<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
MARCH 30, 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 April 30, 1997.
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 30, 1997 and June 30, 1996. 3
Consolidated Statements of Operations for the thirteen and thirty-
nine weeks ended March 30, 1997 and March 31, 1996. 4
Consolidated Statements of Cash Flows for the thirty-nine weeks
ended March 30, 1997 and March 31, 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 13-14
</TABLE>
2
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CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 30, 1997 AND JUNE 30, 1996
<TABLE>
<CAPTION>
MAR. 30, JUNE 30,
1997 1996
---------- ---------
(unaudited) (Note A)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $227,297 $1,602,936
Receivables 163,306 51,503
Income taxes receivable - 165,576
Inventories 151,071 184,838
Prepaid expenses and other current assets 218,342 179,191
---------- ----------
Total current assets 760,016 2,184,044
PROPERTY AND EQUIPMENT (NOTE F)
Buildings - 610,829
Equipment 5,402,629 6,171,435
Leasehold improvements 3,110,633 3,432,203
Automobiles 15,058 15,058
---------- ----------
8,528,320 10,229,525
Less accumulated depreciation and amortization (5,012,325) (5,762,061)
---------- ----------
Net property and equipment 3,515,995 4,467,464
---------- ----------
$4,276,011 $6,651,508
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations $185,511 $198,707
Accounts payable 915,370 1,311,016
Accrued salaries and wages 234,130 306,848
Other accrued liabilities 864,220 752,764
---------- ----------
Total current liabilities 2,199,231 2,569,335
LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES 806,782 907,286
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized 10,000,000
shares; no shares issued or outstanding - -
Common stock, $.01 par value; authorized 10,000,000
shares; issued and outstanding 742,819 shares 7,428 7,428
Additional paid-in capital 4,335,214 4,335,214
Accumulated deficit (3,072,644) (1,167,755)
---------- ----------
1,269,998 3,174,887
---------- ----------
$4,276,011 $6,651,508
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE 13 WEEKS ENDED FOR THE 39 WEEKS ENDED
------------------------- -------------------------
MAR. 30, MAR. 31, MAR. 30, MAR. 31,
1997 1996 1997 1996
----------- ---------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales $4,474,455 $4,449,351 $13,139,917 $13,118,018
Cost of food and beverage 1,356,025 1,340,041 3,997,944 3,857,191
---------- ---------- ----------- -----------
Gross profit 3,118,430 3,109,310 9,141,973 9,260,827
Restaurant operating expenses
Labor and benefits 1,550,257 1,568,725 4,690,525 4,535,859
Direct and occupancy 1,628,702 1,618,652 4,745,835 4,666,708
---------- ---------- ----------- -----------
3,178,959 3,187,377 9,436,360 9,202,567
---------- ---------- ----------- -----------
General and administrative expenses 248,849 274,817 932,092 822,969
Impairment of assets write-down (Note F) - - 640,286 -
---------- ---------- ----------- -----------
248,849 274,817 1,572,378 822,969
---------- ---------- ----------- -----------
Loss from operations (309,378) (352,884) (1,866,765) (764,709)
Other income (expense)
Interest expense (25,555) (24,741) (79,790) (64,458)
Investment income 2,358 13,399 17,983 49,893
Other, net 4,036 5,680 14,800 15,602
---------- ---------- ----------- -----------
(19,161) (5,662) (47,007) 1,037
---------- ---------- ----------- -----------
Loss before income taxes (328,539) (358,546) (1,913,772) (763,672)
Income tax expense (benefit) 1,225 (37,750) (8,883) (102,750)
---------- ---------- ----------- -----------
Net loss ($329,764) ($320,796) ($1,904,889) ($660,922)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Net loss per share (Note B) ($0.44) ($0.43) ($2.56) ($0.90)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Weighted average number of shares
outstanding during the year 742,819 739,679 742,819 734,950
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THIRTY-NINE WEEKS ENDED
-------------------------------
MAR. 30, MAR. 31,
1997 1996
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Operating activities:
Net loss ($1,904,889) ($660,922)
Adjustment to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 726,977 679,950
Impairment of assets write-down 640,286 -
Recovery of note receivable (85,000) -
Changes in operating assets and liabilities:
Receivables (26,803) (14,744)
Income taxes receivable 165,576 40,860
Inventories 33,767 5,796
Prepaid expenses and other current assets (39,151) (71,122)
Accounts payable (395,646) 37,230
Accrued salaries and wages (72,718) (70,793)
Other accrued liabilities 111,456 305
---------- ----------
Net cash used in operating activities (846,145) (53,440)
Investing activities:
Payments for purchases of leasehold
improvements and equipment (415,794) (1,255,442)
Receipts on note receivable - 7,337
Payment for preferred stock subscription - (150,000)
Redemption of held-to-maturity securities - 97,232
---------- ----------
Net cash used in investing activities (415,794) (1,300,873)
Financing activities:
Repayments of long-term obligations (163,700) (110,464)
Proceeds from long-term obligations 50,000 200,000
Net proceeds from the exercise of
common stock options - 2,395
---------- ----------
Net cash provided by (used in)
financing activities (113,700) 91,931
---------- ----------
Net decrease in cash and cash equivalents (1,375,639) (1,262,382)
Cash and cash equivalents at beginning of period 1,602,936 2,096,521
---------- ----------
Cash and cash equivalents at end of period $227,297 $834,139
---------- ----------
---------- ----------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $80,816 $60,197
Income taxes 5,700 2,550
</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 March 30, 1997 and the
unaudited consolidated statements of operations and cash flows for the
thirty-nine weeks ended March 30, 1997 and March 31, 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 March 30, 1997 and the results of operations and cash flow
activity for the periods ended March 30, 1997 and March 31, 1996 have been
made. The consolidated balance sheet as of June 30, 1996 has been taken from
the audited financial statements as of that date. Results of operations for
interim periods are not necessarily indicative of results that may be
expected for a full fiscal year or other interim periods.
NOTE B - NET LOSS PER SHARE
Net loss per share has been computed by dividing the net loss by the
weighted average number of common shares outstanding during the period.
NOTE C - RECENTLY ADOPTED ACCOUNTING STANDARDS
The Company implemented Statement of Financial Accounting Standards
(SFAS) 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," effective July 1, 1996. SFAS 121
establishes guidance for when to recognize and how to measure impairment
losses of long-lived assets and certain identifiable intangibles, and how to
value long-lived assets to be disposed of. The effect of implementation of
SFAS 121 on July 1, 1996 did not have a material effect on the Company's
financial position. Due to events occurring during the second quarter of
fiscal 1997, the Company recognized an impairment of the long-lived assets at
the Company's Madison, Wisconsin restaurant (see Note F).
Additionally, the Company implemented SFAS 123, "Accounting for
Stock-Based Compensation," which established financial accounting and
reporting standards for stock-based employee compensation plans. This
Statement defines and encourages the use of a fair value based method of
accounting for an employee stock option or similar equity instrument. The
Statement allows the use of the intrinsic value based method of accounting as
prescribed by current existing accounting standards for options issued to
employees. The Company adopted this Standard effective July 1, 1996, and
management has elected to utilize the intrinsic value based method of
accounting for stock-based compensation.
NOTE D - NEW ACCOUNTING PRONOUNCEMENT
The FASB has issued Statement of Financial Accounting Standards No. 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
adoption of this standard is not expected to have a material impact on the
disclosure of earnings per share in the financial statements.
6
<PAGE>
NOTE E - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
On September 8, 1996 the Company closed its Glendale, Wisconsin
restaurant. The effect of this transaction is as follows:
Reduction of equipment $369,117
Reduction of leasehold improvements 285,114
Reduction of accumulated depreciation (654,231)
--------
Effect on earnings $ -
--------
--------
NOTE F - IMPAIRMENT OF ASSETS WRITE-DOWN
During the second quarter of fiscal 1997 the Company recognized an
impairment loss on the long-lived assets at its Madison, Wisconsin
restaurant. The decision to recognize this impairment was influenced by a
major national competitor opening a steakhouse restaurant in close proximity
to the Company's restaurant. The competitor's restaurant has the Company's
restaurant out-positioned in the market area, and sales at the Company's
restaurant have suffered due to the opening of this restaurant. In addition,
the Company attempted several advertising and promotional campaigns during
the first twenty-six weeks of fiscal 1997 that did not produce the results
management expected. Based on these items, management revised its forecasts
for this restaurant and projected operating losses and cash flow deficits for
the remainder of the restaurant's lease, which expires in 2005. As a result
of the projected operating losses and future cash flow deficits, the Company
has fully written off the long-lived assets related to this restaurant as
follows:
Reduction of building $ 610,829
Reduction of equipment 620,710
Reduction of leasehold improvements 231,229
Reduction of accumulated depreciation
and amortization (822,482)
---------
Impairment of assets $ 640,286
---------
---------
The impairment of assets write-down is reported in General and
Administrative expenses in the Consolidated Statement of Operations. The
effect of the above adjustment was to increase the year-to-date net loss by
$640,286, or $.86 per share.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
SALES
Consolidated sales of $4,474,455 for the third quarter of fiscal 1997
increased $25,104, or 0.6%, from consolidated sales of $4,449,351 for the
third quarter of fiscal 1996. Consolidated sales of $13,139,917 for the
first thirty-nine weeks of fiscal 1997 increased $21,899, or 0.2%, from
consolidated sales of $13,118,018 reported during the first thirty-nine weeks
of fiscal 1996. The increase in consolidated sales during fiscal 1997 was due
to a decline in sales at the Company's full-service restaurants offset by an
increase in sales at the Company's bagel restaurants, as described below.
Sales at the Company's full-service Italian and steakhouse restaurants of
$4,003,692 for the third quarter of fiscal 1997 decreased 5.1% from sales of
$4,218,621 for the same quarter of fiscal 1996. Full-service restaurant
sales of $11,789,394 for the first thirty-nine weeks of fiscal 1997 decreased
7.8% from sales of $12,787,315 for the same period of fiscal 1996. This
decrease in full-service restaurant sales was due, in part, to the Company
closing its Glendale, Wisconsin restaurant on September 8, 1996. After
adjusting for the sale of this restaurant, same store full-service restaurant
sales were down $1,646 for the quarter and $463,260, or 3.8%, year-to-date
when compared to the same periods of last year. The Company is encouraged by
the same store full-service restaurant sales for the third quarter of fiscal
1997 and believes the extensive advertising campaign entered into during the
third quarter of this year will continue to have a positive influence on
full-service restaurant sales. However, the continued competitiveness of the
full-service restaurant industry may make sales increases difficult to
achieve.
Sales at the Company's bagel restaurants of $470,763 for the third
quarter of fiscal 1997 increased $240,033, or 104.0%, from bagel restaurant
sales of $230,730 for the same quarter of fiscal 1996. Sales of $1,350,523
for the first thirty-nine weeks of fiscal 1997 increased $1,019,820, or
308.4%, over bagel restaurant sales of $330,703 for the same period of fiscal
1996. This increase in sales was primarily a function of the Company having
five bagel restaurants open as of March 30, 1997, while only having three
bagel restaurants open as of March 31, 1996. In addition, during the third
quarter of fiscal 1997 same store bagel restaurant sales were up 5.0% over
the same quarter of last year, thus providing encouragement that increased
market penetration by the Company's bagel restaurants is having a positive
effect on sales levels. The Company is required by its development agreement
to have nine stores open by July 1, 1997 and thirty stores open by July 1,
2001.
COST OF FOOD AND BEVERAGE
Cost of food and beverage as a percentage of sales increased slightly to
30.3% for the third quarter of fiscal 1997 from 30.1% for the same period in
fiscal 1996, and increased to 30.4% for the first thirty-nine weeks of fiscal
1997 from 29.4% for the same period of fiscal 1996. The cost of food and
beverage for the third quarter decreased as a percent of sales at both the
Company's full-service and bagel restaurants. However, the consolidated cost
of sales increased slightly as the mix of the Company's business has changed
in fiscal 1997 to include a larger percentage of bagel restaurant sales,
which have a higher cost of food and beverage associated with them.
The increase in the cost of food and beverage for the first thirty-nine
weeks of fiscal 1997 was primarily due to increases, during the first two
quarters of this fiscal year, in the costs of selected products at the
Company's full-service restaurants without corresponding menu price
increases. The Company believes that its new menu at its full-service
restaurants, which was implemented during the second and third quarters of
fiscal 1997, has allowed the Company to stabilize the cost of food and
beverage and does not expect the cost of food and beverage to increase
significantly in the future.
8
<PAGE>
LABOR AND BENEFITS
Labor and benefit costs as a percentage of sales decreased to 34.6% for
the third quarter of fiscal 1997 from 35.3% for the same quarter of fiscal
1996, but increased to 35.7% for the first thirty-nine weeks of fiscal 1997
compared to 34.6% during the same period of last year. The decrease in labor
and benefits as a percentage of sales when compared to the same quarter of
last year was due to decreases in labor and benefit costs at both the
Company's full-service and bagel restaurants. At the Company's full-service
restaurants, the decrease in labor and benefits was primarily due to the
introduction of the Company's new menu, which provided for labor savings in
the kitchen area. At the Company's bagel restaurants, the decrease in labor
and benefits was a direct result of the increase in sales.
The increase in labor and benefits costs as a percent of sales for the
first thirty-nine weeks of fiscal 1997 was mainly due to increases in labor
and benefit costs as a percentage of sales at the Company's full-service
restaurants during the first and second quarters of this fiscal year. The
Company believes that the introduction of a new menu at its full-service
restaurants has helped the Company stabilize its labor and benefit costs and
does not expect these costs to increase significantly in the future.
Although the Company does not expect the federally mandated minimum wage
increases which became effective October 1, 1996 to have a significant impact
on the Company's financial results, additional increases in state or federal
minimum wage requirements or changes in applicable state law with respect to
minimum wages for "tipped" employees may have an adverse impact on the
Company.
DIRECT AND OCCUPANCY
Direct and occupancy costs were 36.4% of sales for the third quarter of
fiscal 1997, which was consistent with direct and occupancy costs of 36.4%
during the same period of fiscal 1996, and increased to 36.1% of sales for
the first thirty-nine weeks of fiscal 1997 compared to 35.6% of sales during
the same period of last year. The increase in direct and occupancy costs as
a percentage of sales was due primarily to fixed costs such as rent and
depreciation at the Company's bagel restaurants being spread across a small
sales base. If sales at the Company's bagel restaurants increase in the
future, these fixed costs will decrease as a percentage of sales.
Offsetting the increase in direct and occupancy costs as a percentage of
sales at the Company's bagel restaurants was a decrease in direct and
occupancy costs at the Company's Italian and steakhouse restaurants. This
decrease was mainly due to a reduction in advertising and promotion expense
to 2.6% of full-service restaurant sales during the first thirty-nine weeks
of fiscal 1997 from 3.5% of full-service restaurant sales in the first
thirty-nine weeks of fiscal 1996. The Company expects its advertising and
promotion costs to increase to approximately 4.0% of sales for the remainder
of fiscal 1997 as the phases of the Company's new advertising plan are
implemented.
The Company also expects to spend approximately 4.0% of bagel restaurant
sales for advertising and promotion expenses in order to implement several
direct mailing and local store marketing campaigns in the Dallas-Fort Worth,
Texas area.
GENERAL AND ADMINISTRATIVE
General and administrative costs as a percentage of sales decreased to
5.6% for the third quarter of fiscal 1997 from 6.2% of sales reported during
the same quarter of last year, but increased to 7.1% for the first
thirty-nine weeks of fiscal 1997 compared to 6.3% of sales for the same
period of last year. The decrease in general and administrative costs for
the third quarter of fiscal 1997 was due to the Company recording a recovery
of a note receivable of $85,000. A reserve was established during the fourth
quarter of fiscal 1996 to reserve for the entire $147,368 balance of an
outstanding note receivable related to the closure of its Milwaukee,
Wisconsin restaurant in fiscal 1995. During the third quarter of fiscal 1997,
the Company negotiated a settlement amount of $85,000 for the entire balance
of the note receivable. The
9
<PAGE>
settlement amount was received by the Company on April 1, 1997 and the
Company has recorded the recovery of bad debt expense during the third
quarter of fiscal 1997.
The decrease in general and administrative costs at the Company's
full-service restaurants was partially offset by increases in general and
administrative expenses at the Company's bagel restaurants. The Company
incurred approximately $56,000 and $156,000 of additional general and
administrative costs related to operating additional bagel restaurants in the
third quarter and the first thirty-nine weeks of fiscal 1997. The Company
does not expect general and administrative costs at its full-service
restaurants to increase significantly during the remainder of the fiscal
year. General and administrative costs at the Company's bagel restaurants
may increase slightly as the Company opens additional bagel restaurants
during the remainder of the fiscal year.
IMPAIRMENT OF ASSETS WRITE-DOWN
During the second quarter of fiscal 1997, the Company recognized an
impairment loss of $640,286 for the long-lived assets at its Madison,
Wisconsin restaurant. During this time period, a major national competitor
opened a steakhouse restaurant in close proximity to the Company's
restaurant. The competitor's restaurant has the Company's restaurant
out-positioned in the market area, and sales at the Company's restaurant have
suffered due to the opening of this restaurant. In addition, the Company
attempted several advertising and promotional campaigns during the first
twenty-six weeks of fiscal 1997 that did not produce the results management
expected. Based on these items, management revised its forecasts for this
restaurant and projected operating losses and cash flow deficits for the
remainder of the restaurant's lease, which expires in 2005. Accordingly, the
Company has fully written off the long-lived assets at this restaurant. See
Consolidated Notes to Financial Statements, Note F.
OTHER INCOME (EXPENSE) NET
Other income (expense) decreased to a net expense of $19,161 for the
third quarter of fiscal 1997, down from a net expense of $5,662 reported in
the same quarter of last year, and decreased to a net expense of $47,007 for
the first thirty-nine weeks of fiscal 1997 from a net income of $1,037 during
the same period of last year. This decrease in other income (expense) was
primarily due to a decrease in investment income in fiscal 1997 as a result
of fewer funds available for investment. In addition, interest expense
increased during fiscal 1997 due to the additional debt financing that was
arranged during the fourth quarter of fiscal 1996.
INCOME TAX EXPENSE (BENEFIT)
The income tax expense for the third quarter of fiscal 1997 was $1,225 as
compared to an income tax benefit of $37,750 for the third quarter of fiscal
1996. For the first thirty-nine weeks of fiscal 1997 the Company recorded an
income tax benefit of $8,883 as compared to an income tax benefit of $102,750
for the same period of last year. The fiscal 1996 tax benefit recorded was
limited to the amount of taxes recoverable from the carryback of losses;
there was no tax benefit recorded for the carryforward of losses generated in
the first thirty-nine weeks of fiscal 1997. The Company's fiscal 1997 tax
benefit was due to the receipt of state and federal income taxes in excess of
the amount recorded as an income tax receivable as of June 30, 1996. The
fiscal 1997 tax benefit was offset by $5,700 of state and franchise taxes
paid during the period.
As of March 30, 1997, the Company has $144,000 of alternative minimum tax
credit carryforwards and $1,824,000 of 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.
10
<PAGE>
SEASONALITY
The Company's highest sales from its Italian and steakhouse restaurants
have historically occurred during the months of July through December. The
Company is currently unable to determine whether the operation of its bagel
restaurants will result in any change in its seasonality.
EFFECTS OF INFLATION
Inflationary factors such as increases in food and labor costs directly
affect the Company's operations. Because most of the Company's employees are
paid hourly rates related to federal and state minimum wage and tip credit
laws, changes in these laws may result in an increase in the Company's labor
costs. The Company cannot always implement 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
At March 30, 1997 the Company had cash and cash equivalents on hand of
$227,297, which represents a decrease of $1,375,639 from the $1,602,936 in
cash and cash equivalents reported as of June 30, 1996. Net cash used in
operating activities was $846,145 for the first thirty-nine weeks of fiscal
1997. In addition to the net loss of $1,904,889, the Company reduced its
accounts payable balance by $395,646 during the first thirty-nine weeks of
fiscal 1997. The reduction in the Company's accounts payable balance related
primarily to payments made to vendors of $215,816 for capital expenditures
for the Company's fourth bagel restaurant. These uses of cash were partially
offset by non-cash depreciation expenses of $726,977 and an impairment of
assets write-down of $640,286. In addition, the Company received proceeds
from an income tax receivable of $165,576, and had increases in other accrued
liabilities of $111,456.
Net cash used in investing activities was $415,794 during the first
thirty-nine weeks of fiscal 1997. This cash was used primarily for purchases
of equipment and leasehold improvements for the Company's fifth bagel
restaurant in the Dallas-Fort Worth, Texas area.
Net cash used in financing activities was $113,700 for the first
thirty-nine weeks of fiscal 1997. The net cash used in financing activities
is the net amount of repayments of amounts due under the Company's debt
financing of $163,700 and borrowings from the Chairman of the Board of
Directors of the Company of $50,000.
Big D Bagels, Inc. ("Big D"), a wholly-owned subsidiary of Ciatti's,
Inc., entered into a Development Agreement with Bruegger's Franchise
Corporation ("Bruegger's) effective January 1, 1995. This agreement requires
Big D to build 30 bagel restaurants by July 1, 2001. During fiscal 1996,
four bagel restaurants were built, thus meeting the initial terms of this
agreement. Big D is required to open five additional bagel restaurants
during fiscal 1997. As of April 30, 1997, Big D has opened two additional
bagel restaurants and has entered into lease agreements for five additional
bagel restaurant sites. The Company intends, however, to open bagel
restaurants at a faster rate than that obligated under the Development
Agreement, subject to available financing. The Company believes each new
site will require approximately $350,000 for capital expenditures, including
the initial franchise fee.
On October 1, 1996, the Company filed a Registration Statement with the
Securities and Exchange Commission with respect to a rights offering of its
common stock to its existing shareholders. The Company filed the
Registration Statement to obtain additional funds that the Company would
contribute to Big D. In connection with the filing of the Registration
Statement and subsequent communications with Bruegger's, Bruegger's asserted
that it had certain rights of consent and first refusal in connection with
the rights offering. As a result of Bruegger's actions, the Company was
forced to delay the commencement of the rights offering until resolution of
the legal issues. On November 8, 1996, the
11
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Company filed a lawsuit in the United States District Court for the District
of Minnesota against Bruegger's and its parent corporation, Quality Dining,
Inc. See "Item 1. Legal Proceedings."
On March 1, 1997, the Company filed a Form S-2 Registration Statement
with the Securities and Exchange Commission for the sale of $2 million of
one-year and three-year fixed term notes. The Company plans to finance its
working capital and capital resource needs with its current cash, future cash
generated from operations, proceeds from the note offering and additional
debt or equity financing. In addition, during the third quarter of fiscal
1997, the Company borrowed $50,000 from the Chairman of the Board of
Directors of the Company and may borrow additional amounts pending the
receipt of funds from other sources. 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 restaurants at a rate faster than that required by the Development
Agreement, it may need funds in addition to those generated from the note
offering. 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 offering or the rights offering 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 assurances that the Company will be
successful in such efforts.
FORWARD LOOKING STATEMENT
Statements included in this Form 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, Big D Bagels,
Inc., to open additional bagel 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 Company's ability to locate and negotiate
favorable leases for additional locations, (ii) the ability of the Company to
hire, train and retain skilled restaurant management and personnel, (iii) the
ability of the Company to generate funds from operations, obtain adequate
restaurant financing on favorable terms and raise additional working capital
when required, (iv) the competitive environment within the restaurant
industry and (v) the Company's successful resolution of its existing
litigation with Bruegger's Franchise Corporation and Quality Dining, Inc. to
enable it to raise funds needed for working capital.
12
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On October 1, 1996, the Company filed a Registration Statement with the
Securities and Exchange Commission for a Rights Offering to its existing
shareholders. In response to Ciatti's filing of the Registration Statement,
Bruegger's asserted that Bruegger's has certain rights of consent and of
first refusal regarding any sale of securities of Ciatti's. Bruegger's is
the franchisor and Big D, the Company's wholly-owned subsidiary, is the
franchisee under a Development Agreement in which Big D has the exclusive
right to develop Bruegger's bagel restaurants in the Dallas-Fort Worth, Texas
area. Ciatti's believes that such rights exist only with respect to
securities of Big D, who is the "Developer" under the Development Agreement
between Big D and Bruegger's, and not with respect to Ciatti's, which is not
a party to the Development Agreement.
Ciatti's and Bruegger's were unable to agree upon resolution of the
matter and, on November 8, 1996, Ciatti's and Big D filed a lawsuit in
United States District Court for the District of Minnesota against Bruegger's
and its parent corporation, Quality Dining, Inc. ("Quality Dining"). In the
lawsuit, Ciatti's and Big D asked for declaratory and injunctive relief
against the defendants with respect to the Development Agreement. In
response, Bruegger's and Quality Dining filed a counterclaim seeking
declaratory relief that (i) the Development Agreement required Ciatti's to
provide prior notice of its offering to Bruegger's and obtain consent of
Bruegger's and (ii) that the Company's use of any trademark of Bruegger's in
the Company's proposed rights offering without the written consent of
Bruegger's would violate the Development Agreement and related Franchise
Agreements between Big D and Bruegger's. The Company believes that
Bruegger's counterclaims are substantially without merit.
On April 23, 1997, the Company and Bruegger's held a settlement
conference at which the parties reached an agreement in principle concerning
the issues surrounding the litigation. The parties are in the process of
finalizing documentation of the settlement. In connection with the
settlement, the Court issued an order dismissing the action with prejudice,
but reserving judisdiction for sixty (60) days to permit any party to move to
reopen the action for good cause shown or to submit and file a stipulated
form of final judgment or to seek enforcement of the settlement terms.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
13
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CIATTI'S, INC. AND SUBSIDIARY
-----------------------------
(Registrant)
/s/ Phillip R. Danford
-----------------------
Phillip R. Danford
President
/s/ Joseph W. Fesenmaier
-------------------------
Joseph W. Fesenmaier
Controller
Dated May 12, 1997
14
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