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 5, 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 November 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
October 6, 1996 and October 5, 1997
Statements of Operations 4
Twelve weeks and forty weeks ended
October 6, 1996 and October 5, 1997
Statements of Cash Flows 5
Twelve weeks and forty weeks ended
October 6, 1996 and October 5, 1997
Notes to Financial Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II OTHER INFORMATION
Item 1 Legal Proceedings 19
Item 2 Changes in Securities 19
Item 3 Defaults Upon Senior Securities 20
Item 4 Submission of Matters to a Vote of
Security Holders 20
Item 5 Other Information 20
Item 6 Exhibits and Reports on Form 8-K 20
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CIAO CUCINA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
October 6, 1996 October 5, 1997
--------------- ---------------
ASSETS (Unaudited) (Unaudited)
----------- -----------
CURRENT ASSETS
Cash and Cash Equivalents $ 268,384 $ 721,309
Accounts Receivable 83,951 55,276
Inventories 78,802 120,225
Prepayments 54,522 203,800
----------- -----------
Total Current Assets 485,659 1,100,610
EQUIPMENT AND IMPROVEMENTS, net 4,633,305 5,018,661
INTANGIBLE ASSETS, net 514,704 210,264
SECURITY DEPOSITS AND OTHER 398,711 486,533
----------- -----------
TOTAL ASSETS $ 6,032,379 $ 6,816,068
=========== ===========
LIABILITIES, REDEEMABLE EQUITY
AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Current Portion of Long-Term Debt $ 321,127 $ 135,632
Accounts Payable 569,852 628,675
Accrued Expenses 631,770 291,413
----------- -----------
Total Current Liabilities 1,522,749 1,055,720
LONG-TERM LIABILITIES
Notes Payable 2,622,008 245,867
Accrued Rentals 494,437 508,418
Deferred Lease Incentives 2,164,073 1,956,263
----------- -----------
Total Long-Term Liabilities 5,280,518 2,710,548
REDEEMABLE EQUITY
10% Series A Convertible Preferred Stock-$100 par
value, 15,000 shares authorized and issued 1,681,243 -
10% Series B Convertible Preferred Stock-$690 par
value, 1,740 shares authorized, 1,584 shares issued 1,259,006 -
----------- -----------
Total Redeemable Equity 2,940,249 -
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 (1,859,515) (4,532,023)
Treasury Stock-244,445 shares stated at cost (135,000) -
----------- -----------
Total Shareholders' Equity (Deficit) (3,711,137) 3,049,800
TOTAL LIABILITIES, REDEEMABLE EQUITY
AND SHAREHOLDERS' EQUITY (DEFICIT) $ 6,032,379 $ 6,816,068
=========== ===========
(3)
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CIAO CUCINA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Forty Weeks Ended For the Twelve Weeks Ended
October 6, October 5, October 6, October 5,
1996 1997 1996 1997
------------------------------- -------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
RESTAURANT REVENUES $ 5,979,299 $ 5,249,137 $ 1,856,934 $ 1,528,587
OPERATING EXPENSES
Food and Beverage Costs 1,840,423 1,582,470 565,578 458,011
Restaurant Labor Costs 1,987,524 1,834,606 609,715 543,554
Occupancy and Other Restaurant Expenses 1,567,854 1,674,556 438,672 514,441
Depreciation and Amortization 637,266 454,668 251,035 125,114
------------------------------- -------------------------------
6,033,067 5,546,300 1,865,000 1,641,120
RESTAURANT OPERATIONS (53,768) (297,163) (8,066) (112,533)
Interest Expense (Income), net 205,952 (47,862) 29,082 (4,077)
Other Expense (Income), net (201) 19,666 (11,619) 4,644
General and Administrative Expenses 678,732 946,970 196,674 281,501
Loss from Impairment of Long-Lived Assets - 213,655 - 213,655
------------------------------- -------------------------------
NET LOSS (938,251) (1,429,592) (222,203) (608,256)
Accretion of Dividends on Preferred Stock (196,349) - (56,728) -
Accretion of Discount on Preferred Stock (10,364) - (3,109) -
------------------------------- -------------------------------
NET LOSS APPLICABLE TO COMMON STOCK ($1,144,964) ($1,429,595) ($282,040) ($608,256)
================================ ===============================
NET LOSS PER COMMON SHARE ($2.01) ($0.46) ($0.49) ($0.19)
================================ ===============================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 569,910 3,118,062 569,910 3,120,386
(4)
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CIAO CUCINA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Forty Weeks Ended For the Twelve Weeks Ended
October 6, October 5, October 6, October 5,
1996 1997 1996 1997
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
CASH FLOWS FROM
OPERATING ACTIVITIES
Net Loss ($938,251) ($1,429,592) ($222,203) ($608,256)
Depreciation 360,857 380,261 127,166 114,078
Amortization 276,632 74,406 124,092 11,036
Amortization of Lease Incentives (137,266) (156,261) (45,502) (46,878)
Loss from Impairment of Long-Lived Assets - 213,655 - 213,655
Accretion of Notes Payable Discount 12,500 - 6,250 -
Changes in Operating Assets and Liabilities
Decrease (Increase ) in -
Accounts Receivable (55,262) (12,899) (22,586) (3,902)
Inventories (32,728) (33,022) 28,349 (34,562)
Prepayments (31,686) (40,040) 131,730 55,326
Pre-opening Costs (257,717) (146,376) (1,583) (124,693)
Increase (Decrease) in -
Accounts Payable 310,455 84,259 165,390 (102,571)
Accrued Expenses 255,772 (306,788) 85,510 85,896
Accrued Rentals 121,273 (667) 40,122 (11,575)
NET CASH USED BY OPERATING ACTIVITIES (115,421) (1,373,064) 416,735 (452,346)
CASH FLOWS FROM
INVESTING ACTIVITIES
Purchase of Equipment and Improvements (1,716,076) (1,012,811) (234,395) (470,235)
Cash Paid for Security Deposits (54,537) (37,090) (53,118) (11,662)
Cash Paid for Note Receivable - (48,000) - -
Cash Paid for Intangible Assets (129,904) (4,883) (129,078) -
NET CASH USED BY INVESTING ACTIVITIES (1,900,517) (1,102,784) (416,591) (481,897)
CASH FLOWS FROM
FINANCING ACTIVITIES
Proceeds from Issuance of Warrants 50,000 - - -
Proceeds from Notes Payable 2,257,200 359,582 250,000 359,582
Payments of Notes Payable (160,538) (36,186) (17,268) (20,865)
Payments of Syndication Costs - - - -
Proceeds from Bridge Financing - - - -
NET CASH PROVIDED (USED) 2,146,662 323,396 232,732 338,717
BY FINANCING ACTIVITIES
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 130,724 (2,152,454) 232,876 (595,526)
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 137,660 2,873,761 35,508 1,316,835
CASH AND CASH EQUIVALENTS -
END OF PERIOD $268,384 $721,309 $268,384 $721,309
(5)
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CIAO CUCINA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Forty Ended For the Twelve Weeks Ended
October 6, October 5, October 6, October 5,
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 $90,088 $296,084 - $298,084
Dividends Accrued on Series A and B
Convertible Preferred Stock $196,349 - $56,728 -
Accretion of Discount on Series A Convertible
Preferred Stock $10,364 - $3,109 -
Accretion of Discount on Issuance
of Bridge Notes $12,500 - $6,250 -
Issuance of Bridge Note for Deferred $200,000 - - -
Financing Costs
Conversion of Participating Debenture to
Common Stock - $50,000 - -
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash Paid for Interest $229,545 $8,680 $99,449 $7,707
(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
October 6, 1996 and October 5, 1997 and the results of operations and cash flows
for the twelve weeks and forty weeks ended October 6, 1996 and October 5, 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 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 permit stage.
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 project is in the architectural design stage.
On September 15, 1997, the Company entered into a sublease, with Loew's
Building, Ltd., for a 5,700 square foot restaurant and an 11,500 square foot
banquet facility in Cleveland , Ohio. The restaurant and banquet facility will
be located in the Cleveland Playhouse Square Center, in the heart of the
redeveloped theater district. The project is under construction.
On October 27, 1997, the Company signed a lease for a 6,622 square foot
restaurant in Arlington, Virginia. The restaurant will be located in the
Ballston Common Mall, an upscale retail and office complex, directly below 13
movie theaters with stadium style seating. Ballston Common Mall is developed by
Forest City Development Company located in Cleveland, Ohio.
The Company estimates that approximately $2.1 million will be needed, in
addition to landlord incentives, for leasehold improvements, furniture,
fixtures, equipment and pre-opening expenses, for these four restaurants.
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CIAO CUCINA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. LOSS FROM IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment as required by FAS
121. The Company has determined that the long-lived assets in its New Jersey
restaurant have been impaired due to the decline in sales and a loss of $213,655
has been recognized in the third quarter of 1997. The Company plans to exit the
New Jersey location and, consequently, has determined that the leasehold
improvements, furniture and fixtures and the restaurant kitchen equipment should
be written down to zero. The Company can use the point of sale system, the
computer and the copier at other locations and continues to carry these fixed
assets at their fair value which approximates their current book value. Fair
value was derived from sales and purchases of comparable equipment.
This restaurant unit received significant landlord incentives for the
construction and other capital improvements to the property. These landlord
incentives have been accounted for as deferred leasehold incentives and the
write-off of the related assets will have no effect on the statement of
operations in the future.
4. SUBSEQUENT EVENT
On Tuesday, November 11, 1997, the Company determined it would close its New
Jersey restaurant and exit the location. The Company is negotiating with the
landlord to exit the location and currently expects to reach a settlement with
the landlord prior to the end of the fourth quarter. The Company currently
expects the settlement to be approximately $400,000 which would be charged to
the Company's Statement of Operations when the settlement is agreed upon by
both parties.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company owns and operates six restaurants, serving authentic Mediterranean
cuisine, under the name "Ciao Baby Cucina"and "Ciao Cucina". Five of the
Company's six restaurants have been in operation for more than one year with its
newest restaurant opened on September 26, 1997 and two other of its newest
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 1996 and 1997 third quarters (twelve
weeks) ended on October 6, 1996 and October 5, 1997, respectively.
RESULTS OF OPERATIONS
The following table sets forth, for the twelve weeks and the forty weeks
ended October 6, 1996 and October 5, 1997, certain items from the Company's
condensed consolidated Statement of Operations expressed as a percentage of net
revenues.
Twelve Weeks Ended Forty Weeks Ended
STATEMENT OF OPERATIONS DATA: October 6, 1996 October 5, 1997 October 6, 1996 October 5, 1997
--------------- --------------- --------------- ---------------
RESTAURANT REVENUES(1) 100.0% 100.0% 100.0% 100.0%
OPERATING EXPENSES
Food and Beverage Cost 30.5 30.0 30.8 30.1
Restaurant Labor Costs(2) 32.8 35.6 33.2 35.0
Occupancy and Other Restaurant Expenses(3) 23.6 33.6 26.2 31.9
Depreciation and Amortization 13.5 8.2 10.7 8.7
RESTAURANT OPERATIONS (0.4) (7.4) (0.9) (5.7)
Interest (Income) Expense, net 1.6 (0.3) 3.4 (0.9)
Other (Income) Expense, net (0.6) 0.3 0.0 0.4
General and Administrative Expenses(4) 10.6 18.4 11.4 18.0
Loss from Impairment of Long Lived Assets 0.0 14.0 0.0 4.1
NET LOSS (12.0)% (39.8)% (15.7)% (27.3)%
<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, travel and other expenses.
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RESTAURANT REVENUES
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.
Restaurant revenues for the third quarter of fiscal 1997 decreased from
$1,856,934 in 1996 to $1,528,587 in 1997, a decrease of $328,347 or a percentage
decrease of 17.7%. Restaurant revenues year to date 1997 have decreased from
$5,979,299 in 1996 to $5,249,137 in 1997, a decrease of $730,162 or a percentage
decrease of 12.2%. The decrease for the quarter and year to date was due
primarily to a decrease in sales in the Company's New Jersey restaurant and an
additional decrease in sales in the Memphis, Tennessee restaurant. Year to date,
the decrease in sales in New Jersey was $480,072 as compared to 1996. An
additional decrease of $267,304 was experienced by the Memphis location.
As discussed previously, the Company's New Jersey restaurant has experienced
a steady decline in sales levels. The location has been problematic with low
mall traffic counts and a second floor location. In addition, the Company
believes personnel issues and landlord conflicts have contributed to the decline
in sales for this unit. After on going market analysis for this location, the
Company believes that the majority of the Northern New Jersey market prefers
traditional Southern Italian cuisine. The Company originally considered
remodeling this location and changing the concept to better serve the New Jersey
customer base and market, but in considering the landlord and personnel issues
as well as the Company's decision not to cluster in the New Jersey area, the
Company feels it would be more beneficial to the Company to exit this location.
The Company is currently in negotiations with the landlord to accomplish this
strategy. (See the presentation of "Results of Operations" without the New
Jersey location, on page 14.)
The Company's Memphis, Tennessee restaurant 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. In addition, the Orpheum theater, which is expected to
be a high traffic generator, was being renovated for more than a year and no
major, long-running productions were scheduled until the fourth quarter of 1997.
The decline in sales levels for this restaurant were also attributable to the
end of the restaurant's honeymoon period.
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). One of these restaurant units opened on September 26, 1997, nine days
before the end of the third quarter.
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In the third quarter of 1996, the Aronoff Center for the Arts, directly
across the street from the Company's Downtown Cincinnati restaurant, opened
the Broadway series show "Sunset Boulevard" on August 10. In 1997, the first
Broadway series production "Showboat" opened 13 days after the end of the third
quarter. The lack of a major performance in the theater caused a decrease in
sales for this unit for the quarter and year to date.
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 third
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 $739,524 in the third quarter of 1997 compared
to $861,515 in the third quarter of 1996, a decrease of $121,991 or a percentage
decrease of 14.2%. Year to date same store sales for the mature restaurants
decreased from $3,177,482 in 1996 to $2,497,080 in 1997, a decrease of $680,402
or a percentage decrease of 21.4%.
The majority of the decrease in same store sales of the mature restaurants
year to date 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%
or $480,072. The other unit experienced a slight increase in same store sales
for the quarter of $3,655 in 1997 as compared to 1996 or a percentage increase
of 1.66% although same store sales for this unit are down year to date
approximately 15.6%. This 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 third mature restaurant
experienced a slight decrease in sales in the third quarter of 1997 of 1.42% and
a decrease year to date of 5.62%. The majority of lost sales occurred in the
second quarter when daily bomb threats to the building where the restaurant is
located 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
have returned to normal levels.
FOOD AND BEVERAGE COSTS
Food and beverage costs for the third quarter of 1997 decreased from $565,578
in 1996 to $458,011 in 1997, a decrease $107,567 or a percentage decrease of
19.0%. As a percentage of sales, food and beverage costs decreased for the
quarter from 30.5% to 30.0%, a percentage decrease of 0.5%.
On a year to date basis, food and beverage costs decreased from $1,840,423 in
1996 to $1,582,470 in 1997, a decrease of $257,953 or a percentage decrease of
14.0%. As a percentage of sales, food and beverage costs year to date decreased
from 30.8% to 30.1%, 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.
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RESTAURANT LABOR
Restaurant labor for the third quarter of 1997 decreased from $609,715 in
1996 to $543,554 in 1997, a decrease of $66,161 or a percentage decrease of
10.9%. As a percentage of revenues, restaurant labor costs for the third quarter
1997 versus 1996 increased from 32.8% to 35.6%, an increase of 2.8%. Year to
date 1997, restaurant labor costs decreased from $1,987,524 in 1996 to
$1,834,606 in 1997, a decrease of $152,918 or a percentage decrease of 7.7%. As
a percentage of sales, restaurant labor costs year to date increased from 33.2%
to 35.0%, an increase of 1.8%.
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, primarily in New Jersey.
Excluding New Jersey, restaurant labor costs year to date, increased only
slightly from 33.2% to 33.7%, an increase of .5%. (See the presentation of
"Results of Operations" without the New Jersey location, on page 14.)
OCCUPANCY AND OTHER RESTAURANT EXPENSES
Occupancy and other restaurant expenses for the third quarter of 1997
increased from $438,672 in 1996 to $514,441 in 1997, an increase of $75,769 or a
percentage increase of 17.3%. As a percentage of sales, occupancy and other
restaurant expenses increased to 33.7% for the third quarter of 1997 from 23.6%
for the third quarter of 1996 or an increase of 10.1%. Year to date, occupancy
and other restaurant expenses increased from $1,567,854 in 1996 to $1,674,556 in
1997, an increase of $106,702 or a percentage increase of 6.8%. As a percentage
of sales, occupancy and other restaurant expenses increased from 26.2% to 31.9%,
a percentage increase of 5.7%.
The dollar increase for the quarter was attributable to increased rents from
annual escalations in leases (negotiated as part of the original leases),
increased repairs and maintenance expenses for mature restaurants, increased
advertising and promotion expenses in an effort to increase sales, increased
insurance costs due to the initial public offering and increases in property
taxes. Year to date, the dollar increase was attributable to all of the above
and, in addition, to ten periods of rent year to date 1997 for the restaurants
opened in 1996, compared to seven and one-half periods rent for one of the
restaurants opened in 1996 and seven periods rent for the other unit 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 as compared to a decrease in sales of the restaurant units.
Excluding New Jersey, year to date occupancy and other restaurant expenses
increased from 26.2% to 29.3%, an increase of 3.1%. (See the presentation of
"Results of Operations" without the New Jersey location, on page 14.)
DEPRECIATION AND AMORTIZATION
Depreciation and amortization for the third quarter decreased from $251,035
in 1996 to $125,114 in 1997, a decrease of $125,921 or a percentage decrease of
50.2%. This decrease is due to the absence of amortization of pre-opening
expenses for the two newest restaurants
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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 $637,266 to $454,668, a decrease of $182,598 or a
percentage decrease of 28.7%. This decrease was also due to the full
amortization of pre-opening expenses for 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 ten periods in 1997.
As a percentage of sales, depreciation and amortization decreased for the
third quarter of 1997 to 8.2% from 13.5% for the third quarter of 1996, a
decrease of 5.3%. Year to date, as a percentage of sales, depreciation and
amortization decreased from 10.7% to 8.7%, a decrease of 2.0%.
RESTAURANT OPERATIONS
The Company's loss from restaurant operations of $8,066 in the third quarter
of 1996 increased to a loss of $112,533 in the third quarter of 1997, or an
increase of $104,467. Year to date, the loss from restaurant operations for 1996
of $53,768 increased to a loss of $297,163, an increase of $243,395. 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. Two of
the Company's 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
third quarter of 1997 were negative $34,297.
Excluding the New Jersey restaurant, the Company had a profit from restaurant
operations year to date of $2,965 and a positive cash flow from restaurant
operations of $267,373. For the third quarter 1997, the Company had a profit
from restaurant operations of $788 and $68,824 positive cash flow from
restaurant operations. (See the presentation of "Results of Operations" without
the New Jersey location, on page 14.)
INTEREST (INCOME) EXPENSE
Interest expense exceeded interest income for the third quarter of 1996 by
$29,082. Interest income exceeded interest expense for the third quarter of 1997
by $4,077, a change of $33,159 or a percentage change of 114.0%. Year to date
1996, interest expense exceeded interest income by $205,952. Year to date 1997,
interest income exceeded interest expense by $47,862, a change of $253,814 or a
percentage change of 123.2%. 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 third 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 $257,000 in equipment leases, a $74,000
loan from the Ft Lauderdale landlord 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 third quarter of 1997 increased
from $196,674 in 1996 to $281,501 in 1997, an increase of $84,827 or a
percentage increase of 43.1%. As a percentage of revenues, general and
administrative expenses increased from 10.6% in 1996 to 18.4% in 1997, an
increase of 7.8%. Year to date, general and administrative expenses increased
from $678,732 in 1996 to $946,970 in 1997, an increase of $268,238 or a
percentage increase 39.5%. As a percentage of sales, general and administrative
expenses increased from 11.4% in 1996 to 18.0% in 1997, a percentage increase of
6.6%. The increase was primarily due to the addition of a Chief Operating
Officer and a change in the employment contract for the Chief Executive Officer
as well as increases in travel and corporate systems needed to manage the
increased number of restaurant units.
The Chief Executive Officer, the Chief Operating Officer, the Chief Financial
Officer and the Marketing Director of the Company have all taken voluntary
salary deferrals starting September 8, 1997 for an indefinite period. Although
Generally Accepted Accounting Principles require the accrual of the full salary
amounts due to these employees, the deferral of these amounts will preserve cash
flow for the Company. The Company's management took this action not only to
preserve cash flow but to show their continuing commitment to the long term
growth of the Company and Shareholder value.
The following percentage deferrals were voluntarily taken by corporate
management:
President and Chief Executive Officer 28%
Executive Vice President and Chief Operating Officer 20%
Executive Vice President and Chief Financial Officer 10%
Marketing Director 8%
In addition to the above salary deferrals, the Company has eliminated two
corporate staff positions, has reduced the cost of the corporate office rents
and is taking steps to reduce every possible corporate overhead expense until
more restaurant units are open.
LOSS FROM IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets, for impairment, as required by FAS
121. The Company has determined that the long-lived assets in its New Jersey
restaurant have been impaired due to the decline in sales and a loss of $213,655
has been recognized in the third quarter of 1997. The Company plans to exit the
New Jersey location and, consequently, has determined that the leasehold
improvements, furniture and fixtures and the restaurant kitchen equipment should
be written down to zero. The Company can use the point of sale system, the
computer and the copier at other locations and continues to carry these fixed
assets at their fair value which approximates their current book value. Fair
value was derived from sales and purchases of comparable equipment.
This restaurant unit received significant landlord incentives for the
construction and other capital improvements to the property. These landlord
incentives have been accounted for as deferred leasehold incentives and the
write-off of the related assets will have no effect on the statement of
operations in the future.
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NET LOSS
The net loss for the third quarter of 1997 increased from $222,203 in 1996 to
$608,256 in 1997, an increase of $386,053 or a percentage increase of 173.7%.
Year to date, the net loss increased from $938,251 in 1996 to $1,429,592 in
1997, an increase of $491,341, or a percentage increase of 52.3%. The year to
date increase in the net loss was due to a decrease in sales and to increases in
labor, occupancy costs and general and administrative expenses as well as the
recognition of a loss from impairment of long-lived assets for the New Jersey
restaurant.
Of the net loss for the year, $513,783 was attributable to the New Jersey
restaurant. Excluding New Jersey, the net loss would have decreased to $915,809,
a decrease of $22,442. (See the presentation of "Results of Operations" without
the New Jersey location, on page 14.)
RESULTS OF OPERATIONS EXCLUSIVE OF NEW JERSEY
The following table sets forth, by quarter for the forty weeks ended October
5, 1997, certain items from the Company's condensed consolidated Statement of
Operations, exclusive of the New Jersey restaurant.
First Quarter Second Quarter Third Quarter
STATEMENT OF OPERATIONS DATA: April 21, 1997 July 14, 1997 October 5, 1997
--------------- ------------- ---------------
(Sixteen Weeks) (Twelve Weeks) (Twelve Weeks)
RESTAURANT REVENUES $ 1,945,633 $ 1,347,653 $ 1,386,308
OPERATING EXPENSES
Food and Beverage Cost 578,413 408,444 405,094
Restaurant Labor Costs 632,037 478,127 468,667
Occupancy and Other
Restaurant Expenses 533,371 415,989 422,999
Depreciation and Amortization 175,568 69,160 88,760
RESTAURANT OPERATIONS $ 26,244 $ (24,067) $ 788
The following table sets forth, for the third quarter and for the forty weeks
ended October 5, 1997, certain items from the Company's condensed consolidated
Statement of Operations, exclusive of the New Jersey restaurant, expressed as a
percentage of revenues.
Third Quarter Year to Date
STATEMENT OF OPERATIONS DATA: October 5, 1997 October 5, 1997
--------------- ---------------
RESTAURANT REVENUES 100.0% 100.0%
OPERATING EXPENSES
Food and Beverage Cost 29.2% 29.8%
Restaurant Labor Costs 33.8% 33.7%
Occupancy and Other
Restaurant Expenses 30.5% 29.3%
Depreciation and Amortization 6.4% 7.1%
RESTAURANT OPERATIONS .1% .1%
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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, amortization
and loss from impairment of long lived assets for the third quarter 1997
decreased $72,188, from a positive cash flow of $37,891 for the third quarter
1996 to a negative cash flow of $34,297. Year to date 1997, cash flow before
interest, taxes, depreciation, amortization and loss from impairment of long
lived assets decreased $444,712, from a positive $445,956 in 1996 to a positive
$1,244. The Company historically had working capital deficiencies, which it
believes are typical in the restaurant industry. As of October 5, 1997, the
Company's current assets of $1,100,610 exceeded its current liabilities of
$1,055,720, resulting in positive working capital of $44,890. The positive
working capital is due to Cash and Cash Equivalents of $721,309 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 $869,081 for the third
quarter of 1997 as compared to the third quarter of 1996. Year to date, net cash
used by operating activities increased $1,257,643 from $115,421 in 1996 to
$1,373,064 in 1997. This was due primarily to the increase in net loss and a
decrease in accrued expenses.
Cash used by investing activities increased from $416,591 for the third
quarter of 1996 to $481,897 for the third quarter of 1997, an increase of
$65,306. Year to date, cash used by investing activities decreased from
$1,900,517 in 1996 to $1,102,784 in 1997, a decrease of $797,733. 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 for Ft. Lauderdale and
construction in progress for Cleveland in 1997.
Net cash provided by financing activities increased for the third quarter of
1997 as compared to 1996 from $232,732 to net cash provided by financing
activities of $338,717, an increase of $105,985. Cash provided by financing
activities for the third quarter of 1997 consisted mainly of equipment lease
funding for the downtown Cincinnati restaurant and the loan portion of the
tenant finish allowance from the Ft. Lauderdale landlord. Year to date, net cash
provided by
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financing activities decreased from $2,146,662 to $323,396. This decrease of
$1,823,266 primarily reflects the 1996 proceeds from the bridge financing which
was repaid from the proceeds of the offering, net of the equipment lease and
landlord financing discussed previously.
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 Cleveland, Ohio restaurant in January 1998
and the Cleveland banquet facility in February 1998. The Company contribution to
the development of the Cleveland location is estimated at $425,000. Although
certain details of the lease had not been finalized, based upon agreement with
the developer, construction commenced for this restaurant prior to the third
quarter of 1997. The Company finalized its lease in the third quarter.
The Company has entered into a lease with the City of Coral Gables for a
restaurant in The Merrick Place Shops and Parking Building in Coral Gables,
Florida and currently expects to open this restaurant in March 1998.
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 Company currently expects to open the Orlando
restaurant in the first quarter of 1998.
The Company has signed a lease for a 6,622 square foot restaurant location in
Arlington, Virginia and is awaiting execution of the lease by the landlord. The
proposed restaurant will be located in the Ballston Common Mall, an upscale
retail and office complex, directly below 13 movie theaters with stadium style
seating. The Company currently expects to open this restaurant in the second
quarter of 1998.
In the past, developer delays in the construction of their projects have
delayed the Company in opening its restaurant units when previously expected.
The Company is attempting to reduce the risk of developer delays by selecting
projects which are substantially in progress. The Merrick Place Shops and
Parking building is complete at this time, with the grand opening of this
building on November 7, 1997. The Rouse Company has notified the Company that
they have substantially completed construction of Oveido Marketplace in
accordance with the lease agreement and the Company can commence its
construction.
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 continuing to make every
effort to reduce its corporate overhead expenses until additional restaurant
units are open.
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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
subsequent to October 5, 1997, the Company determined it would exit this
location. The Company is negotiating with the landlord to exit the location, and
currently expects to reach a settlement with the landlord prior to the end of
the fourth quarter. The Company currently expects the settlement to be
approximately $400,000 which would be charged to the Company's Statement of
Operations when the settlement is agreed upon by both parties. The Company
believes that, although there will be costs associated with the closure of this
location, the elimination of New Jersey will improve the financial performance
of the Company in the long term and allow the Company's management to
concentrate on other restaurant units with more profit potential. Included in
general and administrative expenses for the Company are additional corporate
overhead expenses, primarily travel, which relate to the management of the New
Jersey location. The presentation of the Company's Results of Operation on page
14, exclusive of New Jersey, does not reflect the additional savings in
corporate overhead that would be realized if the Company were not operating the
New Jersey restaurant.
As noted above, the Company expects to have under development four
restaurants during the remainder of 1997 and estimates that approximately $2.1
million will be needed for the opening of these restaurants. 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 the costs associated with the opening
of these four restaurants. The Company is pursuing financing alternatives and,
to date, the Company 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 will 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. Therefore, the Company continues to search for additional locations in
its target markets for continued growth. For the near term, the Company plans to
concentrate its efforts on opening the new units for 1998 while evaluating
additional proposals for other new locations in 1998 and 1999.
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 the year to reflect higher sales due
to the holiday season and the schedules for theaters in close proximity to the
downtown Cincinnati and the Memphis, Tennessee restaurants. As discussed
previously, in Cincinnati, the Broadway series show "Showboat" has been running
in the fourth quarter with excellent attendance and increased customer counts
for that unit. "Phantom of the Opera" opened in Memphis, at the Orpheum
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Theater, on November 12, 1997, running for four weeks, and the Company expects
increased customer counts in that location also. Many of the Company's
restaurant units have private dining rooms which are traditionally booked for
holiday parties starting after Thanksgiving increasing customer counts further.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 20, 1997, suit was filed against the Company in Bergen County
Division of the Superior Court of New Jersey by the landlord for the Company's
New Jersey restaurant (JMB Income Properties, Ltd.-XI v. Ciao Cucina
Corporation, Civil Action # L-7946-97). The complaint alleges that the Company
has breached its lease by failing to pay its proportionate share of real estate
taxes for the location and failing to maintain the premises in accordance with
the lease and also has anticipatorily breached the lease, by requesting a
restructuring or termination of the lease. The complaint seeks unspecified
damages and an order requiring the Company to comply with the lease. The Company
believes it has substantial defenses to the complaint and, if necessary, will
defend the suit vigorously. As indicated under "Outlook", above, the Company has
concluded that it should cease restaurant operations in this location and hopes
to reach a mutually agreeable solution with the landlord.
ITEM 2. CHANGES IN SECURITIES
The Company completed its initial public offering on November 27, 1996 (Form
SB-2, Registration Statement # 333-05674) The Company filed a Form SR on
February 27, 1997, reporting the initial use of the proceeds from the offering.
As required by Item 701(f) of Regulation SK, following is the Company's update
of the use of proceeds from the Company's initial public offering:
Proceeds of Initial Offering: $ 7,000,000
Underwriting discounts and commissions (630,000)
Expenses paid to or for underwriters (70,000)
Other Expenses (262,500)
Net Proceeds $ 6,037,050
Use of Proceeds:
Construction of plant, building and facilities $ 1,083,031
Purchase and installation of machinery and
equipment 258,203
Repayment of Indebtedness:
Insiders 1,592,800
Others 1,384,573
Working Capital 1,427,944
Temporary investment-Money Market Account 290,499
Total Use of Proceeds $ 6,037,050
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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
a) Exhibits
10.1 Lease between Ciao Cucina Corporation and Loew's Building, Ltd.
dated September 15, 1997.
10.2 Lease between Ciao Cucina Corporation and Ballston Common
Mall Dated October 27, 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: November 19, 1997 By: /s/ Catherine C. Jetter
------------------------
Catherine C. Jetter
Executive Vice President and
Chief Financial Officer
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