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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended June 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Transition period from _____ to _____
COMMISSION FILE NUMBER: 0-16348
CIATTI'S, INC.
(Name of small business issuer in its charter)
MINNESOTA 41-1564262
(State or other jurisdiction of incorporation (I.R.S. Employer
of organization) Identification No.)
5555 WEST 78TH STREET
EDINA, MN 55439
(Address of principal executive offices and zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (612) 941-0108
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value per share
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy of information statements
incorporated by reference in Part III of this Form 10-KSB for any amendment to
this Form 10-KSB. [X]
The Company's sales for its most recent fiscal year were $17,589,187.
On September 15, 1996, the Company had 742,819 shares of common stock, $.01 par
value, outstanding.
The aggregate market value of the shares of voting stock held by non-affiliates
of the Company (persons other than directors and officers) computed at the
average of the NASDAQ closing bid price of $3.75 per share on September 15, 1996
was approximately $1,190,010.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Annual Report to Shareholders for the fiscal year ended June 30,
1996, as incorporated into Part II of this Form 10-KSB. The Company's Proxy
Statement for its 1996 Annual Meeting of Shareholders to be held on November 19,
1996 is incorporated by reference into Part III of this Form 10-KSB.
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CIATTI'S, INC. AND SUBSIDIARY
FORM 10-KSB ANNUAL REPORT
FOR THE YEAR ENDED JUNE 30, 1996
TABLE OF CONTENTS
PART I
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Page
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ITEM 1. Description of Business.................... 3
ITEM 2. Description of Property.................... 10
ITEM 3. Legal Proceedings.......................... 10
ITEM 4. Submission of Matters to a Vote of
Security Holders..................... 10
PART II
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ITEM 5. Market for Common Equity and Related
Stockholder Matters.................. 11
ITEM 6. Management's Discussion and Analysis
or Plan of Operation................. 11
ITEM 7. Financial Statements....................... 11
ITEM 8. Changes In and Disagreements With
Accountants on Accounting and
Financial Disclosure................. 11
PART III
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ITEM 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance With
Section 16(a) if the Exchange Act.... 12
ITEM 10. Executive Compensation..................... 12
ITEM 11. Security Ownership of Certain
Beneficial Owners and Management..... 12
ITEM 12. Certain Relationships and Related
Transactions......................... 12
PART IV
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ITEM 13. Exhibits and Reports on Form 8-K........... 13
SIGNATURES.......................................... 16
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PART I
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ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Ciatti's, Inc. (the "Company"), a Minnesota corporation, owns and operates
full-service restaurants in Minnesota and Wisconsin. As of September 15, 1996,
the Company operates nine restaurants under the name "Ciatti's Italian
Restaurant" and one restaurant under the name "Spurs Steakhouse & Saloon." In
December 1994, the Company, through its wholly-owned subsidiary Big D Bagels,
Inc. ("Big D"), a Minnesota corporation, entered into a Development Agreement
with Bruegger's Franchise Corporation ("Bruegger's") for the development of
Bruegger's Bagel Bakery restaurants in the Dallas-Fort Worth, Texas market.
References in this Form 10-KSB to Bruegger's include Bruegger's Franchise
Corporation and Bruegger's Development Corporation The Company currently owns
and operates four bakeries in the Dallas-Fort Worth metropolitan area and a
fifth bakery is under construction.
The Company does not plan to open any additional Italian or Steakhouse
restaurants. Instead, the Company intends to use its operating skills from its
other restaurant concepts and its available resources to further penetrate its
franchise area and develop additional Bruegger's Bagel Bakery restaurants.
Additionally, the Company intends to lease space for, and construct a commissary
in the Dallas-Fort Worth area to supply its bakeries. Currently, the Company
obtains its dough and other products daily from the commissary of another
franchisee operating Bruegger's Bagel Bakery restaurants in Austin, Texas.
FORWARD LOOKING STATEMENTS
Statements included in this Form 10-KSB that are not historical or current
facts are "forward-looking statements" made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and are
subject to certain risks and uncertainties that could cause actual results to
differ materially. The Company believes its future success will depend in large
part on its ability to expand the number of Bruegger's Bagel Bakery restaurants
that it owns and operates. The Company's ability to successfully open additional
Bruegger's Bagel Bakery restaurants will be affected by facts such as (i) the
Company's ability to locate and negotiate favorable leases for additional
locations, (ii) the ability of the Company to hire, train and retrain skilled
restaurant management and personnel, (iii) the ability of the Company to
generate funds from operations, obtain adequate restaurant financing from their
parties on favorable terms and raise additional working capital when required
and (iv) the competitive environment within the restaurant industry generally
and the bagel market specifically.
RESTAURANT OPERATIONS
The Company currently operates eight Italian restaurants in Minnesota and
one Italian and one Steakhouse restaurant in Wisconsin. The Company's Italian
and Steakhouse restaurants range in size from 6,500 to 9,800 square feet. Each
seats between 70 and 100 customers in the lounge and between 110 and 220
customers in the dining area. The Company's restaurants generally do not include
meeting rooms or banquet facilities although the Company's Madison and Woodbury
restaurants have banquet rooms. Some of the Company's restaurants also offer
outdoor patio dining on a seasonal basis.
During fiscal 1996, the Company opened four Bruegger's Bagel Bakery
restaurants in the Dallas-Forth Worth area. The Company's existing bakeries are
leased for either five or ten years (all with renewal options) and range in size
from 2,130 to 3,000 square feet, each seating between 45 and 50 customers.
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The following table sets forth the opening date and square footage of the
Company's restaurants.
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FULL SERVICE RESTAURANTS:
Approximate
Date Opened Location Square Footage
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September 1984 St. Paul, Minnesota 8,600
February 1985 Madison, Wisconsin 9,800
November 1987 Falcon Heights, Minnesota 7,000
November 1988 Eden Prairie, Minnesota 7,800
June 1989 Burnsville, Minnesota 7,800
February 1990 Maplewood, Minnesota 7,800
November 1990 St. Cloud, Minnesota 6,700
October 1991 Edina, Minnesota 6,500
November 1991 LaCrosse, Wisconsin 7,100
April 1992 Woodbury, Minnesota 7,000
BRUEGGER'S BAGEL BAKERY RESTAURANTS:
Approximate
Date Opened Location Square Footage
----------- -------- --------------
<S> <C> <C>
October 1995 Plano, Texas 3,000
December 1995 Plano, Texas 2,250
February 1996 Dallas, Texas 2,500
June 1996 Fort Worth, Texas 2,130
Under construction Dallas, Texas 2,200
</TABLE>
The Company has established uniform operational standards for its
restaurants, which are maintained by each restaurant's management team in
accordance with the Company's manuals that emphasize quality of ingredients,
food preparation and presentation, maintenance of the restaurant premises and
employee training and conduct. These manuals include an Operations Manual, a
Recipe Manual, a Pre-Opening Manual, a Construction Specifications Manual and a
Furniture, Fixtures and Equipment Specifications Manual. The Company has also
developed a training manual for each position in its Italian restaurants.
The Company's President supervises the operations of all restaurants with
the assistance of a Director of Operations for all Italian and Steakhouse
restaurants, and a Director of Operations for all Bruegger's Bagel Bakery
restaurants. Additionally, a Vice President for Administration, a corporate
Controller, a Director for Purchasing, a Director for Training and a corporate
chef administer their respective areas of responsibility at the corporate
office.
Each restaurant normally employs a general manager and assistant managers.
General managers have primary responsibility for restaurant operations,
including customer relations, food service, cost control, maintenance,
personnel, implementation of Company policies and procedures, and restaurant
profitability. Assistant managers share day-to-day responsibility for
restaurant operations. The Company has a bonus program to compensate its
managers and assistant managers for achieving sales, service and profitability
targets.
Supervisory personnel visit each restaurant an average of one day a week.
During such visits each aspect of the restaurant's operations is scrutinized to
ensure that the restaurant is being operated in conformance with Company
policies and procedures and to monitor customer service.
For its Italian restaurants, the Company periodically prepares and revises
menu items, recipes and lists of approved ingredients. Menu items, recipes and
the ingredients used in preparing them are chosen based upon quality, cost and
customer acceptance. Each restaurant's food and beverage inventories and
supplies are purchased by the general managers directly from suppliers approved
by the Company.
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All supplier invoices are paid at the Company's home office after approval
by the appropriate general manager. The Company believes it has a good working
relationship with its suppliers. The Company limits the number of its suppliers
to take advantage of volume discounts, to achieve better quality control and to
simplify the purchasing process for the general managers. Although the Company
purchases a majority of its food ingredients and restaurant supplies from a
single distributor, which is not uncommon in the restaurant industry, the
Company believes that its food and beverage supplies can be obtained from more
than one supplier if any one supplier is unable to meet the Company's demand or
quality specifications.
The Company maintains centralized financial and accounting controls for its
restaurants. Restaurant personnel are required to report sales and deposit
information to the Company on a daily basis. On a weekly basis, general
managers complete and forward to the Company a food and liquor inventory,
supplier invoices and information with respect to labor hours.
RESTAURANT DEVELOPMENT
Italian and Steakhouse Restaurants.
----------------------------------
The Company concentrated development of full-service restaurants in the
upper Midwest states of Minnesota and Wisconsin. The Company did not open any
additional restaurants in fiscal years 1993-1996, and has no plans to open any
additional Italian or Steakhouse restaurants. The Company intends to expend its
efforts with respect to its existing restaurants on improving the sales and
profitability of these existing restaurants. The Saint Paul restaurant is
located in an urban area. The Falcon Heights, Eden Prairie, Burnsville,
Maplewood, Woodbury and Edina, Minnesota restaurants and the Madison, Wisconsin
restaurant are located in suburban areas. The St. Cloud, Minnesota restaurant
is located in a community of approximately 50,000 residents, 50 miles northwest
of the Minneapolis-Saint Paul metropolitan area. The LaCrosse, Wisconsin
restaurant is in a community of approximately 50,000 residents. The actual cost
of opening Italian and Steakhouse restaurants, including leasehold improvements,
furniture, fixtures, and equipment and other pre-opening costs have varied from
$480,000 to $930,000 for each restaurant.
Bruegger's Bagel Bakery Restaurants.
-----------------------------------
In December 1994, the Company entered into a Development Agreement with
Bruegger's Franchise Corporation. Bruegger's Corporation, which was acquired in
May 1996 by Quality Dining, Inc., has aggressively expanded its franchise system
to most major markets of the country. Bruegger's has indicated that its
objectives are to establish the Bruegger's brand as the leading, most recognized
brand in the bagel industry, to enhance Bruegger's existing position as the
largest chain of fresh bagel bakeries in the United States and to be the leader
in the markets it enters. As of June 30, 1996, Bruegger's, directly or through
franchises, operated in 52 metropolitan markets in 32 states. Since it was
founded in 1983, Bruegger's has experienced 11 consecutive years of systemwide
comparable store sales growth. Bruegger's generated systemwide net sales of
over $150 million, and for the 12 months ended May 1996 (the latest date
available) mature Bruegger's bakeries (open two or more years) were reported to
generate on average approximately $801,000 in net sales.
All franchisees are required to open a contractually specified number of
bakeries in their territory within a specified period of time or they will lose
their territorial franchise rights. As of June 30, 1996, there were 339
Bruegger's Bagel Bakery restaurants open for business, owned and operated by
either Bruegger's or by franchisees. The reported goal of Bruegger's
Corporation is to have 2,000 Bruegger's bakeries systemwide by the end of
October 2000. Although Bruegger's is generally considered the largest bagel
concept in the country, there are several franchise or company-owned systems
with aggressive development plans in direct competition in all areas of the
country.
The Company intends to devote significant resources to the development of
its Bruegger's Bagel Bakery restaurants. This decision to concentrate on
Bruegger's reflects the Company's judgment concerning the potential market for
bagel-based restaurant concepts, the continuing appeal of the Bruegger's format
to customers and the Company's ability to successfully manage its growth. Under
the terms of the Development Agreement between the
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Company and Bruegger's, the Company is required to build 30 Bruegger's Bagel
Bakery restaurants in the Dallas-Fort Worth area by June 30, 2001.
The Company is concentrating its development efforts in the socioeconomic
well-to-do areas of the greater Dallas-Fort Worth area. Experience gained from
other Bruegger's franchises has shown that the typical customer tends to be well
educated and financially well-off. Three bakeries have been opened, and one is
under construction, in the north-central portion of the Dallas area, and one was
opened in the western portion of Fort Worth.
The ability of the Company to open additional bakeries will depend to a
large degree on the availability of suitably sized spaces in desired areas at
economically justifiable terms. Other bagel chains, as well as coffee houses,
are vying for the same locations, thus providing strong competition for space.
The cost of leasehold improvements for the existing bakeries varied from
$150,000 to $300,000 per bakery, depending on the size of the space,
contributions by the lessor, and the condition of the buildings. The Company
has followed its historical practice of purchasing all required furniture,
fixtures and equipment. This cost for the existing bakeries has ranged from
$150,000 to $200,000 for each bakery. Other preopening expenses, including
design services, smallwares, training, and initial inventory has varied from
$28,000 to $35,000 for each bakery.
RESTAURANT CONCEPTS AND FORMATS
Italian Format.
--------------
Since commencing operations, the Company's restaurants have traditionally
had an Italian format. The Company's Italian restaurants serve appetizers,
pizza, soups and salads, sandwiches, pasta, chicken, seafood, bread, and
desserts, together with alcoholic and non-alcoholic beverages. Menu items are
prepared at each restaurant pursuant to the Company's uniform recipes and
ingredient specifications.
The Company has traditionally designed the dining areas and lounges of its
Italian restaurants to convey an atmosphere of casual elegance. The Company has
recently modified or redesigned some of its restaurants to include a more
informal, open kitchen style restaurant. The dining area of each restaurant
features booths and individual tables with either chairs or banquettes. The
Company's restaurants differ in interior design and decor, depending upon the
location and nature of the space. Most restaurants accept reservations for a
limited portion of their dining area. The Company encourages customers waiting
for dining to be seated in the restaurants' lounges, which have full-service
liquor licenses. In most of the Company's restaurants, appetizers and other
menu items are available in the lounge as well as in the restaurant.
The Company believes the future success of its full-service restaurants
depends upon its ability to consistently maintain the standards and procedures
it has established for the operation of its restaurants. Accordingly, the
Company has developed comprehensive uniform management and operations policies
and procedures that are applied on a Company-wide basis and that are implemented
primarily by the general managers of each restaurant. The Company requires that
each restaurant adhere to rigorous standards concerning the quality of
ingredients, preparation of food, maintenance of premises, customer service,
training of personnel and financial controls.
Each Italian restaurant employs a standardized menu with entree prices
ranging from $5.99 to $8.99 at lunch, and $7.99 to $14.99 at dinner. During
fiscal year 1996, food sales comprised approximately 77% and beverage sales
comprised approximately 23% of total sales.
The Company's Italian restaurants are typically open for lunch and dinner
daily during the year, except for Thanksgiving, Christmas Eve and Christmas Day.
Hours of operation may vary depending on local custom and customer traffic.
Menu service is normally available from 11:00 a.m. to 10:00 p.m. (9:00 p.m. on
Sunday). A Sunday brunch is served in some of the Minnesota restaurants from
10:00 a.m. to 2:00 p.m. Each restaurant's
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lounge is typically open from 11:00 a.m. until 12:00 a.m. (10:00 p.m. on
Sundays). In addition to in-restaurant dining, all of the menu items are
available for carry-out. Carry-out sales constitute a small portion of the
Company's total sales.
Steakhouse Format.
-----------------
In 1993, the Company converted its Madison, Wisconsin restaurant into a
Spurs Steakhouse & Saloon. The Company's Steakhouse restaurant has a more
casual atmosphere than the Company's Italian restaurants, with a menu that
features a Texas theme.
Bagel Restaurant Format.
-----------------------
Under the Company's Development Agreement with Bruegger's, the Company is
required to construct 30 bakeries in the Dallas-Fort Worth area by June 30,
2001. Bruegger's Bagel Bakery restaurants specialize in 12 varieties of freshly
baked bagels and branded cream cheeses, as well as their fresh ground, branded
premium "Javahh!" coffee which is brewed every 19 minutes. Bruegger's bagels
are unique because certified bagel masters bake the bagels by kettle-boiling
them in malt and water and then bake them in a stone hearth oven. In addition,
Bruegger's offers deli-style bagel sandwiches, freshly-made soups, and other
food and beverage items. The restaurants are open from approximately 6:30 a.m.
to 7:00 p.m. each day, depending upon location, and offer both carry-out and in-
store dining.
The design and general lay-out of each Bruegger's Bagel Bakery restaurant
is based on plans and guidelines issued by Bruegger's. Bruegger's updated its
plans and designs for all Bruegger's Bagel Bakery restaurants in 1995 and all of
the Company's existing bakeries have been constructed following this new design.
It is anticipated that the new design will be the national standard for a number
of years. The Company's ability to make material changes to such design is
limited and any such change requires the written approval of Bruegger's. The
new design and ambiance is bright and clean looking, using materials to
withstand heavy customer use.
Bruegger's also issues standard plans for furniture, fixtures and equipment
("FF&E"), including standard menu boards and art work. The Company, similarly
to other franchisees of Bruegger's, is required to equip each bakery with such
FF&E. In a number of cases, Bruegger's offers two different manufacturers for
major equipment pieces.
FISCAL YEAR
The Company's fiscal year ends on the Sunday closest to June 30 of each
year. Accordingly, most of the Company's fiscal years are 52 weeks and some are
53 weeks.
SEASONALITY
The Company's highest sales historically have occurred during the period
from 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.
COMPETITION
The restaurant industry is intensely competitive and is affected by changes
in taste and eating habits of the public, local and national economic conditions
affecting spending habits, population and traffic patterns. Menu, price,
service, convenience, location, decor, and atmosphere are all important
competitive factors, with the relative importance of such factors varying among
different segments of the consuming public. By serving high-quality food and
beverages at reasonable prices in pleasant, casual surroundings, the Company
seeks to appeal to a wide range of customers.
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Although the full-service Italian restaurant market segment is highly
fragmented, a few regional and national chains compete directly against the
Company in this market segment. Dardens' concept, The Olive Garden, is
represented in the Company's Minneapolis-Saint Paul and LaCrosse markets. The
Company's Italian and Steakhouse restaurants compete not only with other chain
or locally owned restaurants with similar menus, but also with other full-
service restaurants.
For its Bruegger's Bagel Bakery restaurants, the Company's primary
competitors are several chain bagel operators offering menu items essentially
similar to Bruegger's, all vying for speedy market penetration. For example,
Einstein Bagels and Bagel Boulevard are represented in the Company's territory
as well as a number of local, owner-operated bagel shops which in several cases
have developed a loyal local clientele. In addition, any quick-service or home-
replacement meal restaurants are competing with the Company for breakfast or
lunch customers.
Through the Bruegger's concept, the Company does, however, differentiate
itself from these competitors by providing its customers with bagels baked in
small batches on site throughout the day using fresh, not frozen, dough.
Additionally, by constructing and operating its own commissary to produce and
distribute fresh dough daily, the Company will vertically integrate its
Bruegger's operations. This integration will allow the Company to provide its
Bruegger's customers with a consistently high-quality product and to minimize
transportation and production costs.
ADVERTISING AND PROMOTION
The Company develops and executes annual advertising and promotional
programs customized to each of the markets in which the Company currently
operates. The Company has budgeted 3.75 percent of its projected fiscal 1997
full service restaurant sales for advertising. Under the terms of the Company's
franchise agreement with Bruegger's, the Company is required to spend
approximately four percent of its sales from the bakeries for advertising and
promotion, including advertising and promotions due in connection with
Bruegger's efforts. Due to the small number of Bruegger's Bagel Bakery
restaurants currently existing in the franchise area, the majority of the
Company's efforts in this respect are directed to local store marketing.
Television or other wide coverage advertising will not be economically
justifiable until a larger number of bakeries exists in the Company's territory.
GOVERNMENT REGULATION
Various federal, state and local laws affect the Company's restaurant
business, including laws and regulations relating to health, sanitation,
alcoholic beverage control and safety standards and access for disabled persons.
To date, federal and state environmental regulations have not had a material
effect on the Company's operations. Varied and sometimes stringent requirements
of local government bodies with respect to zoning, building codes, land use and
environmental factors have, in the past, increased, and in the future can be
expected to increase, the cost and time required for developing new restaurants.
In some instances the Company may have to obtain zoning variances and land use
permits for its new restaurants. A significant portion of the Company's Italian
and Steakhouse restaurant business is also derived from the sale of alcoholic
beverages. Any action by an alcoholic beverage control agency to suspend or
revoke a restaurant's liquor license would have an adverse effect on that
restaurant's business. The Company believes that it is operating in compliance
with all material laws and regulations covering its operations.
The Company is also subject to the Fair Labor Standards Act, which covers
such matters as minimum wages, overtime and other working conditions. A
significant portion of the Company's food service personnel are paid at rates
related to the minimum wage, and accordingly increases in the minimum wage
increase the Company's labor cost.
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TRADEMARKS AND LICENSES
The Company has obtained a trademark of the stylized words and design for
"Ciatti's Italian Restaurant," which was renewed in March 1994. The Company
also obtained a trademark for the words and design of "Spurs Steakhouse &
Saloon" in June 1994. Generally, federal registration of a trademark gives the
registrant the exclusive use of the trademark in the United States in connection
with the goods or services associated with the trademark, subject to the common
law rights of any other person who began using the trademark prior to the date
of federal registration. The Company believes that its marks are important to
its business.
Under the terms of the development agreement between the Company and
Bruegger's, the Company, as a franchisee of Bruegger's, has the right to use all
trademarks associated with the Bruegger's bagels franchise in connection with
the operation of its bakeries in the Dallas-Fort Worth area.
"Bruegger's," "Bruegger's Bagel Bakery" and "Javahh!" are trademarks of
Bruegger's Corporation. "Ciatti's Italian Restaurant" and "Spurs Steakhouse &
Saloon" are trademarks of the Company.
EMPLOYEES
As of September 1, 1996, the Company employed approximately 1,000 persons,
including 10 corporate employees, 50 restaurant managers and assistant managers,
and 940 hourly restaurant employees. Hourly employees comprise approximately
94% of the Company's total work force and most work on a part-time basis. Other
than corporate and restaurant management personnel, employees are paid on an
hourly basis. No employees are covered by collective bargaining agreements and
no work stoppages have occurred. The Company considers its employee relations
to be good.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the names and ages of the Company's
Executive Officers, together with all positions and offices held with the
Company by such Executive Officers. Officers are appointed to serve until the
meeting of the Board of Directors following the next Annual Meeting of
Shareholders and until their successors have been elected and have qualified.
<TABLE>
<CAPTION>
Name Age Position
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<S> <C> <C>
Phillip R. Danford 47 President and Director
Barney U. Uhlig 56 Vice President for Administration
and Secretary
</TABLE>
Phillip R. Danford, a co-founder of the Company, has served as President of
the Company since May 1992. Mr. Danford served as Vice President and Chief
Operating Officer from November 1988 until May 1992. Mr. Danford has been a
director of the Company since 1983. From 1982 to 1983, Mr. Danford was General
Manager of the Company's Minneapolis, Minnesota restaurant and developed its
menu, recipes, kitchen layout, and operating procedures. Phillip R. Danford is
the brother of L.E. "Dan" Danford, Jr., Chairman of the Board of Directors of
the Company.
Barney U. Uhlig has been a Vice President of the Company since 1983 and
became its Secretary in November 1985.
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ITEM 2. DESCRIPTION OF PROPERTY
The Company's existing restaurants are located in leased facilities, all of
which the Company believes to be adequate. The Company owns substantially all
of the furniture, fixtures, and equipment in each of its restaurants. Leasehold
improvements paid for by the Company generally will become the property of the
landlord upon expiration or termination of a lease.
The Company's corporate offices are located in Edina, Minnesota, a
Minneapolis suburb. These premises include a test kitchen and a small warehouse
area. The lease currently runs through August 31, 1998, with the Company having
the option to renew the lease for an additional three year term at the then
current market rates. The Company believes this facility will be adequate to
accommodate its administrative needs for the foreseeable future and that it will
be able to renew its existing lease upon satisfactory terms or obtain comparable
space on satisfactory terms.
The Company leases real estate and improvements for its restaurants. The
leases for its Italian restaurants generally provide for an initial term of ten
or twelve years although one restaurant had an initial term of twenty years.
These leases generally have a minimum of two five-year renewal options. Base
rent under the Company's leases varies depending, in part, upon leasehold
allowance funds provided by the lessor. Base rent at some locations also
escalates during the term of the lease. At a few restaurants, the Company also
is required to pay a percentage rate between 4% and 5.5% of sales in excess of
specified amounts. The Company pays all real estate taxes, insurance, utilities
and maintenance expenses for its leased properties.
The Company's leases for its Bruegger's Bagel Bakery restaurants generally
run for either five years or ten years, and have an option to renew for one or
two additional five year terms. The existing leases provide for a set rent for
the primary term in an amount that varies with the location.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
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ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Section entitled "Stock Information" is incorporated herein by
reference from the Company's 1996 Annual Report.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" is incorporated herein by reference from
the Company's 1996 Annual Report.
ITEM 7. FINANCIAL STATEMENTS
The Company's consolidated financial statements and notes thereto and
report of independent certified public accountants thereon which are contained
in the 1996 Annual Report are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
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ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Information required under this item with respect to Directors is set forth
in the Section entitled "Election of Directors" in the Company's 1996 Proxy
Statement and is incorporated herein by reference. A definitive copy of the
Proxy Statement will be filed with the Commission within 120 days of the close
of the fiscal year on June 30, 1996.
Information required under this item with respect to Executive officers is
set forth in the Subsection entitled "Executive Officers of the Company" in Part
I of this Form 10-KSB.
ITEM 10. EXECUTIVE COMPENSATION
Information required under this item is contained in the Section entitled
"Executive Compensation" in the Company's 1996 Proxy Statement and is
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this item is contained in the Section entitled
"Security Ownership of Principal Shareholders and Management" in the Company's
1996 Proxy Statement and is incorporated by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
12
<PAGE>
PART IV
-------
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Form 10-KSB
1. Financial Statements. The following financial statements of
the Company set forth in the Company's 1996 Annual Report are
herein incorporated by reference:
Report of Independent Certified Public Accountants - Grant
Thornton LLP.
Consolidated Balance Sheet as of June 30, 1996.
Consolidated Statements of Operations for the fifty-two weeks
ended June 30, 1996 and July 2, 1995.
Consolidated Statements of Shareholders' Equity for the
fifty-two weeks ended June 30, 1996 and July 2, 1995.
Consolidated Statements of Cash Flows for the fifty-two weeks
ended June 30, 1996 and July 2, 1995.
Notes to the Consolidated Financial Statements for the fifty-
two weeks ended June 30, 1996 and July 2, 1995.
a. Exhibits. Exhibits that cover management contracts or
compensatory plans of arrangements are marked with an
asterisk(*).
Exhibit No. Title
----------- -----
3.1 Articles of Incorporation (7)
3.2 Bylaws (7)
10.1 Lease dated August 31, 1993, as amended
September 1, 1993 between the Company and 850
Limited Partnership, a Minnesota limited
Partnership (St. Paul restaurant)(11)
10.2 Lease dated September 26, 1984, as amended July
1, 1986 between the Company and R&D Joint
Venture (Madison restaurant)(1)
10.2.1 Agreement dated July 1, 1986 between Ciatti's of
Wisconsin, Inc. and C.J. Raymond (Madison
Restaurant)(2)
10.2.2 Amendment to Lease (dated September 26, 1984 as
amended July 1, 1986) dated August 25, 1988
between Ciatti's of Wisconsin, Inc. and C.J.
Raymond (Madison restaurant)(2)
10.3 Lease dated July 24, 1987, between the Company
and Eden Entertainment Associates (Eden Prairie
restaurant)(2)
10.4 Lease dated July 29, 1987, between the Company
and Restaurant Associates (Falcon Heights
restaurant)(3)
13
<PAGE>
10.5 Lease dated December 20, 1988, between the
Company and Ryan Construction Company of
Minnesota, Inc. (Burnsville restaurant)(3)
10.6 Term loan and Credit Agreement between the
Company and Norwest Bank Minnesota, National
Association dated July 30, 1992 (7)
10.6.1 Second Amendment to Term Loan and Credit
Agreement dated December 27, 1993 (11)
10.6.2 Third Amendment to Term Loan and Credit
Agreement dated June 1, 1994 (11)
10.6.3 Fourth Amendment to Term Loan and Credit
Agreement dated March 29, 1996
10.7 Promissory Note dated May 10, 1995, from the
Company to Norwest Equipment Finance, Inc. with
respect to Eden Prairie restaurant (13)
10.8 Lease dated July 11, 1989 between the Company
and Larson-Doran partnership (Maplewood
restaurant)(4)
10.9 Lease dated July 26, 1990, between the Company
and G.R. Herberger's, Inc. (St. Cloud
restaurant)(5)
10.10 Lease dated June 1990 between the Company and
Phoenix Mutual Life Insurance (Corporate
office)(5)
10.10.1 Amendment No. 1 dated March 14, 1995 to June
1990 lease between the Company and Phoenix
Mutual Life Insurance (Corporate office)
10.11 Lease dated April 18, 1991, between the Company
and J.L.P. Associates II of Eden Prairie
(LaCrosse restaurant)(6)
10.11.1 First Amendment dated June 18, 1991, to lease
with respect to LaCrosse restaurant (7)
10.12 Lease dated May 17, 1991, between the Company
and Gabbert and Beck Company (Edina
restaurant)(6)
10.13 Lease dated July 3, 1991, between the Company
and Wooddale Shopping Center (Woodbury
restaurant)(6)
10.14 Shareholder Development Agreement effective as
of January 1, 1995, between Big D Bagels, Inc.
and Bruegger's Franchise Corporation.
10.15* Restated Stock Option Plan, as amended (9)
10.16* 1993 Stock Option Plan (10)
10.17 Promissory Note dated January 15, 1996, from the
Company to Norwest Equipment Finance, Inc. with
respect to Big D Bagels, Inc.
10.18 Promissory Note dated May 31, 1996, from the
Company to Norwest Equipment Finance, Inc. with
respect to Big D Bagels, Inc.
14
<PAGE>
13.1 1996 Annual Report to Shareholders
21.1 The Company has one subsidiary, Big D Bagels,
Inc., a Minnesota corporation, dba Bruegger's
Bagel Bakery
23.1 Consent of Grant Thornton LLP Independent
Certified Public Accountants
24.1 Power of Attorney (included on signature page
hereof)
27.1 Financial Data Schedule
_________________________
(1) Filed as an Exhibit to the Registration Statement on Form S-1, as
amended (Commission File No. 33-8965), effective on December 23, 1986,
and incorporated herein by this reference.
(2) Filed as an exhibit to the July 3, 1988 Form 10-KSB and incorporated
hereby by reference.
(3) Filed as an Exhibit to Post-Effective Amendment No. 1 to Form S-1
Registration Statement dated March 20, 1989 (No. 33-8965).
(4) Filed as an exhibit to the July 2, 1989 Form 10-KSB and incorporated
hereby by reference.
(5) Filed as an exhibit to the July 1, 1990 Form 10-KSB and incorporated
hereby by reference.
(6) Filed as an exhibit to the June 30, 1991 Form 10-KSB and incorporated
hereby by reference.
(7) Filed as an exhibit to the June 28, 1992 Form 10-KSB and incorporated
hereby by reference.
(8) Filed as an exhibit to the June 27, 1993 Form 10-KSB and incorporated
hereby by reference.
(9) Filed as an exhibit to the Form S-8 Registration Statement, File
Number 33-28306 (April 24, 1989).
(10) Filed as an exhibit to the Form S-8 Registration Statement, File
Number 33-76974 (March 28, 1994).
(11) Filed as an exhibit to the July 3, 1994 Form 10-KSB and incorporated
hereby by reference.
(12) Filed as an exhibit to the January 1, 1995 Form 10-QSB and
incorporated hereby by reference.
(13) Filed as an exhibit to the July 2, 1995 Form 10-KSB and incorporated
hereby by reference.
(b) Reports on Form 8-K.
--------------------
The Company filed no reports on Form 8-K during the fourth
quarter.
15
<PAGE>
Exhibit 24.1
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated September 27, 1996 CIATTI'S, INC.
By /s/ Phillip R. Danford
--------------------------------
Phillip R. Danford
President and Director
POWER OF ATTORNEY
-----------------
The undersigned hereby constitute and appoint Phillip R. Danford, our true
and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution for us and in our stead, in any and all capacities, to sign any
or all amendments to this registration statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as such person, hereby ratifying and confirming all that
said attorney-in-fact and agent or his substitute or substitutes may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on September 27,
1996 in the capacities indicated.
/s/ L.E. "Dan" Danford, Jr. Director and Chairman of the Board
--------------------------------
L.E. "Dan" Danford, Jr.
/s/ Phillip R. Danford President and Director
------------------------------- (Principal Executive Officer; Principal
Phillip R. Danford Financial Officer)
/s/ Thomas A. Kelm Director
-------------------------------
Thomas A. Kelm
/s/ Joseph W. Fesenmaier Controller
-------------------------------
Joseph W. Fesenmaier
16
<PAGE>
Exhibit 10.6.3
FOURTH AMENDMENT TO TERM LOAN AND CREDIT AGREEMENT
THIS FOURTH AMENDMENT is made as of the 29 of March, 1996, and is by and between
Ciatti's, Inc. a Minnesota corporation (the "Borrower"), and Norwest Bank
Minnesota, National Association, a national banking association (the "Bank").
REFERENCE IS HEREBY MADE to that certain Term Loan and Credit Agreement dated
as of July 30, 1992, as amended by a First Amendment dated January 27, 1993 and
as amended by a Second Amendment dated December 27, 1993, made between Ciatti's,
Inc., a Delaware corporation ("Ciatti's Delaware"), and the Bank, and as amended
by a Third Amendment dated June 1, 1994, (as amended, the "Credit Agreement"),
made between Ciatti's, Inc. a Minnesota corporation ("Ciatti's Minnesota"), and
the Bank. Capitalized terms not otherwise defined herein shall have the
respective meanings ascribed to them in the Credit Agreement.
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
contained herein, Borrower and the Bank agree as follows:
1. Section 3.3 of the Credit Agreement is hereby amended to read as follows:
Principal only shall be paid in 9 consecutive monthly installments of
$9,074.09 each, beginning April 1, 1996 and on the same day of each month
thereafter until November 1, 1996, plus a final payment on December 1, 1996,
when the entire unpaid principal shall become due and payable, and in
addition, interest is payable monthly, beginning April 1, 1996.
2. Section 8.5 of the Credit Agreement is hereby amended to read as follows:
Permit its Tangible Net Worth to be less than $1,500,000.00 at any time.
3. Section 8.12 of the Credit Agreement is hereby amended to read as follows:
Permit its net loss after taxes (determined in accordance with Generally
Accepted Accounting Principles, consistently applied) to be greater than
$800,000.00 for the fiscal year ending June 28, 1996; provided, however,
that non-cash expenses related to the closing of stores will be added back
to net profit for purposes of the calculation referenced in this Section.
4. Section 8.14 of the Credit Agreement is hereby amended to read as follows:
Permit its ratio of Traditional Cash Flow to current maturities of long-term
debt to be less than 1.0 to 1.0 for the fiscal year ending June 28, 1996.
5. Except as modified by this Fourth Amendment, the Credit Agreement remains
unchanged and in full force and effect.
IN WITNESS WHEREOF, the Borrower and the Bank have executed this Fourth
Amendment as of the date first written above.
CIATTI'S, INC. NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By: /s/ Phillip R. Danford By: /s/ Stephen M. Bianchi
------------------------------- ------------------------------
Its: President Its: Vice President
<PAGE>
[NORWEST EQUIPMENT FINANCE LETTERHEAD] Promissory Note
Exhibit 10.17
For value received, the undersigned, Ciatti's, Inc. & Big D Bagels, Inc. (Co-
Borrowers) hereby promises to pay to the order of Norwest Equipment Finance,
Inc. (the "Lender") at its office in Minneapolis, Minnesota, or at such other
place as may be designated from time to time by the holder hereof, the sum of
$257,928.00 in installments according to the schedule set forth below; provided,
however, that the undersigned and the Lender may agree to any other payment
schedule, in which case any variations shall be set forth in the space provided
for additional provisions. The first payment period shall begin on the 15th day
of the month in which Lender disburses the loan proceeds if disbursement is made
on or before the 15th day of such month, and the first payment period shall
begin on the last day of such month if disbursement is made during the balance
of such month. The first installment shall be payable on the first payment due
date set forth below (which may be the same as the date the first payment period
begins). Subsequent installments shall be payable on the first day of each
payment period beginning after the first payment period. The undersigned agrees
that the date the first payment period begins may be left blank when this Note
is executed and hereby authorized Lender to insert such date based upon the date
the loan proceeds are disbursed.
PAYMENT SCHEDULE: Date first payment period begins: January 15, 1996
First payment due: February 15, 1996
Number of installments: Sixty (60)
Amount of each installment: $4,298.80
Payment period (check one):
[X] Monthly [_] Annually
[_] Quarterly [_] Other-See Additional
[_] Semi-Annually Provisions
Annual interest rate used in computing payment schedule:
10.50%
Principal amount of loan proceeds disbursed: $200,000.00
In addition to installment payments as set forth above, the undersigned agrees
to pay Lender interim interest on the loan proceeds disbursed hereunder from the
date of disbursement to the date the first payment period begins at the annual
interest rate set forth above used in computing the payment schedule. Interim
interest shall be due and payable on the date the first payment period begins.
ADDITIONAL PROVISIONS:
If any installment is not paid when due, then in addition to any other remedy
Lender may have hereunder, Lender may impose and, if imposed, the undersigned
shall pay a late charge of 5% of the amount of the delinquent installment but
in any event not more than permitted by applicable law. Payments thereafter
received shall be applied first to delinquent installments and then to current
installments.
This Note may be prepaid in whole or in part at anytime and from time to time
but only if accompanied by a prepayment premium of 2% of the principal amount
prepaid. Any partial prepayment shall be applied to the last maturing
installment or installments. Upon any prepayment in full, the unearned portion
of the interest will be refunded using the simple interest method.
The following shall constitute an Event of Default hereunder: (a) failure to pay
any installment hereunder when due; (b) the occurrence of an event of default as
defined in any security agreement or mortgage securing this Note; (c) the
commencement of any bankruptcy or insolvency proceedings by or against the
undersigned or any guarantor of this Note; and (d) any indebtedness the
undersigned may now or hereafter owe to Norwest Bank Minnesota, National
Association or any affiliate thereof shall be accelerated following a default
thereunder or, if any such indebtedness is payable on demand, payment thereof
shall be demanded. Upon the occurrence of an Event of Default, Lender may do any
one or more of the following as it may elect: (i) upon written notice to the
undersigned, declare the entire unpaid balance of the Note to be immediately due
and payable, and the same (less unearned interest computed using the simple
interest method as if this Note had been paid in full on the date it became due
and payable) shall thereupon be and become immediately due and payable: (ii)
exercise any one or more of the rights and remedies available to it under any
security agreement or mortgage securing this Note or under any other agreement
or by law.
The undersigned hereby waives presentment, notice of dishonor, and protest. The
undersigned agrees to pay all costs of collection of this Note, including
reasonable attorney's fees. The holder hereof may change the terms of payment
of the Note by extension, renewal or otherwise, and release any security for, or
party to, this Note and such action shall not release any accommodation maker,
endorser, or guarantor from liability on this Note.
Dated December 21, 1995 Ciatti's, Inc.&
----------------- -----------------------------
Co-Borrower: Co-Borrower
Big D Bagels, Inc.
By /s/ Christopher L. Collier By /s/ Christopher L. Collier
-------------------------- --------------------------
Its VP Finance Its VP Finance
------------------------- -------------------------
<PAGE>
[NORWEST EQUIPMENT FINANCE LETTERHEAD] Promissory Note
Exhibit 10.18
For value received, the undersigned, Ciatti's, Inc. & Big D Bagels, Inc.
(Co-Borrowers) hereby promises to pay to the order of Norwest Equipment Finance,
Inc. (the "Lender") at its office in Minneapolis, Minnesota, or at such other
place as may be designated from time to time by the holder hereof, the sum of
$252,843.00 in installments according to the schedule set forth below; provided,
however, that the undersigned and the Lender may agree to any other payment
schedule, in which case any variations shall be set forth in the space provided
for additional provisions. The first payment period shall begin on the 15th day
of the month in which Lender disburses the loan proceeds if disbursement is made
on or before the 15th day of such month, and the first payment shall begin on
the last day of such month if disbursement is made during the balance of such
month. The first installment shall be payable on the first payment due date set
forth below (which may be the same as the date the first payment period begins).
Subsequent installments shall be payable on the first day of each payment period
beginning after the first payment period. The undersigned agrees that the date
the first payment period begins may be left blank when this Note is executed and
hereby authorized Lender to insert such date based upon the date the loan
proceeds are disbursed.
PAYMENT SCHEDULE: Date first payment period begins: May 31, 1996
First payment due: June 30, 1996
Number of installments: Sixty (60)
Amount of each installment: $4,214.05
Payment period (check one):
[X] Monthly [_] Annually
[_] Quarterly [_] Other--See Additional
[_] Semi-Annually Provisions
Annual interest rate used in computing payment schedule:
10.50%
Principal amount of loan proceeds disbursed: $196,058.00
In addition to installment payments as set forth above, the undersigned agrees
to pay Lender interim interest on the loan proceeds disbursed hereunder from the
date of disbursement to the date the first payment period begins at the annual
interest rate set forth above used in computing the payment schedule. Interim
interest shall be due and payable on the date the first payment period begins.
ADDITIONAL PROVISIONS:
If any installment is not paid when due, then in addition to any other remedy
Lender may have hereunder, Lender may impose and, if imposed, the undersigned
shall pay a late charge of 5% of this amount of the delinquent installment but
in any event not more than permitted by applicable law. Payments thereafter
received shall be applied first to delinquent installments and then to current
installments.
This Note may be prepaid in whole or in part at anytime and from time to time
but only if accompanied by a prepayment premium of 2% of the principal amount
prepaid. Any partial prepayment shall be applied to the last maturing
installment or installments. Upon any prepayment in full, the unearned portion
of the interest will be refunded using the simple interest method.
The following shall constitute an Event of Default hereunder: (a) failure to
pay any installment hereunder when due; (b) the occurrence of an event of
default as defined in any security agreement or mortgage securing this Note; (c)
the commencement of any bankruptcy or insolvency proceedings by or against the
undersigned or any guarantor of this Note; and (d) any indebtedness the
undersigned may now or hereafter owe to Norwest Bank Minnesota, National
Association or any affiliate thereof shall be accelerated following a default
thereunder or, if any such indebtedness is payable on demand, payment thereof
shall be demanded. Upon the occurrence of an Event of Default, Lender may do any
one or more of the following as it may elect: (i) upon written notice to the
undersigned, declare the entire unpaid balance of the Note to be immediately due
and payable, and the same (less unearned interest computed using the simple
interest method as if this Note had been paid in full on the date it became due
and payable) shall thereupon be and become immediately due and payable: (ii)
exercise any one or more of the rights and remedies available to it under any
security agreement or mortgage securing this Note or under any other agreement
or by law.
The undersigned hereby waives presentment, notice of dishonor, and protest. The
undersigned agrees to pay all costs of collection of this Note, including
reasonable attorney's fees. The holder hereof may change the terms of payment of
the Note by extension, renewal or otherwise, and release any security for, or
party to, this Note and such action shall not release any accommodation maker,
endorser, or guarantor from liability on this Note.
<PAGE>
Dated April 29, 1996
---------------------------
Co-Borrower:
Big D Bagels, Inc. By: /s/ Christopher L. Collier
------------------------------
Its: V.P. Finance
-----------------------------
Ciatti's, Inc.
- -------------------
Co-Borrower
By: /s/ Christopher L. Collier
------------------------------
Its: V.P. Finance
-----------------------------
<PAGE>
EXHIBIT 13.1
CIATTI'S, INC.
1996 ANNUAL REPORT
<PAGE>
Dear Fellow Shareholders:
Although fiscal 1996 financial results were unrewarding, we believe the Company
has positioned itself for a positive and exciting future with the continued
development of Bruegger's Bagel Bakery restaurants in the Dallas-Fort Worth,
Texas area. The Bruegger's Bagel Bakery franchise is a tremendous opportunity to
be part of one of the fastest growing segments of the quick service restaurant
business.
During the last nine months of fiscal 1996, we opened four Bruegger's Bagel
Bakery restaurants in the Dallas-Fort Worth market. The Company is committed by
our franchise agreement to open twenty-six more Bruegger's Bagel Bakery
restaurants over the next five fiscal years. We expect to exceed the
requirements of this agreement and open stores ahead of schedule as the Dallas-
Fort Worth market has responded favorably to the Bruegger's Bagel Bakery
concept. During fiscal 1997, we plan to construct a commissary which will lower
our food costs and enable us to accelerate our growth.
Although the financial success of our Company is dependent on the growth of our
Bruegger's Bagel Bakery restaurants, we believe the Company's Italian and
Steakhouse restaurants can provide positive cash flows to assist in funding this
new concept. Therefore, for fiscal 1997, we are developing a new menu for the
Company's Italian restaurants. The goal of this menu is to focus on the core
items which are most popular with our customers. We also plan to include larger,
"platter" portions for family and group dining in order to create quality and
increase value to our customers. We plan to introduce the new menu with expanded
local store marketing efforts in order to reach as many customers as possible.
In fiscal 1996, sales were $17,589,187, a decrease of 7.1% from the $18,935,091
reported in fiscal 1995. This decrease in sales was primarily the result of the
following two items. First, the Minneapolis, Minnesota restaurant, which was
closed on December 24, 1994, contributed approximately six months of additional
sales for fiscal 1995. While the closing of this restaurant had a negative
impact on this year's sales levels, we believe the location was not viable in
the long term, and the closing of this restaurant was in the best interest of
the Company. Second, the competition in the dinnerhouse segment of the
restaurant industry continues to intensify as national chains and local
restaurant entrepreneurs keep entering the markets in which our Italian and
Steakhouse restaurants operate.
Along with the decrease in sales in fiscal 1996, the Company also experienced a
net loss of $1,363,039, a significant decline from the net profit of $194,351
reported in fiscal 1995. As mentioned above, increased competition in the
markets in which our Italian and Steakhouse restaurants are located had an
adverse effect on earnings. In addition, the net loss for the year included two
nonrecurring expenses totaling $225,059. These nonrecurring costs include the
2
<PAGE>
establishment of a reserve of $147,368 for the uncollectability of the note
receivable related to the sale of the Milwaukee, Wisconsin restaurant in 1995
and a $77,691 charge for the write-down of assets related to the closing of our
Glendale, Wisconsin restaurant, which occurred on September 8, 1996.
Also included in the net loss for the year were significant costs related to the
development of an infrastructure in the Dallas-Fort Worth area to support the
expansion of the Bruegger's Bagel Bakery concept. We believe, however, that the
start-up expenses incurred with the opening of the Bruegger's Bagel Bakery
restaurants were well spent as the future benefits related to this concept
appear to be very positive.
We wish to thank our customers, employees and shareholders for their continued
support as we look forward to a brighter future.
September 1996
/s/ L.E. Danford, Jr. /s/ Phillip R. Danford
L.E. "Dan" Danford, Jr. Phillip R. Danford
Chairman of the Board President
3
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Fifty-two or fifty-three weeks ended
-------------------------------------------------------------
June 30, July 2, July 3, June 27, June 28,
Statements of Operating Data: 1996 1995 1994 1993 1992
-------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
(53 weeks)
Sales $ 17,589 $ 18,935 $ 22,969 $ 22,359 $ 20,935
Earnings (loss) from restaurant
operations (122) 1,166 1,700 1,008 1,277
Earnings (loss) from operations (1,505) 112 352 (165) 207
Net earnings (loss) $ (1,363) $ 194 $ 310 $ (342) $ 31
======== ======== ======== ======== ========
Net earnings (loss) per common and
common equivalent share $ (1.85) $ .25 $ .40 $ (.42) $ .04
======== ======== ======== ======== ========
Weighted average number of common
common and common equivalent
shares outstanding during the year 736,917 763,226 769,586 805,118 813,315
======== ======== ======== ======== ========
June 30, July 2, July 3, June 27, June 28,
Balance Sheet Data: 1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
Current assets $ 2,184 $ 2,713 $ 2,763 $ 2,308 $ 1,610
Current liabilities 2,569 1,969 2,201 2,219 2,081
Total assets 6,652 7,684 7,206 7,899 8,318
Long-term obligations, less current
maturities 907 1,179 657 1,474 1,679
Other long-term liabilities - - 8 17 27
Shareholders' equity $ 3,175 $ 4,536 $ 4,339 $ 4,189 $ 4,531
</TABLE>
4
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
COMPARISON OF YEAR ENDED JUNE 30, 1996 TO YEAR ENDED JULY 2, 1995
Sales
- -----
Sales for fiscal 1996 decreased $1,345,904, or 7.1%, to $17,589,187 from fiscal
1995 sales of $18,935,091. The 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 addition, the Minneapolis, Minnesota restaurant, which was closed on December
24, 1994, contributed approximately six months of additional sales to fiscal
1995.
Offsetting the decrease in sales by our Italian and Steakhouse restaurants was
the opening of four Bruegger's Bagel Bakery restaurants during fiscal 1996
("Bruegger's" and "Bruegger's Bagel Bakery" are trademarks of Bruegger's
Corporation.). These stores were opened in the Dallas-Fort Worth, Texas area
during the last nine months of fiscal 1996 and have performed up to management's
expectations. The Company is committed by its development agreement to open
twenty-six more Bruegger's Bagel Bakery restaurants in this market over the next
five fiscal years. The Company currently expects to exceed the requirements of
the development agreement as the Dallas-Fort Worth market has responded
positively to the early store openings. The Company does not plan to open any
more Italian or Steakhouse restaurants in the future. Management intends to
focus the Company's expansion resources entirely on the Bruegger's Bagel Bakery
restaurant concept.
Cost of Food and Beverage
- -------------------------
The cost of food and beverage was 29.5% of sales in fiscal 1996. These costs
were down significantly from the 30.5% of sales reported in fiscal 1995 due to
the Company changing its food vendor in order to take advantage of lower
pricing. The Company does not expect the cost of food and beverage to
significantly increase in the future.
Labor and Benefits
- ------------------
Labor and benefit costs were 34.9% of sales in fiscal 1996, an increase from the
33.1% of sales reported in fiscal 1995. This increase in labor and benefit costs
as a percent of sales was primarily due to decreased sales at the Company's
Italian restaurants. In addition, the Company incurred higher labor and benefit
costs as a percentage of sales during the early phase of operating the new
Bruegger's Bagel Bakery restaurants. The Company expects labor and benefit costs
to increase in the future based on the minimum wage increases that will be
effective October 1, 1996.
5
<PAGE>
Direct and Occupancy
- --------------------
Direct and occupancy costs primarily include individual restaurant advertising,
promotion, supplies, utilities, occupancy and depreciation expenses. These costs
were 36.2% of sales in fiscal 1996, an increase from the 30.2% reported last
year. This increase was due to the following three reasons. First, the Company
increased its advertising and promotion costs from 2.3% of sales during fiscal
1995 to 3.6% of sales in fiscal 1996. Second, lower sales levels caused fixed
costs such as occupancy and depreciation to be spread over a smaller sales base,
thus significantly increasing those respective percentages as compared to sales.
Third, the Company incurred significant costs related to the start-up of the
Bruegger's Bagel Bakery restaurants. The Company expects preopening costs
relating to the start-up of bagel bakeries to remain at the current range of
$28,000 to $35,000 for each bakery, adjusted for inflation. The Company is
obligated by its Development Agreement with Bruegger's to spend a minimum of 4%
of sales on advertising and, following its current practice, expects to spend
between 4% and 5% of bakery sales. In addition, the Company expects advertising
and promotional expense to approximate 3.75% of full service restaurant sales
during fiscal 1997.
General and Administrative
- --------------------------
General and administrative costs increased to 7.9% of sales for fiscal 1996, up
from the 5.6% of sales reported in fiscal 1995. This increase was primarily due
to the following two reasons. First, the Company recorded a reserve of $147,368
for the entire balance of an outstanding note receivable related to the closing
of its Milwaukee, Wisconsin, restaurant in fiscal 1995. Second, during the
fourth quarter of 1996, the Company resolved to close its Italian restaurant
located in Glendale, Wisconsin, effective September 8, 1996. Accordingly, the
Company recorded a $77,691 charge during the fourth quarter of 1996 to reduce
the cost of the assets at this location by the excess of the cost over the
accumulated depreciation and amortization. Management does not foresee any
additional material costs to be incurred in relation to either of these items.
Other Income (Expense) Net
- --------------------------
Other income (expense) decreased to a net expense of $17,601 in fiscal 1996 from
income of $87,854 in fiscal 1995. The Company's interest expense increased to
$92,634 in fiscal 1996 from $68,295 in fiscal 1995 as a result of higher debt in
1996 due primarily to the construction of the Company's Bruegger's Bagel Bakery
restaurants in the Dallas-Fort Worth area. The Company's investment income
decreased to $59,526 in fiscal 1996 from $77,469 in fiscal 1995 primarily as a
result of fewer funds available for investment. In addition, other income
decreased to $15,507 in fiscal 1996 from $78,680 in 1995 as 1995 included a gain
of $55,000 from the closure of the Company's Minneapolis, Minnesota restaurant.
6
<PAGE>
Income Tax Expense (Benefit)
- ----------------------------
The income tax benefit for fiscal 1996 was $160,000 as compared to income tax
expense of $6,000 in fiscal 1995. The income tax benefit recorded was limited to
the amount of taxes recoverable from a carryback of the current year loss; there
was no tax benefit recorded for the effect of the carryforward of losses
generated in fiscal 1996. As of June 30, 1996, the Company has $144,000 of
alternative minimum tax credit carryforwards and $559,000 of net operating loss
carryforwards. These tax carryforwards may only be utilized against future
earnings and there can be 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 will 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.
COMPARISON OF YEAR ENDED JULY 2, 1995 TO YEAR ENDED JULY 3, 1994
Sales
- -----
Sales for fiscal 1995 decreased $4,033,495, or 17.6%, to $18,935,091 from fiscal
1994 sales of $22,968,586. The sales decrease was mainly due to four factors.
First, the Milwaukee, Wisconsin restaurant, which was opened during fiscal 1994,
was sold in early fiscal 1995. Second, the Minneapolis, Minnesota restaurant was
closed on December 24, 1994. Third, fiscal 1994 had 53 weeks while fiscal 1995
had only 52 weeks. Fourth, in each of the Company's markets, there continued to
be an influx of national chains that greatly increased the dining options for
the Company's customers, adversely affecting customer traffic.
Cost of Food and Beverage
- -------------------------
Cost of food and beverage as a percentage of sales was 30.5% in fiscal 1995,
which represented an increase from the 29.8% in fiscal 1994. The increase was
mainly due to price increases by the Company's suppliers without a corresponding
menu price increase. Also, the Company experienced an increase in produce prices
due to flooding in California.
7
<PAGE>
Labor and Benefits
- ------------------
Labor and benefits as a percentage of sales were 33.1% for fiscal 1995, which
was an increase from 32.1% in fiscal 1994. The increase was due primarily to the
effect of decreased sales at the Company's restaurants.
Direct and Occupancy
- --------------------
Direct and occupancy costs as a percentage of sales decreased to 30.2% in fiscal
1995 from 30.6% in fiscal 1994. The decrease was mainly due to two factors.
First, during the third quarter of fiscal 1994, there was a charge of $111,265
for preopening costs associated with the conversion of the Company's Madison,
Wisconsin restaurant into a Spurs Steakhouse & Saloon. Second, the Company
decreased its spending for advertising to 2.3% of sales for fiscal 1995 from
3.9% during fiscal 1994.
General and Administrative
- --------------------------
General and administrative expenses decreased to 5.6% of sales in fiscal 1995
from 5.9% in fiscal 1994. There were non-recurring charges in fiscal 1994 of
$315,579 relating to the write-down of certain assets, partially offset by the
addition of a Corporate Chef to the management team and start-up costs
associated with the Bruegger's franchise.
Other Income (Expense)
- ----------------------
Investment income increased during fiscal 1995 from fiscal 1994 due to an
increase in funds available to invest and to slightly higher interest rates.
Interest expense decreased due to the removal of the capital lease obligation
associated with the Indianapolis, Indiana sublease and the reduction of the
Company's bank debt through principal payments. Other income in fiscal 1994
included a gain of $98,918 from the release of the Indianapolis, Indiana lease
obligation.
Income Tax Expense
- ------------------
Income tax expense in fiscal 1995 was $6,000 as compared to income tax expense
of $134,000 in fiscal 1994. Income tax expense in 1995 reflected the benefit of
alternative minimum tax credit carryforwards being utilized.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company had cash and cash equivalents of $1,602,936 on hand as of June 30,
1996, which represents a decrease of $493,585 from the $2,096,521 in cash and
cash equivalents as of July 2, 1995. The major factor contributing to this
decrease was a decrease in cash provided by operations of $405,443.
8
<PAGE>
Net cash used in investing activities was consistent in both fiscal 1996 and
1995. In fiscal 1996, $1,459,233 of cash was used to purchase leasehold
improvements and equipment. This amount was considerably higher than the
$454,141 of cash spent in fiscal 1995 due to the construction of the new
Bruegger's Bagel Bakery sites. Offsetting these expenditures in the current
fiscal year was $600,000 received from Bruegger's Franchise Corporation. The
$600,000 was for the repurchase of 6,000 shares of Bruegger's Corporation
convertible preferred stock that was purchased by the Company during fiscal 1995
and 1996.
Net cash provided by financing activities during fiscal 1996 increased by
$172,966 over fiscal 1995. This increase was due to the Company increasing its
debt from financial institutions during fiscal 1996. The Company entered into
two new loan agreements during the current fiscal year. These loans were used to
purchase equipment and fixtures for the Company's new Bruegger's Bagel Bakery
locations. As of June 30, 1996, the Company had an outstanding balance on all
its outstanding term loans of $696,038.
Bruegger's Bagel Bakery Franchise 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 restaurants over six years. During fiscal 1996, four Bruegger's
Bagel Bakery restaurants were built, thus meeting the initial terms of this
agreement. The Company is required to open five additional Bruegger's Bagel
Bakery restaurants during fiscal 1997. Each new site will require approximately
$350,000 for capital expenditures. In addition, the Company intends to construct
a commissary in late fiscal 1997 or 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, and debt or equity financing.
Forward Looking Statements
- --------------------------
Statements included in this Annual Report that are not historical or
current facts are "forward-looking statements" made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and are
subject to certain risks and uncertainties that could cause actual results to
differ materially. The Company believes its future success will depend in large
part on its ability to expand the number of Bruegger's Bagel Bakery restaurants
that it owns and operates. The Company's ability to successfully open additional
Bruegger's Bagel Bakery restaurants will be affected by facts such as (i) the
Company's ability to locate and negotiate favorable leases for additional
locations, (ii) the ability of the Company to hire, train and retrain skilled
restaurant management and personnel, (iii) the ability of the Company to
generate funds from operations, obtain adequate restaurant financing from their
parties on favorable terms and raise additional working capital when required
and (iv) the competitive environment within the restaurant industry generally
and the bagel market specifically.
9
<PAGE>
[GRANT THORNTON LLP LETTERHEAD]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
Board of Directors and Shareholders
Ciatti's, Inc.
We have audited the accompanying consolidated balance sheet of
Ciatti's, Inc. and Subsidiary as of June 30, 1996, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the fifty-two
week periods ended June 30, 1996 and July 2, 1995. 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 consolidated financial position of
Ciatti's, Inc. and Subsidiary as of June 30, 1996, and the results of their
consolidated operations and their cash flows for the fifty-two week periods
ended June 30, 1996 and July 2, 1995, in conformity with generally accepted
accounting principles.
/s/ Grant Thornton LLP
Minneapolis, Minnesota
August 14, 1996
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash and cash equivalents (notes A and B) $ 1,602,936
Receivables (note B) 51,503
Income taxes receivable 165,576
Inventories (notes A and B) 184,838
Prepaid expenses and other current assets 179,191
-----------
Total current assets 2,184,044
PROPERTY AND EQUIPMENT (notes A, B, D and G)
Buildings 610,829
Leasehold improvements 3,432,203
Equipment 6,171,435
Automobiles 15,058
-----------
10,229,525
Less accumulated depreciation and amortization (5,762,061)
-----------
4,467,464
OTHER ASSETS
Note receivable, net of reserve (note G) -
-----------
$ 6,651,508
===========
</TABLE>
The accompanying notes are an integral part of these statements.
11
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C>
CURRENT LIABILITIES
Current maturities of long-term obligations (note B) $ 198,707
Accounts payable 1,311,016
Accrued salaries and wages 306,848
Other accrued liabilities (note A) 752,764
-----------
Total current liabilities 2,569,335
LONG-TERM OBLIGATIONS, less current maturities (note B) 907,286
COMMITMENTS AND CONTINGENCIES (notes D and H) -
SHAREHOLDERS' EQUITY (note E)
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 outstanding 742,819 shares 7,428
Additional paid-in capital 4,335,214
Accumulated deficit (1,167,755)
-----------
3,174,887
-----------
$ 6,651,508
===========
</TABLE>
The accompanying notes are an integral part of these statements.
12
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FIFTY-TWO WEEKS ENDED JUNE 30, 1996 AND JULY 2, 1995
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Sales $17,589,187 $18,935,091
Cost of food and beverage 5,191,186 5,781,030
----------- -----------
Gross profit 12,398,001 13,154,061
Restaurant operating expenses
Labor and benefits 6,144,829 6,265,433
Direct and occupancy 6,375,300 5,722,130
----------- -----------
12,520,129 11,987,563
----------- -----------
Earnings (loss) from restaurant operations (122,128) 1,166,498
General and administrative expenses (note G) 1,383,310 1,054,001
----------- -----------
Earnings (loss) from operations (1,505,438) 112,497
Other income (expense)
Interest expense (92,634) (68,295)
Investment income 59,526 77,469
Other, net 15,507 78,680
----------- -----------
(17,601) 87,854
----------- -----------
Earnings (loss) before income taxes (1,523,039) 200,351
Income tax expense (benefit) (note C) (160,000) 6,000
----------- -----------
Net earnings (loss) $(1,363,039) $ 194,351
=========== ===========
Net earnings (loss) per common and common
equivalent share $ (1.85) $ .25
=========== ===========
Weighted average number of common and common
equivalent shares outstanding during the year (note A) 736,917 763,226
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
13
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE FIFTY-TWO WEEKS ENDED JUNE 30, 1996 AND JULY 2, 1995
<TABLE>
<CAPTION>
Common stock Retained
--------------- Additional earnings
Par paid-in (accumulated
Shares value capital deficit) Total
------- ------ ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at July 3, 1994 725,118 $7,251 $4,330,638 $ 933 $ 4,338,822
Common stock issued pursuant
to exercise of stock options,
net of 7,295 shares redeemed 7,368 74 2,283 - 2,357
Net earnings - - - 194,351 194,351
------- ------ ---------- ----------- -----------
Balance at July 2, 1995 732,486 7,325 4,332,921 195,284 4,535,530
Common stock issued pursuant
to exercise of stock options,
net of 4,202 shares redeemed 10,333 103 2,293 - 2,396
Net loss - - - (1,363,039) (1,363,039)
------- ------ ---------- ----------- -----------
Balance at June 30, 1996 742,819 $7,428 $4,335,214 $(1,167,755) $ 3,174,887
======= ====== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
14
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FIFTY-TWO WEEKS ENDED JUNE 30, 1996 AND JULY 2, 1995
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Operating activities:
Net earnings (loss) $(1,363,039) $ 194,351
Adjustment to reconcile net earnings (loss) to
cash provided by operating activities:
Reserve for note receivable 147,368 -
Depreciation and amortization 920,358 899,466
Gain on disposal of equipment - (59,505)
Impairment of assets write-down 77,691 -
Changes in operating assets and liabilities:
Receivables (14,753) 18,395
Income taxes receivable (44,419) (121,157)
Inventories 3,830 26,979
Prepaid expenses and other current assets (41,240) (2,470)
Accounts payable 415,612 (283,549)
Salaries and wages payable 7,080 (33,299)
Other accrued liabilities 60,827 (64,453)
----------- ----------
Net cash provided by operating activities 169,315 574,758
Investing activities:
Payments for purchases of leasehold improvements
and equipment (1,459,233) (454,141)
Net proceeds from sale of leasehold improvements and
equipment - 85,000
Receipts on note receivable 11,079 16,553
Payment for preferred stock subscription (150,000) (450,000)
Refund of preferred stock subscription payments 600,000 -
Purchase of held-to-maturity securities - (488,232)
Redemption of held-to-maturity securities 97,232 391,000
----------- ----------
Net cash used in investing activities (900,922) (899,820)
Financing activities:
Proceeds from the exercise of common stock options 2,396 2,357
Proceeds from long-term obligations 396,058 300,000
Repayments of long-term obligations (160,432) (237,301)
----------- ----------
Net cash provided by financing activities 238,022 65,056
----------- ----------
Net decrease in cash and cash equivalents (493,585) (260,006)
Cash and cash equivalents at beginning of year 2,096,521 2,356,527
----------- ----------
Cash and cash equivalents at end of year $ 1,602,936 $2,096,521
=========== ==========
</TABLE>
15
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE FIFTY-TWO WEEKS ENDED JUNE 30, 1996 AND JULY 2, 1995
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $89,040 $ 66,445
Income taxes 3,750 109,485
</TABLE>
During 1996 and 1995, the Company received $208,278 and $425,755, on the sale of
mutual funds classified as cash equivalents.
Supplemental schedule of noncash investing activities:
During 1996, the Company acquired $209,273 of leasehold improvements that were
included as part of accounts payable as of June 30, 1996.
During 1995, the Company issued a $600,000 note payable in exchange for the
preferred stock of another company. During 1996, the remaining $450,000 of
this note payable was canceled in conjunction with the cancellation of the
preferred stock subscription agreement (note H).
During 1995, the Company sold certain leasehold improvements and equipment in
connection with the closure of its Milwaukee, Wisconsin, restaurant. The
effect of the transaction was as follows:
<TABLE>
<CAPTION>
<S> <C>
Increase in cash $ 50,000
Increase in notes receivable 175,000
Reduction of leasehold improvements and equipment (681,327)
Reduction of accumulated depreciation and amortization 480,832
Increase in other accrued liabilities (20,000)
---------
Gain on sale $ 4,505
=========
</TABLE>
During 1995, the Company closed its Minneapolis, Minnesota, restaurant. The
effect of the transaction was as follows:
<TABLE>
<CAPTION>
<S> <C>
Increase in cash $ 55,000
Reduction of property and equipment (1,102,918)
Reduction of accumulated depreciation and amortization 1,102,918
-----------
Gain on closure $ 55,000
===========
</TABLE>
The accompanying notes are an integral part of these statements.
16
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FOR THE FIFTY-TWO WEEKS ENDED JUNE 30, 1996 AND JULY 2, 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of Ciatti's, Inc. and
its wholly-owned subsidiary, Big D Bagels, Inc. ("Big D"), collectively referred
to as "the Company." Significant intercompany accounts and transactions have
been eliminated.
2. Nature of Business
------------------
Ciatti's, Inc. owns and operates ten restaurants, located in Minnesota and
Wisconsin, featuring Italian cuisine and one steakhouse in Madison, Wisconsin.
Big D was incorporated in November 1994 and owns and operates four Bruegger's
Bagel Bakery restaurants in the Dallas-Fort Worth, Texas region (note H).
3. Cash and Cash Equivalents
-------------------------
The Company considers marketable securities purchased with an original maturity
of three months or less to be cash equivalents.
The Company has approximately $591,000 in cash at one bank at June 30, 1996.
Cash equivalents consist of money market funds. The cost of these funds
approximate fair value, and there are no unrealized gains or losses. Cash and
cash equivalents consist of the following at June 30, 1996:
Cash $ 779,012
Money market funds 823,924
-------
$1,602,936
=========
4. Inventories
-----------
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method.
17
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED
FOR THE FIFTY-TWO WEEKS ENDED JUNE 30, 1996 AND JULY 2, 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
5. Property and Equipment
----------------------
Property and equipment are stated at cost, or, in the case of capitalized
leases, at the present value of the future minimum lease payments at inception
of the lease. If facts or changes in circumstances indicate that an impairment
of property and equipment may have occurred, management reviews all evidence
available to determine whether the carrying value of property and equipment
should be reduced (see note G).
Depreciation and amortization of property and equipment are provided on the
straight-line method over the following useful lives:
Years
------
Buildings 20
Leasehold improvements 5 - 10
Equipment 3 - 10
Automobiles 3
Accelerated depreciation methods are used for tax purposes.
6. Employee Benefits
-----------------
The Company acts as a self-insurer for employee medical plans. Specific stop
loss insurance coverage is maintained for catastrophic claims. Losses and
claims are recorded based upon actual and estimated losses and claims
outstanding.
7. Preopening Costs
----------------
Expenses related to the opening of new restaurants and the hiring and training
of personnel, are expensed as incurred.
8. Advertising and Promotion Costs
-------------------------------
The Company expenses advertising and promotion costs when incurred. Advertising
and promotion costs were $640,233 and $405,586 for the fiscal years ended June
30, 1996 and July 2, 1995.
18
<PAGE>
Ciatti's, Inc. and Subsidiary
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- CONTINUED
For the fifty-two weeks ended June 30, 1996 and July 2, 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
9. Net Earnings (Loss) Per Common and Common Equivalent Share
----------------------------------------------------------
Net earnings (loss) per common and common equivalent share have been computed
by dividing net earnings (loss) by the weighted average number of common and
common equivalent shares outstanding during the year. Common equivalent shares
included in the computation represent shares issuable upon the assumed exercise
of stock options, when dilutive.
10. Fiscal Year
-----------
The Company's fiscal year is a fifty-two, fifty-three week year which ends on
the Sunday closest to the last day in June. Interim quarters end on the Sunday
closest to the last day of September, December and March.
11. Future Effect of Recently Issued Accounting Pronouncements
----------------------------------------------------------
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standard (SFAS) 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which
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. SFAS 121 is effective for fiscal years
beginning after December 15, 1995. Management believes the adoption of this
Statement will not have a material effect on the Company's financial position
or results of operations.
Additionally, the FASB has issued SFAS 123, "Accounting for Stock-Based
Compensation," which establishes 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; however, there is a
requirement to disclose the pro forma net income as if the fair value based
method had been used. SFAS 123 is effective for fiscal years beginning after
December 15, 1995. The disclosures must include awards granted in fiscal years
beginning after December 15, 1994.
19
<PAGE>
Ciatti's, Inc. and Subsidiary
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- CONTINUED
For the fifty-two weeks ended June 30, 1996 and July 2, 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Management has determined that the Company will utilize the intrinsic value
based method of accounting for stock-based compensation and believes the
adoption of the standard will not have a material effect on the Company's
financial position or results of operations.
12. Use of Estimates
----------------
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE B - LONG-TERM OBLIGATIONS
Long-term obligations at June 30, 1996 consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Note payable to a bank, collateralized by the fixed assets of all Minnesota
restaurants and all cash held by the Company at the bank. Interest on the
note is calculated at 1.0% above the bank's prime rate (effective rate of
9.25%). Payable in monthly installments through December 1996. $ 54,444
Note payable to a financial institution, collateralized by the inventory,
receivables and property and equipment of the Company. Interest on
the note is 11.5%. Payable in monthly installments through December 2000. 258,503
Notes payable to a financial institution, collateralized by certain
equipment and fixtures of Big D. Interest on the notes is 10.5%.
Payable in monthly installments through May 2001. 383,091
---------
696,038
Obligation under capital lease (note D) 409,955
---------
1,105,993
Less current maturities 198,707
---------
$ 907,286
=========
</TABLE>
20
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED
FOR THE FIFTY-TWO WEEKS ENDED JUNE 30, 1996 AND JULY 2, 1995
NOTE B - LONG-TERM OBLIGATIONS - Continued
Aggregate maturities of long-term obligations, exclusive of amounts due under
capital lease included in lease commitments, are as follows:
<TABLE>
<CAPTION>
Fiscal year ending
------------------
<S> <C>
1997 $166,246
1998 124,637
1999 138,950
2000 154,910
2001 111,295
--------
$696,038
========
</TABLE>
Certain notes payable include requirements to maintain certain restrictive
covenants, including, among other things, restrictions on dividends,
indebtedness, limitations on the purchase of property and equipment, as well as
the maintenance of certain financial statement ratios. The Company was in
compliance with or had obtained waivers for these covenants as of June 30,
1996.
Based on the borrowing rates currently available to the Company for long-term
obligations with similar terms and average maturities, management believes the
fair value of these obligations, exclusive of the capital lease, approximates
the carrying value at June 30, 1996.
NOTE C - INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
1996 1995
--------- ------
<S> <C> <C>
Current
Federal $(167,000) $ -
State 7,000 6,000
Deferred - -
--------- ------
$(160,000) $6,000
========= ======
</TABLE>
21
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED
FOR THE FIFTY-TWO WEEKS ENDED JUNE 30, 1996 AND JULY 2, 1995
NOTE C - INCOME TAXES - Continued
The actual tax expense (benefit) differs from the "expected" tax expense
(benefit) computed by applying the U.S. corporate income tax rate of 34% to
earnings (loss) before income taxes as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Computed "expected" tax expense $(517,833) $ 68,119
Effect of Federal alternative minimum tax - (71,514)
State income taxes, net of Federal tax benefit 4,637 3,317
Change in valuation allowance 355,000 -
Other (1,804) 6,078
--------- --------
Actual income tax expense (benefit) $(160,000) $ 6,000
========= ========
</TABLE>
At June 30, 1996, the Company has $144,000 of Federal and state alternative
minimum tax credit carryforwards available to reduce income taxes payable in
future years. These credits are available for carryforward until fully
utilized. In addition, the Company has other tax credit carryforwards of
$57,000 which expire in 1998. The Company has approximately $599,000 in
Federal net operating loss carryforwards which expire through the year 2011.
The components of deferred tax assets (liabilities) were comprised of the
following:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax assets:
Tax credit carryforwards $201,000 $265,000
Net operating loss carryforwards 228,000 5,000
Gift certificates 168,000 161,000
Impairment of assets write-down 31,000 -
Reserve for note receivable 59,000 -
Other 83,000 79,000
-------- --------
Total deferred tax assets 770,000 510,000
</TABLE>
22
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED
FOR THE FIFTY-TWO WEEKS ENDED JUNE 30, 1996 AND JULY 2, 1995
NOTE C - INCOME TAXES - Continued
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Depreciation $ (57,000) $(163,000)
Other (68,000) (57,000)
--------- ---------
Total deferred tax liabilities (125,000) (220,000)
--------- ---------
Net deferred tax asset before valuation allowance 645,000 290,000
Valuation allowance (645,000) (290,000)
--------- ---------
Net deferred tax asset $ - $ -
========= =========
</TABLE>
NOTE D - LEASES
The Company conducts its operations from leased facilities. The lease
agreements are noncancelable, include various renewal options and expire on
various dates through 2008. The following is an analysis of property under
capital lease as of June 30, 1996:
Building $610,829
Less accumulated depreciation 351,243
-------
$259,586
========
23
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED
FOR THE FIFTY-TWO WEEKS ENDED JUNE 30, 1996 AND JULY 2, 1995
NOTE D - LEASES - Continued
Future minimum lease payments under noncancelable operating leases and the
present value of future minimum capital lease payments as of June 30, 1996 are:
<TABLE>
<CAPTION>
Facility Capital Total
Fiscal year ending rentals leases rentals
- ------------------ --------- -------- ---------
<S> <C> <C> <C>
1997 $1,488,239 $ 70,062 $1,558,301
1998 1,392,639 70,062 1,462,701
1999 1,233,870 70,062 1,303,932
2000 1,001,747 70,062 1,071,809
2001 875,758 70,062 945,820
2002 and thereafter 2,752,818 251,055 3,003,873
---------- -------- ----------
Total minimum lease payments $8,745,071 601,365 $9,346,436
========== ==========
Less amount representing
interest imputed at a rate 191,410
of approximately 15% --------
Present value of net minimum
capital lease payments $409,955
========
Rent expense under noncancelable operating leases is summarized as follows:
1996 1995
---------- ----------
Minimum rentals $1,291,264 $1,171,120
Contingent rentals - 3,558
---------- ----------
$1,291,264 $1,174,678
========== ==========
</TABLE>
Contingent rentals are based upon sales volumes above specified levels. Real
estate taxes, insurance and maintenance expense are generally obligations of
the Company and, accordingly, are not included as part of the rental payment.
24
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED
FOR THE FIFTY-TWO WEEKS ENDED JUNE 30, 1996 AND JULY 2, 1995
NOTE E - SHAREHOLDERS' EQUITY
The Company Stock Option Plans of 1984 and 1993 provide that stock options to
purchase an aggregate of 212,500 shares of common stock may be granted to
officers and key employees at prices equal to the fair market value at the date
of grant. The plans provide for granting of incentive and nonqualified options.
Information with respect to options under the plans are as follows:
<TABLE>
<CAPTION>
Shares under Option price range
option per share
------------- ------------------
<S> <C> <C>
Outstanding at July 3, 1994 82,449 $1.50 - $18.00
Exercised (14,663) 1.75 - 2.20
Granted 12,500 2.00 - 3.30
Canceled (3,050) 1.75 - 2.00
-------
Outstanding at July 2, 1995 77,236 1.50 - 18.00
Exercised (14,540) 1.50 - 2.20
Granted 4,000 3.32 - 5.50
Canceled (525) 1.75 - 2.00
-------
Outstanding at June 30, 1996 66,171 $1.50 - $18.00
=======
</TABLE>
Options to purchase 29,950 shares were exercisable at June 30, 1996.
NOTE F - EMPLOYEE BENEFIT PLAN
The Company has a 401(k) salary savings plan. Under this plan, employees who
meet eligibility requirements, as defined in the plan, may elect to defer a
portion of their salary into the plan, up to certain limits set by law. At the
discretion of the Company, matching contributions equal to a percentage of the
salary deferred by the employee will be made. The matching contribution is
determined by the Company on a calendar year basis. For the plan years ended
December 31, 1995 and 1996, the Company approved to match 100% of the employee's
elected salary deferral up to a maximum of 3% of the employee's gross wages.
Company matching contributions were $48,642 and $55,567 for the fiscal years
ended June 30, 1996 and July 2, 1995.
25
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED
FOR THE FIFTY-TWO WEEKS ENDED JUNE 30, 1996 AND JULY 2, 1995
NOTE G - FOURTH QUARTER RESULTS
During the fourth quarter of 1996, the Company recorded a reserve of $147,368
for the entire balance of an outstanding note receivable related to the closure
of its Milwaukee, Wisconsin, restaurant in fiscal year 1995. Subsequent
recoveries of the note receivable will be reflected as recovery of bad debt
expense.
Also during the fourth quarter of 1996, the Board of Directors resolved to
close the Glendale, Wisconsin, restaurant during September 1996. During August
1996, an agreement was entered into with the landlord which will release the
Company from the remainder of its lease obligations in exchange for the
remaining leasehold improvements and equipment at this location. Accordingly,
the Company has reduced the cost of these assets by the excess of the cost over
the accumulated depreciation and amortization calculated as follows:
<TABLE>
<CAPTION>
<S> <C>
Equipment $ 409,878
Leasehold improvements 322,044
Accumulated depreciation and amortization (654,231)
---------
Impairment of assets $ 77,691
=========
</TABLE>
The net effect of the above adjustments was to increase the net loss for 1996
by $225,059 or $.31 per share.
During the fourth quarter of fiscal 1995, the Company recorded a $65,000
reduction of income tax expense to adjust to the Company's annual effective tax
rate. The effect of this adjustment was to increase net earnings for 1995 by
$.09 per share.
NOTE H - BRUEGGER'S BAGEL BAKERY FRANCHISE AGREEMENT
On December 13, 1994, Big D entered into a development agreement effective
January 1, 1995, with Bruegger's Franchise Corporation for the Dallas/Fort
Worth, Texas market. The development agreement requires Big D to build 30
Bruegger's Bagel Bakery restaurants by July 2001. Pursuant to this agreement,
Big D opened four Bruegger's Bagel Bakery restaurants during fiscal 1996. This
agreement also calls for Big D to open five additional restaurants during
fiscal 1997. Subsequent to year end, Big D signed one lease agreement related
to the development agreement.
26
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED
FOR THE FIFTY-TWO WEEKS ENDED JUNE 30, 1996 AND JULY 2, 1996
NOTE H - BRUEGGER'S BAGEL FRANCHISE AGREEMENT - Continued
Under the development agreement, each bakery has a separate franchise agreement
which requires the bakery to pay 5% of gross sales as a royalty fee. In
addition, the bakery is required to contribute 2% of gross sales to an
advertising fund established by the franchisor and to expend 2% of gross sales
for its own advertising.
Concurrent with the execution of the development agreement, Big D entered into
a subscription agreement to purchase 10,500 shares of convertible preferred
stock of Bruegger's Corporation at a price of $100 per share. Big D paid
$450,000 of the total purchase price upon execution of the subscription
agreement. The remaining $600,000 consisted of a note payable, which was non-
interest bearing and was to be paid in annual installments of $150,000 on the
first, second, third and fourth anniversaries of the execution of the
subscription agreement. The Company paid the first installment of $150,000
during fiscal 1996.
During fiscal 1996, Bruegger's Franchise Corporation was purchased by Quality
Dining, Inc. As part of this transaction, franchisees (including the Company)
were given the option of having their shares of Bruegger's Corporation
preferred stock repurchased at the original subscription price of $100 cash per
share or exchanged for shares of Quality Dining stock. The Company chose to
return their 6,000 shares of Bruegger's Corporation preferred stock for
$600,000 in cash. In addition, the Company's obligation to purchase any
remaining amount of Bruegger's Corporation preferred stock under the
subscription agreement was canceled by Quality Dining, Inc.
The Company obtains its bagel dough and other food supplies for its bakeries
from another Bruegger's franchisee located in Austin, Texas. The closing of
the Austin commissary, which is not under the control of the Company, would
have a severe and immediate effect on the continuation of the Company's bakery
business in Dallas-Fort Worth.
27
<PAGE>
STOCK INFORMATION
The Company's common stock is quoted on the NASDAQ system under the symbol
"CIAT." The following tables set forth, for the fiscal periods indicated, the
high and low closing bid prices for the Company's common stock, as reported by
NASDAQ. All quotations reflect inter-dealer prices without retail mark-up,
mark-down or commissions and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
Common stock
------------
Fiscal 1995 Low High
- ----------- --- ----
<S> <C> <C>
First quarter $3.00 $3.00
Second quarter 3.00 3.50
Third quarter 3.50 4.00
Fourth quarter 3.00 4.00
Fiscal 1996
- -----------
<S> <C> <C>
First quarter $3.25 $4.50
Second quarter 4.50 5.50
Third quarter 4.25 5.50
Fourth quarter 3.00 4.25
</TABLE>
As of September 1, 1996, the Company has 79 shareholders of record, plus an
additional 386,950 shares held by depository institutions for an undetermined
number of additional shareholders. The total number of outstanding shares was
742,819.
The Company has not paid cash dividends on its common stock in the last three
fiscal years. The Company's policy is to retain earnings to fund the development
and growth of the business, and thus the Company does not contemplate payment of
cash dividends within the foreseeable future.
28
<PAGE>
CORPORATE INFORMATION
AS OF SEPTEMBER 1996
DIRECTORS AND OFFICERS
Dan Danford
Director and Founder, Chairman of the Board
Managing Director, Piper Jaffray Inc.
Phillip Danford
President, Director and Founder
Thomas A. Kelm
Director
President and Chief Executive Officer
of North State Advisors, Inc.
Barney U. Uhlig
Vice President for Administration and Secretary
TRANSFER AGENT
Norwest Bank, Minnesota N.A., St. Paul, Minnesota 55164
INDEPENDENT AUDITORS
Grant Thornton LLP, Minneapolis, Minnesota 55402
LEGAL COUNSEL
Lindquist & Vennum, P.L.L.P., Minneapolis, Minnesota 55402
EXECUTIVE OFFICES
5555 West 78th Street
Edina, Minnesota 55439
612/941-0108
SHAREHOLDER SERVICE
Requests for Form 10-KSB and questions from shareholders
should be directed to:
Ciatti's, Inc.
5555 West 78th Street
Edina, Minnesota 55439
29
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated August 14, 1996, accompanying the consolidated
financial statements incorporated by reference in the Annual Report of Ciatti's,
Inc. on Form 10-KSB for the fifty-two weeks ended June 30, 1996. We consent to
the incorporation by reference of said report in the Registration Statements of
Ciatti's, Inc. on Forms S-8 (File No. 33-28306, effective April 24, 1989 and
File No. 33-76974, effective March 28, 1994).
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Minneapolis, Minnesota
September 23, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-03-1995
<PERIOD-END> JUN-30-1996
<CASH> 1,602,936
<SECURITIES> 0
<RECEIVABLES> 217,079
<ALLOWANCES> 0
<INVENTORY> 184,838
<CURRENT-ASSETS> 2,184,044
<PP&E> 10,229,525
<DEPRECIATION> 5,762,061
<TOTAL-ASSETS> 6,651,508
<CURRENT-LIABILITIES> 2,569,335
<BONDS> 907,286
<COMMON> 7,428
0
0
<OTHER-SE> 3,167,459
<TOTAL-LIABILITY-AND-EQUITY> 6,651,508
<SALES> 17,589,187
<TOTAL-REVENUES> 17,589,187
<CGS> (5,191,186)
<TOTAL-COSTS> (13,903,439)
<OTHER-EXPENSES> 75,033
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (92,634)
<INCOME-PRETAX> (1,523,039)
<INCOME-TAX> 160,000
<INCOME-CONTINUING> (1,363,039)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,363,039)
<EPS-PRIMARY> (1.85)
<EPS-DILUTED> 0
</TABLE>
