1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 6, 1996
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------- --------------
Commission file number: 000-21745
CIAO CUCINA CORPORATION
(Exact name of small business issuer as specified in its charter)
OHIO 31-1357862
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
700 WALNUT STREET, SUITE 300, CINCINNATI, OH 45202
(Address of principal executive offices)
(513) 241-9161
(Issuer's telephone number)
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 preceding 12 months
(or for 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 No X
-------- --------
The issuer had 3,104,848 shares of Common Stock outstanding as of
December 29, 1996.
Transitional Small Business Disclosure Format (check one):
Yes No X
-------- --------
2
CIAO CUCINA CORPORATION
INDEX
PART I FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Balance Sheets 3
December 31, 1995 and October 6, 1996
Statements of Operations 4
Twelve weeks and Forty weeks ended
October 1, 1995 and October 6, 1996
Statements of Cash Flows 5
Twelve weeks and Forty weeks ended
October 1, 1995 and October 6, 1996
Notes to Financial Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II OTHER INFORMATION
Item 1 Legal Proceedings 15
Item 2 Changes in Securities 15
Item 3 Defaults Upon Senior Securities 15
Item 4 Submission of Matters to a Vote of
Security Holders 15
Item 5 Other Information 15
Item 6 Exhibits and Reports on Form 8-K 15
(2)
3
CIAO CUCINA CORPORATION
CONDENSED BALANCE SHEETS
December 31, 1995 October 6, 1996
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 137,660 $ 268,384
Accounts Receivable 28,689 83,951
Inventories 46,074 78,802
Prepayments 22,836 54,522
----------- -----------
Total Current Assets 235,259 485,659
EQUIPMENT AND IMPROVEMENTS, net 3,102,576 4,633,305
INTANGIBLE ASSETS, net 203,715 514,704
SECURITY DEPOSITS AND OTHER 344,174 398,711
----------- -----------
TOTAL ASSETS $ 3,885,724 $ 6,032,379
=========== ===========
LIABILITIES, REDEEMABLE EQUITY
AND SHAREHOLDER'S DEFICIT
CURRENT LIABILITIES
Current Portion of Long-Term Debt $ 449,638 $ 321,127
Accounts Payable 259,397 569,852
Accrued Expenses 375,998 631,770
----------- -----------
Total Current Liabilities 1,085,033 1,522,749
----------- -----------
LONG-TERM LIABILITIES
Notes Payable 184,335 2,622,008
Accrued Rentals 373,164 494,437
Deferred Lease Incentives 2,125,829 2,164,073
----------- -----------
Total Long-Term Liabilities 2,683,328 5,280,518
----------- -----------
REDEEMABLE EQUITY
10% Series A Convertible Preferred Stock - $100
par value, 15,000 shares authorized and issued 1,558,604 1,681,243
10% Series B Convertible Preferred Stock - $690
par value, 1,740 shares authorized, 1,584 shares issued 1,174,932 1,259,006
----------- -----------
Total Redeemable Equity 2,733,536 2,940,249
----------- -----------
SHAREHOLDERS' DEFICIT
Common Stock - no par value, 10,000,000 shares
authorized, 794,355 shares issued 750 750
Additional Paid-In Capital (Deficit) (1,767,372) (1,717,372)
Accumulated Deficit (714,551) (1,859,515)
Treasury Stock - 224,445 shares stated at cost (135,000) (135,000)
----------- -----------
Total Shareholders' Deficit (2,616,173) (3,711,137)
----------- -----------
TOTAL LIABILITIES, REDEEMABLE EQUITY
AND SHAREHOLDERS' DEFICIT $ 3,885,724 $ 6,032,379
=========== ===========
(3)
4
CIAO CUCINA CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
FOR THE FORTY WEEKS ENDED FOR THE TWELVE WEEKS ENDED
OCTOBER 1, 1995 OCTOBER 6, 1996 OCTOBER 1, 1995 OCTOBER 6, 1996
RESTAURANT REVENUES $ 3,585,571 $ 5,979,299 $ 1,030,730 $ 1,856,934
----------- ----------- ----------- -----------
OPERATING EXPENSES
Food and Beverage Costs 1,054,514 1,840,423 324,248 565,578
Restaurant Labor Costs 1,171,556 1,987,524 454,763 609,715
Occupancy and Other Restaurant Expenses 1,202,240 1,567,854 204,442 438,672
General and Administrative Expenses 421,540 678,732 103,941 196,674
Depreciation and Amortization 386,926 637,266 146,416 251,035
----------- ----------- ----------- -----------
Total Operating Expenses 4,236,776 6,711,799 1,233,810 2,061,674
LOSS FROM OPERATIONS (651,205) (732,500) (203,080) (204,740)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest Expense (55,692) (223,281) (14,920) (33,923)
Interest Income 16,036 17,329 5,743 4,841
Other Income 3,918 201 32,309 11,619
----------- ----------- ----------- -----------
Total Other Income (Expense) (35,738) (205,751) 23,132 (17,463)
----------- ----------- ----------- -----------
NET LOSS (686,943) (938,251) (179,948) (222,203)
Accretion of Dividends on Preferred Stock (132,866) (196,349) (62,276) (56,728)
Accretion of Discount on Preferred Stock (6,887) (10,364) (3,219) (3,109)
----------- ----------- ----------- -----------
NET LOSS APPLICABLE TO COMMON STOCK ($ 826,696) ($1,144,964) ($ 245,443) ($ 282,040)
=========== =========== =========== ===========
NET LOSS PER COMMON SHARE ($1.45) ($2.01) ($0.43) ($0.49)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 569,910 569,910 569,910 569,910
=========== =========== =========== ===========
(4)
5
CIAO CUCINA CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE FORTY WEEKS ENDED FOR THE TWELVE WEEKS ENDED
OCTOBER 1, 1995 OCTOBER 6, 1996 OCTOBER 1, 1995 OCTOBER 6, 1996
CASH FLOWS FROM OPERATING
ACTIVITIES
Net Loss ($ 686,943) ($ 938,251) ($179,948) ($222,203)
Depreciation 225,874 360,857 99,212 127,166
Amortization 161,051 276,632 47,203 124,092
Amortization of Lease Incentives (122,080) (137,266) (57,583) (45,502)
Accretion of Notes Payable Discount 0 12,500 0 6,250
Changes in Operating Assets and Liabilities
Decrease (Increase) in -
Accounts Receivable (5,861) (55,262) (13,384) (22,586)
Inventories 7,457 (32,728) 71,222 28,349
Prepayments (49) (31,686) (9,518) 131,730
Pre-opening Costs (23,034) (257,717) 191 (1,583)
Increase (Decrease) in -
Accounts Payable (60,808) 310,455 (47,285) 165,390
Accrued Expenses (192,387) 255,772 16,418 85,510
Accrued Rentals 162,075 121,273 68,845 40,122
----------- ----------- --------- ---------
Net Cash Provided by (Used in)
Operating Activities (534,705) (115,421) (4,627) 416,735
----------- ----------- --------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of Equipment and Improvements (235,836) (1,716,076) (123,304) (234,395)
Cash paid for Intangible Assets (7,444) (129,904) (7,444) (129,078)
Cash paid for Security Deposits (125,609) (54,537) (6,110) (53,118)
----------- ----------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (368,889) (1,900,517) (136,858) (416,591)
----------- ----------- --------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES
Increase (Decrease) in Bank Overdraft (22,555) 0 0 0
Proceeds from Issuance of Redeemable
Equity 1,150,000 0 0 0
Proceeds from Issuance of Warrants 0 50,000 0 0
Payment of Preferred Stock Issuance Costs (64,001) 0 0 0
Proceeds from Notes Payable 628,038 2,257,200 153,038 250,000
Payments of Notes Payable (633,256) (160,538) (62,195) (17,268)
----------- ----------- --------- ---------
Net Cash Provided by Financing 1,058,226 2,146,662 90,843 232,732
Activities ----------- ----------- --------- ---------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 154,632 130,724 (50,642) 232,876
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 33,864 137,660 239,138 35,508
----------- ----------- --------- ---------
CASH AND CASH EQUIVALENTS -
END OF PERIOD $ 188,496 $ 268,384 $ 188,496 $ 268,384
=========== =========== ========= =========
(5)
6
CIAO CUCINA CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE FORTY WEEKS ENDED FOR THE TWELVE WEEKS ENDED
OCTOBER 1, 1995 OCTOBER 6, 1996 OCTOBER 1, 1995 OCTOBER 6, 1996
SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES
Deferred landlord incentives received used to
purchase leasehold improvements and
equipment $ 196,972 $ 90,088 $28,000 $ 0
========== ======== ======= =======
Conversion of short-term note into Series A
Convertible Preferred Stock $ 350,000 $ 0 $ 0 $ 0
========== ======== ======= =======
Conversion of Series A and B Convertible
Subordinated Participating Income Notes
into Series B Convertible Preferred Stock $1,092,960 $ 0 $ 0 $ 0
========== ======== ======= =======
Dividends accrued on Series A and B
Convertible Preferred Stock $ 6,887 $196,349 $ 3,219 $56,728
========== ======== ======= =======
Accretion of discount on issuance of Bridge
Notes $ 0 $ 12,500 $ 0 $ 6,250
========== ======== ======= =======
Issuance of Bridge Note for Deferred
Financing Costs $ 0 $200,000 $ 0 $ 0
========== ======== ======= =======
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid for interest $ 197,103 $229,545 $86,005 $99,449
========== ======== ======= =======
(6)
7
CIAO CUCINA CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. PRESENTATION OF INTERIM INFORMATION
In the opinion of the management of Ciao Cucina Corporation, the accompanying
unaudited condensed financial statements include all normal adjustments
considered necessary to present fairly the financial position as of October 6,
1996, and the results of operations for the twelve weeks and forty weeks ended
October 1, 1995 and October 6, 1996 and cash flows for the twelve weeks and
forty weeks ended October 1, 1995 and October 6, 1996. Interim results are not
necessarily indicative of results for a full year.
The condensed financial statements and notes are presented as permitted by
Form 10-QSB, and do not contain certain information included in the Company's
audited financial statements and notes for the fiscal year ended December 31,
1995. See the Company's Registration Statement on Form SB-2, File No. 333-5674.
2. COMMITMENTS
On July 1, 1996, the Company entered into a lease for a 6,755 square foot
restaurant in Ft. Lauderdale, Florida. The restaurant will be located in
Northport Marketplace Center, in close proximity to Broward County Convention
Center and the Port Everglades Cruise Port.
(7)
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company is the owner and operator of restaurants serving authentic
Mediterranean cuisine.
OVERVIEW
The Company owns and operates five restaurants under the name "Ciao Baby
Cucina". Three of the Company's five restaurants have been in operation for more
than one year and two restaurants opened in February and March, 1996.
The Company has a limited operating history and the results achieved to date
by the Company's restaurants may not be indicative of future results.
The Company uses a 52/53 week year which is generally comprised of 13
four-week periods. The Company's fiscal 1995 and 1996 third quarters (twelve
weeks) ended on October 1, 1995 and October 6, 1996, respectively.
RESULTS OF OPERATIONS
The following table sets forth, for the twelve weeks and the forty weeks
ended October 1, 1995 and October 6, 1996, certain items from the Company's
condensed Statement of Operations expressed as a percentage of net revenues.
CIAO CUCINA CORPORATION
STATEMENT OF OPERATIONS DATA
FOR THE FORTY WEEKS ENDED FOR THE TWELVE WEEKS ENDED
OCTOBER 1, 1995 OCTOBER 6, 1996 OCTOBER 1, 1995 OCTOBER 6, 1996
RESTAURANT REVENUES (1) 100.0% 100.0% 100.0% 100.0%
OPERATING EXPENSES
Food and Beverage Costs 29.4% 30.8% 31.5% 30.5%
Restaurant Labor Costs (2) 32.7% 33.2% 44.1% 32.8%
Occupancy and Other Restaurant Expenses (3) 33.5% 26.2% 19.8% 23.6%
General and Administrative Expenses (4) 11.8% 11.4% 10.1% 10.6%
Depreciation and Amortization 10.8% 10.7% 14.2% 13.5%
----- ----- ----- -----
Total Operating Expenses 118.2% 112.3% 119.7% 111.0%
LOSS FROM OPERATIONS -18.2% -12.3% -19.7% -11.0%
OTHER INCOME (EXPENSE)
Interest Expense -1.6% -3.7% -1.5% -1.8%
Interest Income 0.5% 0.3% 0.6% 0.3%
Other Income 0.1% 0.0% 3.1% 0.6%
---- ---- ---- ----
Total Other Expense -1.0% -3.4% 2.2% -0.9%
NET LOSS -19.2% -15.7% -17.5% -11.9%
Number of restaurants open at period end 3 5 3 5
Number of mature restaurants (5) 2 3 2 3
- ---------------------------------------------
<FN>
(1) Revenues consist of restaurant food and beverage sales.
(2) Restaurant labor consists of hourly and management payroll, benefits and
taxes.
(3) Occupancy and other restaurant expenses include rent, utilities,
advertising, repairs and maintenance and operating supplies.
(4) General and administrative expenses include corporate salaries, benefits
and taxes, rent, insurance, professional services and other expenses.
(5) A mature restaurant is one which has been open at least 18 months.
(8)
9
RESTAURANT REVENUES
Restaurant revenues for the third quarter of fiscal 1996 exceeded restaurant
revenues for the third quarter of fiscal 1995 by $826,204 an increase of 80.0%.
Restaurant revenues year to date 1996 exceeded restaurant revenues year to date
1995 by $2,393,728 an increase of 66.8%. The increases for the quarter and year
to date are due to the opening of two additional restaurants in the first
quarter of 1996. Total restaurant seats for the company increased 83.4% with the
opening of the two newest restaurant units in Memphis, TN and Cincinnati, OH.
The Company's newest restaurants represent the prototypical restaurant units
developed by the Company, incorporating store-front style gourmet coffee shops
and bakeries adding an additional source of revenues to those units.
Revenues of individual restaurants typically are affected by a number of
factors. When a restaurant first opens, its novelty and freshness often lead to
a period of high revenues. Generally this occurs during the first six months of
a restaurant's initial operations. In the industry, this is referred to as a
"honeymoon period." Following the "honeymoon period," restaurant revenues
typically decline to a more realistic level reflecting continued business and
mature operations. Thereafter, revenues are influenced by a number of factors,
including competition by nearby restaurants, changes in marketing expenditures
(and related changes in traffic counts) by malls in which a restaurant is
located, scheduling of nearby special events, performance schedules of nearby
theaters and renovation or construction activities in proximity to a restaurant.
A review of revenues of the Company's mature restaurants (those which have been
open more than 18 months), none of which are prototypical units as planned by
the Company for its expansion, illustrate this pattern and are presented in the
following table:
1995 1996
---- ----
First Quarter (1) (2) $ 830,189 $ 875,906
Second Quarter (2) 662,843 652,974
Third Quarter (3) 1,049,336 861,515
Year to Date (2) $2,189,430 $2,127,867
<FN>
(1) First quarters are sixteen weeks, all other quarters are twelve weeks.
(2) Includes 2 mature restaurants.
(3) Includes 3 mature restaurants.
The Company has a limited operating history. The base of mature restaurant
units in the Company is small; only two in the first two quarters of 1995 and
three in the third quarter of 1995. None of the mature restaurants are
prototypical units as planned by the Company for its expansion.
Same store sales for mature restaurants for the first quarter of 1996
increased $45,717 over 1995 an increase of 5.5%. Second quarter 1996 same store
sales for mature restaurants decreased $9,869 as compared to 1995 or 1.4%. Third
quarter 1996 same store sales for mature restaurants decreased $187,821 as
compared to 1995 or 17.8%.
(9)
10
Two of the Company's mature restaurants which are not prototypical units have
experienced a decline in same store sales particularly for the third quarter
1996, as compared to 1995, for the following reasons: One restaurant has
experienced a rapid growth in competition in its market area. Thirteen new
restaurants opened within a 1.5 mile radius of the location in 1993 and eleven
additional restaurants were opened in the area in 1996. In addition, certain
special events which are high traffic generators were held in the general
vicinity of the restaurant in 1995, contributing to an increase in sales. In
1996, these events did not take place in the immediate area. The second
restaurant has experienced a decrease in traffic count. A $25 million renovation
of the mall, where the restaurant is located, was completed in 1995 accompanied
by heavy marketing by mall ownership which increased traffic counts at that
location. In 1996, the mall ownership reduced its marketing budget and mall
traffic counts have been down. In addition, the two level, 30,000 square foot
anchor store directly adjacent to the restaurant was unoccupied through the
third quarter of 1996. The Company's third mature restaurant experienced an
increase in same store sales for all quarters and year to date.
FOOD AND BEVERAGE COSTS
Food and beverage costs for the third quarter 1996 exceeded food and beverage
costs for the third quarter 1995 by $241,330 or 74.4%. As a percentage of sales,
food and beverage costs decreased from 31.5% to 30.5%. The increase in the cost
of sales was attributable to the opening of two additional restaurants in the
first quarter of 1996. The decrease in food and beverage costs as a percentage
of revenues was attributable to efficiencies in purchasing achieved by corporate
controls, menu re-engineering and training of purchasing personnel.
On a year to date basis, food and beverage costs increased $785,909 or 74.5%.
This increase in the cost of sales was also attributable to the opening of the
two additional restaurants in 1996. As a percentage of restaurant revenues, food
and beverage costs increased from 29.4% to 30.8% or an increase of 1.4%. This
increase was attributable to inefficiencies occurring during the first months of
operation of the new restaurants, caused by newly hired personnel needing the
training necessary to achieve the corporate goals and standards for food and
beverage costs.
RESTAURANT LABOR
Restaurant labor for the third quarter 1996 increased $154,952 or 34.1%
compared to the third quarter 1995. This increase was attributable to the
opening of two additional restaurants in the first quarter of 1996. As a
percentage of revenues, restaurant labor costs for the third quarter 1996 versus
1995 decreased from 44.1% to 32.8%. This decrease was due to efficiencies
achieved by improved restaurant labor scheduling and labor planning.
On a year to date basis, restaurant labor costs increased $815,968 or 69.6%.
This increase was attributable to the opening of two additional restaurants in
1996. As a percentage of sales, restaurant labor costs remained relatively
constant, increasing from 32.7% to 33.2% or an increase of 0.5%. The decrease in
the third quarter was negated year to date by the inefficiencies of labor due to
training, requiring more personnel than is normally necessary with a trained
staff, during the first months of operation of the new restaurants.
(10)
11
OCCUPANCY AND OTHER RESTAURANT EXPENSES
Occupancy and other restaurant expenses for the third quarter of 1996
exceeded occupancy and other restaurant expenses for the third quarter of 1995
by $234,230 or 114.6%. This increase was primarily due to the opening of two
additional restaurants in 1996. As a percentage of sales, occupancy and other
restaurant expenses increased to 23.6% for the third quarter of 1996 from 19.8%
for the third quarter of 1995 or an increase of 3.8%. This increase was
attributable to a decline in sales as a result of the theater season affecting
the two newest restaurants in downtown Cincinnati, OH and Memphis, TN. There
were no major productions in the theater in downtown Cincinnati for the first
five weeks of the quarter until the 1996/1997 Broadway Series commenced. In
addition, the Orpheum theater in Memphis went through an expansion and
renovation which postponed the theater season and the theater re-opened later
than originally projected. There were no major productions in the Orpheum
theater until after the end of the third quarter. In addition, downtown Memphis
redevelopment projects have experienced construction delays postponing the
opening of other high traffic generators, affecting restaurant revenues.
For year to date 1996, occupancy and other restaurant expenses increased
$365,614 over year to date 1995 due to the opening of two additional
restaurants. As a percentage of revenues, occupancy and other restaurant
expenses declined for year to date 1996 versus 1995 from 33.5% to 26.2%. This
decrease is primarily due to higher sales volumes of the two restaurants opened
in 1996 as compared to their fixed occupancy costs during the first 120 days of
operation.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses for the third quarter 1996 increased over
the third quarter of 1995 by $92,733 or 89.2%. Year to date 1996 general and
administrative expenses increased over year to date 1995 by $257,192 or an
increase of 61.0%. As a percentage of revenues, general and administrative
expenses have remained relatively constant increasing from 10.1% third quarter
1995 to 10.6% third quarter 1996 and decreasing year to date from 11.8% for 1995
to 11.4% for 1996.
The increases in general and administrative expenses for the quarter and year
to date are attributable to the growth in corporate management and systems
needed to manage increased numbers of restaurant units.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $104,619 for the third quarter 1996
over third quarter 1995 or 71.5%. Depreciation and amortization increased
$250,340 year to date 1996 over year to date 1995 or 64.7%. This increase is due
to additional depreciation of assets acquired for the two new restaurants opened
in 1996 and the amortization of pre-opening costs for these two units.
Pre-opening costs are amortized over the first twelve months following the
opening of a restaurant unit.
As a percentage of sales, depreciation and amortization decreased slightly
for the third quarter 1996 to 13.5% from 14.2% for the third quarter of 1995.
Year to date depreciation and amortization decreased for fiscal 1996 to 10.7%
from 10.8% for fiscal 1995. Depreciation and
(11)
12
amortization from year to year remained relatively constant in spite of the
increased amortization of pre-opening costs for the two new units because
pre-opening amortization for the New Jersey restaurant was completed by the end
of 1995 and amortization for the two new units did not commence until March of
1996.
LOSS FROM OPERATIONS
The loss from operations for the third quarter of 1996 increased by $ 1,660
over 1995 or 0.8%. Year to date 1996, the loss from operations increased by
$81,295 or 12.5%. These increases were primarily due to an increase in
depreciation and amortization. As a percentage of sales, the loss from
operations decreased in 1996 for the third quarter from 19.7% in 1995 to 11.0%.
Year to date 1996, the loss from operations as a percentage of sales decreased
from 18.2% in 1995 to 12.3%. The decrease in the loss from operations as a
percentage of sales was due to increased total revenues and operating
efficiencies achieved in all areas of the Company.
INTEREST EXPENSE
Interest expense increased $19,003 for the third quarter 1996 compared to
1995 or an increase of 127.4% and year to date 1996 interest expense increased
$167,589 compared to year to date 1995 or an increase of 300.9%. This increase
both for the quarter and year to date is mainly due to the bridge note financing
in the amount of $2,300,000 acquired in the first two quarters of 1996(see
Liquidity and Capital Resources discussion).
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are for capital expenditures and
operating expenses. Historically, the Company's primary sources of cash have
been from operations, bank borrowing, and the issuance of subordinated
debentures and preferred stock. The Company's cash flow before interest, taxes,
depreciation and amortization for the third quarter 1996 increased from a
negative cash flow of $56,664 to a positive cash flow of $46,295. Year to date
1996, the Company's cash flow before interest, taxes, depreciation and
amortization improved from a negative $264,279 in 1995 to a negative $95,234. In
1996, the Company acquired $2,300,000 in bridge financing (net of financing
costs) in anticipation of its initial public offering, to provide the Company
with the funds necessary to complete its two newest restaurant units and to
provide working capital. As of the end of the third quarter 1996 and prior to
the Company's initial public offering, the Company's financing arrangements did
not provide sufficient cash flow for continuing operating losses and the
development and opening of the restaurant in Ft. Lauderdale, Florida, for which
the Company has executed a lease agreement and for other expansion plans. In
late November 1996, subsequent to the end of the third quarter, the Company
completed the sale of 1,000,000 shares of its common stock at an initial public
offering price of $7.00 per share.
Net proceeds of the offering were approximately $6.1 million. Of this,
approximately $2,900,000 was used to repay certain indebtedness. The balance of
the net proceeds will be used for the development and opening of new restaurants
and working capital. For further information concerning uses of funds, see
"Outlook."
In conjunction with the initial public offering, all outstanding shares of
the Company's Series A and Series B preferred stock and an outstanding note in
the principal amount of $150,000 were converted to common stock.
(12)
13
The Company historically has working capital deficiencies, which it believes
are typical in the restaurant industry. As of October 6, 1996, the Company's
current liabilities of $1,522,749 exceeded its current assets of $485,659,
resulting in a working capital deficiency of $1,037,090. These deficiencies were
due primarily to the current portion of certain indebtedness (which was repaid
from the proceeds of the offering), the Company's ability to acquire favorable
terms with its vendors and its aggressive growth strategy.
Net cash used by operating activities decreased $419,284 year to date 1996 as
compared to year to date 1995. This was due primarily to an increase in accounts
payable and accrued expenses. The Company opened two new restaurants in 1996
and, as discussed above, the favorable terms acquired from the Company's vendors
had a favorable impact over cash used by operating activities.
Cash used in investing activities increased from $368,889 year to date 1995
to $1,900,517 year to date 1996 or $1,531,628. This increase is attributable to
the expenditures for equipment and improvements for the two new restaurants
opened in 1996.
Cash flows from financing activities increased year to date 1996 by
$1,088,436 over year to date 1995. This increase in financing activities was
attributable to bridge loan financing acquired in the first quarter of 1996,
which was repaid from the proceeds of the offering.
OUTLOOK
THE STATEMENTS CONTAINED IN THIS OUTLOOK ARE BASED ON CURRENT EXPECTATIONS.
THESE STATEMENTS ARE FORWARD LOOKING AND ACTUAL RESULTS MAY DIFFER MATERIALLY
DUE TO VARIOUS FACTORS AND UNCERTAINTIES INCLUDING, BUT NOT LIMITED TO, THE
EFFECT OF UNANTICIPATED COSTS OF EXPANSION, ADVERSE EFFECTS IF GROWTH IS NOT
MANAGED PROPERLY, EXPOSURE TO COST FLUCTUATIONS, AVAILABILITY OF LABOR,
COMPETITION FROM OTHER RESTAURANTS, CHANGING TRENDS, GOVERNMENT REGULATION,
AVAILABILITY OF LOCATIONS WITH FAVORABLE LANDLORD INCENTIVES AND ABILITY TO
SECURE REQUIRED PERMITS AND LICENSING.
The Company expects to open its Ft. Lauderdale restaurant in April 1997. It
is anticipated that the investment by the Company to build the Ft. Lauderdale
restaurant will be approximately $539,500. The Company is negotiating a lease
for a Cleveland, Ohio restaurant expected to open in May 1997. The Company
contribution to the development of the Cleveland location is estimated at
$400,000. The Company expects to open three other locations in 1997. These sites
have not been firmly identified.
The Company plans to renovate its oldest restaurant located in Harper's
Point, OH, during the first two weeks in January 1997. This restaurant, after
its renovation, will more closely resemble the Company's prototype restaurants
in Memphis, TN and downtown Cincinnati, OH. The Company believes this renovation
will create new customer interest at that location.
The Company also plans to remodel its New Jersey restaurant in the first
quarter of 1997 and to adjust the restaurant concept to better serve the New
Jersey customer base and market.
As noted above, the Company expects to open five restaurants during 1997 and
estimates that approximately $2.6 million will be needed for the opening of
these restaurants. The Company also expects that during 1997 it will spend
approximately $200,000 for the capital improvements
(13)
14
to its existing restaurants discussed above. The Company believes the remaining
net proceeds from its initial public offering, along with cash flow from
operations and developer leasehold incentives, will be sufficient both to meet
operating expenses and capital expenditures for 1997 and to fund the costs
associated with the opening of these five restaurants.
For the longer term, the Company's goal is to expand to thirty restaurants by
year-end 2000. The Company anticipates that additional bank and other financing
will be needed to fund costs associated with the opening of these restaurants.
If such financing is not available, or if the Company's assumptions regarding
cash flow or landlord leasehold incentives prove incorrect, the Company would be
required to curtail its expansion plans.
The Company expects growth to continue in the restaurant industry as more and
more people are consuming their meals away from home or taking prepared meals to
the home. The Company's strategy is to provide high quality food and personal
service at a reasonable price.
The Company continues to search for additional locations in its target market
for continued growth of the Company. The Company has received proposals for a
second location in Cleveland, OH, a second location in South Florida and a
second location in the DC metro area. The Company considered a proposal for a
restaurant in Baton Rouge, Louisiana, but has decided not to proceed with this
proposal.
The restaurant business is seasonal by nature and the Company's strategy of
locating its restaurants near high traffic generators is intended to attract
customers who are already in the area for purposes other than a meal. Any
seasonality associated with these high traffic generators could affect the level
of sales for a particular unit.
THE COMPANY EXPECTS THE FOURTH QUARTER OF 1996 TO GENERATE ITS HIGHEST LEVEL
OF QUARTERLY SALES TO DATE. IN SPITE OF THE INCREASED LEVEL OF SALES, THE
COMPANY EXPECTS TO CONTINUE TO SHOW A LOSS FOR THE FOURTH QUARTER AND THE YEAR.
CERTAIN RESTRUCTURING COSTS, ESTIMATED TO BE $325,000, WILL BE EXPENSED IN THE
FOURTH QUARTER. IN ADDITION, LOAN FEES AND THE VALUE OF WARRANTS ASSOCIATED WITH
THE BRIDGE FINANCING, AGGREGATING APPROXIMATELY $250,000, WILL BE EXPENSED IN
THE FOURTH QUARTER 1996.
(14)
15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As discussed in the Company's Form SB-2 Registration Statement, the Company
was added as a defendant in an Amended Counterclaim in litigation pending in the
Superior Court of the District of Columbia, Notte Luna Limited Partnership et
al. v. Capital Management and Development Corporation et al.(Civ. Div. No
0007600-95). This lawsuit has been settled on favorable terms to the Company.
The settlement amount is not material to the Company.
ITEM 2. CHANGES IN SECURITIES
N/A
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
N/A
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
N/A
ITEM 5. OTHER INFORMATION
N/A
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
(15)
16
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.
CIAO CUCINA CORPORATION
Date: January 2, 1997 By:
-----------------------------
Catherine C. Jetter
Executive Vice President and
Chief Financial Officer
(16)