<PAGE>
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 SEPTEMBER 29, 1996.
__ 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 Identification No.)
incorporation of organization)
(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. [X]
The Company had 742,819 shares of Common Stock, $.01 par value per share,
outstanding as of October 30, 1996.
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
--------------------
Consolidated Balance Sheets as of September 29, 1996
and June 30, 1996. 3-4
Consolidated Statements of Operations for the thirteen weeks
ended September 29, 1996 and October 1, 1995. 5
Consolidated Statements of Cash Flows for the thirteen weeks
ended September 29, 1996 and October 1, 1995. 6
Consolidated Notes to Financial Statements 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 8-12
---------------------------------------------------------
PART II. OTHER INFORMATION 13
2
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CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 29, 1996 AND JUNE 30, 1996
ASSETS
SEPTEMBER 29, JUNE 30,
1996 1996
---------- ----------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $726,248 $1,602,936
Receivables 71,811 51,503
Income taxes receivable 165,576 165,576
Inventories 162,484 184,838
Prepaid expenses and other current assets 163,688 179,191
---------- ----------
Total current assets 1,289,807 2,184,044
PROPERTY AND EQUIPMENT
Buildings 610,829 610,829
Equipment 3,439,623 3,371,170
Leasehold improvements 6,287,543 6,232,468
Automobiles 15,058 15,058
---------- ----------
10,353,053 10,229,525
Less accumulated depreciation and amortization (6,009,467) (5,762,061)
---------- ----------
Net property and equipment 4,343,586 4,467,464
OTHER ASSETS
Note receivable, net of reserve - -
---------- ----------
$5,633,393 $6,651,508
---------- ----------
---------- ----------
The accompanying notes are an integral part of these financial statements.
3
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CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 29, 1996 AND JUNE 30, 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
SEPTEMBER 29 JUNE 30,
1996 1996
------------ -----------
(unaudited)
CURRENT LIABILITIES
Current maturities of long-term obligations $175,093 $198,707
Accounts payable 1,000,839 1,311,016
Accrued salaries and wages 245,518 306,848
Other accrued liabilities 689,334 752,764
------------ -----------
Total current liabilities 2,110,784 2,569,335
LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES 867,480 907,286
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized 10,000,000
shares; no shares issued or outstanding - -
Common stock, $.01 par value; authorized 10,000,000
shares; issued and outstand 742,819 shares 7,428 7,428
Additional paid-in capital 4,335,214 4,335,214
Accumulated deficit (1,687,513) (1,167,755)
------------ -----------
2,655,129 3,174,887
------------ -----------
$5,633,393 $6,651,508
------------ -----------
------------ -----------
The accompanying notes are an integral part of these financial statements.
4
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CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED
----------------------------
SEPTEMBER 29, OCTOBER 1,
1996 1995
----------- ----------
(unaudited) (unaudited)
Sales $4,269,487 $4,205,421
Cost of food and beverage 1,293,650 1,214,399
----------- ----------
Gross profit 2,975,837 2,991,022
Restaurant operating expenses
Labor and benefits 1,598,980 1,457,479
Direct and occupancy 1,531,241 1,472,261
----------- ----------
3,130,221 2,929,740
----------- ----------
Earnings (loss) from restaurant operations (154,384) 61,282
General and administrative expenses 352,780 275,608
----------- ----------
Loss from operations (507,164) (214,326)
Other income (expense)
Interest expense (29,177) (22,268)
Investment income 9,908 24,078
Other, net 8,625 4,784
----------- ----------
(10,644) 6,594
----------- ----------
Loss before income taxes (517,808) (207,732)
Income tax expense (benefit) 1,950 (25,000)
----------- ----------
Net loss ($519,758) ($182,732)
----------- ----------
----------- ----------
Net loss per share ($0.70) ($0.25)
----------- ----------
----------- ----------
Weighted average number of shares
outstanding during the period 742,819 732,486
----------- ----------
----------- ----------
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTEEN WEEKS ENDED
----------------------------
SEPTEMBER 29, OCTOBER 1,
1996 1995
---------- -----------
(unaudited) (unaudited)
Operating activities:
Net loss ($519,758) ($182,732)
Adjustment to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 247,406 211,453
Changes in operating assets and liabilities:
Receivables (20,308) (7,272)
Income taxes receivable - 57,199
Inventories 22,354 12,977
Prepaid expenses and other current assets 15,503 (1,154)
Accounts payable (310,177) 39,700
Accrued salaries and wages (61,330) (65,884)
Other accrued liabilities (63,430) (144,755)
---------- -----------
Net cash used in operating activities (689,740) (80,468)
Investing activities:
Payments for purchases of leasehold
improvements and equipment (123,528) (124,533)
---------- -----------
Net cash used in investing activities (123,528) (124,533)
Financing activities:
Repayments of long-term obligations (63,420) (40,237)
---------- -----------
Net cash used in financing activities (63,420) (40,237)
---------- -----------
Net decrease in cash and cash equivalents (876,688) (245,238)
Cash and cash equivalents at beginning of period 1,602,936 2,096,521
---------- -----------
Cash and cash equivalents at end of period $726,248 $1,851,283
---------- -----------
---------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $30,225 $22,268
Income taxes 1,950 -
The accompanying notes are an integral part of these financial statements.
6
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CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - FINANCIAL STATEMENTS
The unaudited consolidated balance sheet as of September 29, 1996 and
the unaudited consolidated statements of operations and cash flows for the
thirteen weeks ended September 29, 1996 and October 1, 1995 have been
prepared by the Company. In the opinion of management, all adjustments (all
of which are normal and recurring in nature) necessary to present fairly the
financial position at September 29, 1996 and the results of operations and
cash flow activity for the periods ended September 29, 1996 and October 1,
1995 have been made. The consolidated balance sheet as of June 30, 1996 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.
NOTE B - NET LOSS PER SHARE
Net loss per share has been computed by dividing the net loss by the
weighted average number of common shares outstanding during the period.
NOTE C - RECENTLY ADOPTED ACCOUNTING STANDARDS
The Company implemented Statement of Financial Accounting Standards
(SFAS) 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," effective July 1, 1996. SFAS 121
establishes guidance for when to recognize and how to measure impairment
losses of long-lived assets and certain identifiable intangibles, and how to
value long-lived assets to be disposed of. The adoption of this Standard did
not have a material effect on the Company's financial position.
Additionally, the Company implemented SFAS 123, "Accounting for
Stock-Based Compensation," which established financial accounting and
reporting standards for stock-based employee compensation plans. This
Statement defines and encourages the use of a fair value based method of
accounting for an employee stock option or similar equity instrument. The
Statement allows the use of the intrinsic value based method of accounting as
prescribed by current existing accounting standards for options issued to
employees. The Company adopted this Standard effective July 1, 1996, and
management has elected to utilize the intrinsic value based method of
accounting for stock-based compensation.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
Sales
- -----
Consolidated sales for the first quarter of fiscal 1997 increased
$64,066, or 1.5%, to $4,269,487 from the first quarter of fiscal 1996 sales
of $4,205,421. This sales increase was a direct result of the four bagel
restaurants now open and operating in the Dallas-Fort Worth, Texas area
contributing $423,599 of sales to the first quarter of fiscal 1997 compared
to no sales during the first quarter of fiscal 1996. The Company has
scheduled another store opening for early in the second quarter of fiscal
1997 and expects to open two to three additional stores during each of the
third and fourth quarters of this fiscal year. The Company is required by
its development agreement to have nine stores open by July 1, 1997 and thirty
stores open by July 1, 2001.
Offsetting the increase in consolidated sales from the Company's bagel
restaurants was a decrease in sales by the Company's Italian and Steakhouse
restaurants. For the first quarter of fiscal 1997, Italian and Steakhouse
restaurant sales were down $359,533, or 8.5%, from the same quarter of the
previous year. This decrease in sales was primarily due to the increased
competition of national chain restaurants in each of the markets in which the
Company's Italian and Steakhouse restaurants operate. The Company expects
competition to intensify and, therefore, most of the Company's restaurants
will continue to face significant pressure to maintain sales levels. In
order to improve the competitiveness of these restaurants, the Company has
undertaken the following measures. First, beginning in the second quarter of
fiscal 1997, the Company has entered into several advertising and promotional
campaigns to help promote sales levels at the Company's Italian and
Steakhouse restaurants. Second, the Company has developed a new menu that
will be introduced to the Italian restaurants during the second quarter of
fiscal 1997. This new menu will focus on the core menu items which are most
popular with customers and will include "platter" portions for family and
group dining in order to create quality and increase value to these customers.
Management intends to focus the Company's expansion resources entirely
on the bagel restaurant concept. The Company does not expect to open any
more Italian or Steakhouse restaurants in the future.
Cost of Food and Beverage
- -------------------------
Food and beverage cost was 30.3% of sales for the first quarter of
fiscal 1997. These costs were up from the 28.9% of sales reported in the
same quarter of fiscal 1996 due to the mix of the Company's business
including a larger percentage of bagel restaurant sales, which have a
slightly higher cost of food and beverage associated with them.
The Company does not expect the cost of food and beverage to increase
significantly in the future. In fact, the Company expects to construct a
commissary in early fiscal 1998 to lower the food and beverage costs
associated with its bagel restaurants and believes the addition of the new
menu at the Company's Italian restaurants will help to lower their cost of
food and beverage.
Labor and Benefits
- ------------------
Labor and benefits costs were 37.5% of sales for the first quarter of
fiscal 1997, an increase from the 34.7% reported in the first quarter of
fiscal 1996. This increase was primarily due to an increase in labor and
benefit costs at the Company's Italian and Steakhouse restaurants caused by
fixed labor and benefit costs being spread across a smaller sales base.
Although the Company does not expect the federally mandated minimum wage
increases which became effective October 1, 1996 to have a significant impact
on the Company's financial results,
8
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additional increases in state or federal minimum wage requirements or changes
in applicable state law with respect to minimum wages for "tipped" employees
may have an adverse impact on the Company.
Direct and Occupancy
- --------------------
Direct and occupancy costs were 35.9% of sales in the first quarter of
fiscal 1997, up from 35.0% of sales reported in the same quarter of fiscal
1996. Direct and occupancy costs at the Company's bagel restaurants were
affected by fixed costs such as rent and depreciation being spread across a
low sales base. As sales at the Company's bagel restaurants increase in the
future, these fixed costs will decrease as a percent of sales.
Also included as part of direct and occupancy costs are preopening costs
related to the start-up of each individual bagel restaurant. During the
first quarter of fiscal 1997, there were no costs relating to the start-up of
the Company's bagel restaurants. In the future, the Company expects the
start-up costs relating to each new bagel restaurant to be approximately
$28,000 to $35,000, adjusted for inflation.
Direct and occupancy costs at the Company's Italian and Steakhouse
restaurants were 32.2% of full service restaurant sales for the first quarter
of fiscal 1997, down from the 35.0% of sales reported in the same quarter of
the previous year. The majority of this decrease was due to a reduction in
advertising expense from 3.8% of full service restaurant sales in the first
quarter of fiscal 1996 to 1.3% of full service restaurant sales in the first
quarter of the fiscal 1997.
The Company expects consolidated advertising costs to increase during
the remainder of fiscal 1997 as it has budgeted approximately 4.0% of sales
for advertising and promotion expenses in order to implement several direct
mailing and local store marketing campaigns.
General and Administrative
- --------------------------
General and administrative costs were 8.3% of sales in the first quarter
of fiscal 1997, up from 6.6% of sales reported during the same quarter of
last year. This increase in general and administrative costs was primarily
due to the Company incurring approximately $49,000 of additional general and
administrative costs in the first quarter of fiscal 1997 relating to
operating the Company's new bagel restaurants, as compared to no costs in the
first quarter of fiscal 1996. The Company does not expect general and
administrative costs to increase significantly as a percent of sales during
the remainder of the fiscal year.
Other Income (Expense) Net
- --------------------------
Other income (expense) decreased to a net expense of $10,644 for the
first quarter of fiscal 1997, down from a net income of $6,594 reported in
the same quarter of last year. This decrease in other income (expense) was
primarily due to the decrease in investment income to $9,908 in the first
quarter of fiscal 1997 from $24,078 in the same quarter of last year as a
result of fewer funds available for investment.
Income Tax Expense (Benefit)
- ----------------------------
The income tax expense for the first quarter of fiscal 1997 was $1,950
as compared to an income tax benefit of $25,000 for the first quarter of
fiscal 1996. The fiscal 1996 tax benefit recorded was limited to the amount
of taxes recoverable from the carryback of losses; there was no tax benefit
recorded for the carryforward of losses generated in the first quarter of
fiscal 1997. The fiscal 1997 tax expense recorded by the Company related to
state franchise tax fees.
As of September 29, 1996, the Company has a $144,000 of alternative
minimum tax credit carryforwards and $1,079,000 of net operating loss
carryforwards. These tax carryforwards may only be
9
<PAGE>
utilized against future earnings and there is no assurance that the Company
will realize these benefits. The utilization of these carryforwards may be
limited if there are significant changes in the ownership of the Company.
Seasonality
- -----------
The Company's highest sales from its Italian and Steakhouse restaurants
have historically occurred during the months of July through December. The
Company is currently unable to determine whether the operation of its bagel
restaurants will result in any change in its seasonality.
Effects of Inflation
- --------------------
Inflationary factors such as increases in food and labor costs directly
affect the Company's operations. Because most of the Company's employees are
paid hourly rates related to federal and state minimum wage and tip credit
laws, changes in these laws may result in an increase in the Company's labor
costs. The Company cannot always effect immediate price increases to offset
higher costs, and no assurance can be given that the Company will be able to
do so in the future.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company had cash and cash equivalents of $726,248 on hand as of
September 29, 1996. This represents a decrease of $876,688 from the
$1,602,936 in cash and cash equivalents reported as of June 30, 1996. Net
cash used in operating activities was $689,740 for the first quarter of
fiscal 1997. In addition to the net loss for the quarter of $519,758, the
Company reduced its accounts payable balance by $310,177 during the first
quarter of fiscal 1997. The decrease in accounts payable was primarily due
to the Company reducing the accounts payable balance for its bagel
restaurants by $215,816 by paying off amounts due for the opening of the
Company's fourth bagel restaurant, which were in accounts payable as of June 30,
1996.
Net cash used in investing activities was $123,528 during the first
quarter of fiscal 1997. This cash was used primarily for purchases of
equipment and leasehold improvements for the Company's fifth bagel restaurant
in the Dallas-Fort Worth, Texas area.
Net cash used in financing activities was $63,420 during the first
quarter of fiscal 1997, reflecting a net repayment of amounts due under the
Company's debt financing.
Bruegger's Bagel Bakery-Registered Trademark- Development Agreement
- -------------------------------------------------------------------
Big D Bagels, Inc. ("Big D"), a wholly-owned subsidiary of Ciatti's,
Inc., entered into a Development Agreement with Bruegger's Franchise
Corporation effective January 1, 1995. This agreement requires Big D to
build 30 Bruegger's Bagel Bakery-Registered Trademark- restaurants by July 1,
2001. During fiscal 1996, four bagel restaurants were built, thus meeting
the initial terms of this agreement. The Company is required to open five
additional bagel restaurants during fiscal 1997. Each new site will cost
approximately $350,000 for capital expenditures. In addition, the Company
intends to construct a commissary in early fiscal 1998, at an estimated cost
of $500,000. Currently, the Company is supplying its bakeries from the
commissary of another Bruegger's franchisee in Austin, Texas. The Company
plans to finance these capital expenditures with its current cash, future
cash generated from operations, proceeds from its rights offering, and
additional debt or equity financing.
10
<PAGE>
Rights Offering
- ---------------
On October 1, 1996, the Company filed a Registration Statement with the
Securities and Exchange Commission with respect to a rights offering of its
common stock to its existing shareholders. In connection with the filing of
the Registration Statement and subsequent communications with Bruegger's
Franchise Corporation asserting certain rights of Bruegger's to consent to
this offering, the Company filed a lawsuit in United States District Court
for the District of Minnesota against Bruegger's Franchise Corporation and
its parent corporation, Quality Dining, Inc. See "Item 1. Legal
Proceedings."
The Company believes that the proceeds from its proposed rights
offering, together with funds from operations and cash and cash equivalents
will be sufficient to enable it to satisfy its working capital and capital
resource needs for the next twelve months. If the Company is unable to
commence the rights offering in a timely manner, it may be necessary for it
to raise additional capital through other means of financing.
11
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On November 8, 1996, Ciatti's, Inc. ("Ciatti's") and its wholly owned
subsidiary, Big D Bagels, Inc. ("Big D Bagels"), filed a lawsuit in United
States District Court for the District of Minnesota against Bruegger's
Franchise Corporation ("Bruegger's") and its parent corporation, Quality
Dining, Inc. In the lawsuit, Ciatti's and Big D Bagels asked for declaratory
and injunctive relief against the defendants with respect to a Development
Agreement between Big D Bagels and Bruegger's for the Dallas-Fort Worth,
Texas area. Under the terms of the Development Agreement, Big D Bagels has
the exclusive right to develop Bruegger's bagel restaurants in the
Dallas-Fort Worth, Texas area.
In October 1996, Ciatti's filed a Registration Statement with the
Securities and Exchange Commission for a Rights Offering to its existing
shareholders. In response to Ciatti's filing of the Registration Statement,
Bruegger's contacted the Company asserting that any sale of securities by
Ciatti's requires the consent of Bruegger's. Ciatti's and Bruegger's have
been unable to agree upon resolution of the matter and the Company filed
declaratory judgment action to seek a judicial determination of the parties'
respective rights.
In light of the lawsuit and its desire to have this mater resolved prior
to commencement of the Rights Offering, Ciatti's announced that it was
postponing the Record Date and the Commencement Date of its Rights Offering.
The Company also announced that it has not set a new record date for the
Rights Offering.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports of Form 8-K
None.
12
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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)
/s/ Phillip R. Danford
Phillip R. Danford
President
/s/ Joseph W. Fesenmaier
-----------------------------
Joseph W. Fesenmaier
Controller
Dated November 8, 1996
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1ST QUARTER
FISCAL 1997 UNAUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000802517
<NAME> CIATTI'S
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-29-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-29-1996
<CASH> 726,248
<SECURITIES> 0
<RECEIVABLES> 237,387
<ALLOWANCES> 0
<INVENTORY> 162,484
<CURRENT-ASSETS> 1,289,807
<PP&E> 10,353,053
<DEPRECIATION> 6,009,467
<TOTAL-ASSETS> 5,633,393
<CURRENT-LIABILITIES> 2,110,784
<BONDS> 0
0
0
<COMMON> 7,428
<OTHER-SE> 2,647,701
<TOTAL-LIABILITY-AND-EQUITY> 5,633,393
<SALES> 4,269,487
<TOTAL-REVENUES> 4,269,487
<CGS> 1,293,650
<TOTAL-COSTS> 3,483,001
<OTHER-EXPENSES> (18,533)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,177
<INCOME-PRETAX> (517,808)
<INCOME-TAX> 1,950
<INCOME-CONTINUING> (519,758)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (519,758)
<EPS-PRIMARY> (0.70)
<EPS-DILUTED> 0
</TABLE>
