6
7
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
(Mark One)
_X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1995.
__ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO _______.
Commission file number 0-16348
Ciatti's, Inc.
(Exact name of small business issuer as specified in its
charter)
Minnesota 41-1564262
(State or other jurisdiction of (I.R.S.
Employer
incorporation or organization)
Identification No.)
5555 West 78th Street Edina, Minnesota 55439
(Address of principal executive offices) Zip Code
(612) 941-0108
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes__X___ No______
The Company had 732,685 shares of Common Stock, $.01 par value
per share, outstanding as of January 31, 1996.
CIATTI'S, INC. AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION Page
Number
Item 1. Financial Statements
Balance Sheets as of 3,4
December 31, 1995 and July 2, 1995.
Statements of Earnings for
5
the three months and six months ended
December 31, 1995 and January 1, 1995.
Statements of Cash Flows for the 6,7
six months ended December 31, 1995 and
January 1, 1995.
Notes to Financial Statements
8,9
Item 2. Management's Discussion and Analysis or
Plan of Operation 10-
12
Part II. OTHER INFORMATION 13-
14
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CIATTI'S, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1995 and July 2, 1995
December 31, July 2,
ASSETS 1995 1995
--------- ---------
(unaudited) (unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,521,365 $ 2,096,521
Short-term investments - 97,232
Receivables 47,267 36,750
Income tax receivable 78,478 121,157
Inventories 171,768 188,668
Prepaid expenses and
other current assets 163,319 137,951
Current installment of
note receivable 22,824 35,108
--------- ---------
Total current assets 2,005,021 2,713,387
PROPERTY AND EQUIPMENT:
Buildings 610,829 610,829
Equipment 5,840,336 5,378,194
Leasehold improvements 3,090,479 2,634,629
Automobiles 18,021 30,074
--------- ---------
9,559,665 8,653,726
Less accumulated depreciation and
amortization (5,280,517) (4,856,719)
--------- ---------
4,279,148 3,797,007
OTHER ASSETS:
Investment in preferred stock 1,050,000 1,050,000
Note receivable 133,807 123,339
--------- ---------
1,183,087 1,173,339
--------- ---------
$ 7,467,976 $ 7,683,733
========= =========
See accompanying notes to financial statements.
(continued)
CIATTI'S, INC. AND SUBSIDIARY
Consolidated Balance Sheets, continued
December 31, 1995 and July 2, 1995
December 31, July 2,
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1995
--------- ---------
(unaudited) (unaudited)
Current liabilities:
Current installments of long
term debt $144,952 $ 141,188
Current installment of preferred
stock subscription payable 150,000 150,000
Accounts payable 1,027,574 686,131
Salaries and wages payable 348,434 299,768
Other accrued liabilities 642,182 691,937
--------- ---------
Total current liabilities 2,313,142 1,969,024
Note payable bank, less current
installments 264,889 319,224
Obligations under capital lease,
less current installment 394,238 409,955
Preferred stock subscription payable
less current installment 300,000 450,000
--------- ---------
Total liabilities 3,272,269 3,148,203
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value.
Authorized 10,000,000 shares; none
issued or outstanding - -
Common stock, $.01 par value. Authorized
10,000,000 shares; issued and
outstanding 732,685 shares at
December 31, 1995 and
732,486 at July 2, 1995 7,330 7,325
Additional paid-in capital 4,333,219 4,332,921
Retained earnings (deficit) (144,842) 195,284
--------- ---------
Total stockholders' equity 4,195,707 4,535,530
--------- ---------
$ 7,467,976 $ 7,683,733
========= =========
See accompanying notes to financial statements.
CIATTI'S, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Three months ended Six months ended
December 31, January 1, December 31,January 1,
1995 1995 1995 1995
--------- --------- --------- ---------
(unaudited) (unaudited) (unaudited) (unaudited)
Sales $ 4,463,246 $ 5,066,377 $ 8,668,667 $ 10,126,468
Cost of food and beverage 1,302,751 1,575,026 2,517,150 3,100,609
--------- --------- --------- ---------
Gross Profit 3,160,495 3,491,351 6,151,517 7,025,859
Restaurant operating expenses:
Labor and Benefits 1,509,655 1,625,906 2,967,134 3,286,784
Direct and Occupancy 1,575,795 1,484,426 3,048,056 3,068,912
--------- --------- --------- ---------
3,085,450 3,110,332 6,015,190 6,355,696
--------- --------- --------- ---------
Earnings from restaurant
operations 75,045 381,019 136,327 670,163
Corporate and operations
overhead 272,544 247,293 548,152 521,659
Earnings (loss) --------- --------- --------- ---------
from operations (197,499) 133,726 (411,825) 148,504
Other income (expense)
Interest expense (17,449) (17,102) (39,717) (35,550)
Investment income 12,416 20,653 36,494 41,895
Other, net 5,140 5,302 9,922 13,794
--------- --------- --------- ---------
Total other expense 107 8,853 6,699 20,139
--------- --------- --------- ---------
Earnings (loss) before
income taxes and
extraordinary item (197,392) 142,579 (405,126) 168,643
Income taxes - 47,000 - 54,000
--------- --------- --------- ---------
Earnings (loss) before
extraordianary item (197,392) 95,579 (405,126) 114,643
Extraordiary item:
Tax benefit or net
operating loss
carrybacks 40,000 - 65,000 -
--------- --------- --------- ---------
Net earnings (loss) $ (157,392) $ 95,579 $(340,126) $ 114,643
========= ========= ========= =========
Net Earnings (loss)
per share: $ (.21) $ .13 $ (.46) $ .15
========= ========= ========= =========
Weighted average number of
common and common equivalent
shares outstanding during
the period 732,685 763,753 732,486 760,426
See accompanying notes to financial statements.
CIATTI'S, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Six months ended December 31, 1995 and January 1, 1995
Six months ended
December 31, January 1,
1995 1995
--------- ---------
(unaudited) (unaudited)
OPERATING ACTIVITIES:
Net Earnings (loss) $ (340,126) $ 114,643
Adjustments to reconcile net
earnings to net cash
provided by operating activities:
Depreciation and amortization 438,814 490,327
Gain on the sale of equipment - (4,505)
Changes in operating assets and
liabilities:
Accounts receivable (10,517) 18,779
Income tax receivable 42,679 -
Inventories 16,900 12,726
Prepaid expenses and other
current assets (25,368) (20,295)
Accounts payable 341,443 (70,776)
Salaries and wages payable 48,666 19,401
Other accrued liabilities (48,603) 112,980
Other long-term liabilities (1,152) (3,453)
Net cash provided by -------- --------
operating activities 462,736 669,827
INVESTING ACTIVITIES:
Payments for purchases of property
and equipment (920,955) (16,154)
Proceeds from sale of equipment - 50,000
Receipts on note receivable 1,816 -
Investment in preferred stock (150,000) (450,000)
Redemption of held to maturity
securities 97,232 -
Net cash used in investing -------- --------
activities $ (971,907) $ (416,154)
See accompanying notes to financial statements.
(continued)
CIATTI'S, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows, continued
Six months ended December 31, 1995 and January 1, 1995
Six months ended
December 31, January 1,
1995 1995
---------- ----------
(unaudited) (unaudited)
FINANCING ACTIVITIES:
Repayments of long term debt $ (66,288) $ (191,040)
Net Proceeds from the exercise
of common stock options 303 280
Net cash used in -------- --------
financing activities (65,985) (190,760)
Net increase (decrease)in cash
and cash equivalents (575,156) 62,913
Cash and cash equivalents
at beginning of period 2,096,521 2,356,527
--------- ---------
Cash and cash equivalents at
end of period $ 1,521,365 $ 2,419,440
========= =========
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest $ 39,717 $ 35,550
Income taxes 1,300 82,397
See accompanying notes to financial statements.
CIATTI'S, INC. AND SUBSIDIARY
Notes to Financial Statements
(UNAUDITED)
(1) Financial Statements
The balance sheet as of December 31, 1995, the statements
of earnings for the three months and six months ended
December 31, 1995 and January 1, 1995, and the statements of
cash flows for the six months ended December 31, 1995 and
January 1, 1995 have been prepared by the Company without
audit. In the opinion of management, all adjustments (all of
which are normal and recurring in nature) necessary to
present fairly the financial position at December 31, 1995
and results of operations and cash flows activity for the
periods ended December 31, 1995 and January 1, 1995 have been
made. The balance sheet at July 2, 1995 has been taken from
the audited financial statements as of that date. Results of
operations for interim periods are not necessarily indicative
of the full fiscal year.
(2) Net Earnings (loss) Per Share
Net earnings per common and common equivalent share is
computed by dividing the net earnings for the period by the
weighted average number of common and common equivalent shares
outstanding during the period. Common equivalent shares
included in the computation represent shares issuable upon the
assumed exercise of stock options.
(3) Supplemental Disclosure of Cash Flow Information
During the second quarter of fiscal 1995 the Company
completed the sale of the assets at its Milwaukee, Wisconsin
restaurant. The effect of the transaction was as follows:
Increase in cash $ 50,000
Increase in notes receivable 175,000
Reduction of property and equipment (681,327)
Reduction of accumulated depreciation 480,832
Increase in other accrued liabilities (20,000)
-------
Gain on the sale of property and equipment 4,505
During the second quarter of fiscal 1995 the Company closed its
Minneapolis, Minnesota restaurant. The effect of the
transaction is as follows:
Reduction of property and equipment $1,102,917
Reduction of accumulated depreciation (1,102,917)
Item 2. Management's Discussion and Analysis or Plan of Operation
RESULTS OF OPERATIONS
Sales. Sales of $4,463,246 for the second quarter of fiscal
1996 decreased 11.9% from the $5,066,377 for the second quarter
of fiscal 1995. Sales of $8,668,667 for the first six months
of fiscal 1996 decreased 14.4% from $10,126,468 for the first
six months of fiscal 1995. The decrease in sales for the 1996
second quarter and the first six months is mainly attributable
to two factors. First, the Minneapolis, Minnesota restaurant,
which was closed on December 23, 1994, has been closed
throughout fiscal 1996. Second, sales declined at most of the
Company's restaurants due to continued intense competitive
pressure from the expansion of national chains in the Company's
markets. For fiscal 1996, the Company is conducting an
advertising campaign which will use television, direct mail and
billboards. The Company expects the advertising campaign to
slow the sales decreases but the continued competitiveness of
the industry will make sales increases hard to achieve.
The Company opened two Bruegger's Bagel Bakeries during the
second quarter of fiscal 1996. The stores opened in October
and November and contributed $99,973 in sales during the second
quarter of fiscal 1996. The Company has one additional
Bruegger's Bagel Bakery under construction and continues to
search for a fourth location.
Cost of Food and Beverage. Cost of food and beverage as a
percentage of sales decreased to 29.2% for the second quarter
of fiscal 1996 from 31.1% for the same period in fiscal 1995,
and decreased to 29.0% for the first six months of fiscal 1996
compared to 30.6% for the first six months of fiscal 1995. The
decrease is a result of the Company switching to a new food
distributor which had more competitive pricing.
Restaurant Operating Expenses. Labor expense increased to
33.8% of sales for the second quarter of fiscal 1996 from 32.1%
of sales for the same period in fiscal 1995, and increased to
34.2% of sales for the first six months of fiscal 1996 compared
to 32.5% for the same period in fiscal 1995. The increase
during the second quarter and the first six months is mainly
due to the negative effect of decreased sales at mature
restaurants.
Direct and occupancy expense include individual restaurant
general and administrative and advertising and promotion
expenses. Direct and occupancy expense increased to 35.3% of
sales for the second quarter of fiscal 1996 from 29.3% of sales
for the same period in fiscal 1995, and to 35.2% of sales for
the first six months of fiscal 1996 from 30.3% for the first
six months of fiscal 1995. The increase is due to the decreased
sales, an increase in advertising and promotional expense and
preopening expense associated with the opening of the Company's
Bruegger's Bagel Bakeries in Dallas. The Company had
preopening costs of approximately $100,000 relating to its
Bruegger's restaurants during the six months ended December 31,
1995. The first six months of the fiscal 1996 advertising
campaign has raised advertising and promotional expense to 3.6%
of sales compared to 2.7% for the same period in fiscal 1995.
The Company expects the promotional and advertising expense to
remain near four percent for the remainder of fiscal 1996.
RESULTS OF OPERATIONS (continued)
Corporate and Operations Overhead. Corporate and operations
overhead expense increased to 6.1% of sales in fiscal 1996 from
4.9% of sales for the second quarter of fiscal 1995, and
increased to 6.3% of sales for the first six months of fiscal
1996 from 5.2% in fiscal 1995. The increase as a percentage of
sales is mainly due to the decrease in sales at the
restaurants. The Company expects general and administrative
expenses to remain above 6.0% for the rest of fiscal 1996.
Other Income and Expense. The decrease in investment income is
due to the decrease in the amount of funds available for
investment.
Liquidity and Capital Resources
At December 31, 1995 the Company had cash and cash equivalents
of $1,521,365 which is a $575,156 decrease from the cash and
cash equivalents at July 2, 1995. Major influences on cash and
cash equivalents during the first six months of fiscal 1996
include: $462,736 generated from operations, $920,955 spent on
equipment and leasehold improvements and $150,000 invested in
the purchase of preferred stock of Bruegger's Corporation.
The Company has two notes which are payable over the next five
years with a Minneapolis bank. The proceeds from the
borrowings were used to buy fixtures for new restaurants. As
of December 31, 1995 the Company has an outstanding balance on
the notes of $379,013. The interest rate on the credit
agreements range from 1% above the bank's prime rate to 11 1/2%
fixed. The Company has a commitment from a Minneapolis bank to
provide $750,000 in financing for four Bruegger's Bagel Bakery
restaurants. The commitment is contingent on the financial
strength of the Company and can be terminated in the event of
an adverse change in the financial performance of the Company.
On January 5, 1996 the Company borrowed the first $200,000
under the loan commitment.
The Bruegger's development agreement requires the Company to
open four Bruegger's Bagel Bakery restaurants during fiscal
1996. As of December 31, 1995 the Company has two Bruegger's
Bagel Bakery restaurants open and one under construction. The
Company is required to construct five bagel bakeries during
fiscal 1997. The Company does not believe that its funds
generated from operations and current existing financing
commitments will be adequate to cover the construction of the
required additional Bruegger's Bagel Bakery restaurants over
the next twelve months and therefore the Company will have to
obtain additional debt or equity financing. The Company is
exploring alternatives for additional financing.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on November 16,
1995. At the meeting, the Company re-elected L.E. Danford, Phillip
R. Danford and Thomas A. Kelm as directors of the Company.
The Company also ratified the selection by the Board of
Directors of Grant Thornton as the Company's independent auditors
for the fiscal year ending June 30, 1996, by a vote of 558,039
votes for, 0 votes withheld, 0 votes abstained and 0 broker no-
votes.
With respect to the nomination of directors, the following persons
received the following votes:
Votes Votes Broker
Name for Withheld Abstentions Non Votes
L.E. Danford 558,039 0 0 0
Phillip R. Danford 558,039 0 0 0
Thomas A. Kelm 626,214 31,825 0 0
Item 5. Other Information
None
PART II. OTHER INFORMATION (continued)
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
CIATTI'S, INC. AND SUBSIDIARY
(Registrant)
Dated February 9, 1996 Christopher L. Collier
Vice President and Chief Financial Officer
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> DEC-31-1995
<CASH> 1,521,365
<SECURITIES> 0
<RECEIVABLES> 47,267
<ALLOWANCES> 0
<INVENTORY> 171,768
<CURRENT-ASSETS> 2,005,021
<PP&E> 9,559,665
<DEPRECIATION> 5,280,517
<TOTAL-ASSETS> 7,467,976
<CURRENT-LIABILITIES> 2,313,142
<BONDS> 959,127
0
0
<COMMON> 7,330
<OTHER-SE> 4,188,377
<TOTAL-LIABILITY-AND-EQUITY> 7,467,976
<SALES> 8,668,667
<TOTAL-REVENUES> 8,668,667
<CGS> 2,517,150
<TOTAL-COSTS> 6,563,342
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,717
<INCOME-PRETAX> (405,126)
<INCOME-TAX> 0
<INCOME-CONTINUING> (405,126)
<DISCONTINUED> 0
<EXTRAORDINARY> 65,000
<CHANGES> 0
<NET-INCOME> (340,126)
<EPS-PRIMARY> (.46)
<EPS-DILUTED> (.46)
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