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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 July 13, 1997
( ) 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 X No
----- -----
The issuer had 3,120,386 shares of Common Stock outstanding as of
August 1, 1997.
Transitional Small Business Disclosure Format (check one):
Yes No X
----- -----
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CIAO CUCINA CORPORATION
INDEX
PART I FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Balance Sheets 3
July 14, 1996 and July 13, 1997
Statements of Operations 4
Twelve weeks and twenty-eight weeks ended
July 14, 1996 and July 13, 1997
Statements of Cash Flows 5
Twelve weeks and twenty-eight weeks ended
July 14, 1996 and July 13, 1997
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
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CIAO CUCINA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
July 14, 1996 July 13, 1997
------------- -------------
ASSETS (Unaudited) (Unaudited)
------ ----------- -----------
CURRENT ASSETS
Cash and Cash Equivalents $ 35,508 $ 1,316,835
Accounts Receivable 61,365 51,474
Inventories 107,151 85,663
Prepayments 186,252 259,126
----------- -----------
Total Current Assets 390,276 1,713,098
EQUIPMENT AND IMPROVEMENTS, NET 4,440,653 4,892,509
INTANGIBLE ASSETS, NET 408,136 96,607
SECURITY DEPOSITS AND OTHER 345,593 474,871
----------- -----------
TOTAL ASSETS $ 5,584,658 $ 7,177,085
=========== ===========
LIABILITIES, REDEEMABLE EQUITY
AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Current Portion of Long-Term Debt $ 342,141 $ 52,643
Accounts Payable 404,462 733,214
Accrued Expenses 546,260 205,517
----------- -----------
Total Current Liabilities 1,292,863 991,374
LONG-TERM LIABILITIES
Notes Payable 2,262,012 4,520
Accrued Rentals 454,315 519,993
Deferred Lease Incentives 2,124,153 2,003,142
----------- -----------
Total Long-Term Liabilities 4,840,480 2,527,655
REDEEMABLE EQUITY
10% Series A Convertible Preferred Stock-$100 par
value, 15,000 shares authorized and issued 1,646,628 --
10% Series B Convertible Preferred Stock-$690 par
value, 1,740 shares authorized, 1,584 shares issued 1,233,784 --
----------- -----------
Total Redeemable Equity 2,880,412 --
SHAREHOLDERS' EQUITY (DEFICIT)
Common Stock-no par value, 10,000,000 shares
authorized, 794,355 shares issued for 1996,
3,120,386 shares issued for 1997 750 9,229,195
Additional Paid-In Capital (Deficit) (1,717,372) (1,647,372)
Accumulated Deficit (1,577,475) (3,923,767)
Treasury Stock-244,445 shares stated at cost (135,000) --
----------- -----------
Total Shareholders' Equity (Deficit) (3,429,097) 3,658,056
TOTAL LIABILITIES, REDEEMABLE EQUITY
AND SHAREHOLDERS' EQUITY (DEFICIT) $ 5,584,658 $ 7,177,085
=========== ===========
(3)
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CIAO CUCINA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Twenty-Eight Weeks Ended For the Twelve Weeks Ended
July 14, July 13, July 14, July 13,
1996 1997 1996 1997
---------------------------- ----------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
RESTAURANT REVENUES $ 4,130,369 $ 3,720,550 $ 2,154,090 $ 1,511,675
OPERATING EXPENSES
Food and Beverage Costs 1,274,845 1,124,459 666,041 459,407
Restaurant Labor Costs 1,377,809 1,291,052 728,162 551,958
Occupancy and Other Restaurant Expenses 977,887 1,160,115 543,689 504,966
Depreciation and Amortization 386,231 329,554 231,201 105,514
---------------------------- ----------------------------
4,016,772 3,905,180 2,169,093 1,621,845
RESTAURANT OPERATIONS 113,597 (184,630) (15,003) (110,170)
Interest Expense (Income), net 176,870 (43,785) 74,416 (19,652)
Other Expense 11,620 15,022 11,423 6,531
General and Administrative Expenses 641,155 665,469 396,773 332,807
---------------------------- ----------------------------
NET LOSS (716,048) (821,336) (497,615) (429,856)
Accretion of Dividends on Preferred Stock (139,621) -- (89,321) --
Accretion of Discount on Preferred Stock (7,255) -- 26,375 --
---------------------------- ----------------------------
NET LOSS APPLICABLE TO COMMON STOCK ($ 862,924) ($ 821,336) ($ 560,561) ($ 429,856)
============================ ============================
NET LOSS PER COMMON SHARE ($ 1.51) ($ 0.26) ($ 0.98) ($ 0.14)
============================ ============================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 569,910 3,117,056 569,910 3,120,386
(4)
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CIAO CUCINA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Twenty-Eight Weeks Ended For the Twelve Weeks Ended
July 14, July 13, July 14, July 13,
1996 1997 1996 1997
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
CASH FLOWS FROM
OPERATING ACTIVITIES
Net Loss ($716,048) ($821,336) ($497,615) ($429,856)
Depreciation 233,691 256,382 122,812 104,279
Amortization 152,540 73,172 108,389 1,235
Amortization of Lease Incentives (91,764) (109,383) (45,353) (46,878)
Accretion of Notes Payable Discount 6,250 -- 6,250 --
Changes in Operating Assets and Liabilities
Decrease (Increase ) in -
Accounts Receivable (32,676) (9,097) 58,168 (4,515)
Inventories (61,077) 1,540 2,277 (4,749)
Prepayments (163,416) (15,286) (150,429) (36,980)
Pre-opening Costs (256,134) (38,819) 53,487 (21,757)
Increase (Decrease) in -
Accounts Payable 145,065 188,798 (143,584) 95,057
Accrued Expenses 170,262 (392,684) 167,767 35,450
Accrued Rentals 81,151 10,908 40,231 (8,348)
NET CASH USED BY OPERATING ACTIVITIES (532,156) (855,805) (277,600) (317,062)
CASH FLOWS FROM
INVESTING ACTIVITIES
Purchase of Equipment and Improvements (1,481,681) (620,960) (97,314) (259,078)
Cash Paid for Security Deposits (1,419) (25,427) (1,419) (150,326)
Cash Paid for Note Receivable -- (48,000) -- --
Cash Paid for Intangible Assets (827) (4,884) (827) (1,301)
NET CASH USED BY INVESTING ACTIVITIES (1,483,927) (699,271) (99,560) (410,705)
CASH FLOWS FROM
FINANCING ACTIVITIES
Proceeds from Issuance of Warrants 50,000 50,000
Proceeds from Notes Payable 2,007,200 -- 1,998,102 --
Payments of Notes Payable (143,270) (1,850) (56,016) (815)
Payments of Syndication Costs -- -- 140,306 --
Proceeds from Bridge Financing -- -- (2,050,000) --
NET CASH PROVIDED (USED) 1,913,930 (1,850) 82,392 (815)
BY FINANCING ACTIVITIES
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (102,153) (1,556,926) (294,768) (728,582)
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 137,660 2,873,761 330,275 2,045,417
CASH AND CASH EQUIVALENTS -
END OF PERIOD $35,507 $1,316,835 $35,507 $1,316,835
(5)
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CIAO CUCINA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Twenty-Eight Weeks Ended For the Twelve Weeks Ended
July 14, July 13, July 14, July 13,
1996 1997 1996 1997
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES
Deferred Landlord Incentives Received,
Used For Purchase of Leasehold
Improvements and Equipment $90,087 -- -- --
Dividends Accrued on Series A and B
Convertible Preferred Stock $139,621 -- -- --
Accretion of Discount on Series A Convertible
Preferred Stock $7,255 -- -- --
Accretion of Discount on Issuance
of Bridge Notes $6,250 -- -- --
Deferred Financing Costs on Bridge Notes $100,000 -- -- --
Conversion of Participating Debenture to
Common Stock -- $50,000 $50,000 --
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash Paid for Interest $130,096 $6,790 $578 $421
(6)
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CIAO CUCINA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. PRESENTATION OF INTERIM INFORMATION
In the opinion of the management of Ciao Cucina Corporation, the
accompanying unaudited condensed consolidated financial statements include all
normal adjustments considered necessary to present fairly the financial position
as of July 14, 1996 and July 13, 1997 and the results of operations and cash
flows for the twelve weeks and twenty-eight weeks ended July 14, 1996 and July
13, 1997. Interim results are not necessarily indicative of results for a full
year.
The condensed consolidated 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 29, 1996. See the Company's Annual Report on Form 10-KSB, File No.
000-21745.
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. Construction is in progress for
this location.
On May 8, 1997, the Company entered into a lease for a 5,809 square foot
restaurant in Coral Gables, Florida. The restaurant will be located in the
Merrick Place Shops and Parking Building developed by the City of Coral Gables.
The project is in the architectural design stages.
On July 7, 1997, the Company entered into a lease for a 6,500 square foot
restaurant in Orlando, Florida. The restaurant will be located in The Oviedo
Marketplace, in close proximity to Central Florida University, Altamonte Springs
and Winter Park and directly below a 22 screen movie theater. The Oviedo
Marketplace is being developed by Rouse-Orlando, Inc., an affiliate of the Rouse
Company.
The Company expected to finalize the lease with The Playhouse Square
Foundation for its Cleveland, Ohio location no later than June 15, 1997.
Although certain details of the lease have not been finalized, construction has
commenced.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company owns and operates five restaurants, serving authentic
Mediterranean cuisine, under the name "Ciao Baby Cucina". All of the Company's
five restaurants have been in operation for more than one year with its two
newest restaurants opening 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 1996 and 1997 second quarters (twelve
weeks) ended on July 14, 1996 and July 13, 1997, respectively.
RESULTS OF OPERATIONS
The following table sets forth, for the twelve weeks and the twenty-eight
weeks ended July 14, 1996 and July 13, 1997, certain items from the Company's
condensed consolidated Statement of Operations expressed as a percentage of net
revenues.
Twelve Weeks Ended Twenty-eight Weeks Ended
STATEMENT OF OPERATIONS DATA: July 14, 1996 July 13, 1997 July 14, 1996 July 13, 1997
------------- ------------- -------------- -------------
RESTAURANT REVENUES(1) 100.0% 100.0% 100.0% 100.0%
OPERATING EXPENSES
Food and Beverage Cost 30.9 30.4 30.9 30.2
Restaurant Labor Costs(2) 33.8 36.5 33.4 34.7
Occupancy and Other Restaurant Expenses(3) 25.2 33.4 23.6 31.2
Depreciation and Amortization 10.8 7.0 9.4 8.9
RESTAURANT OPERATIONS (0.7) (7.3) 2.7 (5.0)
Interest (Income) Expense, net 3.5 (1.3) 4.3 (1.2)
Other (Income) Expense, net 0.5 0.4 0.2 0.4
General and Administrative Expenses(4) 18.4 22.0 15.5 17.9
NET LOSS (23.1)% (28.4)% (17.3)% (22.1)%
<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, travel and other
expenses.
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RESTAURANT REVENUES
Restaurant revenues for the second quarter of fiscal 1997 decreased from
$2,154,090 in 1996 to $1,511,675 in 1997, a decrease of $642,415 or a percentage
decrease of 29.8%. Restaurant revenues year to date 1997 have decreased from
$4,130,369 in 1996 to $3,720,550 in 1997, a decrease of $409,819 or a percentage
decrease of 9.9%. The decrease for the quarter was due to a decrease in sales in
all restaurant units. The Company's two newest restaurants experienced a
decrease which is typical following the honeymoon period (see discussion of
"honeymoon period" below). In addition, one of these new units is located in a
downtown development area which is behind schedule by more than one year. Other
traffic generators expected in the surrounding area of this restaurant did not
open as the developer expected. Of the Company's mature restaurants, the
restaurant located in New Jersey, has experienced a steady decline in sales
levels. The location has been problematic with low mall traffic counts and a
second floor location. The Company believes personnel issues and landlord
conflicts have contributed to the decline in sales for this unit. As discussed
previously, the Company is evaluating available alternatives for this unit.
The Company expected to open two additional restaurant units in the first
quarter of 1997, which would have created additional sales for the quarter and
year to date. These restaurants would have been in their honeymoon periods,
offsetting the declines due to the leveling off of revenues in restaurants
opened in the prior year. These openings did not occur on schedule due to
landlord development delays, out of the Company's control (see "Outlook"
section).
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.
The Company has a limited operating history and a small base of mature
restaurants (those which have been open more than 18 months). In the second
quarter of 1997, the Company had three mature restaurants, none of which is a
prototypical unit as planned by the Company for its expansion. Same store sales
for these mature restaurants were $714,261 in the second quarter of 1997
compared to $979,134 in the second quarter of 1996, a decrease $264,873 or a
percentage decrease of 27.0%. Year to date same store sales decreased from
$2,315,967 in 1996 to $1,757,556 in 1997, a decrease of $558,411 or a percentage
decrease of 24.1%.
The majority of the decrease in same store sales of the mature restaurants
was attributable to two of the three restaurants. As discussed above, the New
Jersey unit has experienced a decline in sales for 1997 of 45.7%. The other unit
has experienced a rapid growth in competition in its market area. Of eleven new
restaurants opened within a five mile radius of this unit since the beginning of
1996, four are considered by the Company to provide head-on-head competition.
Additionally, this restaurant was closed for renovation for 17 days in early
1997. The Company's
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third mature restaurant experienced a decrease in sales in the second quarter of
1997 due to daily bomb threats to the building where the restaurant is located.
The bomb threats occurred for approximately 12 days causing evacuation of the
restaurant during lunch, the restaurant's highest revenue period (85% of this
unit's revenues are generated at lunch due to its downtown location). The
Company was forced to write-off unpaid guest checks and customer counts in the
restaurant declined following the twelve day period due to customer fears.
Customer counts appear to be returning to normal levels at this time.
FOOD AND BEVERAGE COSTS
Food and beverage costs for the second quarter of 1997 decreased from
$666,041 in 1996 to $459,407 in 1997, a decrease $206,634 or a percentage
decrease of 31.0%. As a percentage of sales, food and beverage costs decreased
for the quarter from 30.9% to 30.4%, a percentage decrease of 0.5%.
On a year to date basis, food and beverage costs decreased from $1,274,845
in 1996 to $1,124,459 in 1997, a decrease of $150,386 or a percentage decrease
of 11.8%. As a percentage of sales, food and beverage costs year to date
decreased from 30.9% to 30.2%, a percentage decrease of 0.7%. The dollar
decreases in the food and beverage costs for both the quarter and year to date
are attributable to the decrease in sales for the periods. The decreases 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.
RESTAURANT LABOR
Restaurant labor for the second quarter of 1997 decreased from $728,162 in
1996 to $551,958 in 1997, a decrease of $176,204 or a percentage decrease of
24.2%. As a percentage of revenues, restaurant labor costs for the second
quarter 1997 versus 1996 increased from 33.8% to 36.5%, an increase of 2.7%.
Year to date 1997, restaurant labor costs decreased from $1,377,809 in 1996 to
$1,291,052 in 1997, a decrease of $86,757 or a percentage decrease of 6.3%. As a
percentage of sales, restaurant labor costs year to date increased from 33.4% to
34.7%, an increase of 1.3%.
The decrease in restaurant labor costs for the quarter and year to date are
attributable to lower staffing levels due to decreased sales. As a percentage of
sales, the increases are due to the fixed labor costs of the management staff as
compared to the decrease in sales for all restaurant units.
OCCUPANCY AND OTHER RESTAURANT EXPENSES
Occupancy and other restaurant expenses for the second quarter of 1997
decreased from $543,689 in 1996 to $504,966 in 1997, a decrease of $38,723 or a
percentage decrease of 7.1%. As a percentage of sales, occupancy and other
restaurant expenses increased to 33.4% for the second quarter of 1997 from 25.2%
for the second quarter of 1996 or an increase of 8.2%. Year to date, occupancy
and other restaurant expenses increased from $977,887 in 1996 to $1,160,115 in
1997, an increase of $182,228 or a percentage increase of 18.6%. As a percentage
of sales, occupancy and other restaurant expenses increased from 23.7% to 31.2%,
a percentage increase of 7.5%.
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The decrease for the quarter was attributable to reductions in other
restaurant expenses due to forecasted lower sales volumes. The increase, year to
date, was attributable to rents for the two newest units opened in 1996. The
increases in occupancy and other restaurant expenses as a percentage of sales,
for both the quarter and year to date, were primarily due to the fixed occupancy
costs and the decrease in sales of the restaurant units.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased from $231,201 in 1996 to $105,514
in 1997, a decrease of $125,687 or a percentage decrease of 54.4%. This decrease
is due to the absence of amortization for pre-opening expenses for the two
newest restaurants opened in 1996. Pre-opening costs are amortized over the
first thirteen periods following the opening of a restaurant unit. These
expenses were fully amortized prior to the end of the first quarter. Year to
date, depreciation and amortization decreased from $386,231 to $329,554, a
decrease of $56,677 or a percentage decrease of 14.7%. This decrease was also
due to the full amortization of the newest restaurants opened in 1996, partially
offset by higher depreciation of the fixed assets for those units in 1997.
Depreciation was taken for the full seven periods in 1997.
As a percentage of sales, depreciation and amortization decreased for the
second quarter of 1997 to 7.0% from 10.7% for the second quarter of 1996, a
decrease of 3.7%. Year to date, as a percentage of sales, depreciation and
amortization decreased from 9.4% to 8.9%, a decrease of 0.5%.
RESTAURANT OPERATIONS
The Company's loss from restaurant operations of $15,003 in the second
quarter of 1996 increased to a loss of $110,170 in the second quarter of 1997,
or an increase of $95,167. Year to date, the profit from restaurant operations
for 1996 of $113,597 decreased to a loss of $184,630, a decrease of $298,227.
The losses for the quarter and year to date were attributable to the increase in
fixed occupancy costs and the decrease in sales for the Company's restaurants.
The Company's two newest restaurants opened in the first quarter of 1996 and as
discussed above were beyond their honeymoon period in 1997. Although cash flows
from operations before depreciation and amortization were positive year to date
1997, cash flows from operations before depreciation and amortization for the
second quarter of 1997 were negative $51,534.
INTEREST (INCOME) EXPENSE
Interest expense exceeded interest income for the second quarter of 1996 by
$74,416. Interest income exceeded interest expense for the second quarter of
1997 by $19,652, a change of $94,068 for the second quarter 1997 compared to
1996 or a percentage change of 126.4%. Year to date 1996, interest expense
exceeded interest income by $176,870. Year to date 1997, interest income
exceeded interest expense by $43,785, a change of $220,655 or a percentage
change of 124.8%. The decreases in interest expense were due to the payoff of
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) and the
payoff of the Company's bank loans. Interest income exceeded interest expense
for the second quarter of 1997 and year to date due to the investment of the
remaining proceeds from the Company's initial public offering. The Company has
reduced its debt to approximately $7,000 in equipment leases and a $50,000
convertible subordinated debenture that has not converted to Common Stock.
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GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses for the second quarter of 1997
decreased from $396,773 in 1996 to $332,807 in 1997, a decrease of $63,966 or a
percentage decrease of 16.1%. As a percentage of revenues, general and
administrative expenses increased from 18.4% in 1996 to 22.0% in 1997, an
increase of 3.6%. Year to date, general and administrative expenses increased
from $641,155 in 1996 to $665,469 in 1997, an increase of $24,314 or a
percentage increase 3.8%. As a percentage of sales, general and administrative
expenses increased from 15.5% in 1996 to 17.9% in 1997, a percentage increase of
2.4%. The increase was primarily due to the addition of a Chief Operating
Officer and a change in employment contract for the Chief Executive Officer as
well as increases in travel and corporate systems needed to manage the increased
numbers of restaurant units. These increases, however, were offset by
management's cost controls of other expenses. The Company expected to open two
additional restaurants in the first quarter of 1997, creating an increase in
sales and reducing general and administrative expenses as a percentage of sales.
The restaurants did not open in the first quarter of 1997 due to landlord
development delays (see "Outlook" section).
NET LOSS
The net loss for the second quarter of 1997 decreased from $497,615 in 1996
to $429,856 in 1997, a decrease of $67,759 or a percentage decrease of 13.6%.
Year to date, the net loss increased from $716,048 in 1996 to $821,336 in 1997,
an increase of $105,288, a percentage increase of 14.7%. The year to date
increase was due to the increased loss for the first quarter.
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. As of the end of the third quarter of 1996, the
Company's financing arrangements did not provide sufficient cash flow for
continuing operating losses and for the Company's expansion plans. In late
November 1996, the Company completed an initial public offering 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 has been and 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. In the first
quarter of 1997, a $50,000 convertible subordinated debenture holder elected to
convert the debenture to Common Stock of the Company.
The Company's cash flow before interest, taxes, depreciation and
amortization for the second quarter 1997 decreased $153,521, from a negative
cash flow of $237,351 for the second quarter 1996 to a negative cash flow of
$390,872. Year to date 1997, cash flow before interest, taxes, depreciation and
amortization decreased $400,239, from a negative $244,711 in 1996 to a negative
$644,950. The Company historically had working capital deficiencies, which it
believes are typical in the restaurant industry. As of July 13, 1997, the
Company's current assets of $1,713,098 exceeded its current liabilities of
$991,374, resulting in positive working capital of
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$721,724. The positive working capital is due to Cash and Cash Equivalents of
$1,316,835 remaining from the offering. The prior deficiencies in working
capital 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 increased $39,462 for the second
quarter of 1997 as compared to the second quarter of 1996. Year to date, net
cash used by operating activities increased $323,649 from $532,156 in 1996 to
$855,805 in 1997. This was due primarily to the increase in net loss and a
decrease in accrued expenses.
Cash used in investing activities increased from $99,560 for the second
quarter of 1996 to $410,705 for the second quarter of 1997, an increase of
$311,145. Year to date, cash used in investing activities decreased from
$1,483,297 in 1996 to $699,271 in 1997. The year to date decrease in cash used
by investing activities reflects the furniture, equipment and leasehold
improvements purchases for the two new restaurants opened in 1996, as compared
to the construction in progress for Ft. Lauderdale and Cleveland in 1997.
Net cash provided by financing activities decreased for the first quarter
of 1997 as compared to 1996 from $82,392 to net cash used by financing
activities of $815, a decrease of $83,207. The cash used by financing activities
for the second quarter of 1997 consisted of principal payments of $815 on
equipment leases of approximately $7,000. Year to date, net cash provided by
financing activities decreased from $1,913,930 to net cash used by financing
activities of $1,850. This decrease of $2,098,930 reflects the 1996 proceeds
from the bridge financing which was repaid from the proceeds of the offering. In
1997 the net cash used by financing activities of $1,850 also consists of
equipment lease payments.
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 DELAYS IN THE DEVELOPMENT OF NEW RESTAURANTS AND 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 on September 22,
1997. It is anticipated that the investment by the Company to build the Ft.
Lauderdale restaurant will be approximately $539,500. Construction is in
progress on the Ft. Lauderdale restaurant. The Company has negotiated a lease
for a Cleveland, Ohio restaurant expected to open late in 1997. The Company
contribution to the development of the Cleveland location is estimated at
$400,000. Although certain details of the lease have not been finalized, based
upon agreement with the developer, construction has commenced for this
restaurant. The Company has signed a lease for a restaurant in The Merrick Place
Shops and Parking Building in Coral Gables, Florida, developed by the City of
Coral Gables, and expects to open this restaurant mid December, 1997. The
landlord has executed this lease. The Company has entered into a lease with
Rouse-Orlando, Inc., an affiliate of the Rouse Company, for a 6,500 square foot
restaurant in Orlando, Florida. The restaurant will be located in The Oviedo
Marketplace, in close proximity to Central Florida University, Altamonte
Springs, Winter Park and directly below a 22 screen movie theater. The
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Company expects to open the Orlando restaurant in the first quarter of 1998.
The Company has previously stated that, due to the growth of its corporate
structure to support added restaurant units, the Company would not be profitable
until additional restaurants were open. The Company is making every effort to
reduce its corporate overhead expenses until additional restaurant units are
open.
The Company is negotiating a lease for a restaurant location at Balston
Commons in Arlington, Virginia. The lease is presently in the drafting stages.
The Company had originally planned 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. This renovation has not taken place and
the Company is evaluating several alternatives with regard to this location.
As noted above, the Company expects to open or have under development five
restaurants during 1997 and estimates that approximately $2.6 million will be
needed for the opening of these restaurants. The Company believes that in
addition to the remaining net proceeds from its initial public offering,
expected cash flow from operations and developer leasehold incentives, equipment
leasing arrangements or other financing will be necessary to fund some of the
costs associated with the opening of these five restaurants. The Company is
pursuing equipment financing alternatives, and to date, has acquired an
equipment lease for one restaurant.
For the longer term, the Company's goal was to expand to thirty restaurants
by year-end 2000. Landlord construction problems beyond the Company's control
have caused delays in the opening of two restaurants which originally were
planned to open in the first quarter of 1997. Therefore, the Company may not be
able to reach its original goal. The Company anticipates that additional bank
and other financing will be needed to fund costs associated with the opening of
future 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 further.
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
markets for continued growth of the Company. The Company plans to concentrate
its efforts on opening the new units for 1997 while evaluating additional
proposals for new locations in 1998.
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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
N/A
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
The Annual Meeting of Shareholders of the Company was held on May 27, 1997 for
the purpose of electing its board of directors. The result of the matter voted
on is as follows:
Against or
Election of Directors: For Withheld
--------- -----
Carl A. Bruggemeier 2,844,960 7,600
Catherine C. Jetter 2,844,960 7,600
Roger Lipton 2,844,960 7,600
Marvin Rosenberg 2,844,960 7,600
Roger D. Taylor 2,844,960 7,600
Russell C. Wiles 2,844,960 7,600
John H. Wyant 2,844,960 7,600
ITEM 5. OTHER INFORMATION
N/A
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.1 Lease between Ciao Cucina Corporation and Rouse-Orlando, Inc.,
dated July 7, 1997.
27 Financial Data Schedule (contained in EDGAR filing only)
b) Reports on Form 8-K: None
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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: August 26, 1997 By: /s/ Catherine C. Jetter
------------------------
Catherine C. Jetter
Executive Vice President and
Chief Financial Officer
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