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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
For the fiscal year ended June 29, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
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COMMISSION FILE NUMBER: 0-16348
CIATTI'S, INC.
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(Name of small business issuer in its charter)
MINNESOTA 41-1564262
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5555 WEST 78TH STREET
EDINA, MN 55439
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(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. YES X NO
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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 OR 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 REVENUES FOR ITS MOST RECENT FISCAL YEAR WERE $17,738,000.
ON SEPTEMBER 19, 1997, 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 AND ASK PRICE OF $2.00 PER
SHARE ON SEPTEMBER 19, 1997 WAS APPROXIMATELY $656,592.
DOCUMENTS INCORPORATED BY REFERENCE
THE COMPANY'S PROXY STATEMENT FOR ITS 1997 ANNUAL MEETING OF SHAREHOLDERS TO
BE HELD ON NOVEMBER 13, 1997 IS INCORPORATED BY REFERENCE INTO PART III OF
THIS FORM 10-KSB.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Ciatti's, Inc. (the "Company") owns and operates seven full-service
restaurants in Minnesota and Wisconsin. At September 17, 1997, these
full-service restaurants included six Italian restaurants operating in
Minnesota and Wisconsin under the name "Ciatti's Italian Restaurant" and one
Steakhouse restaurant operating in Wisconsin under the name "Spurs Steakhouse
& Saloon." During September 1997, the Company sold three Italian restaurants
and the Company has entered into an agreement to sell a fourth restaurant in
October 1997. DFW Bagels, Inc. ("DFW Bagels"), a wholly-owned subsidiary of
the Company, has entered into an exclusive area development agreement with
Bruegger's Franchise Corporation ("Bruegger's") to develop bagel bakeries in
the Dallas-Fort Worth area. As of September 17, 1997, DFW Bagels is
operating eight bagel bakeries in the Dallas-Fort Worth area.
RESTAURANT DEMOGRAPHICS
FULL-SERVICE RESTAURANTS
The Company currently operates five 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. Some of the Company's restaurants also
offer outdoor patio dining on a seasonal basis.
The following table sets forth the opening date and square footage of the
Company's full-service restaurants:
APPROXIMATE
DATE OPENED LOCATION SQUARE FOOTAGE
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September, 1984 Saint Paul, Minnesota 8,600
February, 1985 Madison, Wisconsin 9,800
November, 1988 Eden Prairie, Minnesota 7,800
February, 1990 Maplewood, Minnesota 7,800
November, 1990 St. Cloud, Minnesota (1) 6,700
October, 1991 Edina, Minnesota 6,500
November, 1991 LaCrosse, Wisconsin 7,100
_________________________________
(1) The Company has entered into an agreement to dispose of the St. Cloud
restaurant in October 1997.
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The Saint Paul restaurant is located in an urban area. The Madison, Eden
Prairie, Maplewood and Edina restaurants are located in suburban areas. The
St. Cloud restaurant is located in a community of approximately 50,000
residents, 50 miles northwest of the Minneapolis-St. Paul metropolitan area.
The LaCrosse, Wisconsin restaurant is located in a community of approximately
50,000 residents, 90 miles southeast of the Minneapolis-Saint Paul
metropolitan area. The actual cost of opening an Italian or steakhouse
restaurant, including leasehold improvements, furniture, fixtures, and
equipment and other pre-opening costs has varied from $480,000 to $930,000
per restaurant.
The Company has not opened any Italian or steakhouse restaurants in
recent years and has no plans to open any additional full-service restaurants
in the future. In September 1997, the Company sold three of its full service
restaurants and entered into an agreement to sell a fourth restaurant. The
restaurants that were sold were located in Burnsville, Falcon Heights, and
Woodbury, Minnesota, while the restaurant that the Company has entered into
an agreement to sell is located in St. Cloud, Minnesota. The aggregate sales
price of the three restaurants that were sold in September 1997 was
approximately $925,000, of which $825,000 was paid in cash with the remaining
$100,000 payable in monthly installments over a five year period. The net
book value of the leasehold improvements and equipment as of June 29, 1997 at
these three locations was approximately $479,000.
The restaurants being sold will initially be operated as Ciatti's Italian
Restaurants. The new owners have the right, however, to change the name at
any time after the sale. 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 the
construction of Bruegger's bagel bakeries in the Dallas-Fort Worth area.
During fiscal 1997, the three full-service restaurants that were sold by the
Company in September 1997 generated approximately $5,025,000 of sales, net
earnings of $53,000 and cash flows from operations of $275,000.
BAGEL BAKERIES
As of September 17, 1997, DFW Bagels operated eight bagel bakeries in the
Dallas-Forth Worth area and has signed leases for an additional four bakeries.
Generally, these bagel bakeries range in size from 2,100 to 3,000 square feet
and seat between 45 and 50 customers. Most bagel bakeries also offer a limited
area for outdoor patio dining. As a test, the Company opened a 520 square foot
bagel bakery as part of a service station/convenience store in Irving, Texas
during the last quarter of fiscal 1997. In the future, the Company plans to
open bagel bakeries ranging in size from 1,800 to 2,200 square feet.
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The following table sets forth the opening date and square footage of the
Company's bagel bakeries:
APPROXIMATE
DATE OPENED LOCATION SQUARE FOOTAGE
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October, 1995 Plano (Lancer's Square) 3,000
December, 1995 Plano (Shepard Place) 2,250
February, 1996 Dallas (Preston Center) 2,500
June, 1996 Fort Worth (Bowie) 2,130
November, 1996 Dallas (Preston Campbell) 2,200
April, 1997 Irving (Valley Ranch) 520
June, 1997 Fort Worth (Fossil Creek) 2,100
August, 1997 University Park (Southern 2,300
Methodist University)
RESTAURANT FORMATS
ITALIAN RESTAURANTS
The Company's restaurants have traditionally had an Italian format. The
Company's Italian restaurants serve appetizers, pizza, soups, 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
dining area of each restaurant features booths and individual tables with
either chairs or banquettes. Each restaurant differs in interior design and
decor, depending upon the location and nature of the space. The Company has
recently redesigned one of its restaurants to be a more informal,
open-kitchen style restaurant. Most restaurants accept reservations for a
limited portion of their dining area. The Company has lounge areas, which
have full-service liquor licenses, available in most restaurants for
customers waiting to be seated for dining. In most of the Company's
restaurants, appetizers and other menu items are available in the lounge as
well as in the restaurant.
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 1997, food sales comprised approximately 77% and beverage sales
comprised approximately 23% of total full-service 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
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restaurants from 10:00 a.m. to 2:00 p.m. Each restaurant's lounge is
typically open from 11:00 a.m. until midnight (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 RESTAURANT
The Company's Madison, Wisconsin Spurs Steakhouse & Saloon restaurant has
a more casual atmosphere than the Company's Italian restaurants, with a menu
that features a Texas theme, featuring a variety of steaks, ribs, chicken,
seafood, sandwiches, salads, soup and appetizers. Prices at the steakhouse
restaurant range from $4.99 to $17.95 and the hours of operation are similar
to those of the Company's Italian restaurants.
BAGEL BAKERIES
The Company's bagel bakeries specialize in 12 varieties of freshly baked
bagels and branded cream cheeses, as well as freshly ground, premium branded
coffee which is brewed fresh every 19 minutes. Bruegger's bagels are unique
because certified bagel masters make the bagels by kettle-boiling them in
malt and water and then baking them in a stone hearth oven. In addition,
each bagel bakery offers deli-style bagel sandwiches, freshly-made soups, and
other food and beverage items. The bagel bakeries 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 layout of the Company's bagel bakeries are based
on plans and guidelines issued by Bruegger's. Bruegger's updated its plans
and designs for all bagel bakeries in 1995 and all of the Company's existing
bagel 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
franchisees an option to purchase major equipment from two different
manufacturers.
RESTAURANT AND BAKERY OPERATIONS
The Company has established uniform operational standards for all of 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.
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The Company's President supervises the operations of all restaurants with
the assistance of a Director of Operations for the bagel bakeries.
Additionally, a Vice President for Administration, a Corporate Controller 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 goals.
Supervisory personnel visit each restaurant an average of one day a week.
During these 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 that the Company's high levels of customer
service are being maintained.
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.
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 and bakery 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, payroll reports and other various information.
RESTAURANT DEVELOPMENT
The Company has entered into an exclusive development agreement with
Bruegger's. Bruegger's was acquired in May 1996 by Quality Dining, Inc. As
of May 11, 1997, Bruegger's, directly or through franchises, operated in 52
metropolitan markets in 32 states. In September
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1997, Quality Dining, Inc. entered into a share exchange agreement under
which it will sell Bruegger's Corporation back to its former owners. The
Company believes the transaction will be completed during October 1997. See
"Proposed Sale of Bruegger's Corporation by Quality Dining, Inc."
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, 1997, there were 475
bagel bakeries open for business, owned and operated by either Bruegger's or
by franchisees. 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 bagel bakeries. 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
agreement, the Company is required to build thirty bagel bakeries in the
Dallas-Fort Worth area by July 1, 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. As of September 17, 1997, six
bagel bakeries have been opened in the north-central portion of the Dallas
area, and two were opened in the Fort Worth area.
The ability of the Company to open additional bagel 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 opening a new bagel bakery is approximately $370,000. The
cost of leasehold improvements for the existing bakeries has averaged
$175,000 per bakery, depending on the size of the space, contributions by the
lessor and the condition of the buildings. The cost of equipment for the
existing bakeries has averaged $150,000 for each bakery. Other pre-opening
expenses, including design services, smallwares, training, and initial
inventory is $45,000 for each bakery, including the initial franchise fee.
RELATIONSHIP WITH BRUEGGER'S AND QUALITY DINING
The development by DFW Bagels of bagel bakeries is based upon franchise
documents entered into between DFW Bagels and Bruegger's. The principal
documents are a development agreement dated as of January 1, 1995 and amended
on April 23, 1997 and franchise agreements pertaining to each existing bagel
bakery. In September 1997, Quality Dining, Inc. entered into a
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share exchange agreement under which it will sell Bruegger's Corporation back
to its former owners. The Company believes the transaction will be completed
during October 1997. See "Proposed Sale of Bruegger's Corporation by Quality
Dining, Inc."
The development agreement, as amended, gives DFW Bagels the right to
construct, own and operate bagel bakeries in the counties of Tarrant and
Dallas, Texas and certain areas immediately north of the City of Dallas,
including the City of Plano, Texas (the "Development Area"). The development
agreement grants DFW Bagels the exclusive right and obligation to develop
thirty bagel bakeries within the Development Area by July 1, 2001 on the
following schedule:
Minimum number
of bagel bakeries
DFW Bagels must have in
Deadline Operation by Deadline
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July 1, 1996 4
January 1, 1998 9
October 1, 1998 14
July 1, 1999 19
July 1, 2000 24
July 1, 2001 30
DFW Bagels is to choose the sites for the bagel bakeries at its sole
expense but must seek site approval from Bruegger's in writing prior to
beginning construction. The development agreement also defines the
relationship of DFW Bagels to Bruegger's as that of independent contractor
and states that none of the rights granted therein may be assigned or
otherwise transferred. In addition, Ciatti's, Inc. agreed that any sales of
its interest in DFW Bagels shall be subject to a right of first refusal and
prior written consent by Bruegger's. Bruegger's has additional rights to
acquire equity securities of Ciatti's, Inc. if Ciatti's stock ceases to be
publicly traded.
The development agreement may be renewed in one year increments after the
initial term if DFW Bagels continues opening bagel bakeries at the rate of
three per year. After five years of renewals, however, DFW Bagels is
obligated to open only one bagel bakery per year.
The development agreement gives DFW Bagels the exclusive right to operate
bagel bakeries in the Development Area. The development agreement provides,
however, that certain Bruegger's specialty products (specifically cheese
spreads and related products) may be distributed by a third party through
supermarkets, delicatessens, specialty food stores, convenience stores, and
other wholesale and retail food stores within the Development Area, but in
such event DFW Bagels has a right to act as distributor.
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The development agreement provides that if DFW Bagels breaches any term
of the agreement, Bruegger's has the right to terminate the agreement.
The development agreement provides that DFW Bagels and Bruegger's will
enter into a predetermined franchise agreement for each bagel bakery opened
by DFW Bagels. Each franchise agreement grants DFW Bagels the right to
establish and operate the particular bagel bakery and to use the Bruegger's
system and various trademarks. The franchise agreement designates the
locations approved pursuant to the development agreement as the exclusive
sites for the operation of the bagel bakeries. Under the terms of the
franchise agreement, Bruegger's agrees to provide DFW Bagels with operation
assistance, layout as well as manuals, training and annual audits. The
franchise agreement also states that Bruegger's may at its discretion
establish an Advertising Cooperative (the "Coop") for certain geographic
areas and that if DFW Bagels operates a bagel bakery within such area it must
immediately become a member of the Coop. DFW Bagels s duties under the
franchise agreement include constructing bagel bakeries at its own expense
from pre-approved plans and sending new managers to Bruegger's training
program. DFW Bagels also agrees that its bagel bakeries will strictly
conform to Bruegger's methods, such as its core products, management of the
business, fixtures, furnishings, and maintenance, and that it will keep
confidential the Operations and Bagel Production Manuals provided it. In
consideration of the rights granted it, DFW Bagels is obligated to pay
certain franchise and other fees to Bruegger's. Each franchise agreement has
a term of twenty years and may be renewed in ten year increments. If DFW
Bagels chooses to renew, the terms of the franchise agreement will change to
whatever terms are being offered new franchisees at the time of renewal.
As a result of a dispute between the Company and Bruegger's with respect
to whether Bruegger's had the right to consent to issuances of securities by
Ciatti's and a right of first refusal to purchase securities of Ciatti's, the
Company commenced litigation against Quality Dining and Bruegger's in
November 1996 in United States District Court for the District of Minnesota.
Quality Dining and Bruegger's counterclaimed and the parties conducted
discovery. In April 1997, in connection with the settlement of the lawsuit,
Ciatti's and Bruegger's entered into a Settlement Agreement. Under the terms
of the Settlement Agreement, Bruegger's agreed to extend the dates on which
the Company was required to complete the opening of certain bagel bakeries
under the development agreement, and under certain circumstances the Company
needs the consent of Bruegger's to issue securities and under certain
circumstances Bruegger's has a right of first refusal with respect to the
Company's securities.
PROPOSED SALE OF BRUEGGER'S CORPORATION BY QUALITY DINING, INC.
In September 1997, Quality Dining, Inc. entered into a share exchange
agreement under which it agreed to sell Bruegger's Corporation back to its
former owners. Although the Company is unable to determine the effect of the
sale upon it, the Company believes completion of this transaction will remove
some of the uncertainty surrounding the status of Bruegger's in the bagel
market place and may facilitate the Company's ability to expand and achieve
profitability in
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the Dallas-Fort Worth market. The Company expects this transaction to close
at the end of October 1997.
RELIANCE ON COMMISSARY OF THIRD PARTY
Currently, the Company obtains its shaped bagel dough, as well as other
food supplies from a commissary owned by Quality Dining, Inc. Based upon
industry information, the Company does not consider it economically
advantageous to invest in the construction of its own commissary until it has
opened approximately ten to fifteen of its own bagel bakeries, which the
Company expects to occur in fiscal 1998, subject to available financing.
While the current arrangement represents the most cost effective way of
obtaining bagel dough and other supplies, the closing of the commissary or
the inability of the Company to receive its supplies from the commissary,
would have a severe and immediate impact on the continuation of the Company's
business in the Dallas-Fort Worth area.
FISCAL YEAR
The Company's fiscal year ends on the Sunday closest to June 30 of each
year. Therefore, the Company's fiscal years are either 52 or 53 week periods.
SEASONALITY
The Company's full-service restaurant sales historically have been the
highest during the period from July through December. The Company's bagel
bakeries' highest sales have occurred during the period from September
through May.
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.
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 Minnesota and Wisconsin 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.
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For its bagel bakeries, 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 Development Area as well as
are 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 bagel
operations. This integration will allow the Company to provide its bagel
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 2.75% of its projected fiscal 1998
full-service restaurant sales for advertising. Under the terms of the
franchise agreements with Bruegger's, the Company is required to spend
approximately 4% 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 bagel bakeries currently
existing in the franchise area, the majority of the Company's efforts in this
respect are directed to local store marketing and direct mail. As part of
its efforts to increase sales of its bagel bakeries, the Company intends to
spend between 4% and 5% of bagel bakery sales for advertising in the near
future. Television, radio or other wide coverage advertising could 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 or bakeries. In some instances the Company may
have to obtain zoning variances and land use permits for its new restaurants
or bakeries. 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
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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
above, but related to, the minimum wage. Although the Company plans to
implement a menu-price increase at its full-service restaurants effective
October 1, 1997 to offset the September 1, 1997 minimum wage increase,
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.
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.
"BRUEGGER'S" and "BRUEGGER'S BAGEL BAKERY" are trademarks of Bruegger's
Corporation. Under the terms of the development agreement, DFW Bagels has
the right to use all trademarks associated with the Bruegger's bagels
franchise in connection with the operation of bagel bakeries in the
Dallas-Fort Worth area.
EMPLOYEES
As of September 17, 1997, the Company employed approximately 854 persons,
including 7 corporate employees, 52 restaurant and bakery managers and
assistant managers, and 795 hourly restaurant and bakery employees. Hourly
employees comprise approximately 93% 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.
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NAME AGE POSITION
- ------------------ --- ----------------------
Phillip R. Danford 48 President and Director
Barney U. Uhlig 57 Vice President for
Administration and Secretary
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 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 1992.
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 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.
13
<PAGE>
The Company's leases for its bagel bakeries generally run for either five
or ten years, and have an option to renew for one or two additional five year
terms. The existing leases provide for a fixed rent for the primary term in
an amount that varies with the location.
ITEM 3. LEGAL PROCEEDINGS
The Company is not subject to any pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
14
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is currently traded on the Nasdaq SmallCap
Market under the symbol "CIAT." The following table sets forth the range of
high and low prices for the Company's Common Stock on the Nasdaq SmallCap
Market for fiscal 1996 and 1997. The prices listed below indicate
inter-dealer prices without retail mark up, mark down or commissions. They
may not necessarily represent actual transactions.
FISCAL YEAR LOW HIGH
--- ----
1997 First Quarter $3.50 $5.00
Second Quarter 2.50 4.00
Third Quarter 2.50 2.50
Fourth Quarter 2.25 2.25
1996 First Quarter $3.75 $5.00
Second Quarter 4.00 6.125
Third Quarter 4.25 6.25
Fourth Quarter 2.75 5.25
As of September 1, 1997, the Company had 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 past
and does not intend to pay cash dividends in the foreseeable future.
15
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF FIFTY-TWO WEEKS ENDED JUNE 29, 1997 TO
FIFTY-TWO WEEKS ENDED JUNE 30, 1996
SALES
Sales for fiscal 1997 increased $148,617, or .8%, to $17,737,804 from fiscal
1996 sales of $17,589,187. The increase in consolidated sales during fiscal
1997 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 $15,811,370 for fiscal 1997 decreased 6.8%
from sales of $16,962,135 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, year-to-date full-service restaurant sales were down
$399,460, or 2.5%, when compared to the same period last year. The Company
believes an extensive advertising campaign entered into during the third
quarter of this year, which will extend through the first quarter of fiscal
1998, has had and 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.
Bagel bakery sales of $1,926,434 for fiscal 1997 increased $1,299,382, or
207.2%, over bagel bakery sales of $627,052 for fiscal 1996. This increase
in sales was primarily a function of the Company having seven bagel
restaurants open as of June 29, 1997, while only having four bagel
restaurants open as of June 30, 1996. The Company is required by its
development agreement to have nine stores open by January 1, 1998 and thirty
stores open by July 1, 2001.
COST OF FOOD AND BEVERAGE
The cost of food and beverage was 30.3% of sales in fiscal 1997, an increase
from the 29.5% of sales reported in fiscal 1996. The increase in the cost of
food and beverage for fiscal 1997 was primarily due to the Company's bagel
bakery concept operating at higher cost levels than its full-service
restaurants. In addition, increases during the first two quarters of this
fiscal year in the costs of selected products at the Company's full-service
restaurants occurred 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.
16
<PAGE>
LABOR AND BENEFITS
Labor and benefit costs were 35.5% of sales in fiscal 1997, an increase from
the 34.9% of sales reported in fiscal 1996. The increase in labor and
benefits costs as a percent of sales for fiscal 1997 was mainly due to the
Company's bagel bakery concept operating at higher cost levels than its
full-service restaurants. In addition, increases occurred in labor and
benefit costs as a percentage of sales at the Company's full-service
restaurants during the first and second quarters of the 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.
The federally mandated minimum wage increases which became effective October
1, 1996 did not have a significant impact on the Company's financial results.
On September 1, 1997, another minimum wage increase became effective. In
response to this wage increase, the Company plans to implement menu price
increases at its full-service restaurants effective October 1, 1997. These
increases are expected to offset the cost of the wage increases.
DIRECT AND OCCUPANCY
Direct and occupancy costs primarily include individual restaurant
advertising, promotion, supplies, utilities, occupancy and depreciation
expenses. These costs were 37.3% of sales in fiscal 1997, an increase from
the 36.2% reported last year. This increase was due to the following three
reasons. First, the Company increased its advertising and promotion costs
from 3.6% of sales during fiscal 1996 to 4.5% of sales in fiscal 1997.
Second, lower sales levels at the full-service restaurants caused fixed costs
such as occupancy and depreciation to be spread over a smaller sales base,
thus increasing those respective percentages as compared to sales. Third,
the Company incurred significant costs related to the start-up of the bagel
bakeries. The Company expects preopening costs relating to the start-up of
bagel bakeries to remain at an average of $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
the near future. In addition, the Company expects advertising and
promotional expenses to approximate 2.75% of full-service restaurant sales
during fiscal 1998.
GENERAL AND ADMINISTRATIVE
General and administrative costs were 7.4% of sales for fiscal 1997 and
fiscal 1996. The Company incurred approximately $208,000 of additional
general and administrative costs related to operating additional bagel
bakeries in fiscal 1997. The Company also had increased professional fees
which were partially offset by the recovery of a note receivable that had
been fully reserved for.
17
<PAGE>
WRITE-DOWN OF IMPAIRED ASSETS
Due to events occurring during fiscal 1997, the Company recognized an
impairment loss of $640,286 for the long-lived assets at its Madison,
Wisconsin restaurant. During fiscal 1997, 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 half of fiscal 1997
that did not produce the results management expected. Based on these
factors, 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.
During fiscal 1996, the Board of Directors resolved to close its full-service
restaurant located in Glendale, Wisconsin, effective September 8, 1996.
Accordingly, the Company recorded a $77,691 charge during fiscal 1996 to
write-off the assets at this location.
OTHER INCOME (EXPENSE), NET
Other income (expense) increased to a net expense of $69,140 in fiscal 1997
from a net expense of $17,601 in fiscal 1996. The Company's interest expense
increased to $105,460 in fiscal 1997 from $92,634 in fiscal 1996 as a result
of higher debt in 1997 due primarily to the construction of the Company's
bagel bakeries. The Company's investment income decreased to $18,097 in
fiscal 1997 from $59,526 in fiscal 1996 primarily as a result of fewer funds
available for investment.
INCOME TAX BENEFIT
The income tax benefit for fiscal 1997 was $7,633 as compared to $160,000 in
fiscal 1996. The fiscal 1996 tax benefit recorded reflects the amount of
taxes recoverable from the carryback of losses; there was no tax benefit
recorded for the losses generated during 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 $7,025 of state and
franchise taxes paid during the year.
As of June 29, 1997, the Company has approximately $166,000 of alternative
minimum tax credit carryforwards and $2,733,000 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 full-service restaurant sales historically have been the
highest during the period from July through December. The Company's bagel
bakeries' highest sales have occurred during the period from September
through May.
18
<PAGE>
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 June 29, 1997, the Company had cash and cash equivalents on hand of
$454,157, which represents a decrease of $1,148,779 from the $1,602,936 in
cash and cash equivalents reported as of June 30, 1996. At June 29, 1997,
the Company had a deficit in working capital of $1,871,619 compared to a
deficit in working capital of $385,291 at June 30, 1996.
Net cash used in operating activities was $706,255 for fiscal 1997. During
fiscal 1997, the Company incurred a net loss of $2,568,778. This use of cash
was partially offset by non-cash depreciation and amortization expense of
$1,002,942 and a write-down of impaired assets of $640,286. In addition, the
Company received proceeds from an income tax receivable of $165,576.
Net cash used in investing activities was $414,320 during fiscal 1997 which
is the net of $499,320, used primarily for purchases of equipment and
leasehold improvements for the Company's fifth bagel bakery, and $85,000
recovered on a note receivable. The equipment and leasehold purchases for
the Company's sixth and seventh bagel bakeries were financed with loans from
construction companies.
Net cash used in financing activities was $28,204 for fiscal 1997. The net
cash used in financing activities is the net of proceeds of borrowings from
the Chairman of the Board of Directors of the Company of $100,000 and
borrowings of $73,000 from a note offering commenced in June 1997, less
payments of $201,204 due under other debt financing.
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. During fiscal
1996, four bagel restaurants were built, thus meeting the initial terms of
this agreement. During fiscal 1997, three additional bagel bakeries were
opened. DFW Bagels is required to open two additional bagel bakeries by
January 1, 1998. As of September 15, 1997, DFW Bagels opened one additional
bagel bakery and 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.
19
<PAGE>
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 July 31, 1997, the Company had raised
approximately $200,000 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.
In August 1997, the Company borrowed $300,000 from the Chairman of the Board
of Directors of the Company and may borrow additional amounts.
During September 1997, the Company sold three of its full-service restaurants
and entered into an agreement to sell an additional restaurant in October 1997.
The restaurants are located in Burnsville, Falcon Heights, St. Cloud, and
Woodbury, Minnesota. The sale of these restaurants will generate proceeds of
approximately $1,500,000. The net book value of the leasehold improvements and
equipment as of June 29, 1997 at these locations was approximately $663,000.
The restaurants being sold will initially be operated as Ciatti's Italian
Restaurants-Registered Trademark-, however, the new operators have the right to
change the name at any time after the sale. 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. The Company has no
current intention of selling any of its other full-service restaurants.
20
<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
explored several alternatives for lease financing and equipment financing for
its bagel bakeries and believes that it will be able to obtain such financing
when the Bruegger's divestiture is completed, as described below. 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 unit 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 unit 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 assurance that the Company
will be successful.
In May 1996, Bruegger's was purchased by Quality Dining, Inc. On May 12,
1997 Quality Dining, Inc. announced that its Board of Directors approved a
plan to divest its Bruegger's bagel-related business. On September 3, 1997,
Quality Dining, Inc. entered into a share exchange agreement under which it
will sell Bruegger's to its former owners in exchange for their securities of
Quality Dining, Inc. and certain other consideration. Consummation of the
transactions is subject to the prior satisfaction of certain conditions. The
Company believes the transactions will be consummated in October 1997.
FAILURE TO MEET CURRENT NASDAQ NATIONAL SMALLCAP MARKET REQUIREMENTS
The Company's common stock trades on the Nasdaq SmallCap Market. Under the
rules of the Nasdaq SmallCap Market, an issuer must maintain shareholders'
equity of at least $1,000,000. As a result of its net loss in fiscal 1997,
the Company's shareholders' equity as of June 29, 1997 was approximately
$606,000, which is less than the minimum required for continued inclusion on
the Nasdaq SmallCap Market. In August 1997, Nasdaq advised the Company that
it was not in compliance with the shareholders' equity requirement and
indicated that it intended to delist the Company's common stock from the
Nasdaq SmallCap Market. The Company has requested an exemption from the
$1,000,000 shareholders' equity requirement on the basis that the Company had
filed a registration statement for a public offering that, among other
things, would raise sufficient funds to satisfy the $1,000,000 requirement.
The Nasdaq staff denied the Company's request for the exemption. The Company
has appealed the Nasdaq staff determination and requested an oral hearing
with respect to this issue. The hearing has been scheduled for October 2,
1997. If the Company does not receive an exemption and does not otherwise
raise additional capital in an amount sufficient to achieve compliance with
the Nasdaq SmallCap shareholders' equity requirement, the Company's common
stock could be delisted from the Nasdaq SmallCap Market and would trade on
the Nasdaq "Bulletin Board" or in the over-the-counter market. This could
have an adverse effect on the price and liquidity of the Company's common
stock.
21
<PAGE>
In addition, on August 25, 1997, the SEC approved new Nasdaq rules that
require issuers of SmallCap securities to either (i) maintain net tangible
assets (assets, excluding goodwill, less liabilities) of at least $2.0
million, (ii) achieve net income of at least $500,000 in the most recent
fiscal year or in two of the three most recently completed fiscal years or
(iii) have a market capitalization of $35 million. This new requirement
becomes applicable to Nasdaq SmallCap issuers, including the Company, on
February 25, 1998. Although the Company believes that it will be able to
achieve the $2.0 million net tangible assets requirements by February 25,
1998 by raising additional equity in the unit offering, there can be no
assurance that the Company will be able to attain the required net tangible
assets or meet either of the other requirements for continued inclusion in
the Nasdaq SmallCap Market. If the Company is unable to achieve the minimum
requirements for continued inclusion on the Nasdaq SmallCap Market, then its
securities would trade on the Nasdaq "Bulletin Board" or in the
over-the-counter market. This could have an adverse effect on the price and
liquidity of the Company's common stock.
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'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.
22
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS. The following financial statements of the
Company are included herein.
Report of Independent Certified Public
Accountants - Grant Thornton LLP
Consolidated Balance Sheet as of June 29, 1997.
Consolidated Statements of Operations for the fifty-two weeks ended
June 29, 1997 and June 30, 1996.
Consolidated Statements of Shareholders' Equity for the fifty-two weeks
ended June 29, 1997 and June 30, 1996.
Consolidated Statements of Cash Flows for the fifty-two weeks ended
June 29, 1997 and June 30, 1996.
Notes to the Consolidated Financial Statements for the fifty-two weeks
ended June 29, 1997 and June 30, 1996.
2. PRO FORMA FINANCIAL STATEMENTS. The pro forma unaudited condensed
consolidated financial statements of Ciatti's, Inc. reflecting the sale
of three restaurants in September 1997 are included as Exhibit 99.1.
23
<PAGE>
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 29, 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for the fifty-two week periods ended June 29, 1997 and June 30, 1996. 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 29, 1997, and the results of their
consolidated operations and their cash flows for the fifty-two week periods
ended June 29, 1997 and June 30, 1996, in conformity with generally accepted
accounting principles.
As discussed in note G to the consolidated financial statements, the
Company changed its method of accounting for impairment of long-lived assets
and for long-lived assets to be disposed of, effective July 1, 1996.
/s/ Grant Thorton LLP
Minneapolis, Minnesota
August 18, 1997 (except for note H, as to which the
date is September 3, 1997 and note I, as to
which the date is September 17, 1997)
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JUNE 29, 1997
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 454,157
Receivables 72,930
Inventories 146,598
Prepaid expenses and other current assets 83,574
Assets held for sale 663,108
----------
Total current assets 1,420,367
PROPERTY AND EQUIPMENT
Leasehold improvements 2,638,024
Equipment 3,870,418
Automobiles 15,058
----------
6,523,500
Less accumulated depreciation and amortization (3,281,305)
----------
3,242,195
----------
$ 4,662,562
----------
----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations
Related party $ 100,000
Other 779,807
Accounts payable 1,369,290
Accrued salaries and wages 322,071
Other accrued liabilities 720,818
----------
Total current liabilities 3,291,986
LONG-TERM OBLIGATIONS, less current maturities 764,467
COMMITMENTS AND CONTINGENCIES --
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
Additional paid-in capital 4,335,214
Accumulated deficit (3,736,533)
----------
606,109
----------
$ 4,662,562
----------
----------
The accompanying notes are an integral part of these statements.
24
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996
1997 1996
----------- -----------
Sales
Full-service restaurants $15,811,370 $16,962,135
Bagel bakeries 1,926,434 627,052
---------- ----------
Total sales 17,737,804 17,589,187
Cost of food and beverage 5,371,297 5,191,186
---------- ----------
Gross profit 12,366,507 12,398,001
Operating expenses
Labor and benefits 6,304,321 6,144,829
Direct and occupancy 6,624,350 6,375,300
General and administrative 1,304,821 1,305,619
Write-down of impaired assets 640,286 77,691
---------- ----------
14,873,778 13,903,439
---------- ----------
Loss from operations (2,507,271) (1,505,438)
Other income (expense)
Interest expense (105,460) (92,634)
Investment income 18,097 59,526
Other, net 18,223 15,507
---------- ----------
(69,140) (17,601)
---------- ----------
Loss before income taxes (2,576,411) (1,523,039)
Income tax benefit 7,633 160,000
---------- ----------
Net loss $(2,568,778) $(1,363,039)
---------- ----------
---------- ----------
Net loss per common share $ (3.46) $ (1.85)
---------- ----------
---------- ----------
Weighted average number of common
shares outstanding during the year 742,819 736,917
---------- ----------
---------- ----------
The accompanying notes are an integral part of these statements.
25
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996
<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 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 4,207 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
Net loss -- -- -- (2,568,778) (2,568,778)
------- ----- --------- ---------- ----------
Balance at June 29, 1997 742,819 $7,428 $4,335,214 $(3,736,533) $ 606,109
------- ----- --------- ---------- ----------
------- ----- --------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
26
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Operating activities:
Net loss $(2,568,778) $(1,363,039)
Adjustment to reconcile net loss to cash
provided by (used in) operating activities:
Provision for (recovery of) losses on note receivable (85,000) 147,368
Depreciation and amortization 1,002,942 920,358
Write-down of impaired assets 640,286 77,691
Changes in operating assets and liabilities:
Receivables (21,427) (14,753)
Income taxes receivable 165,576 (44,419)
Inventories 38,240 3,830
Prepaid expenses and other current assets 95,617 (41,240)
Accounts payable 43,012 415,612
Accrued salaries and wages 15,223 7,080
Other accrued liabilities (31,946) 60,827
---------- ---------
Net cash provided by (used in)
operating activities (706,255) 169,315
Investing activities:
Purchases of leasehold improvements and equipment (499,320) (1,459,233)
Receipts on note receivable 85,000 11,079
Payment for preferred stock subscription -- (150,000)
Refund of preferred stock subscription payments -- 600,000
Redemption of held-to-maturity securities -- 97,232
---------- ---------
Net cash used in investing activities (414,320) (900,922)
Financing activities:
Proceeds from the exercise of stock options -- 2,396
Proceeds from long-term obligations 173,000 396,058
Payments of long-term obligations (201,204) (160,432)
---------- ---------
Net cash provided by (used in)
financing activities (28,204) 238,022
---------- ---------
Net decrease in cash and cash equivalents (1,148,779) (493,585)
Cash and cash equivalents at beginning of fiscal year 1,602,936 2,096,521
---------- ---------
Cash and cash equivalents at end of fiscal year $ 454,157 $ 1,602,936
---------- ---------
---------- ---------
</TABLE>
27
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 105,213 $ 89,040
Income taxes 5,000 3,750
Supplemental schedule of noncash investing and financing activities:
Leasehold improvements that were included in
accounts payable at end of fiscal year $ 15,262 $ 209,273
Leasehold improvements that were acquired by
issuance of long-term obligations 566,485 --
</TABLE>
During fiscal year 1997 and 1996, the Company recorded write-downs of
impaired assets in connection with two of its restaurants (note G). The
effect of these write-downs was to reduce the Company's assets as follows:
<TABLE>
<S> <C> <C>
Building $ 610,829 $ --
Equipment 620,710 409,878
Leasehold improvements 231,229 322,044
Accumulated depreciation and amortization (822,482) (654,231)
-------- --------
Write-down of impaired assets $ 640,286 $ 77,691
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
28
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Ciatti's,
Inc. (Ciatti's) and its wholly-owned subsidiary, DFW Bagels, Inc. (DFW
Bagels), formally Big D Bagels, Inc., collectively referred to as the
"Company." Significant intercompany accounts and transactions have been
eliminated.
NATURE OF BUSINESS
The Company owns and operates ten full-service restaurants in Minnesota and
Wisconsin. Included in these full-service restaurants are nine Italian
restaurants operating in Minnesota and Wisconsin under the name "Ciatti's
Italian Restaurant-Registered Trademark-" and one steakhouse restaurant
operating in Wisconsin under the name "Spurs Steakhouse & Saloon-Registered
Trademark-." Subsequent to June 29, 1997, four of the full-service
restaurants were sold (note I). DFW Bagels has entered into an exclusive
development agreement with Bruegger's Franchise Corporation (Bruegger's) to
develop bagel bakeries in the Dallas-Fort Worth area. DFW Bagels owns and
operates seven bagel bakeries in the Dallas-Fort Worth, Texas area (note
H). Subsequent to June 29, 1997, the eighth bagel bakery was opened. All
bagel bakeries operate under the name "Bruegger's Bagel Bakery" pursuant to
the terms of the Bruegger's development agreement and related franchise
documents.
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 $165,000 of cash at one bank at June 29,
1997.
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 29, 1997:
Cash $444,899
Money market funds 9,258
--------
$454,157
--------
--------
29
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED
FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. 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
-----
Leasehold improvements 5 - 10
Equipment 3 - 10
Automobiles 3
Accelerated depreciation methods are used for tax purposes.
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.
PRE-OPENING COSTS
Expenses related to the opening of new restaurants and the hiring and
training of personnel are expensed as incurred.
30
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED
FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
ADVERTISING AND PROMOTION COSTS
The Company expenses advertising and promotion costs when incurred.
Advertising and promotion costs were $790,407 and $640,233 for fiscal 1997
and 1996.
EMPLOYEE STOCK OPTIONS
The Company's employee stock option plans are accounted for under the
intrinsic value method.
NET LOSS PER COMMON SHARE
Net loss per common share has been computed by dividing net loss by the
weighted average number of common shares outstanding during the year.
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.
FUTURE EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) 128, "Earnings per Share," which is
effective for fiscal year 1998. 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.
31
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED
FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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.
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.
RECLASSIFICATIONS
Certain 1996 amounts have been reclassified to conform with the 1997
presentation.
NOTE B - LONG-TERM OBLIGATIONS
Long-term obligations at June 29, 1997 consist of the following:
Unsecured notes payable to an officer and shareholder;
interest at 10.5%; payable in quarterly installments
through June 1, 1998 $ 100,000
Unsecured notes payable to two construction companies;
interest at prime plus 3% (effective rate of 11.5%);
payable in monthly installments through June 23, 1998 566,485
32
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED
FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996
NOTE B - LONG-TERM OBLIGATIONS - Continued
Note payable to a financial institution, collateralized
by inventory, receivables and property of the Company;
interest at 11.5%; payable in monthly installments
through December 2000 $ 211,975
Notes payable to a financial institution, collateralized
by certain equipment and fixtures of DFW Bagels; interest
at 10.5%; payable in monthly installments through May 2001 315,317
Subordinated notes payable (a) 73,000
Obligation under capital lease (note D) 377,497
---------
1,644,274
Less current maturities 879,807
---------
$ 764,467
---------
---------
(a) During the fiscal year ended June 29, 1997, the Company authorized the
issuance of up to $2,000,000 in subordinated fixed-rate notes with
maturities of either one year (9% notes) or three years (9.25% notes).
Interest is payable semi-annually on January 1 and July 1. As of
June 29, 1997, the Company has issued $53,000 in one-year notes due
through June 25, 1998 and $20,000 in three-year notes due through
June 25, 2000. Subsequent to June 29, 1997, approximately $118,000 of
one-year notes and $8,000 of three-year notes were issued.
Aggregate maturities of long-term obligations, are as follows:
FISCAL YEAR ENDING
------------------
1998 $ 879,807
1999 178,180
2000 218,038
2001 156,210
2002 52,127
2003 and thereafter 159,912
---------
$1,644,274
---------
---------
33
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED
FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996
NOTE B - LONG-TERM OBLIGATIONS - Continued
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 approximates the
carrying value at June 29, 1997.
NOTE C - INCOME TAXES
Income tax expense (benefit) consists of the following:
1997 1996
-------- ---------
Current
Federal $(14,658) $(167,000)
State 7,025 7,000
Deferred -- --
------- --------
$ (7,633) $(160,000)
------- --------
------- --------
The actual income tax benefit differs from the "expected" tax benefit
computed by applying the U.S. corporate income tax rate of 34% to loss
before income taxes as follows:
1997 1996
--------- --------
Computed "expected" tax benefit $ (875,980) $(517,833)
State income taxes, net of Federal tax effect (114,697) (42,048)
Change in valuation allowance 1,035,000 355,000
Other (51,956) 44,881
--------- --------
Actual income tax benefit $ (7,633) $(160,000)
--------- --------
--------- --------
At June 29, 1997, the Company has approximately $166,000 of 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 $2,733,000 of
net operating loss carryforwards which expire through the year 2012.
34
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED
FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996
NOTE C - INCOME TAXES - Continued
The components of deferred tax assets (liabilities) were comprised of the
following:
1997 1996
----------- ---------
Deferred tax assets:
Tax credit carryforwards $ 223,000 $ 201,000
Net operating loss carryforwards 1,076,000 228,000
Gift certificates 154,000 168,000
Reserve for note receivable -- 59,000
Capital lease obligation 151,000 164,000
Other 86,000 83,000
---------- --------
Total deferred tax assets 1,690,000 903,000
Deferred tax liabilities:
Fixed asset bases recovery differences (10,000) (258,000)
---------- --------
Net deferred tax asset before valuation allowance 1,680,000 645,000
Valuation allowance (1,680,000) (645,000)
---------- --------
Net deferred tax asset $ -- $ --
---------- --------
---------- --------
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. During 1997, the building under capital lease
was fully written off (note G).
35
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED
FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996
NOTE D - LEASES - Continued
Future minimum lease payments under noncancelable operating leases (as
adjusted for sale of four restaurants subsequent to year end (note I)) and
the present value of future minimum capital lease payments as of June 29,
1997 are:
Facility Capital Total
Fiscal year ending rentals lease rentals
------------------ ---------- ------- ----------
1998 $1,333,531 $ 70,062 $1,403,593
1999 1,172,091 70,062 1,242,153
2000 966,407 70,062 1,036,469
2001 915,308 70,062 985,370
2002 894,133 70,062 964,195
2003 and thereafter 2,110,714 180,924 2,291,638
--------- ------- ---------
Total minimum lease payments $7,392,184 531,234 $7,923,418
--------- ------- ---------
--------- ------- ---------
Less amount representing interest
imputed at a rate of approximately 15% 153,737
-------
Present value of net minimum capital
lease payments $377,497
-------
-------
Rent expense under noncancelable operating leases was $1,398,718 and
$1,291,264 during fiscal years 1997 and 1996.
Certain of the Company's leases have contingent rentals based upon sales
volumes above specified levels. There has been no contingent rent expense
in fiscal years 1997 or 1996. Real estate taxes, insurance and maintenance
expense are generally obligations of the Company and, accordingly, are not
included as part of the rental payment.
36
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED
FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996
NOTE E - SHAREHOLDERS' EQUITY
STOCK OPTIONS
The Company's 1984 and 1993 Stock Option Plans provide that stock options to
purchase an aggregate of 212,500 shares of common stock may be granted to
officers and key employees. The plans provide for the granting of incentive
and nonqualified options.
Under both plans, incentive stock options may not be granted at a purchase
price less than the fair market value of the common shares on the date of
the grant (or for an option granted to a person holding more than 10 percent
of the Company's voting stock at less than 110 percent of the fair market
value). Under both plans, the option term is fixed at the date of grant and
may not exceed ten years from the date the option is granted (except that an
incentive stock option granted to a person holding more than 10 percent of
the Company's voting stock may be exercisable only for five years). Options
become exercisable in installments generally over five years. No
compensation expense has been recorded by the Company during fiscal years
1997 and 1996.
A summary of the Company's stock option transactions during fiscal years
1997 and 1996 is as follows:
1997 1996
------------------- -------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------- -------- -------- --------
Outstanding at beginning of year 66,171 $2.50 77,236 $2.27
Exercised -- -- (14,540) 1.71
Granted 1,500 3.00 4,000 4.14
Forfeited (9,092) 2.19 (525) 1.90
Expirations (188) 2.20 -- --
------ ------
Outstanding at end of year 58,391 $2.58 66,171 $2.50
------ ------
------ ------
Options exercisable at end of
year 40,493 $2.57 29,950 $2.73
------ ------
------ ------
Weighted average fair value of
options granted during the year $1.80 $2.35
37
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED
FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996
NOTE E - SHAREHOLDERS' EQUITY - Continued
The following applies to grants that are outstanding at June 29, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- -------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
-------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.50 to $2.00 42,191 3 years $ 1.82 33,243 $ 1.85
$3.00 to $3.32 11,500 7 years 3.13 3,750 3.14
$5.00 to $5.50 2,750 5 years 5.27 1,550 5.10
$8.00 1,200 4 years 8.00 1,200 8.00
$18.00 750 2 years 18.00 750 18.00
------ ------
58,391 40,493
------ ------
------ ------
</TABLE>
The FASB issued SFAS 123, "Accounting for Stock-Based Compensation," which
introduced an alternative method for recognizing compensation costs based
upon the fair value of the awards on the date they are granted. SFAS 123
allows entities to continue to account for stock options using the
intrinsic value method, provided pro forma net earnings (loss) and net
earnings (loss) per share, as if the fair value based method had been used,
are disclosed. The effects on the Company's pro forma net loss and net
loss per share, had the fair value based method been used, was not material
for fiscal years 1997 and 1996. These effects may not be representative of
the future effects of applying this statement.
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes options-pricing model with the following weighted
average assumptions used in fiscal years 1997 and 1996: zero dividend
yield; expected volatility of 49.76 percent and 52.41 percent; risk-free
interest rates of 6.63 percent and 6.23 percent; and expected lives of
seven years and six years.
38
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED
FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996
NOTE E - SHAREHOLDERS' EQUITY - Continued
PUBLIC 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.
FAILURE TO MEET CURRENT NASDAQ NATIONAL SMALLCAP MARKET REQUIREMENTS
The Company's common stock trades on the Nasdaq SmallCap Market. Under the
rules of the Nasdaq SmallCap Market, an issuer must maintain shareholders'
equity of at least $1,000,000. As a result of its net loss in fiscal 1997,
the Company's shareholders' equity as of June 29, 1997 was approximately
$606,000, which is less than the minimum required for continued inclusion
on the Nasdaq SmallCap Market. In August 1997, Nasdaq advised the Company
that it was not in compliance with the shareholders' equity requirement and
indicated that it intended to delist the Company's common stock from the
Nasdaq SmallCap Market. The Company has requested an exemption from the
$1,000,000 shareholders' equity requirement on the basis that the Company
had filed a registration statement for a public offering that, among other
things, would raise sufficient funds to satisfy the $1,000,000 requirement.
The Nasdaq staff denied the Company's request for the exemption. The
Company has appealed the Nasdaq staff determination and requested an oral
hearing with respect to this issue. The Company expects the hearing to
occur during October 1997. If the Company does not receive an exemption
and does not otherwise raise additional capital in an amount sufficient to
achieve compliance with the Nasdaq SmallCap shareholders' equity
requirement, the Company's common stock could be delisted from the Nasdaq
SmallCap Market, which could have an adverse effect on the price and
liquidity of the Company's common stock.
39
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED
FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996
NOTE E - SHAREHOLDERS' EQUITY - Continued
In addition, on August 25, 1997, the SEC approved new Nasdaq rules that
require issuers of SmallCap securities to either (i) maintain net tangible
assets (assets, excluding goodwill, less liabilities) of at least $2.0
million, (ii) achieve net income of at least $500,000 in the most recent
fiscal year or in two of the three most recently completed fiscal years or
(iii) have a market capitalization of $35 million. This new requirement
becomes applicable to Nasdaq SmallCap issuers, including the Company, on
February 25, 1998. Although the Company believes that it will be able to
achieve the $2.0 million net tangible assets requirements by February 25,
1998 by raising additional equity in the unit offering, there can be no
assurance that the Company will be able to attain the required net tangible
assets or meet either of the other requirements for continued inclusion on
the Nasdaq SmallCap Market. If the Company is unable to achieve the
minimum requirements for continued inclusion on the Nasdaq SmallCap Market,
then its securities would trade on the Nasdaq "Bulletin Board" or in the
over-the-counter market. This could have an adverse effect on the price
and liquidity of the Company's common stock.
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 may be made. The
matching contribution is determined by the Company on a calendar year
basis. For the plan years ending December 31, 1997 and 1996, the Company
approved a match of 100% of the employee's elected salary deferral up to a
maximum of 3% of the employee's gross wages. Company matching
contributions were $42,814 and $48,642 for fiscal years 1997 and 1996.
NOTE G - IMPAIRMENT OF ASSETS
The Company implemented 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 fiscal year 1997, the Company recognized an impairment of
the long-lived assets at the Company's Madison, Wisconsin restaurant.
40
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED
FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996
NOTE G - IMPAIRMENT OF ASSETS - Continued
Based on several factors, 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, during fiscal year 1997, the long-lived assets at
this restaurant as follows:
Building $ 610,829
Equipment 620,710
Leasehold improvements 231,229
Accumulated depreciation and amortization (822,482)
--------
Write-down of impaired assets $ 640,286
--------
--------
The effect of the above write-down was to increase the Company's net loss
for fiscal year 1997 by $640,286 or $.86 per share.
During fiscal year 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 released the Company
from the remainder of its lease obligations in exchange for the remaining
leasehold improvements and equipment at this location. Accordingly, during
fiscal 1996, the Company wrote off the assets as follows:
Equipment $ 409,878
Leasehold improvements 322,044
Accumulated depreciation and amortization (654,231)
--------
Write-down of impaired assets $ 77,691
--------
--------
Also during fiscal year 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.
41
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED
FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996
NOTE G - IMPAIRMENT OF ASSETS - Continued
The net effect of the above was to increase the net loss for fiscal year
1996 by $225,059 or $.31 per share.
During fiscal year 1997, the Company recovered $85,000 of the note
receivable and recorded the recovery of bad debt expense.
NOTE H - BRUEGGER'S BAGEL BAKERY DEVELOPMENT AGREEMENT
DFW Bagels has entered into an exclusive development agreement with
Bruegger's to develop bagel bakeries in the Dallas-Fort Worth, Texas area.
The agreement, as amended on April 23, 1997, requires DFW Bagels to build
30 bagel bakeries by July 2001. DFW Bagels opened four bagel bakeries
during fiscal year 1996, three during fiscal year 1997, and one additional
bagel bakery was opened subsequent to June 29, 1997. Pursuant to the
amended agreement, DFW Bagels is required to have nine bagel bakeries
opened by January 1, 1998 and 14 opened by October 1, 1998.
The Company is in the process of attempting to raise funds to open the
additional bagel bakeries. The inability of the Company to obtain adequate
financing to open the required bagel bakeries could have a severe and
immediate effect on the continuation of the Company's bagel bakery business
in Dallas-Fort Worth and could have a material adverse effect on the
Company's consolidated financial position or results of operations.
Under the amended development agreement, each bakery has a separate
franchise agreement which requires DFW Bagels to pay a $20,000 franchise
fee upon the opening of each bagel bakery, and 5% of bagel bakery gross
sales as a royalty fee. In addition, DFW Bagels is required to contribute
2% of bagel bakery gross sales to an advertising fund established by
Bruegger's and to expend 2% of bagel bakery gross sales for its own
advertising.
Under the terms of the amended development agreement, under certain
circumstances the Company needs the consent of Bruegger's to issue
securities and under certain circumstances Bruegger's has a right of first
refusal with respect to the Company's securities.
During fiscal 1997, the Company was in default of one of the terms of the
development agreement and obtained a waiver from Bruegger's.
42
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED
FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996
NOTE H - BRUEGGER'S BAGEL BAKERY DEVELOPMENT AGREEMENT -
Continued
In May 1996, Bruegger's was purchased by Quality Dining, Inc. On May 12,
1997, Quality Dining, Inc. announced that its Board of Directors approved a
plan to divest its Bruegger's bagel-related businesses. On September 3,
1997, Quality Dining, Inc. entered into a share exchange agreement under
which it will sell Bruegger's to its former owners in exchange for their
securities of Quality Dining, Inc. and certain other consideration.
Consummation of the transactions is subject to the prior satisfaction of
certain conditions. The Company believes the transaction will be
consummated in October 1997.
The Company obtains its bagel dough and other food supplies for its bagel
bakeries from a commissary owned by Quality Dining, Inc. located in Austin,
Texas. The closing of the Austin commissary or the inability of the
Company to receive its supplies from the commissary would have a severe and
immediate effect on the continuation of the Company's bagel bakery business
in Dallas-Fort Worth.
NOTE I - SUBSEQUENT EVENTS
On August 26, 1997, the Company borrowed an additional $300,000 from an
officer and shareholder (note B).
During September 1997, the Company sold three of its full-service
restaurants and entered into an agreement to sell an additional restaurant
in October 1997. The restaurants are located in Burnsville, Falcon
Heights, St. Cloud, and Woodbury, Minnesota. The sale of these restaurants
will generate proceeds of approximately $1,500,000. The net book value of
the leasehold improvements and equipment as of June 29, 1997 at these
locations was $663,108. During fiscal 1997, these restaurants generated
approximately $6,913,000 of sales, net earnings of $203,000 and cash flows
from operations of $488,000. The Company has no current intention of
selling any of its other full-service restaurants.
The Company will remain contingently liable for future lease payments for
three of the restaurants. The leases have termination dates through 2002.
The aggregate amount of the contingent lease payments was approximately
$1,290,000 as of June 29, 1997.
43
<PAGE>
STOCK INFORMATION
The Company's common stock is currently traded on the Nasdaq SmallCap Market
system under the symbol "CIAT." The following table sets forth the range of
high and low prices for the Company's common stock on the Nasdaq SmallCap
Market for fiscal years 1996 and 1997. The prices listed below indicate
inter-dealer prices without retail mark up, mark down or commissions and may
not necessarily represent actual transactions.
Common Stock
--------------
Fiscal Year 1997 Low High
---------------- --- ----
First quarter $3.50 $5.00
Second quarter 2.50 4.00
Third quarter 2.50 2.50
Fourth quarter 2.25 2.25
Fiscal Year 1996 Low High
---------------- --- ----
First quarter $3.75 $5.00
Second quarter 4.00 6.125
Third quarter 4.25 6.25
Fourth quarter 2.75 5.25
As of September 1, 1997, 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 past and
does not intend to pay cash dividends in the foreseeable future.
44
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
45
<PAGE>
PART III
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 1997
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 ended June 29, 1997.
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 1997 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 1997 Proxy Statement and is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this item is contained in the section entitled
"Certain Transactions" in the Company's 1997 Proxy Statement and is
incorporated herein by reference.
46
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits that cover management contracts or compensatory plans or
arrangements are marked with an asterisk(*).
EXHIBIT NO. TITLE
- ----------- -----
3.1 Articles of Incorporation; Filed as an exhibit to the June 28,
1992 Form 10-KSB and incorporated hereby by reference.
3.2 Bylaws; Filed as an exhibit to the June 28, 1992 Form 10-KSB
and incorporated hereby by reference.
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); Filed as an exhibit
to the July 3, 1994 Form 10-KSB and incorporated hereby by
reference.
10.2 Lease dated September 26, 1984, as amended July 1, 1986 between
the Company and R&D Joint Venture (Madison restaurant); 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 reference.
10.2.1 Agreement dated July 1, 1986 between Ciatti's of Wisconsin,
Inc. and C.J. Raymond (Madison Restaurant); Filed as an exhibit
to the July 3, 1988 Form 10-KSB and incorporated hereby by
reference.
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); Filed as an exhibit to
the July 3, 1988 Form 10-KSB and incorporated hereby by
reference.
10.3 Lease dated July 24, 1987, between the Company and Eden
Entertainment Associates (Eden Prairie restaurant); Filed as an
exhibit to the July 3, 1988 Form 10-KSB and incorporated hereby
by reference.
10.4 Lease dated July 29, 1987, between the Company and Restaurant
Associates (Falcon Heights restaurant); Filed as an Exhibit to
Post-Effective Amendment No. 1 to Form S-1 Registration
Statement dated March 20, 1989 (No. 33-8965).
47
<PAGE>
10.5 Lease dated December 20, 1988, between the Company and Ryan
Construction Company of Minnesota, Inc. (Burnsville
restaurant); Filed as an Exhibit to Post-Effective Amendment
No. 1 to Form S-1 Registration Statement dated March 20, 1989
(No. 33-8965).
10.7 Promissory Note dated May 10, 1995, from the Company to Norwest
Equipment Finance, Inc. with respect to Eden Prairie
restaurant; Filed as an exhibit to the July 2, 1995 Form 10-KSB
and incorporated hereby by reference.
10.8 Lease dated July 11, 1989 between the Company and Larson-Doran
partnership (Maplewood restaurant); Filed as an exhibit to the
July 2, 1989 Form 10-KSB and incorporated hereby by reference
10.9 Lease dated July 26, 1990, between the Company and G.R.
Herberger's, Inc. (St. Cloud restaurant); Filed as an exhibit
to the July 1, 1990 Form 10-KSB and incorporated hereby by
reference.
10.10 Lease dated June 1990 between the Company and Phoenix Mutual
Life Insurance (Corporate office); Filed as an exhibit to the
July 1, 1990 Form 10-KSB and incorporated hereby by reference.
10.10.1 Amendment No. 1 dated March 14, 1995 to June 1990 lease between
the Company and Phoenix Mutual Life Insurance (Corporate
office); Filed as an exhibit to the July 1, 1990 Form 10-KSB
and incorporated hereby by reference.
10.11 Lease dated April 18, 1991, between the Company and J.L.P.
Associates II of Eden Prairie (LaCrosse restaurant); Filed as
an exhibit to the June 30, 1991 Form 10-KSB and incorporated
hereby by reference.
10.11.1 First Amendment dated June 18, 1991, to lease with respect to
LaCrosse restaurant; Filed as an exhibit to the June 28, 1992
Form 10-KSB and incorporated hereby by reference.
10.12 Lease dated May 17, 1991, between the Company and Gabbert and
Beck Company (Edina restaurant); Filed as an exhibit to the
June 30, 1991 Form 10-KSB and incorporated hereby by reference.
10.13 Lease dated July 3, 1991, between the Company and Wooddale
Shopping Center (Woodbury restaurant); Filed as an exhibit to
the June 30, 1991 Form 10-KSB and incorporated hereby by
reference.
48
<PAGE>
10.14 Shareholder Development Agreement effective as of January 1,
1995, between Big D Bagels, Inc. and Bruegger's Franchise
Corporation; Filed as an exhibit to the January 1, 1995 Form
10-QSB and incorporated hereby by reference.
10.14.1 Settlement Agreement dated April 23, 1997 between Ciatti's,
Inc., Big D. Bagels, Inc., Quality Dining, Inc. and Bruegger's
Franchise Corporation; Incorporated by reference to Exhibit
10.14.1 to Amendment No. 2 to Form S-2 File No. 333-23233.
10.15* Restated Stock Option Plan, as amended; Filed as an exhibit to
the Form S-8 Registration Statement, File Number 33-28306
(April 24, 1989).
10.16* 1993 Stock Option Plan; Filed as an exhibit to the Form S-8
Registration Statement, File Number 33-76974 (March 28, 1994).
10.17 Promissory Note dated January 15, 1996, from the Company to
Norwest Equipment Finance, Inc. with respect to Big D Bagels,
Inc.; Filed as an exhibit to the June 30, 1996 Form 10-K and
incorporated herein by reference.
10.18 Promissory Note dated May 31, 1996, from the Company to Norwest
Equipment Finance, Inc. with respect to Big D Bagels, Inc.;
Filed as an exhibit to the June 30, 1996 Form 10-K and
incorporated herein by reference.
21.1 The Company has one subsidiary, DFW 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
99.1 Pro Forma Unaudited Condensed Consolidated Financial Statements
of Ciatti's, Inc.
50
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: September 25, 1997 CIATTI'S, INC.
By /s/ Phillip R. Danford
--------------------------------------
Phillip R. Danford,
President and Director
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities
indicated on the dates indicated.
(Power of Attorney)
Each person whose signature appears below constitutes and appoints
Phillip R. Danford as his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any or all amendments to this
Annual Report on Form 10-KSB 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 he might or could do in person, hereby ratifying and confirming
all said attorney in-fact and agent, or his substitute, may lawfully do or
cause to be done by virtue thereof.
Signature Title Date
--------- ----- ----
/s/ Phillip R. Danford President and Director September 25, 1997
- --------------------------
Phillip R. Danford
/s/ Scott McGuire Controller September 25, 1997
- --------------------------
Scott McGuire
51
<PAGE>
/s/ L. E. "Dan" Danford, Jr. Chairman of the Board and September 25, 1997
- ---------------------------- Director
L. E. "Dan" Danford, Jr.
/s/ Thomas A. Kelm Director September 25, 1997
- ----------------------------
Thomas A. Kelm
52
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated August 18, 1997 accompanying the consolidated
financial statements included in the Annual Report of Ciatti's, Inc. on Form
10-KSB for the fifty-two weeks ended June 29, 1997. We consent to the
incorporation by reference of said report in the Registration Statements of
Ciatti's, Inc. on Form S-8, File No. 33-28306, effective April 24, 1989; Form
S-8, File No. 33-76974, effective March 28, 1994; and Form S-2, File No.
333-23233, effective June 2, 1997.
GRANT THORNTON LLP
/s/ Grant Thornton LLP
Minneapolis, Minnesota
September 22, 1997
53
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-29-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-29-1997
<CASH> 454,157
<SECURITIES> 0
<RECEIVABLES> 72,930
<ALLOWANCES> 0
<INVENTORY> 146,598
<CURRENT-ASSETS> 1,420,367
<PP&E> 6,523,500
<DEPRECIATION> 3,281,305
<TOTAL-ASSETS> 4,662,562
<CURRENT-LIABILITIES> 3,291,986
<BONDS> 764,467
0
0
<COMMON> 7,428
<OTHER-SE> 598,681
<TOTAL-LIABILITY-AND-EQUITY> 4,662,562
<SALES> 0
<TOTAL-REVENUES> 17,737,804
<CGS> 5,371,297
<TOTAL-COSTS> 14,873,778
<OTHER-EXPENSES> 69,140
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,576,411)
<INCOME-TAX> (7,633)
<INCOME-CONTINUING> (2,568,778)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,568,778)
<EPS-PRIMARY> (3.46)
<EPS-DILUTED> (3.46)
</TABLE>
<PAGE>
PRO FORMA UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS OF CIATTI'S, INC.
In September 1997, the Company sold three of its full-service restaurants and
entered into an agreement to sell a fourth restaurant. The restaurants that
were sold were located in Burnsville, Falcon Heights and Woodbury, Minnesota,
and the restaurant that the Company entered into an agreement to sell is
located in St. Cloud, Minnesota. The unaudited pro forma condensed
consolidated financial statements reflect the completed transactions for the
sale of three restaurants. On a pro forma basis, the sale of these
restaurants generated cash proceeds of $844,775 and five-year 10.5% notes
receivable for $133,580.
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 June 29, 1997 as if the sale had occurred on June 29,
1997 and (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.
The pro forma condensed consolidated financial statements reflect the
recognition of the estimated effect of the sale of the three full-service
restaurants. 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 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
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 three full-service restaurants
been sold as of June 30, 1996 or the future results of operations which may
be obtained.
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
JUNE 29, 1997
<TABLE>
<CAPTION>
Pro Forma Adjustments
----------------------------
Sale of Three
Full-Service
ASSETS Historical Restaurants (a) Other (b) Pro Forma
------------ --------------- --------- ----------
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 454,157 $ - $844,775 $ 1,298,932
Receivables 72,930 - - 72,930
Current portion of notes receivable -- - 21,441 21,441
Inventories 146,598 36,440 - 110,158
Prepaid expenses and other current assets 83,574 16,915 - 66,659
Assets held for sale 663,108 479,324 - 183,784
--------- ------- ------ ---------
Total current assets 1,420,367 532,679 866,216 1,753,904
PROPERTY AND EQUIPMENT, net 3,242,195 - - 3,242,195
NOTES RECEIVABLE, less current portion -- - 112,139 112,139
--------- ------- ------ ---------
$ 4,662,562 $532,679 $978,355 $ 5,108,238
--------- ------- ------ ---------
--------- ------- ------ ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations $ 879,807 $ - $ - $ 879,807
Accounts payable 1,369,290 - - 1,369,290
Accrued liabilities 1,042,889 - - 1,042,889
--------- ------- ------ ---------
Total current liabilities 3,291,986 - - 3,291,986
LONG-TERM OBLIGATIONS, less current
maturities 764,467 - - 764,467
SHAREHOLDERS' EQUITY
Common stock 7,428 - - 7,428
Additional paid-in capital 4,335,214 - - 4,335,214
Accumulated deficit (3,736,533) 532,679 978,355 (3,290,857)
--------- ------- ------ ---------
606,109 532,679 978,355 1,051,785
--------- ------- ------ ---------
$ 4,662,562 $532,679 $978,355 $ 5,108,238
--------- ------- ------ ---------
--------- ------- ------ ---------
</TABLE>
Notes:
(a) To eliminate certain assets related to the three full-service restaurants
included in the consolidated balance sheet of Ciatti's, Inc. as of June 29,
1997.
(b) To reflect the cash proceeds and the 10.5% five-year notes receivable
received from the sale of three full-service restaurants.
<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
Full-Service
Historical Restaurants (a) Other (b) Pro Forma
------------ --------------- --------- ----------
<S> <C> <C> <C> <C>
Sales
Full-service restaurants $15,811,370 $5,024,775 $ - $10,786,595
Bagel bakeries 1,926,434 - - 1,926,434
---------- --------- ------- ----------
Total sales 17,737,804 5,024,775 - 12,713,029
Cost of food and beverage 5,371,297 1,497,791 - 3,873,506
---------- --------- ------- ----------
Gross profit 12,366,507 3,526,984 - 8,839,523
Operating expenses
Labor and benefits 6,304,321 1,680,574 - 4,623,747
Direct and occupancy 6,624,350 1,641,710 - 4,982,640
General and administrative 1,304,821 156,392 - 1,148,429
Write-down of impaired assets 640,286 - - 640,286
---------- --------- ------- ----------
14,873,778 3,478,676 - 11,395,102
---------- --------- ------- ----------
Earnings (loss) from operations (2,507,271) 48,308 - (2,555,579)
Other income (expense)
Interest expense (105,460) - - (105,460)
Investment income 18,097 - 13,014 31,111
Other, net 18,223 4,869 - 13,354
---------- --------- ------- ----------
(69,140) 4,869 13,014 (60,995)
---------- --------- ------- ----------
Earnings (loss) before income taxes (2,576,411) 53,177 13,014 (2,616,574)
Income tax benefit 7,633 - - 7,633
---------- --------- ------- ----------
Net earnings (loss) $ (2,568,778) $ 53,177 $ 13,014 $(2,608,941)
---------- --------- ------- ----------
---------- --------- ------- ----------
Net earnings (loss) per common share $ (3.46) $ 0.07 $ 0.02 $ (3.51)
---------- --------- ------- ----------
---------- --------- ------- ----------
Weighted average number of common shares
outstanding during the year 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.
(b) To reflect interest income on the 10.5% five-year notes receivable.
