4
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 MARCH 31, 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
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 742,814 shares of Common Stock, $.01 par value
per share, outstanding as of April 30, 1996.
CIATTI'S, INC. AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION Page
Number
Item 1. Financial Statements
Consolidated Balance Sheets as of 3,4
March 31, 1996 and July 2, 1995.
Consolidated Statements of Operations for 5
the three months and nine months ended
March 31, 1996 and April 2, 1995.
Consolidated Statements of Cash Flows for the 6,7
nine months ended March 31, 1996 and
April 2, 1995.
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis or
Plan of Operation 9-11
Part II. OTHER INFORMATION 12
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CIATTI'S, INC. AND SUBSIDIARY
Consolidated Balance Sheets
March 31, 1996 and July 2, 1995
March 31, July 2,
ASSETS 1996 1995
--------- ---------
(unaudited) (unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 834,139 $ 2,096,521
Short-term investments - 97,232
Receivables 51,494 36,750
Income tax receivable 80,297 121,157
Inventories 182,872 188,668
Prepaid expenses and
other current assets 209,073 137,951
Current portion of
note receivable 22,824 35,108
--------- ---------
Total current assets 1,380,699 2,713,387
PROPERTY AND EQUIPMENT:
Buildings 610,829 610,829
Equipment 5,959,013 5,378,194
Leasehold improvements 3,306,289 2,634,629
Automobiles 18,021 30,074
--------- ---------
9,894,152 8,653,726
Less accumulated depreciation and
amortization (5,521,653) (4,856,719)
--------- ---------
4,372,499 3,797,007
OTHER ASSETS:
Long-term investment 1,050,000 1,050,000
Note receivable 128,286 123,339
--------- ---------
1,178,286 1,173,339
--------- ---------
$ 6,931,484 $ 7,683,733
========= =========
See accompanying notes to financial statements.
(continued)
CIATTI'S, INC. AND SUBSIDIARY
Consolidated Balance Sheets, continued
March 31, 1996 and July 2, 1995
March 31, July 2,
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
--------- ---------
(unaudited) (unaudited)
Current liabilities:
Current installment of long
term debt $ 179,476 $ 141,188
Current installment of preferred
stock subscription payable 150,000 150,000
Accounts payable 723,361 686,131
Salaries and wages payable 228,975 299,768
Other accrued liabilities 692,242 691,937
--------- ---------
Total current liabilities 1,974,054 1,969,024
Note payable bank, less current
installments 394,387 319,224
Obligations under capital lease,
less current installment 386,040 409,955
Preferred stock subscription payable
less current installment 300,000 450,000
--------- ---------
Total liabilities 3,054,481 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 742,814 shares at
March 31, 1996 and
732,486 at July 2, 1995 7,428 7,325
Additional paid-in capital 4,335,214 4,332,921
Retained earnings (deficit) (465,639) 195,284
--------- ---------
Total shareholders' equity 3,877,003 4,535,530
--------- ---------
$ 6,931,484 $ 7,683,733
========= =========
See accompanying notes to financial statements.
CIATTI'S, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Three months ended Nine months ended
March 31, April 2, March 31, April 2,
1996 1995 1996 1995
--------- --------- --------- ---------
(unaudited) (unaudited) (unaudited) (unaudited)
Sales $ 4,449,351 $ 4,621,116 $ 13,118,018 $14,747,584
Cost of food and beverage 1,340,041 1,395,988 3,857,191 4,496,597
--------- --------- --------- ----------
Gross Profit 3,109,310 3,225,128 9,260,827 10,250,987
Restaurant operating expenses:
Labor and Benefits 1,568,725 1,526,069 4,535,859 4,812,853
Direct and Occupancy 1,618,652 1,385,800 4,666,708 4,454,712
--------- --------- --------- ----------
3,187,377 2,911,869 9,202,567 9,267,565
--------- --------- --------- ----------
Earnings (loss) from
restaurant operations (78,067) 313,259 58,260 983,422
Corporate and operations
overhead 274,817 274,051 822,969 795,710
Earnings (loss) --------- --------- --------- ---------
from operations (352,884) 39,208 (764,709) 187,712
Other income (expense)
Interest expense (24,741) (14,616) (64,458) (50,166)
Investment income 13,399 25,253 49,893 67,148
Other, net 5,680 49,060 15,602 62,854
--------- --------- --------- ---------
Other, net (5,662) 59,697 1,037 79,836
--------- --------- --------- ---------
Earnings (loss) before
income taxes (358,546) 98,905 (763,672) 267,548
Income taxes (benefit) (37,750) 31,000 (102,750) 85,000
--------- --------- --------- ---------
Net earnings (loss) $ (320,796) $ 67,905 $(660,922) $ 182,548
========= ========= ========= =========
Net Earnings (loss)
per share: $ (.43) $ .09 $ (.90) $ .24
========= ========= ========= =========
Weighted average number of
common and common equivalent
shares outstanding during
the period 739,679 767,336 734,950 762,729
See accompanying notes to financial statements.
CIATTI'S, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Nine months ended March 31, 1996 and April 2, 1995
Nine months ended
March 31, April 2,
1996 1995
--------- ---------
(unaudited) (unaudited)
OPERATING ACTIVITIES:
Net Earnings (loss) $ (660,922) $ 182,548
Adjustments to reconcile net
earnings (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 679,950 702,329
Gain on the disposal of equipment - (4,505)
Changes in operating assets and
liabilities:
Accounts receivable (14,744) 13,900
Income tax receivable 40,860 -
Inventories 5,796 43,437
Prepaid expenses and other
current assets (71,122) (3,513)
Accounts payable 37,230 (80,137)
Salaries and wages payable (70,793) (103,018)
Other accrued liabilities 1,457 (31,784)
Other long-term liabilities (1,152) (5,180)
Net cash provided by (used in) -------- --------
operating activities (53,440) 714,077
INVESTING ACTIVITIES:
Payments for purchases of leasehold
improvements and equipment (1,255,442) (50,325)
Proceeds from sale of equipment - 50,000
Receipts on note receivable 7,337 12,354
Payment for preferred stock (150,000) (450,000)
Redemption of held-to-maturity
securities 97,232 -
Net cash used in investing -------- --------
activities $ (1,300,873) $ (437,971)
See accompanying notes to financial statements.
(continued)
CIATTI'S, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows, continued
Nine months ended March 31, 1996 and April 2, 1995
Nine months ended
March 31, April 2,
1996 1995
---------- ----------
(unaudited) (unaudited)
FINANCING ACTIVITIES:
Repayments of long-term debt $ (110,464) (209,547)
Proceeds from long-term debt 200,000
Net Proceeds from the exercise
of common stock options 2,395 1,955
Net cash provided by (used in) -------- --------
financing activities 91,931 (207,592)
Net increase (decrease)in cash
and cash equivalents (1,262,382) 68,514
Cash and cash equivalents
at beginning of period 2,096,521 2,356,527
--------- ---------
Cash and cash equivalents at
end of period $ 834,139 $ 2,425,041
========= =========
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest $ 60,197 $ 50,166
Income taxes 2,550 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 March 31, 1996, the statements
of operations for the three months and nine months ended
March 31, 1996 and April 2, 1995, and the statements of
cash flows for the nine months ended March 31, 1996 and
April 2, 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 March 31, 1996
and results of operations and cash flows activity for
the periods ended March 31, 1996 and April 2, 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 (loss) per common and common equivalent share
is computed by dividing the net earnings (loss) for the
period by the weighted average number of common and common
equivalent shares, when dilutive, 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 $(1,102,918)
Reduction of accumulated depreciation 1,102,918
Item 2. Management's Discussion and Analysis or Plan of
Operation
RESULTS OF OPERATIONS
Sales. Sales of $4,449,351 for the third quarter of fiscal
1996 decreased 3.7% from the $4,621,116 for the third
quarter of fiscal 1995. Sales of $13,118,018 for the first
nine months of fiscal 1996 decreased 11.0% from $14,747,584
for the first nine months of fiscal 1995. The decrease in
sales for the 1996 third quarter was mostly due to continued
competitive pressure from the expansion of national chains
in the Company's Italian restaurant markets. Sales declines
for the first nine months is mainly attributable to two
factors. First, the Minneapolis, Minnesota Ciatti's Italian
restaurant, which was closed on December 23, 1994, has been
closed throughout fiscal 1996. Second, sales declined at
most of the Company's Ciatti's Italian restaurants due to
continued competitive pressure from the expansion of
national chains. For fiscal 1996, the Company is conducting
an advertising campaign which uses television, direct mail
and billboards. The Company expects the advertising campaign
to slow the sales decreases at the Italian restaurants but
the continued competitiveness of the industry will make
sales increases difficult to achieve.
The Company has opened three Bruegger's Bagel Bakeries
during fiscal 1996. The stores opened in October, November
and February and have contributed $330,703 in sales during
the first nine months of fiscal 1996. The Company is
currently negotiating with landlords for a fourth location.
To remain in compliance with the Bruegger's Development
Agreement the fourth location must be built before June 30,
1996.
Cost of Food and Beverage. Cost of food and beverage as a
percentage of sales decreased to 30.1% for the third quarter
of fiscal 1996 from 30.2% for the same period in fiscal
1995, and decreased to 29.4% for the first nine months of
fiscal 1996 compared to 30.5% for the first nine months of
fiscal 1995. The decrease is a result of the Company
switching to a new food distributor which had more
competitive pricing. The fiscal 1996 third quarter decrease
was not as significant as the first two quarters due to a
sharp increase in produce prices.
Restaurant Operating Expenses. Labor expense increased to
35.3% of sales for the third quarter of fiscal 1996 from
33.0% of sales for the same period in fiscal 1995, and
increased to 34.6% of sales for the first nine months of
fiscal 1996 compared to 32.6% for the same period in fiscal
1995. The increase during the third quarter and the first
nine months is mainly due to the negative effect of
decreased sales at the Italian restaurants and high labor
cost associated with the opening of the three Bruegger's
Bagel units.
Direct and occupancy expense includes individual restaurant
general and administrative and advertising and promotion
expenses. Direct and occupancy expense increased to 36.4%
of sales for the third quarter of fiscal 1996 from 30.0% of
sales for the same period in fiscal 1995, and to 35.6% of
sales for the first nine months of fiscal 1996 from 30.2%
for the first nine 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 three Bruegger's Bagel Bakeries
in Dallas.
RESULTS OF OPERATIONS (continued)
The Company had preopening costs of approximately $120,000
relating to its Bruegger's restaurants during the nine
months ended March 31, 1996. The first nine months of the
fiscal 1996 advertising campaign has raised advertising and
promotional expense to 3.5% of sales compared to 2.6% for
the same period in fiscal 1995. The Company expects the
promotional and advertising expense to remain near 3.5% for
the remainder of fiscal 1996.
Corporate and Operations Overhead. Corporate and operations
overhead expense increased to 6.2% of sales in fiscal 1996
from 5.9% of sales for the third quarter of fiscal 1995, and
increased to 6.3% of sales for the first nine months of
fiscal 1996 from 5.4% in fiscal 1995. The increase as a
percentage of sales is mainly due to the decrease in sales.
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. The increase in interest expense is due to
increased long term debt and higher interest rates.
Income Taxes
The income tax benefits recorded during the nine months
ended March 31, 1996 represents the estimated refund of
prior years' alternative minimum taxes, as a result of
carrying back the loss generated during the nine months
ended March 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996 the Company had cash and cash equivalents
of $834,139 which is a $1,262,382 decrease from the cash and
cash equivalents at July 2, 1995. Major influences on cash
and cash equivalents during the first nine months of fiscal
1996 include: $53,440 used in operations, $1,255,442 spent
on equipment and leasehold improvements, $200,000 provided
by long term debt and $150,000 invested in the purchase of
preferred stock of Bruegger's Corporation.
The Company has term notes with a Minneapolis bank that are
payable over the next five years. The proceeds from the
borrowings were used to buy fixtures for new restaurants.
As of March 31, 1996 the Company has an outstanding balance
on the notes of $542,302. The interest rate on the credit
agreements ranges 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 equipment 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. As of March 31, 1996
the Company has borrowed $200,000 under the loan
commitment.
RESULTS OF OPERATIONS (continued)
The Bruegger's Development Agreement requires the Company to
open four Bruegger's Bagel Bakery restaurants during fiscal
1996. As of March 31, 1996 the Company has three Bruegger's
Bagel Bakery restaurants open. 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
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None
(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 May 10, 1996 Christopher L. Collier
Vice President and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 834,139
<SECURITIES> 0
<RECEIVABLES> 131,791
<ALLOWANCES> 0
<INVENTORY> 182,872
<CURRENT-ASSETS> 1,380,699
<PP&E> 9,894,152
<DEPRECIATION> 5,521,653
<TOTAL-ASSETS> 6,931,484
<CURRENT-LIABILITIES> 1,974,054
<BONDS> 1,080,427
0
0
<COMMON> 7,428
<OTHER-SE> 3,877,003
<TOTAL-LIABILITY-AND-EQUITY> 6,931,484
<SALES> 13,118,018
<TOTAL-REVENUES> 13,118,018
<CGS> 3,857,191
<TOTAL-COSTS> 10,025,536
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64,458
<INCOME-PRETAX> (763,672)
<INCOME-TAX> (102,750)
<INCOME-CONTINUING> (660,922)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (660,922)
<EPS-PRIMARY> (.90)
<EPS-DILUTED> (.90)
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