncements--The Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of" (SFAS 121) in March, 1995, to be effective for fiscal years
beginning after December 15, 1995. SFAS 121 establishes accounting standards for
the recognition and measurement of impairment of long-lived assets, certain
identifiable intangibles and goodwill either to be held or disposed of. The
Company adopted SFAS 121 during the year ended December 31, 1995, with no impact
on operations.
Stock-Based Compensation--Accounting Principles Board (APB) Opinion 25
requires compensation cost for stock-based compensation plans to be recognized
based on the difference, if any, between the fair market value of the stock on
the date of grant and the option exercise price. In October, 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
(SFAS) 123, "Accounting for Stock-Based Compensation". SFAS 123 established a
fair value-based method of accounting for compensation cost related to stock
options and other forms of stock-based compensation plans. However, SFAS 123
allows an entity to continue to measure compensation costs using the principles
of APB Opinion 25 if certain pro forma disclosures are made. SFAS 123 is
effective for fiscal years beginning after December 15, 1995. The Company
intends to adopt the provisions for pro forma disclosure requirements of SFAS
123 in fiscal year 1996.
NOTE 2. LIQUIDITY AND OPERATIONS
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company has incurred net losses of $902,657 for the year ended December 31, 1995
and $716,048 (unaudited) for the two quarters ended July 14, 1996. The Company
has a deficiency in working capital of $849,774 at December 31, 1995 and
$902,587 (unaudited) at July 14, 1996, and has a shareholders' deficit of
$2,616,173 at December 31, 1995 and $3,429,097 (unaudited) at July 14, 1996.
These factors among others raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Due in part to the Company's continued expansion and plans for expansion,
current operating cash flow is not sufficient to meet liquidity needs. The
Company's current financing arrangements do not provide sufficient cash flow for
continuing operating losses and the development and opening of the restaurant in
Fort Lauderdale, Florida, for which the Company has executed a lease agreement,
and for planned restaurants in Cleveland, Ohio and Baton Rouge, Louisiana. The
Company intends to file with the Securities and Exchange Commission a Form SB-2
Registration Statement for the sale by the Company of approximately 1,000,000
shares of common stock at a proposed price of $7.00 per share (the offering).
Offering proceeds to the Company of approximately $6.1 million are anticipated
to be used to retire the 10.35% to 12% bridge notes for $2,500,000 and the
Company's prime plus 2% bank debt totaling approximately $200,000 at July 14,
1996, to fund development activities of the Fort Lauderdale, Cleveland, Baton
Rouge and other restaurants, and to provide working capital.
F-10
57
CIAO LIMITED, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the proposed initial public offering by the Company,
subsequent to December 31, 1995, the following transactions have occurred or are
anticipated to occur at the closing date of the offering:
1) The 15,000 shares of Series A preferred stock will convert into
813,529 shares of the Company's common stock.
2) The 1,584 shares of Series B preferred stock will convert into
552,270 shares of the Company's common stock.
3) The Company will issue 55,554 shares of common stock to its former
Series A and B preferred shareholders in satisfaction of cumulative unpaid
dividends and 23,285 shares to a director and affiliate of a director for
unpaid consulting fees. These share amounts assume an offering closing of
September 30, 1996.
4) The holders of the Series A and B Convertible Participating Income
Notes will convert their notes into 53,866 shares of the Company's common
stock.
After giving effect to the financing secured subsequent to December 31,
1995 and the offering, the unaudited pro forma effect on the Company's financial
position as of July 14, 1996 is summarized as follows:
PRO FORMA
JULY 14,
1996
(UNAUDITED)
-----------
Cash.................................................................. $3,301,008
Current Assets........................................................ $3,655,776
Equipment and Improvements, net....................................... $4,440,653
Security Deposits and Intangibles, net................................ $ 601,229
Total Assets.......................................................... $8,697,658
Total Debt, including current portion................................. $ 10,479
Shareholders' Equity.................................................. $5,649,123
Total Liabilities and Shareholders' Equity............................ $8,697,658
NOTE 3. EQUIPMENT AND IMPROVEMENTS
Equipment and improvements consist of the following major classifications:
JULY 14,
1996
1994 1995 (UNAUDITED)
---------- ---------- -----------
Leasehold Improvements...................... $1,527,902 $1,609,732 $3,549,477
Restaurant Furniture and Equipment.......... 675,846 698,358 1,274,961
Computer Equipment.......................... 148,952 148,952 231,540
Office Furniture and Equipment.............. 60,934 89,244 110,608
China, Glassware and Flatware............... 55,154 46,123 77,097
Construction in Progress.................... -- 1,079,506 --
---------- ---------- ----------
2,468,788 3,671,915 5,243,683
Accumulated Depreciation.................... (294,079) (569,339) (803,030)
---------- ---------- ----------
$2,174,709 $3,102,576 $4,440,653
========== ========== ==========
F-11
58
CIAO LIMITED, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. INTANGIBLE ASSETS
Intangible assets consist of the following:
JULY 14,
1996
1994 1995 (UNAUDITED)
----------- ---------- -----------
Licenses.................................... $ 57,500 $ 80,298 $ 81,125
Preopening Costs............................ 392,413 515,551 771,684
Organizational and Startup Costs............ 65,178 65,178 65,178
Deferred Financing Costs.................... -- -- 100,000
--------- --------- ----------
515,091 661,027 1,017,987
Accumulated Amortization.................... (273,022) (457,312) (609,851)
--------- --------- ----------
$ 242,069 $ 203,715 $ 408,136
========= ========= ==========
NOTE 5. NOTES PAYABLE
Notes payable consist of the following:
JULY 14,
1996
1994 1995 (UNAUDITED)
----------- --------- -----------
Notes payable to bank, rates from 9% to prime plus
2%, maturities extending through May, 1997......... $ 306,680 $ 282,204 $ 195,899
10% Series A and B Convertible Subordinated
Participating Income Notes......................... 1,200,000 100,000 100,000
7% Notes payable to holders of Series B Convertible
Subordinated Participating Income Notes............ 425,000 --
10% Convertible Subordinated Note Payable............ -- 150,000 150,000
Prime note payable to officer and
shareholder--payable $7,500 monthly plus interest,
due February, 1997................................. 194,391 95,984 41,525
10.35% to 12% Bridge Notes--due on the earlier of
March 8, 1998 or within 10 days of closing of the
company's initial public offering--convertible upon
default into shares of a new class of convertible
stock.............................................. -- -- 2,106,250
Equipment notes payable.............................. 5,150 5,785 10,479
---------- --------- ----------
2,131,221 633,973 2,604,153
Less current portion................................. (1,742,503) (449,638) (342,141)
----------- --------- ----------
$ 388,718 $ 184,335 $2,262,012
=========== ========= ==========
The notes payable to bank are secured by substantially all assets of the
Company and the guarantee of the Company's president.
The Series A and B Convertible Participating Income Notes provide for
interest at 10% plus contingent interest based on sales not to exceed 10% of the
principal amount. These notes are convertible into 53,866 shares of the
Company's common stock, are subject to certain prepayment penalties through
September, 1998 and are unsecured. These notes are included in the current
portion of long-term debt at December 31, 1995 as the notes are in default due
to nonpayment of interest.
F-12
59
CIAO LIMITED, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The 10% Convertible Subordinated Note Payable is due to an entity
controlled by certain shareholders and is convertible into 81,352 shares of the
Company's common stock. This note is subject to certain redemption options
subsequent to December 31, 1999.
At December 31, 1995 aggregate maturities of long-term debt for the five
years subsequent to that date are as follows:
YEAR ENDING
-----------
December 29, 1996............................ $449,638
December 28, 1997............................ $ 34,335
December 27, 1998............................ --
December 26, 1999............................ $150,000
Based on the borrowing rates currently available to the Company for notes
payable with similar terms and average maturities, the fair values of debt
securities approximate their carrying values.
NOTE 6. REDEEMABLE EQUITY
In March, 1995, the Company issued Series A and Series B redeemable
convertible preferred stock to retire certain indebtedness, to fund restaurant
development and to provide working capital. This preferred stock may be
described as follows:
Series A--15,000 shares of $100 par value Series A preferred stock were
issued in exchange for an existing $350,000 note and $1,150,000 in cash. The
Series A preferred stock is entitled to annual cumulative dividends equal to 10%
of par value, is convertible into 813,529 shares of common stock at the option
of the preferred shareholders, is entitled to voting rights equal to the
respective number of common stock equivalents to which the preferred
shareholders are entitled in the event of conversion and is subject to mandatory
redemption beginning December 31, 1999 for a price equal to the par value plus
accumulated and unpaid dividends. The Company is restricted from paying
dividends on its Series B preferred stock and on its common stock until
cumulative unpaid dividends on Series A preferred stock have been paid. These
cumulative unpaid dividends totaled $112,500 at December 31, 1995 and $193,269
(unaudited) at July 14, 1996.
Series B--1,584 shares of $690 par value Series B preferred stock were
issued in exchange for then outstanding Series A notes of $650,000 and Series B
notes of $450,000 respectively. The Series B preferred stock is entitled to
annual cumulative dividends equal to 10% of par value, is convertible into
552,270 shares of common stock at the option of the preferred shareholders, is
entitled to voting rights equal to the respective number of common stock
equivalents to which the preferred shareholders are entitled in the event of
conversion and is subject to mandatory redemption beginning December 31, 1999
for a price equal to the par value plus accumulated and unpaid dividends. The
Company is restricted from paying dividends on its common stock until cumulative
unpaid dividends on Series A and Series B preferred stock have been paid. These
cumulative unpaid dividends totaled $81,972 for Series B at December 31, 1995
and $140,824 (unaudited) at July 14, 1996.
At December 31, 1995, the Series A preferred stock had a carrying value of
$1,558,604 and the Series B preferred stock had a carrying value of $1,174,932.
Based upon terms available to the Company for similar instruments, the Company
believes these carrying values approximate the fair market values as of such
date.
F-13
60
CIAO LIMITED, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. INCOME TAXES
The provision for income taxes consists of the following:
Deferred Provision............................................... $(107,000)
Tax Benefit of Net Operating Loss Carryforward................... (162,000)
---------
Valuation Allowance.............................................. 269,000
---------
Total Provision for Income Taxes............................ $ --
=========
The provision for income taxes differs from the amounts computed by
applying the federal statutory rate to book income for the period from March 30,
1995 to December 31, 1995 is as follows:
Income tax at federal statutory rate............................. $(230,000)
State income taxes, net of federal benefit....................... (40,000)
Valuation Allowance.............................................. 269,000
Other............................................................ 1,000
---------
$ --
=========
As discussed in the summary of significant accounting policies, the Company
changed its tax status from non-taxable to taxable effective March 30, 1995.
Accordingly, the deferred tax asset at that date of approximately $219,500 has
been recorded during 1995 along with an offsetting valuation allowance of
$219,500.
Given the historical net losses incurred by the Company and the tax rates
and jurisdictions in which the Company operates, the Company would incur no
income tax expense as a C corporation; therefore, pro forma net loss and net
loss applicable to common stock would be equivalent to results as reported in
the income statement. The Company's net operating losses and certain other items
would result in a deferred tax asset and income tax benefit, but the Company
would record a valuation allowance in an equivalent amount to reduce the
deferred tax asset and income tax benefit to zero; accordingly, the statement of
financial position and results of operations would not be impacted by the
Company's pro forma taxation as a C corporation.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of
significant items comprising the Company's deferred tax assets are as follows:
Accrued expenses................................................. $ 84,000
Deferred Rent.................................................... 149,000
Net operating loss carryforwards................................. 162,000
Asset depreciation and amortization, net of deferred lease
incentive...................................................... 93,500
---------
488,500
---------
Valuation allowances............................................. (488,500)
---------
Net Deferred Tax Asset...................................... $ --
=========
No benefit for income taxes has been recorded due to losses reported in
fiscal year 1995 given that the realization of this asset is uncertain in that
it is dependent upon, among others, prospective taxable income.
NOTE 8. LEASE COMMITMENTS
The Company leases restaurant facilities and administrative offices under
terms which generally provide for minimum annual rental plus additional rents
computed as a percentage of sales if a restaurant's sales exceed certain levels.
The restaurant leases expire through 2012 and generally contain options to renew
for
F-14
61
CIAO LIMITED, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
terms of up to ten years. Two of the Company's restaurant locations and the
Company's administrative offices are leased from an entity controlled by certain
of its shareholders. The lease for one restaurant location is guaranteed by the
Company's president.
Future minimum lease payments under noncancellable operating leases with
initial or remaining lease terms in excess of one year as of December 31, 1995,
including the lease agreement executed for the Fort Lauderdale, Florida
restaurant during 1996, are as follows:
THIRD RELATED SUB-LEASE
YEAR ENDING PARTIES PARTIES RENTALS TOTAL
--------------------------------- ---------- ---------- --------- -----------
December 29, 1996................ $ 558,400 $ 178,380 $ (41,477) $ 695,303
December 28, 1997................ 845,647 286,676 (43,137) $ 1,089,186
December 27, 1998................ 857,149 286,676 (44,862) $ 1,098,963
December 26, 1999................ 829,052 286,676 (11,324) $ 1,104,404
December 31, 2000................ 823,304 286,676 -- $ 1,109,980
Thereafter....................... 4,664,518 1,914,891 -- $ 6,579,409
---------- ---------- --------- -----------
$8,578,070 $3,239,975 $(140,800) $11,677,245
========== ========== ========= ===========
Rent expense totaled $373,209 for 1994, $527,060 for 1995 and $367,388
(unaudited) for the two quarters ended July 14, 1996. Contingent rental expense,
computed principally on the basis of sales in excess of specified threshold
amounts, totaled $23,581 for 1994, $116,331 for 1995 and $80,465 (unaudited) for
the two quarters ended July 14, 1996.
NOTE 9. RELATED PARTY TRANSACTIONS
The Company has a consulting agreement with one of its directors and
shareholders which provides for consulting and financial advisory fees of
$50,000 annually. Consulting fees totaled $37,500 for 1995 and $26,923
(unaudited) for the two quarters ended July 14, 1996 under this arrangement, of
which $13,000 was outstanding at December 31, 1995 and $39,923 (unaudited) at
July 14, 1996.
The Company has a consulting agreement with an affiliate of the holder of
its Series A convertible preferred stock and a director which provides for
consulting and financial advisory fees of $75,000 annually. Consulting fees
totaled $56,250 for 1995 and $40,385 (unaudited) for the two quarters ended July
14, 1996 under this arrangement, of which $56,250 was outstanding at December
31, 1995 and $96,635 (unaudited) at July 14, 1996.
The Company has a demand note payable to a shareholder and officer bearing
interest at the prime rate. The outstanding balance on this note was $194,391 at
December 25, 1994, $95,984 at December 31, 1995, and $41,525 (unaudited) at July
14, 1995. Interest expense on this note totaled $8,550 for 1994, $10,964 for
1995, and $2,712 (unaudited) for the two quarters ended July 14, 1996.
The Company leases one restaurant, and in 1996 commenced leasing an
additional restaurant and its administrative offices, from partnerships in which
a nominee for director and shareholders serve as general partners. Rent expense
for these facilities totaled $57,448 for 1994, $76,111 for 1995 and $63,523
(unaudited) for the two quarters ended July 14, 1996.
The Company purchases certain alcoholic beverages from a company in which a
nominee for director of the Company is an officer. Purchases of alcoholic
beverage products totaled $79,647 for 1994, $82,766 for 1995 and $112,321
(unaudited) for the two quarters ended July 14, 1996.
F-15
62
CIAO LIMITED, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. LITIGATION
In August 1996, the Company was added as a defendant in an Amended
Counterclaim in litigation pending in the Superior Court of the District of
Columbia, Notte Luna Limited Partnership et al. v. Capital Management and
Development Corporation et al. (Civ. Div. No. 0007600-95). Notte Luna, a
Washington, D.C. restaurant, engaged Capital Management and Development
Corporation ("CMDC") to manage its restaurant. Alleging poor performance and
defaults in the management agreement, Notte Luna terminated the CMDC management
agreement, engaged the Company to manage the restaurant and sued CMDC. The
Company managed the restaurant from March 4, 1995 to April 21, 1996. CMDC has
now brought a counterclaim against the Company alleging conspiracy to induce
Notte Luna to terminate its contract with CMDC, as well as slander and
interference with contract and business relationships, and claiming $6,000,000
in compensatory and $6,000,000 in punitive damages. The litigation is in the
early stages of proceedings. Accordingly, the Company is unable to predict the
effect of the ultimate resolution of the matter. Although an unfavorable
decision could have a material adverse effect upon the Company's results of
operations, financial condition and liquidity, the Company believes it has
meritorious defenses and intends to defend the action vigorously.
NOTE 11. STOCK OPTIONS
The Company has an employment agreement with its president and chief
executive officer which extends through March, 1997 and is subject to annual
renewals. This agreement provides for the issuance of options to purchase 46,270
shares subsequent to April 1, 1995 and 45,924 shares for each of the following
two years at a price of $1.45 per share. The Company and its president plan to
cancel this employment agreement and the related options.
NOTE 12. DEVELOPMENT COMMITMENTS
During February and March, 1996, the Company opened additional restaurants
in Memphis, Tennessee and Cincinnati, Ohio. The Company expended approximately
$1,739,000 subsequent to December 31, 1995 for leasehold improvements,
furniture, fixtures, equipment and preopening costs, net of reimbursements from
landlords.
On July 1, 1996, the Company entered into a lease for a 6,755 square foot
restaurant in Fort Lauderdale, Florida for a ten-year term, with two five-year
renewal options. This restaurant is expected to be open in the first quarter of
fiscal year 1997, and is projected to require a $675,500 contribution from the
Company for leasehold improvements and approximately $674,500 from the Company
for restaurant furniture, fixtures and equipment, preopening costs and other
costs. The lease agreement provides for minimum base rental of $202,650 annually
plus contingent rentals due at percentages of gross sales in excess of certain
levels.
The Company is engaged in negotiations to lease a 5,700 square foot
restaurant and a 11,500 square feet banquet facility in Cleveland, Ohio. These
facilities are projected to open in April, 1997 and require a $400,000
contribution from the Company for leasehold improvements, restaurant furniture,
fixtures and equipment, preopening costs and other costs. The minimum base
rentals have not yet been determined, but are anticipated to include a
contingent rental payment based on 50% of restaurant net income, as adjusted for
certain items.
The Company is evaluating a proposal from a developer to lease a 7,515
square foot restaurant in Baton Rouge, Louisiana for a twenty year term, which
is projected to be open in mid-1997. The proposal provides for minimum annual
rentals of $210,420 for the first ten years and $225,450 for the second ten
years of the lease term. The cost of leasehold improvements is projected to be
$1,350,000, of which the landlord is anticipated to provide lease incentives
totaling $750,000. This lease agreement is anticipated to contain pro rata
payment of
F-16
63
CIAO LIMITED, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
common area maintenance, taxes and insurance, and a provision for contingent
rentals for sales in excess of certain minimum amounts.
NOTE 13. SUBSEQUENT EVENTS
Subsequent to December 31, 1995, the Company issued $2,500,000 face value
in 10.35% to 12% convertible notes to fund development costs and operations.
These notes are secured by certain personal property and are convertible in the
event of default into Series C, 8% preferred stock redeemable in December, 1999.
The notes include warrants for the purchase of common stock at the offering
price in the event of an initial public offering for a period of five years
subsequent to the public offering, which were allocated $50,000 from the
proceeds of the note offering. The term of the notes is two years, with payment
accelerated in the event of a closing of an initial public offering or in the
event of a material adverse change as determined by the agent for the notes. The
Company expects to repay these notes with the proceeds of its initial public
offering. In the event that this offering does not occur, the supplemental loss
per common and equivalent share, as if the bridge notes were converted to Series
C redeemable equity for all periods presented, is $1.51 and $2.29 for the years
ended December 31, 1994 and December 25, 1995 and $1.70 for the two quarters
ended July 14, 1996.
On November 18, 1996, the Company changed its name to Ciao Cucina
Corporation and increased its authorized number of common shares to 10,000,000
and its authorized number of preferred shares to 100,000. The financial
statements reflect a 345.3 to 1 stock split (effected in the form of a stock
dividend), which transaction occurred in connection with the Company's initial
public offering. All share and per share data have been restated to reflect the
stock split and reclassification.
F-17
64
[PICTURE OF FOOD ITEMS]
EUROPEAN BREADS, MUFFINS & PASTRIES
[PICTURE OF STORE-FRONT STYLE
SPECIALTY GOURMET COFFEE
OPERATION]
CIAO ESPRESSO MEMPHIS
[PICTURE OF RETAIL ITEMS]
CIAO RETAIL PRODUCTS & MERCHANDISE
[PICTURE OF WINE LOCKER]
CIAO WINE LOCKERS
[PICTURE OF DINING ROOM]
PRIVATE DINING ROOM MEMPHIS
65
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ON BEHALF OF
THE COMPANY ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS,
IN CONNECTION WITH THE OFFER MADE HEREBY, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITY OTHER THAN THE SECURITIES OFFERED
HEREBY, OR AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT QUALIFIED OR TO
ANY PERSON TO WHOM SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.................... 3
Risk Factors.......................... 8
History of the Company................ 15
Use of Proceeds....................... 16
Dividend Policy....................... 16
Capitalization........................ 17
Dilution.............................. 18
Selected Financial Data............... 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 25
Executive Officers, Directors and
Nominees............................ 34
Compensation.......................... 36
Certain Transactions.................. 37
Holdings of Management and Principal
Shareholders........................ 40
Selling Shareholders.................. 41
Description of Capital Stock.......... 41
Shares Eligible for Future Sale....... 44
Underwriting.......................... 45
Legal Matters......................... 46
Experts............................... 46
Available Information................. 46
Index to Financial Statements......... F-1
------------------------
Until December 17, 1996 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Common Stock, whether or not participating
in the distribution, may be required to deliver a Prospectus. This delivery
requirement is in addition to the obligation of dealers to deliver a Prospectus
when acting as Underwriters and with respect to their unsold allotments or
subscriptions.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
CIAO CUCINA CORPORATION LOGO
1,000,000
SHARES
CIAO
CUCINA
CORPORATION
COMMON STOCK
-----------------
PROSPECTUS
-----------------
GLASER CAPITAL CORPORATION
NOVEMBER 22, 1996
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