<PAGE>
U.S SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark one)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 28, 1997.
__ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO
_______.
Commission file number 0-16348.
CIATTI'S, INC.
(Exact name of small business issuer as specified in its charter)
MINNESOTA 41-1564262
------------------------------ -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
(612) 941-0108
---------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past
90 days. [X]
The Company had 742,819 shares of Common Stock, $.01 par value per share,
outstanding as of October 31, 1997.
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 28, 1997
and June 29, 1997. 3
Consolidated Statements of Operations for the thirteen weeks
ended September 28, 1997 and September 29, 1996. 4
Consolidated Statements of Cash Flows for the thirteen weeks
ended September 28, 1997 and September 29, 1996. 5
Consolidated Notes to Financial Statements 6-7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION 8-12
PART II. OTHER INFORMATION 13-18
2
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 28, 1997 AND JUNE 29, 1997
SEPT. 28, JUNE 29,
1997 1997
----------- ----------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 727,064 $ 454,157
Receivables 70,658 72,930
Current portion of notes receivable 24,188 -
Inventories 113,295 146,598
Prepaid expenses and other current assets 66,592 83,574
Assets held for sale 167,992 663,108
----------- ----------
Total current assets 1,169,789 1,420,367
PROPERTY AND EQUIPMENT
Equipment 4,029,101 3,870,418
Leasehold improvements 2,709,208 2,638,024
Automobiles 15,058 15,058
----------- ----------
6,753,367 6,523,500
Less accumulated depreciation and amortization (3,484,026) (3,281,305)
----------- ----------
Net property and equipment 3,269,341 3,242,195
OTHER ASSETS
Notes receivable 126,509 -
----------- ----------
$ 4,565,639 $ 4,662,562
----------- ----------
----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term notes payable and current
maturities of long-term obligations
Related party $ 400,000 $ 100,000
Other 1,092,361 779,807
Accounts payable 1,016,638 1,369,290
Accrued salaries and wages 262,801 322,071
Other accrued liabilities 768,720 720,818
----------- ----------
Total current liabilities 3,540,520 3,291,986
LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES 733,775 764,467
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized
10,000,000 shares; no shares issued or
outstanding - -
Common stock, $.01 par value; authorized 10,000,000
shares; issued and outstanding 742,819 shares 7,428 7,428
Additional paid-in capital 4,335,214 4,335,214
Accumulated deficit (4,051,298) (3,736,533)
----------- ----------
291,344 606,109
----------- ----------
$ 4,565,639 $ 4,662,562
----------- ----------
----------- ----------
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED
----------------------------
SEPT. 28, SEPT. 29,
1997 1996
-------------- -----------
(unaudited) (unaudited)
Sales
Full-service restaurants $ 3,583,412 $ 3,845,888
Bagel bakeries 699,678 423,599
-------------- -----------
Total sales 4,283,090 4,269,487
Cost of food and beverage 1,301,338 1,293,650
-------------- -----------
Gross profit 2,981,752 2,975,837
Restaurant operating expenses
Labor and benefits 1,558,924 1,598,980
Direct and occupancy 1,789,897 1,531,241
General and administrative expenses 379,886 352,780
Gain on sale of full-service restaurants (486,255) -
-------------- -----------
3,242,452 3,483,001
-------------- -----------
Loss from operations (260,700) (507,164)
Other income (expense)
Interest expense (57,053) (29,177)
Investment income 735 9,908
Other, net 2,253 8,625
-------------- -----------
(54,065) (10,644)
-------------- -----------
Loss before income taxes (314,765) (517,808)
Income tax expense - 1,950
-------------- -----------
Net loss $ (314,765) $ (519,758)
-------------- -----------
-------------- -----------
Net loss per share ($0.42) ($0.70)
-------------- -----------
-------------- -----------
Weighted average number of shares
outstanding during the period 742,819 742,819
-------------- -----------
-------------- -----------
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THIRTEEN WEEKS ENDED
----------------------------
SEPT. 28, SEPT. 29,
1997 1996
------------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Operating activities:
Net loss $(314,765) $ (519,758)
Adjustment to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 259,092 247,406
Gain on sale of full-service restaurants (486,255) -
Changes in operating assets and liabilities
net of the effects of the sale of full-service restaurants
Receivables 2,272 (20,308)
Inventories (9,021) 22,354
Prepaid expenses and other current assets 8,609 15,503
Accounts payable (352,652) (310,177)
Accrued salaries and wages (59,270) (61,330)
Other accrued liabilities 47,902 (63,430)
------------- -----------
Net cash used in operating activities (904,088) (689,740)
Investing activities:
Purchases of leasehold improvements and equipment (62,652) (123,528)
Proceeds from sale of full-service restaurants 825,000 -
------------- -----------
Net cash provided by (used in) investing activities 762,348 (123,528)
Financing activities:
Proceeds from debt obligations 451,390 -
Payments of debt obligations (36,743) (63,420)
------------- -----------
Net cash provided by (used in) financing activities 414,647 (63,420)
------------- -----------
Net increase (decrease) in cash and cash equivalents 272,907 (876,688)
Cash and cash equivalents at beginning of period 454,157 1,602,936
------------- -----------
Cash and cash equivalents at end of period $ 727,064 $ 726,248
------------- -----------
------------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 14,101 $ 30,225
Income taxes - 1,950
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - FINANCIAL STATEMENTS
The unaudited consolidated balance sheet as of September 28, 1997 and the
unaudited consolidated statements of operations and cash flows for the thirteen
weeks ended September 28, 1997 and September 29, 1996 have been prepared by the
Company. In the opinion of management, all adjustments (all of which are normal
and recurring in nature) necessary to present fairly the financial position at
September 28, 1997 and the results of operations and cash flow activity for the
periods ended September 28, 1997 and September 29, 1996 have been made. The
consolidated balance sheet as of June 29, 1997 has been taken from the audited
financial statements as of that date. Results of operations for interim periods
are not necessarily indicative of the full fiscal year.
NOTE B - NET LOSS PER SHARE
Net loss per share has been computed by dividing the net loss by the
weighted average number of common shares outstanding during the period.
NOTE C - RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) 128, "Earnings per Share," which is
effective for financial statements issued after December 15, 1997. Early
adoption of the new standard is not permitted. The new standard eliminates
primary and fully diluted earnings per share and requires presentation of basic
and diluted earnings per share together with disclosure of how the per share
amounts were computed.
The FASB also issued SFAS 130, "Reporting Comprehensive Income," which
requires the Company to display an amount representing total comprehensive
income, as defined by the statement, as part of the Company's basic financial
statements. Additionally, SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," requires the Company to disclose financial
and other information about its business segments, their products and services,
geographic areas, sales, profits, assets and other information. These
statements will be effective in fiscal year 1999.
The adoption of these statements is not expected to have a material effect
on the consolidated financial statements of the Company.
NOTE D - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During September 1997, the Company sold three of its full-service
restaurants. The effect of these sales on the financial statements was as
follows:
Increase in cash and cash equivalents $ 825,000
Increase in notes receivable 150,697
Reduction of assets held for sale (438,745)
Reduction of inventories (42,324)
Reduction of prepaid expenses and other current assets (8,373)
---------
Gain on sale $ 486,255
---------
---------
6
<PAGE>
During the first quarter of fiscal 1998, leasehold improvements of $167,215
were acquired by issuance of debt obligations.
NOTE E - SHAREHOLDERS' EQUITY
On October 8, 1997, the Nasdaq notified the Company that it would not grant
the Company an exemption for the Company's inability to comply with the Nasdaq
SmallCap Market $1.0 million shareholders' equity requirement. Accordingly, the
Company's securities were delisted from the Nasdaq SmallCap Market as of the
close of business on October 8, 1997. Although the Company anticipates that its
common stock will trade on the Nasdaq "Bulletin Board" or in the local
over-the-counter market, there can be no assurance that such a market will
develop or be maintained.
NOTE F - SUBSEQUENT EVENT
On October 31, 1997 the Company sold an additional full-service restaurant.
The sale of this restaurant generated proceeds of approximately $565,000. The
net book value of the equipment and leaseholds as of September 28, 1997 was
approximately $168,000.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
SALES
Consolidated sales for the first quarter of fiscal 1998 increased $13,603,
or 0.3%, to $4,283,090 from the first quarter of fiscal 1997 sales of
$4,269,487. The increase in consolidated sales during the first quarter of
fiscal 1998 was due to an increase in sales at the Company's bagel bakeries
which was offset by a decline in sales at the Company's full-service restaurants
as described below.
Full-service restaurant sales of $3,583,412 for the first quarter of fiscal
1998 decreased 6.8% from sales of $3,845,888 for the same period of fiscal 1997.
This decrease in full-service restaurant sales was due, in part, to the Company
selling three of its full-service restaurants in September 1997. The Company
sold a fourth restaurant in October 1997. In addition, this decrease in sales
was 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. To offset this the Company developed a new menu that was
introduced to the Italian restaurants in September 1997. The focus of the new
menu is to increase portion sizes and increase the offerings of chicken and
seafood in order to create a higher quality and value to the customer. In
addition, the purpose of the new menu is to increase the check average per
person without decreasing the value.
Bagel bakery sales of $699,678 for the first quarter of fiscal 1998
increased 65.2% over bagel bakery sales of $423,599 for the same period in
fiscal 1997. This increase in sales was primarily a function of the Company
having eight bagel bakeries open as of September 28, 1997, while having four
bagel restaurants open as of September 29, 1996.
Management intends to focus the Company's expansion resources entirely on
the bagel restaurant concept. The Company does not expect to open any more
Italian or Steakhouse restaurants in the future. Although the Company has not
contracted to sell any of its remaining full-service restaurants, it will
consider any offers it receives.
COST OF FOOD AND BEVERAGE
Food and beverage cost was 30.4% of sales for the first quarter of fiscal
1998. These costs were up from the 30.3% of sales reported in the same quarter
of fiscal 1997 due to the mix of the Company's business including a larger
percentage of bagel restaurant sales, which have a slightly higher cost of food
and beverage associated with them.
The Company does not expect the cost of food and beverage to increase
significantly in the future. In fact, the Company expects to construct a
commissary in the fourth quarter of fiscal 1998 to lower the food and beverage
costs associated with its bagel restaurants and believes the addition of the new
menu at the Company's Italian restaurants will help to lower their cost of food
and beverage.
LABOR AND BENEFITS
Labor and benefits costs were 36.4% of sales for the first quarter of
fiscal 1998, a decrease from the 37.5% reported in the first quarter of fiscal
1997. This decrease was primarily due to the Company improving upon its labor
costs at its bagel bakeries.
8
<PAGE>
On September 1, 1997 a minimum wage increase became effective. In response
to this minimum wage increase, the Company has implemented menu price increases
at its full-service restaurants which took effect October 1, 1997. These
increases are expected to offset the cost of the wage increases. This minimum
wage increase is not expected to have a material effect on the Company's bagel
bakeries as all employee pay rates are already at or above the new minimum wage.
DIRECT AND OCCUPANCY
Direct and occupancy costs were 41.8% of sales in the first quarter of
fiscal 1998, up from 35.9% of sales reported in the same quarter of fiscal 1997.
This increase was primarily due to the fact that the Company is currently paying
rent on three bagel bakery leases that are not yet under construction. Bagel
bakeries will not be constructed at these locations until financing can be
acquired. Secondly, the Company increased its advertising and promotion costs
at its full-service restaurants from 1.3% of sales in the first quarter of
fiscal 1997 to 6.1% of sales for the same quarter in fiscal 1998. The Company
expects advertising and promotional expenses at its full-service restaurants to
approximate 2.75% for the remainder of fiscal 1998. 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 the near future. Lastly, direct and occupancy costs
at the Company's bagel bakery restaurants were affected by fixed costs such as
rent and depreciation being spread across a lower sales base than at its
full-service restaurants. As sales at the Company's bagel bakery restaurants
increase in the future, these fixed costs will decrease as a percent of sales.
GENERAL AND ADMINISTRATIVE
General and administrative costs were 8.9% of sales in the first quarter of
fiscal 1998, up from 8.3% of sales reported during the same quarter of last
year. This increase in general and administrative costs was primarily due to
the Company incurring approximately $135,000 of general and administrative
costs in the first quarter of fiscal 1998 relating to the development of a
corporate infrastructure at its bagel bakery operation, as compared to only
$49,000 of costs in the first quarter of fiscal 1997. The Company also had
increased professional fees pertaining to its attempts to acquire financing for
its bagel bakery concept.
GAIN ON SALE OF FULL-SERVICE RESTAURANTS
The Company sold three of its full-service restaurants in September, 1997.
The restaurants are located in Burnsville, Falcon Heights and Woodbury,
Minnesota. The sale of these restaurants generated proceeds of approximately
$975,000. The gain recognized on the sale of the three restaurants sold in
September 1997 was $486,255.
OTHER INCOME (EXPENSE), NET
Other income (expense) increased to a net expense of $54,065 for the first
quarter of fiscal 1998, an increase from a net expense of $10,644 reported in
the same quarter of last year. This increase in other income (expense) was
primarily due to the Company carrying higher debt as a result of the
construction of the Company's bagel bakeries. The Company's investment income
decreased to $735 in the first quarter of fiscal 1998 from $9,908 in the same
quarter last year as a result of fewer funds available for investment.
9
<PAGE>
INCOME TAX EXPENSE (BENEFIT)
For the fiscal quarters ended September 28, 1997 and September 29, 1996, no
tax benefit was recorded for the losses generated because no taxes would have
been recoverable from a carryback of the net losses. As of September 28, 1997,
the Company has approximately $166,000 of alternative minimum tax credit
carryforwards and $3,048,000 in net operating loss carryforwards. These tax
carryforwards may only be utilized against future earnings and there is no
assurance that the Company will realize these benefits. The utilization of
these carryforwards may be limited if there are significant changes in the
ownership of the Company.
SEASONALITY
The Company's highest sales from its Italian and Steakhouse restaurants
have historically occurred during the months of July through December. The
Company's bagel bakeries' highest sales have occurred during the period from
September through May.
EFFECTS OF INFLATION
Inflationary factors such as increases in food and labor costs directly
affect the Company's operations. Because most of the Company's employees are
paid hourly rates related to federal and state minimum wage and tip credit laws,
changes in these laws may result in an increase in the Company's labor costs.
The Company cannot always effect immediate price increases to offset higher
costs, and no assurance can be given that the Company will be able to do so in
the future.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $727,064 on hand as of
September 28, 1997 which represents an increase of $272,907 from the $454,157 in
cash and cash equivalents reported as of June 29, 1997. Net cash used in
operating activities was $904,088 for the first quarter of fiscal 1998. In the
first quarter of fiscal 1998 the Company incurred a net loss of $314,765 which
was net of a gain of $486,255 pertaining to the sale of three of the Company's
full-service restaurants. In addition, the Company reduced its accounts payable
balance by $352,652 during the first quarter of fiscal 1998 as a result of the
sale of the three full-service restaurants.
Net cash provided by investing activities was $762,348 during the first
quarter of fiscal 1998, which is the net of $825,000 generated from the sale of
three of the Company's full-service restaurants, and $62,652 relating to the
purchase of leasehold improvements and equipment for the Company's eighth bagel
bakery.
Net cash provided by financing activities was $414,647 during the first
quarter of fiscal 1998. The net cash provided by financing activities consists
of borrowings from the Chairman of the Board of Directors of the Company of
$300,000 and borrowings of $151,390 from a note offering commenced in June 1997.
These borrowings were partially offset by payments of $36,743 due under other
debt financing.
10
<PAGE>
DFW Bagels, Inc. (DFW Bagels), a wholly-owned subsidiary of Ciatti's, Inc.,
has entered into an exclusive development agreement with Bruegger's Franchise
Corporation (Bruegger's). This agreement, as amended in April 1997, requires
DFW Bagels to build thirty bagel bakeries by July 1, 2001. Through October 31,
1997, DFW Bagels has opened eight bagel bakeries and is required to open one
additional bagel bakery by January 1, 1998. Currently, DFW Bagels has entered
into lease agreements for four additional bagel bakery sites. The Company
intends to open bagel bakeries at a faster rate than that obligated under the
development agreement, subject to available financing. The Company believes
each new site will require approximately $370,000 for capital expenditures,
including the initial franchise fee.
During the period from May 1996 through October 1997, Bruegger's was owned
by Quality Dining, Inc. In October 1997, Bruegger's was sold back to its
original owners. The Company is working with the current owners of Bruegger's
to provide the Company with additional working capital and to increase sales at
the Company's bagel bakeries. In connection with the reaquisition of
Bruegger's, the owners have agreed to certain reductions in the payment of
initial franchise fees and in reduced franchise royalties until the end of
calendar 1998.
The Company believes that the profitability of any individual bagel bakery
often depends to a high degree on the penetration of a particular market by the
bagel bakery operator. The Company believes that individual bagel bakeries will
generally become profitable only after the Company has opened a number of bagel
bakeries sufficient to make the franchise name well-known in that market. The
Company estimates that in the Dallas-Fort Worth area the minimal number of bagel
bakeries needed for such penetration is between twelve and twenty. If the
Company is unable to achieve this level of penetration, its ability to achieve
profitability may be affected. In addition, if the Company is unable to obtain
adequate financing to open the bagel bakeries, it could have a material adverse
effect on the Company's consolidated financial position or results of
operations.
In June 1997, the Company commenced a note offering of $2,000,000 in one
and three year notes. Through September 28, 1997, the Company had raised
approximately $224,000 from the offering.
On August 8, 1997, the Company filed a Registration Statement with the
Securities and Exchange Commission (SEC) for the sale of up to 3,000,000 units,
each unit consisting of one share of common stock and a warrant to purchase an
additional share of common stock. The Registration Statement indicates that the
units will be sold at a price of $2.25 per unit, with the warrant exercisable at
a price of $5.00 until December 31, 2001. The offering will be made directly by
the Company. The offering is being done on a minimum - maximum basis with a
minimum of $2,000,000. The Registration Statement has not yet become effective.
As of the quarter ended September 28, 1997, the Company has borrowed
$400,000 from the Chairman of the Board of Directors of the Company and may
borrow additional amounts.
The Company sold three of its full-service restaurants in September 1997
and one of its full-service restaurants in October 1997. The restaurants are
located in Burnsville, Falcon Heights, St. Cloud, and Woodbury, Minnesota. The
sale of these restaurants generated proceeds of approximately $1,540,000. The
gain recognized on the sale of the three restaurants sold in September 1997 was
$486,255, and the gain recognized on the sale of the restaurant sold in October
1997 was approximately $397,000. The restaurants sold are initially being
operated as Ciatti's Italian Restaurants-Registered Trademark-, however, the new
operators have the right to change the name. The Company decided to sell these
restaurants to focus on achieving and maintaining profitability at its remaining
full-service restaurants and to generate cash to continue to expand its bagel
bakery concept in the Dallas-Fort Worth market. During fiscal 1997, the
restaurants being sold generated approximately $6,913,000 of sales, net earnings
of $203,000 and cash flows from operations of $488,000. Although the Company
has not contracted to sell any of its remaining full-service restaurants, it
will consider any offers it receives.
11
<PAGE>
The Company plans to finance its working capital and capital resource
needs with its current cash, future cash generated from operations, and proceeds
from its current and future debt and equity financing. The Company has and is
continuing to explore several alternatives for lease financing and equipment
financing for its bagel bakeries. The Company believes that these sources will
be sufficient to enable it to satisfy its working capital needs for the next
twelve months. If the Company decides to pursue a strategy of building bagel
bakeries at a rate faster than that required by the development agreement, it
may need funds in addition to those generated from the current note and unit
offerings. In such event, the Company will attempt to raise additional funds
through debt or equity offerings. If the Company is unable to successfully
raise funds from the note and unit offerings in a timely manner, it may be
necessary for it to raise additional capital through other means of financing.
Although the Company believes that it will be able to secure the necessary
capital, there can be no assurance that the Company will be successful.
DELISTING FROM NASDAQ SMALLCAP MARKET
On October 8, 1997, the Nasdaq notified the Company that it would not grant
the Company an exemption for the Company's inability to comply with the Nasdaq
SmallCap Market $1.0 million shareholders' equity requirement. Accordingly, the
Company's securities were delisted from the Nasdaq SmallCap Market as of the
close of business on October 8, 1997. Although the Company anticipates that its
common stock will trade on the Nasdaq "Bulletin Board" or in the local
over-the-counter market, there can be no assurance that such a market will
develop or be maintained.
FORWARD LOOKING STATEMENTS
Statements included in this 10-QSB 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's ability to succeed in the future is dependent upon the Company's
ability to achieve and maintain profitability in its existing restaurants and,
together with its subsidiary, DFW Bagels, Inc., to open additional Bruegger's
Bagel Bakery restaurants and to operate those restaurants in a profitable
manner. The Company's ability to achieve these goals will be affected by
factors such as (i) the ability of the Company to generate funds from
operations, obtain adequate restaurant financing on favorable terms and raise a
significant amount of additional working capital, (ii) the strength of the
Bruegger's name, including in the areas in which the Company is the franchisee,
(iii) the ability of the Company to locate and negotiate favorable leases for
additional locations, (iv) the ability of the Company to hire, train and retain
skilled restaurant management and personnel, and (v) the competitive environment
within the restaurant industry.
12
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
(a) Delisting from Nasdaq Small Cap Market
On October 1, 1997, the Company's request for continued
inclusion on the Nasdaq SmallCap Market, not withstanding its failure
to meet the minimum shareholders' equity standard, was denied and the
Company's stock was delisted from the Nasdaq SmallCap market.
Although the Company anticipates that its common stock will trade on
the Nasdaq "Bulletin Board" or in the local over-the-counter market,
there can be no assurance that such a market will develop or be
maintained.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 - Pro Forma Unaudited Condensed Consolidated Financial
Statements of Ciatti's Inc.
(b) Reports of Form 8-K
None.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CIATTI'S, INC. AND SUBSIDIARY
-----------------------------
(Registrant)
/s/ Phillip R. Danford
-----------------------------
Phillip R. Danford
President
/s/ Scott P. McGuire
-----------------------------
Scott P. McGuire
Controller
Dated November 11, 1997
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000802517
<NAME> CIATTI'S
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-28-1998
<PERIOD-START> JUN-30-1997
<PERIOD-END> SEP-28-1997
<CASH> 727,064
<SECURITIES> 0
<RECEIVABLES> 197,167
<ALLOWANCES> 0
<INVENTORY> 113,295
<CURRENT-ASSETS> 1,169,789
<PP&E> 6,753,367
<DEPRECIATION> 3,484,026
<TOTAL-ASSETS> 4,565,639
<CURRENT-LIABILITIES> 3,540,520
<BONDS> 0
0
0
<COMMON> 7,428
<OTHER-SE> 203,916
<TOTAL-LIABILITY-AND-EQUITY> 4,565,639
<SALES> 4,283,090
<TOTAL-REVENUES> 4,283,090
<CGS> 1,301,338
<TOTAL-COSTS> 4,543,790
<OTHER-EXPENSES> (2,988)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 57,053
<INCOME-PRETAX> (314,765)
<INCOME-TAX> 0
<INCOME-CONTINUING> (314,765)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (314,765)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> 0
</TABLE>
<PAGE>
Exhibit 99.1
PRO FORMA UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS OF CIATTI'S, INC.
In September 1997, the Company sold three of its full-service restaurants and in
October it sold a fourth full-service restaurant. The restaurants that were
sold in September were located in Burnsville, Falcon Heights and Woodbury,
Minnesota, and the restaurant that the Company sold in October was located in
St. Cloud, Minnesota. The historical consolidated financial statements reflect
the completed transaction for the sale of the three restaurants sold in
September. The unaudited pro forma condensed consolidated financial statements
reflect the completed transaction for the sale of the restaurant sold in
October. On a pro forma basis, the sale of the restaurant sold in October
generated cash proceeds of $593,424.
The following unaudited pro forma condensed consolidated financial statements
set forth, for the periods and at the dates indicated, summarized unaudited pro
forma condensed consolidated financial information for Ciatti's, Inc. This
information is derived from the historical consolidated financial statements and
notes thereto and reflects (a) the condensed consolidated balance sheet as of
September 28, 1997 as if the sale had occurred on September 28, 1997, (b) the
condensed consolidated results of operations for the fifty-two weeks ended
June 29, 1997 as if the sale had occurred on June 30, 1996 and (c) the condensed
consolidated results of operations for the thirteen weeks ended September 28,
1997 as if the sale had occurred on June 29, 1997.
The pro forma condensed consolidated financial statements reflect the
recognition of the estimated effect of the sale of the three full-service
restaurants sold in September 1997 and the one full-service restaurant sold in
October 1997. The net gain on the sale of certain assets related to these
restaurants is not reflected in the unaudited pro forma condensed consolidated
statement of operations for the thirteen weeks ended September 28, 1997 and for
the fifty-two weeks ended June 29, 1997. In addition, in accordance with the
rules and regulations of the Securities and Exchange Commission, interest income
on the cash proceeds from the sale of the full-service restaurants has not been
reflected in the unaudited pro forma condensed consolidated statement of
operations for the thirteen weeks ended September 28, 1997 and for the fifty-two
weeks ended June 29, 1997.
Assumptions underlying the pro forma adjustments are described in the
accompanying notes which should be read in conjunction with the unaudited pro
forma condensed consolidated financial statements. These financial statements
should also be read in conjunction with the historical financial statements of
Ciatti's, Inc. and notes thereto. Actual adjustments may differ from the pro
forma adjustments presented herein. The pro forma financial statements do not
purport to be indicative of the actual results of operations which would have
occurred had the four full-service restaurants been sold as of June 29, 1997 or
as of June 30, 1996 or the future results of operations which may be obtained.
15
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 28, 1997
<TABLE>
<CAPTION>
Pro Forma Adjustments
-----------------------------
Sale of One
Full-Service
ASSETS Historical Restaurant (a) Other (b) Pro Forma
----------- -------------- --------- -----------
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 727,064 $ - $ 593,424 $ 1,320,488
Receivables 70,658 - - 70,658
Current portion of notes receivable 24,188 - - 24,188
Inventories 113,295 18,296 - 94,999
Prepaid expenses and other current assets 66,592 10,127 - 56,465
Assets held for sale 167,992 167,992 - -
----------- ---------- --------- -----------
Total current assets 1,169,789 196,415 593,424 1,566,798
PROPERTY AND EQUIPMENT, net 3,269,341 - - 3,269,341
NOTES RECEIVABLE, less current portion 126,509 - - 126,509
----------- ---------- --------- -----------
$ 4,565,639 $ 196,415 $ 593,424 $ 4,962,648
----------- ---------- --------- -----------
----------- ---------- --------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term notes payable and current
maturities of long-term obligations $ 1,492,361 $ - $ - $ 1,492,361
Accounts payable 1,016,638 - - 1,016,638
Accrued liabilities 1,031,521 - - 1,031,521
----------- ---------- --------- -----------
Total current liabilities 3,540,520 - - 3,540,520
LONG-TERM OBLIGATIONS, less current maturities 733,775 - - 733,775
SHAREHOLDERS' EQUITY
Common stock 7,428 - - 7,428
Additional paid-in capital 4,335,214 - - 4,335,214
Accumulated deficit (4,051,298) 196,415 593,424 (3,654,289)
----------- ---------- --------- -----------
291,344 196,415 593,424 688,353
----------- ---------- --------- -----------
$ 4,565,639 $ 196,415 $ 593,424 $ 4,962,648
----------- ---------- --------- -----------
----------- ---------- --------- -----------
</TABLE>
Notes:
(a) To eliminate certain assets related to the full-service restaurant sold in
October 1997 and included in the consolidated balance sheet of Ciatti's,
Inc. as of September 28, 1997.
(b) To reflect the cash proceeds received from the sale of the full-service
restaurant sold in October 1997.
16
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997
<TABLE>
<CAPTION>
Pro Forma Adjustments
---------------------------------------------
Sale of Three Sale of One
Full-Service Full-Service
Historical Restaurants (a) Restaurant (b) Other (c) Pro Forma
------------- --------------- --------------- --------- ------------
<S> <C> <C> <C> <C> <C>
Sales
Full-service restaurants $ 15,811,370 $ 5,024,775 $ 1,888,795 $ - $ 8,897,800
Bagel bakeries 1,926,434 - - - 1,926,434
------------- --------------- --------------- ----------- ------------
Total sales 17,737,804 5,024,775 1,888,795 - 10,824,234
Cost of food and beverage 5,371,297 1,497,791 551,308 - 3,322,198
------------- --------------- --------------- ----------- ------------
Gross profit 12,366,507 3,526,984 1,337,487 - 7,502,036
Operating expenses
Labor and benefits 6,304,321 1,680,574 656,143 - 3,967,604
Direct and occupancy 6,624,350 1,641,710 530,233 - 4,452,407
General and administrative 1,304,821 156,392 4,300 - 1,144,129
Write-down of impaired assets 640,286 - - - 640,286
------------- --------------- --------------- ----------- ------------
14,873,778 3,478,676 1,190,676 - 10,204,426
------------- --------------- --------------- ----------- ------------
Earnings (loss) from operations (2,507,271) 48,308 146,811 - (2,702,390)
Other income (expense)
Interest expense (105,460) - - - (105,460)
Investment income 18,097 - - 13,014 31,111
Other, net 18,223 4,869 2,649 - 10,705
------------- --------------- --------------- ----------- ------------
(69,140) 4,869 2,649 13,014 (63,644)
------------- --------------- --------------- ----------- ------------
Earnings (loss) before income taxes (2,576,411) 53,177 149,460 13,014 (2,766,034)
Income tax benefit 7,633 - - - 7,633
------------- --------------- --------------- ----------- ------------
Net earnings (loss) $ (2,568,778) $ 53,177 $ 149,460 $ 13,014 $ (2,758,401)
------------- --------------- --------------- ----------- ------------
Net earnings (loss) per common share $ (3.46) $ 0.07 $ 0.20 $ 0.02 $ (3.71)
------------- --------------- --------------- ----------- ------------
Weighted average number of common shares
outstanding during the year 742,819 742,819 742,819 742,819 742,819
------------- --------------- --------------- ----------- ------------
------------- --------------- --------------- ----------- ------------
</TABLE>
Notes:
(a) To reflect the decrease in sales and costs and expenses for the
fifty-two weeks ended June 29, 1997 related to the operations of the
three full-service restaurants sold in September 1997.
(b) To reflect the decrease in sales and costs and expenses for the
fifty-two weeks ended June 29, 1997 related to the operations of one
full-service restaurant sold in October 1997.
(c) To reflect interest income on the 10.5% five-year notes receivable.
17
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE THIRTEEN WEEKS ENDED SEPTEMBER 28, 1997
<TABLE>
<CAPTION>
Pro Forma Adjustments
------------------------------------------------
Sale of Three Sale of One
Full-Service Full-Service
Historical Restaurants (a) Restaurant (b) Other (c) Pro Forma
------------- --------------- -------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Sales
Full-service restaurants $ 3,583,412 $ 977,358 $ 460,255 $ - $ 2,145,799
Bagel bakeries 699,678 - - - 699,678
------------- --------------- -------------- ---------- ------------
Total sales 4,283,090 977,358 460,255 - 2,845,477
Cost of food and beverage 1,301,338 281,535 138,643 - 881,160
------------- --------------- -------------- ---------- ------------
Gross profit 2,981,752 695,823 321,612 - 1,964,317
Operating expenses
Labor and benefits 1,558,924 349,823 162,661 - 1,046,440
Direct and occupancy 1,789,897 348,178 138,901 - 1,302,818
General and administrative 379,886 39,098 1,075 - 339,713
Gain on sale of full-service restaurants (486,255) - - 486,255 -
------------- --------------- -------------- ---------- ------------
3,242,452 737,099 302,637 486,255 2,688,971
------------- --------------- -------------- ---------- ------------
Earnings (loss) from operations (260,700) (41,276) 18,975 (486,255) (724,654)
Other income (expense)
Interest expense (57,053) - - - (57,053)
Investment income 735 - - 3,254 3,989
Other, net 2,253 554 285 - 1,414
------------- --------------- -------------- ---------- ------------
(54,065) 554 285 3,254 (51,650)
------------- --------------- -------------- ---------- ------------
Earnings (loss) before income taxes (314,765) (40,722) 19,260 (483,001) (776,304)
Income tax benefit - - - - -
------------- --------------- -------------- ---------- ------------
Net earnings (loss) $ (314,765) $ (40,722) $ 19,260 $ (483,001) $ (776,304)
------------- --------------- -------------- ---------- ------------
Net earnings (loss) per common share $ (0.42) $ (0.06) $ 0.03 $ (0.65) $ (1.04)
------------- --------------- -------------- ---------- ------------
------------- --------------- -------------- ---------- ------------
Weighted average number of common shares
outstanding during the year 742,819 742,819 742,819 742,819 742,819
------------- --------------- -------------- ---------- ------------
</TABLE>
Notes:
(a) To reflect the decrease in sales and costs and expenses for the
fifty-two weeks ended June 29, 1997 related to the operations of the
three full-service restaurants sold in September 1997.
(b) To reflect the decrease in sales and costs and expenses for the
fifty-two weeks ended June 29, 1997 related to the operations of one
full-service restaurant sold in October 1997.
(c) To reflect interest income on the 10.5% five-year notes receivable and
the elimination of the gain on sale of the three full-service
restaurants sold in September 1997.
18
