<PAGE>
U.S SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark one)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
DECEMBER 29, 1996.
__ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO
_______.
Commission file number 0-16348.
CIATTI'S, INC.
(Exact name of small business issuer as specified in its charter)
Minnesota 41-1564262
--------- -----------
(State or other jurisdiction of (I.R.S. EmployerIdentification No.)
incorporation of organization)
(612) 941-0108
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. [X]
The Company had 742,819 shares of Common Stock, $.01 par value per share,
outstanding as of January 31, 1997.
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 29,1996
and June 30, 1996. 3
Consolidated Statements of Operations for the
thirteen and twenty-six weeks ended
December 29, 1996 and December 31, 1995. 4
Consolidated Statements of Cash Flows for the
twenty-six weeks ended December 29, 1996 and
December 31, 1995. 5
Consolidated Notes to Financial Statements 6-7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 8-12
PART II. OTHER INFORMATION 13-14
2
<PAGE>
PART I - FINANCIAL INFORMATION
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 29, 1996 AND JUNE 30, 1996
DEC. 29, JUNE 30,
1996 1996
----------- -----------
(unaudited) (Note A)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $637,257 $1,602,936
Receivables 76,051 51,503
Income taxes receivable 0 165,576
Inventories 162,491 184,838
Prepaid expenses and other current assets 189,892 179,191
---------- ----------
Total current assets 1,065,691 2,184,044
PROPERTY AND EQUIPMENT (NOTE E)
Buildings 0 610,829
Equipment 5,392,451 6,171,435
Leasehold improvements 3,100,819 3,432,203
Automobiles 15,058 15,058
---------- ----------
8,508,328 10,229,525
Less accumulated depreciation and amortization (4,790,449) (5,762,061)
---------- ----------
Net property and equipment 3,717,879 4,467,464
---------- ----------
$4,783,570 $6,651,508
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations $152,078 $198,707
Accounts payable 944,253 1,311,016
Accrued salaries and wages 356,931 306,848
Other accrued liabilities 903,803 752,764
---------- ----------
Total current liabilities 2,357,065 2,569,335
LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES 826,743 907,286
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized 10,000,000
shares; no shares issued or outstanding - -
Common stock, $.01 par value; authorized 10,000,000
shares; issued and outstanding 742,819 shares 7,428 7,428
Additional paid-in capital 4,335,214 4,335,214
Accumulated deficit (2,742,880) (1,167,755)
---------- ----------
1,599,762 3,174,887
---------- ----------
$4,783,570 $6,651,508
---------- ----------
---------- ----------
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE 13 WEEKS ENDED FOR THE 26 WEEKS ENDED
------------------------- ------------------------
DEC. 29, DEC. 31, DEC. 29, DEC 31,
1996 1995 1996 1995
----------- ---------- ---------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales $4,395,975 $4,463,246 $8,665,462 $8,668,667
Cost of food and beverage 1,348,269 1,302,751 2,641,919 2,517,150
---------- ---------- ---------- ----------
Gross profit 3,047,706 3,160,495 6,023,543 6,151,517
Restaurant operating expenses
Labor and benefits 1,541,288 1,509,655 3,140,268 2,967,134
Direct and occupancy 1,585,892 1,575,795 3,117,133 3,048,056
---------- ---------- ---------- ----------
3,127,180 3,085,450 6,257,401 6,015,190
---------- ---------- ---------- ----------
Earnings (loss) from restaurant operations (79,474) 75,045 (233,858) 136,327
General and administrative expenses 330,463 272,544 683,243 548,152
Impairment of assets write-down (Note E) 640,286 - 640,286 -
---------- ---------- ---------- ----------
970,749 272,544 1,323,529 548,152
---------- ---------- ---------- ----------
Loss from operations (1,050,223) (197,499) (1,557,387) (411,825)
Other income (expense)
Interest expense (25,058) (17,449) (54,235) (39,717)
Investment income 5,717 12,416 15,625 36,494
Other, net 2,139 5,140 10,764 9,922
---------- ---------- ---------- ----------
(17,202) 107 (27,846) 6,699
---------- ---------- ---------- ----------
Loss before income taxes (1,067,425) (197,392) (1,585,233) (405,126)
Income tax benefit (12,058) (40,000) (10,108) (65,000)
---------- ---------- ---------- ----------
Net loss ($1,055,367) ($157,392) ($1,575,125) ($340,126)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net loss per share (Note B) ($1.42) ($0.21) ($2.12) ($0.46)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average number of shares
outstanding during the year 742,819 732,685 742,819 732,486
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWENTY-SIX WEEKS ENDED
------------------------------
DEC. 29, DEC. 31,
1996 1995
------------- ------------
(unaudited) (unaudited)
Operating activities:
Net loss ($1,575,125) ($340,126)
Adjustment to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 505,101 438,814
Impairment of assets write-down 640,286 -
Changes in operating assets and liabilities:
Receivables (24,548) (10,517)
Income taxes receivable 165,576 42,679
Inventories 22,347 16,900
Prepaid expenses and other current assets (10,701) (25,368)
Accounts payable (366,763) 341,443
Accrued salaries and wages 50,083 48,666
Other accrued liabilities 151,039 (49,755)
----------- -----------
Net cash provided by (used in)
operating activities (442,705) 462,736
Investing activities:
Payments for purchases of leasehold
improvements and equipment (395,802) (920,955)
Receipts on note receivable - 1,816
Payment for preferred stock subscription - (150,000)
Redemption of held-to-maturity securities - 97,232
----------- -----------
Net cash used in investing activities (395,802) (971,907)
Financing activities:
Repayments of long-term obligations (127,172) (66,288)
Net proceeds from the exercise of
common stock options - 303
----------- -----------
Net cash used in financing activities (127,172) (65,985)
----------- -----------
Net decrease in cash and cash equivalents (965,679) (575,156)
Cash and cash equivalents at beginning of period 1,602,936 2,096,521
----------- -----------
Cash and cash equivalents at end of period $637,257 $1,521,365
----------- -----------
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $56,587 $39,717
Income taxes 6,425 1,300
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
CIATTI'S, INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - FINANCIAL STATEMENTS
The unaudited consolidated balance sheet as of December 29, 1996 and the
unaudited consolidated statements of operations and cash flows for the twenty-
six weeks ended December 29, 1996 and December 31, 1995 have been prepared by
the Company. In the opinion of management, all adjustments (all of which are
normal and recurring in nature) necessary to present fairly the financial
position at December 29, 1996 and the results of operations and cash flow
activity for the periods ended December 29, 1996 and December 31, 1995 have been
made. The consolidated balance sheet as of June 30, 1996 has been taken from
the audited financial statements as of that date. Results of operations for
interim periods are not necessarily indicative of results that may be expected
for a full fiscal year or other interim periods.
NOTE B - NET LOSS PER SHARE
Net loss per share has been computed by dividing the net loss by the
weighted average number of common shares outstanding during the period.
NOTE C - RECENTLY ADOPTED ACCOUNTING STANDARDS
The Company implemented Statement of Financial Accounting Standards (SFAS)
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," effective July 1, 1996. SFAS 121 establishes
guidance for when to recognize and how to measure impairment losses of long-
lived assets and certain identifiable intangibles, and how to value long-lived
assets to be disposed of. The effect of implementation of SFAS 121 on July 1,
1996 did not have a material effect on the Company's financial position. Due to
events occurring during the second quarter of fiscal 1997, the Company
recognized an impairment of the long-lived assets at the Company's Madison,
Wisconsin restaurant (see Note E).
Additionally, the Company implemented SFAS 123, "Accounting for Stock-Based
Compensation," which established financial accounting and reporting standards
for stock-based employee compensation plans. This Statement defines and
encourages the use of a fair value based method of accounting for an employee
stock option or similar equity instrument. The Statement allows the use of the
intrinsic value based method of accounting as prescribed by current existing
accounting standards for options issued to employees. The Company adopted this
Standard effective July 1, 1996, and management has elected to utilize the
intrinsic value based method of accounting for stock-based compensation.
NOTE D - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
On September 8, 1996 the Company closed its Glendale, Wisconsin restaurant.
The effect of this transaction is as follows:
Reduction of equipment $369,117
Reduction of leasehold improvements 285,114
Reduction of accumulated depreciation (654,231)
----------
Effect on earnings $ -
----------
----------
6
<PAGE>
NOTE E - IMPAIRMENT OF ASSETS WRITE-DOWN
The Company recognized an impairment loss on the long-lived assets at its
Madison, Wisconsin restaurant. During the second quarter of 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 has attempted several advertising and promotional campaigns during
the first twenty-six weeks of fiscal 1997 that have not produced the results
management had expected. Based on these items, management has revised their
forecasts for this restaurant and has projected operating losses and cash flow
deficits for the remainder of the restaurant's lease, which expires in 2005. As
a result of the projected operating losses and future cash flow deficits, the
Company has fully written off the long-lived assets related to this restaurant
as follows:
Reduction of building $610,829
Reduction of equipment 620,710
Reduction of leasehold improvements 231,229
Reduction of accumulated depreciation
and amortization (822,482)
---------
Impairment of assets $640,286
---------
---------
The impairment of assets write-down is reported in General and
Administrative expenses in the Consolidated Statement of Operations. The effect
of the above adjustment was to increase the net loss by $640,286, or $.86 per
share.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
SALES
Consolidated sales of $4,395,975 for the second quarter of fiscal 1997
decreased 1.5% from consolidated sales of $4,463,246 for the second quarter of
fiscal 1996. Consolidated sales of $8,665,462 for the first twenty-six weeks of
fiscal 1997 were also down slightly from consolidated sales of $8,668,667
reported during the first twenty-six weeks of fiscal 1996. The decrease in
consolidated sales during fiscal 1997 was due to a decline in sales at the
Company's full-service restaurants offset by an increase in sales at the
Company's bagel restaurants, as described below.
Sales at the Company's full-service Italian and steakhouse restaurants of
$3,939,814 for the second quarter of fiscal 1997 decreased 9.7% from sales of
$4,363,273 for the same quarter of fiscal 1996. Full-service restaurant sales
of $7,785,702 for the first twenty-six weeks of fiscal 1997 decreased 9.1% from
sales of $8,568,694 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. This restaurant contributed $487,566
of sales to the first twenty-six weeks of fiscal 1996 while only $166,188 to the
same period of fiscal 1997. After adjusting for the sale of this restaurant,
full-service restaurant sales were down 4.5% for the quarter and 5.7% for the
year-to-date when compared to the same periods of last year. The remaining
decrease in full-service restaurant sales was primarily due to the continued
competition of local and national chain restaurants in each of the markets in
which the Company's full-service restaurants operate. The Company expects
competition to intensify and anticipates that most of its full-service
restaurants will face continuing pressures to maintain sales levels. In order
to improve the competitiveness of these restaurants, in January 1997 the Company
began an extensive advertising campaign utilizing radio, newspaper, billboards,
direct customer mailings and a rewards program for customers who frequent the
Company's restaurants on a regular basis. Although it is too early to determine
the direct results of this advertising, the Company believes these efforts
should help reverse the recent trend of same store sales decreases.
Sales at the Company's bagel restaurants of $456,161 for the second quarter
of fiscal 1997 increased 356.3% from $99,973 of sales for the same quarter of
fiscal 1996. Sales of $879,760 for the first twenty-six weeks of fiscal 1997
increased 780.0% over bagel restaurant sales for the same period of fiscal 1996.
This increase in sales was primarily a function of the Company having five bagel
restaurants open as of December 29, 1996, while only having two bagel
restaurants open as of December 31, 1995. The Company is required by its
development agreement to have nine stores open by July 1, 1997 and thirty stores
open by July 1, 2001.
COST OF FOOD AND BEVERAGE
Cost of food and beverage as a percentage of sales increased to 30.7% for
the second quarter of fiscal 1997 from 29.2% for the same period in fiscal 1996,
and increased to 30.5% for the first twenty-six weeks of fiscal 1997 from 29.0%
for the same period of fiscal 1996. The increase in the cost of food and
beverage was due, in part, to an increase in prices of selected products at the
Company's Italian and steakhouse restaurants without corresponding menu price
increases. In addition, the mix of the Company's business has changed in fiscal
1997 to include a larger percentage of bagel restaurant sales, which have a
higher cost of food and beverage associated with them.
The Company does not expect the cost of food and beverage to increase
significantly in the future. The Company is in process of implementing a new
menu at its Italian restaurants which should help to stabilize the cost of food
and beverage. In addition, the Company expects to construct a commissary during
fiscal 1998 to lower the cost of food and beverage at its bagel restaurants.
8
<PAGE>
LABOR AND BENEFITS
Labor and benefit costs as a percentage of sales increased to 35.1% for the
second quarter of fiscal 1997 from 33.8% for the same quarter of fiscal 1996,
and increased to 36.2% for the first twenty-six weeks of fiscal 1997 compared to
34.2% during the same period of last year. This increase in labor and benefit
costs was mainly due to the fixed labor and benefit costs at the Company's
Italian and steakhouse restaurants being spread across a lower sales base and
high labor and benefit costs associated with the opening of the Company's new
bagel restaurants.
Although the Company does not expect the federally mandated minimum wage
increases which became effective October 1, 1996 to have a significant impact on
the Company's financial results, additional increases in state or federal
minimum wage requirements or changes in applicable state law with respect to
minimum wages for "tipped" employees may have an adverse impact on the Company.
DIRECT AND OCCUPANCY
Direct and occupancy costs increased to 36.1% of sales for the second
quarter of fiscal 1997 from 35.3% during the same period of fiscal 1996, and
increased to 36.0% of sales for the first twenty-six weeks of fiscal 1997
compared to 35.2% of sales during the same period of last year. The increase in
direct and occupancy costs as a percentage of sales was due primarily to fixed
costs such as rent and depreciation at the Company's bagel restaurants being
spread across a small sales base. If sales at the Company's bagel restaurants
increase in the future, these fixed costs will decrease as a percentage of
sales.
Offsetting the increase in direct and occupancy costs as a percentage of
sales at the Company's bagel restaurants was a decrease in direct and occupancy
costs at the Company's Italian and steakhouse restaurants. This decrease was
mainly due to a reduction in advertising and promotion expense to 1.9% of full-
service restaurant sales during the first twenty-six weeks of fiscal 1997 from
3.6% of full-service restaurant sales in the first twenty-six weeks of fiscal
1996. The Company expects its advertising and promotion costs to increase to
approximately 4.0% of sales for the remainder of fiscal 1997 as the phases of
the Company's new advertising plan are implemented.
The Company also expects to spend approximately 4% of bagel restaurant
sales for advertising and promotion expenses in order to implement several
direct mailing and local store marketing campaigns in the Dallas-Fort Worth,
Texas area.
GENERAL AND ADMINISTRATIVE
General and administrative costs as a percentage of sales increased to 7.5%
for the second quarter of fiscal 1997 from 6.1% of sales reported during the
same quarter of last year, and increased to 7.9% for the first twenty-six weeks
of fiscal 1997 compared to 6.3% of sales for the same period of last year. The
increase in general and administrative costs was primarily due to the Company
incurring approximately $41,000 and $90,000 of additional general and
administrative costs related to operating additional bagel restaurants in the
second quarter and the first twenty-six weeks of fiscal 1997, respectively.
General and administrative costs at the Company's full-service restaurants have
remained relatively constant, but have increased as a percent of sales due to
lower sales at these restaurants. The Company does not expect general and
administrative costs at its full-service and bagel restaurants to increase
significantly during the remainder of the fiscal year.
IMPAIRMENT OF ASSETS WRITE-DOWN
During the second quarter of fiscal 1997, the Company recognized an
impairment loss of $640,286 for the long-lived assets at its Madison, Wisconsin
restaurant. During this time period, a major national competitor opened a
steakhouse restaurant in close proximity to the Company's restaurant. The
competitor's restaurant has the Company's restaurant out-positioned in the
market area, and sales at the
9
<PAGE>
Company's restaurant have suffered due to the opening of this restaurant. In
addition, the Company has attempted several advertising and promotional
campaigns during the first twenty-six weeks of fiscal 1997 that have not
produced the results management had expected. Based on these items, management
has revised their forecasts for this restaurant and has 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 cost of the
long-lived assets at this restaurant. See Consolidated Notes to Financial
Statements, Note E.
OTHER INCOME (EXPENSE) NET
Other income (expense) decreased to a net expense of $17,202 for the second
quarter of fiscal 1997, down from a net income of $107 reported in the same
quarter of last year, and decreased to a net expense of $27,846 for the first
twenty-six weeks of fiscal 1997 from a net income of $6,699 during the same
period of last year. This decrease in other income (expense) was primarily due
to a decrease in investment income in fiscal 1997 as a result of fewer funds
available for investment. In addition, interest expense increased during fiscal
1997 due to the additional debt financing that was arranged during the fourth
quarter of fiscal 1996.
INCOME TAX EXPENSE (BENEFIT)
The income tax benefit for the second quarter of fiscal 1997 was $12,058 as
compared to an income tax benefit of $40,000 for the second quarter of fiscal
1996. For the first twenty-six weeks of fiscal 1997 the Company recorded an
income tax benefit of $10,108 as compared to an income tax benefit of $65,000
for the same period of last year. The fiscal 1996 tax benefit recorded was
limited to the amount of taxes recoverable from the carryback of losses; there
was no tax benefit recorded for the carryforward of losses generated in the
first twenty-six weeks of fiscal 1997. The Company's fiscal 1997 tax benefit
was due to the receipt of state and federal income taxes in excess of the amount
recorded as an income tax receivable as of June 30, 1996. The fiscal 1997 tax
benefit was offset by $4,475 of state and franchise taxes paid during the
period.
As of December 29, 1996, the Company has a $144,000 of alternative minimum
tax credit carryforwards and $1,494,000 of net operating loss carryforwards.
These tax carryforwards may only be utilized against future earnings and there
is no assurance that the Company will realize these benefits. The utilization
of these carryforwards may be limited if there are significant changes in the
ownership of the Company.
SEASONALITY
The Company's highest sales from its Italian and steakhouse restaurants
have historically occurred during the months of July through December. The
Company is currently unable to determine whether the operation of its bagel
restaurants will result in any change in its seasonality.
EFFECTS OF INFLATION
Inflationary factors such as increases in food and labor costs directly
affect the Company's operations. Because most of the Company's employees are
paid hourly rates related to federal and state minimum wage and tip credit laws,
changes in these laws may result in an increase in the Company's labor costs.
The Company cannot always implement immediate price increases to offset higher
costs, and no assurance can be given that the Company will be able to do so in
the future.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At December 29, 1996 the Company had cash and cash equivalents on hand of
$637,257, which represents a decrease of $965,679 from the $1,602,936 in cash
and cash equivalents reported as of June 30, 1996. Net cash used in operating
activities was $442,705 for the first twenty-six weeks of fiscal 1997. In
addition to the net loss of $1,575,125, the Company reduced its accounts payable
balance by $366,763 during the first twenty-six weeks of fiscal 1997. The
reduction in the Company's accounts payable balance related primarily to
payments made to vendors of $215,816 for capital expenditures for the Company's
fourth bagel restaurant. These uses of cash were partially offset by non-cash
depreciation expenses of $505,101 and an impairment of assets write-down of
$640,286. In addition, the Company received proceeds from an income tax
receivable of $165,576 and had increases in other accrued liabilities of
$151,039.
Net cash used in investing activities was $395,802 during the first twenty-
six weeks of fiscal 1997. This cash was used primarily for purchases of
equipment and leasehold improvements for the Company's fifth bagel restaurant in
the Dallas-Fort Worth, Texas area.
Net cash used in financing activities was $127,172 for the first twenty-six
weeks of fiscal 1997, reflecting a net repayment of amounts due under the
Company's debt financing.
Big D Bagels, Inc. ("Big D"), a wholly-owned subsidiary of Ciatti's, Inc.,
entered into a Development Agreement with Bruegger's Franchise Corporation
("Bruegger's) effective January 1, 1995. This agreement requires Big D to build
30 bagel restaurants by July 1, 2001. During fiscal 1996, four bagel
restaurants were built, thus meeting the initial terms of this agreement. Big D
is required to open five additional bagel restaurants during fiscal 1997. As of
December 29, 1996, Big D has opened one additional bagel restaurant, and as of
January 31, 1997 has entered into lease agreements for two additional bagel
restaurant sites. The Company believes each new site will require approximately
$350,000 for capital expenditures. In addition, Big D intends to construct a
commissary in fiscal 1998 at an estimated cost of $500,000. Currently, Big D is
supplying fresh dough to its bagel restaurants from the commissary of another
Bruegger's franchisee in Austin, Texas.
On October 1, 1996, the Company filed a Registration Statement with the
Securities and Exchange Commission with respect to a rights offering of its
common stock to its existing shareholders. The Company filed the Registration
Statement to obtain additional funds that the Company would contribute to Big D.
In connection with the filing of the Registration Statement and subsequent
communications with Bruegger's, Bruegger's asserted that it had certain rights
of consent and first refusal in connection with the rights offering. As a
result of Bruegger's actions, the Company was forced to delay the commencement
of the rights offering until resolution of the legal issues. On November 8,
1996, the Company filed a lawsuit in the United States District Court for the
District of Minnesota against Bruegger's and its parent corporation, Quality
Dining, Inc. See "Item 1. Legal Proceedings."
The Company plans to finance its working capital and capital resource needs
with its current cash, future cash generated from operations, proceeds from the
rights offering, and additional debt or equity financing. The Company believes
that these sources will be sufficient to enable it to satisfy its working
capital and capital resource needs for the next twelve months. If the Company
is unable to commence the rights offering in a timely manner, it may be
necessary for it to raise additional capital through other means of financing.
Although the Company believes that it will be able to secure the necessary
capital, there can be no assurances that the Company will be successful in such
efforts.
11
<PAGE>
FORWARD LOOKING STATEMENT
Statements included in this Form 10-QSB that are not historical or current
facts are "forward-looking statements" made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and are
subject to certain risks and uncertainties that could cause actual results to
differ materially. The Company's ability to succeed in the future is dependent
upon the Company's ability to achieve and maintain profitability in its existing
restaurants and together with its subsidiary, Big D Bagels, Inc., to open
additional bagel restaurants and to operate those restaurants in a profitable
manner. The Company's ability to achieve these goals will be affected by
factors such as (i) the Company's ability to locate and negotiate favorable
leases for additional locations, (ii) the ability of the Company to hire, train
and retain skilled restaurant management and personnel, (iii) the ability of the
Company to generate funds from operations, obtain adequate restaurant financing
on favorable terms and raise additional working capital when required, (iv) the
competitive environment within the restaurant industry and (v) the Company's
successful resolution of its existing litigation with Bruegger's Franchise
Corporation and Quality Dining, Inc. to enable it to raise funds needed for
working capital.
12
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In October 1996, Ciatti's, Inc. ("Ciatti's) filed a Registration Statement
with the Securities and Exchange Commission for a Rights Offering to its
existing shareholders. In response to Ciatti's filing of the Registration
Statement, Bruegger's Franchise Corporation ("Bruegger's") asserted that
Bruegger's has certain rights of consent and of first refusal regarding any sale
of securities of Ciatti's. Bruegger's is the franchisor and Big D Bagels, Inc.
("Big D"), the Company's wholly-owned subsidiary, is the franchisee under a
Development Agreement in which Big D has the exclusive right to develop
Bruegger's bagel restaurants in the Dallas-Fort Worth, Texas area. Ciatti's
believes that such rights exist only with respect to securities of Big D, who is
the "Developer" under the Development Agreement between Big D and Bruegger's,
and not with respect to Ciatti's, which is not a party to the Development
Agreement.
Ciatti's and Bruegger's were unable to agree upon resolution of the matter
and, on November 8, 1996, Ciatti's and Big D filed a lawsuit in United States
District Court for the District of Minnesota against Bruegger's and its parent
corporation, Quality Dining, Inc. ("Quality Dining"). In the lawsuit, Ciatti's
and Big D asked for declaratory and injunctive relief against the defendants
with respect to the Development Agreement. In response, Bruegger's and Quality
Dining filed a counterclaim seeking declaratory relief that (i) the Development
Agreement required Ciatti's to provide prior notice of its offering to
Bruegger's and obtain consent of Bruegger's and (ii) that the Company's use of
any trademark of Bruegger's in the Company's proposed rights offering without
the written consent of Bruegger's would violate the Development Agreement and
related Franchise Agreements between Big D and Bruegger's. The Company believes
that Bruegger's counterclaims are substantially without merit. The Court has
scheduled a Summary Judgment hearing on February 14, 1997.
In light of the lawsuit and its desire to have this mater resolved prior to
commencement of the Rights Offering, Ciatti's announced that it was postponing
the Record Date and the Commencement Date of its Rights Offering. The Company
also announced that it has not set a new record date for the Rights Offering.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule.
13
<PAGE>
(b) Reports of Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CIATTI'S, INC. AND SUBSIDIARY
-----------------------------
(Registrant)
/s/ Phillip R. Danford
-----------------------
Phillip R. Danford
President
/s/ Joseph W. Fesenmaier
-------------------------
Joseph W. Fesenmaier
Controller
Dated February 12, 1997
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-29-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-29-1996
<CASH> 637,257
<SECURITIES> 0
<RECEIVABLES> 76,051
<ALLOWANCES> 0
<INVENTORY> 162,491
<CURRENT-ASSETS> 1,065,691
<PP&E> 8,508,328
<DEPRECIATION> 4,790,449
<TOTAL-ASSETS> 4,783,570
<CURRENT-LIABILITIES> 2,357,065
<BONDS> 0
0
0
<COMMON> 7,428
<OTHER-SE> 1,593,332
<TOTAL-LIABILITY-AND-EQUITY> 4,783,570
<SALES> 8,665,462
<TOTAL-REVENUES> 8,665,462
<CGS> 2,641,919
<TOTAL-COSTS> 7,580,930
<OTHER-EXPENSES> (26,389)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54,235
<INCOME-PRETAX> (1,585,233)
<INCOME-TAX> (10,108)
<INCOME-CONTINUING> (1,575,125)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,575,125)
<EPS-PRIMARY> (2.12)
<EPS-DILUTED> 0
</TABLE>
