<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] 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 - 000-27015
CHICKEN KITCHEN CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-3283225
------------------------------ -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5415 Collins Avenue, Suite 305
Miami Beach, Florida 33140
- --------------------------------------------------------------------------------
(Address of principal executive offices, including zip code)
(305) 867-4433
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Number of shares of common stock, $.01 par value per share, outstanding as of
November 15, 1999: 12,826,904
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Chicken Kitchen Corp.
Index
<TABLE>
<CAPTION>
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheet at September 30, 1999 and March 31, 1999 3
Condensed Statements of Operations for the three months and six months ended
September 30, 1999 and 1998 4
Condensed Statement of Cash Flows for the six months ended September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
</TABLE>
2
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CHICKEN KITCHEN CORPORATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, March 31,
1999 1999
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 19,612 $ 183,430
Marketable securities -- 150,775
Other current assets 109,528 140,874
----------- -----------
Total Current Assets 129,140 475,079
----------- -----------
ADVANCES TO AFFILIATE 138,913 22,040
PROPERTY AND EQUIPMENT, net 744,736 781,998
INTANGIBLE ASSETS, net 1,704,722 1,827,390
OTHER ASSETS 82,202 64,746
----------- -----------
Total Assets $ 2,799,713 $ 3,171,253
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 433,620 $ 345,892
Accrued expenses 346,336 379,840
Note payable 112,403 103,403
----------- -----------
Total Current Liabilities 892,359 829,135
----------- -----------
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
Series A, convertible preferred stock, $0.0005 par value; 1,000,000 shares
authorized; 3,880 and 3,905 shares issued and outstanding 2 2
Common stock Class A, $0.0005 par value; 50,000,000 shares authorized;
11,907,954 and 11,857,954 issued; and 11,807,954 and 11,737,954 outstanding,
respectively (Note 5) 5,905 5,880
Common stock Class B, $0.0005 par value; 15,000,000 shares authorized;
1,018,950 issued and outstanding, respectively 509 509
Additional paid-in capital 6,245,364 6,245,389
Accumulated deficit (4,344,426) (3,899,490)
Treasury shares, at cost -- (10,172)
----------- -----------
Total Stockholders' Equity 1,907,354 2,342,118
----------- -----------
Total Liabilities and Stockholders' Equity $ 2,799,713 $ 3,171,253
=========== ===========
</TABLE>
The accompanying notes to condensed financial statements
are an integral part of these statements.
3
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CHICKEN KITCHEN CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended Months Ended
September 30, September 30,
------------------------------ ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
FOOD AND BEVERAGE SALES, net $ 1,829,450 $ 1,589,703 $ 3,817,199 $ 3,024,779
OPERATING EXPENSES:
Cost of sales 673,464 719,198 1,543,703 1,366,765
Labor and employee benefits 512,543 518,170 1,120,744 1,010,520
Direct operating expenses 234,286 180,053 624,505 357,225
Consulting fees 20,100 20,806 36,961 44,091
Administrative and general 557,085 272,901 753,464 446,374
Depreciation and amortization 101,319 97,165 202,216 185,281
------------ ------------ ------------ ------------
Total operating expenses 2,098,797 1,808,293 4,261,493 3,410,256
------------ ------------ ------------ ------------
Loss from operations (269,347) (218,590) (444,294) (385,477)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Net realized and unrealized gains on sales of
marketable securities -- -- 7,075 --
Other, net (1,736) (17,068) (7,140) (6,260)
------------ ------------ ------------ ------------
Total other income, net (1,736) (17,068) (65) (6,260)
------------ ------------ ------------ ------------
Loss before income taxes (271,083) (235,658) (444,359) (391,737)
------------ ------------ ------------ ------------
INCOME TAXES -- -- -- --
------------ ------------ ------------ ------------
Net loss $ (271,083) $ (235,658) $ (444,359) $ (391,737)
============ ============ ============ ============
Weighted Average Common Shares Outstanding 12,826,904 12,020,017 12,811,080 11,799,493
Net Loss Per Common Share $ (0.03) $ (0.03) $ (0.05) $ (0.04)
============ ============ ============ ============
</TABLE>
The accompanying notes to condensed financial statements
are and integral part of these statements.
4
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CHICKEN KITCHEN CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
September 30,
------------------------
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITES:
Net loss $(444,359) $(391,737)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 202,216 185,281
Issuance of common stock for services -- 8,000
Gain on sale of marketable securities (7,075) --
Changes in operating assets and liabilities:
Other current assets 31,346 10,678
Advances to affiliate (116,873) --
Other assets (17,456) 4,051
Accounts payable and accrued expenses 54,224 136,351
--------- ---------
Net cash used in operating activities (297,977) (47,376)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (42,286) (256,128)
Sale (purchase) of marketable securities 157,850 (43,380)
--------- ---------
Net cash used in investing activities 115,564 (299,508)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale (purchase) of treasury stock 9,595 (10,172)
Increase in note payable 9,000 --
--------- ---------
Net cash provided by financing activities 18,595 (10,172)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (163,818) (357,056)
--------- ---------
CASH AND CASH EQUIVALENTS, beginning of period 183,430 357,056
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 19,612 $ --
========= =========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for preferred dividend $ -- $ 202,144
========= =========
Conversion of preferred stock into common stock $ -- $ 41
========= =========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest expense $ -- $ --
========= =========
Cash paid for income taxes $ -- $ --
========= =========
</TABLE>
The accompanying notes to condensed financial statements
are an integral part of these statements.
5
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CHICKEN KITCHEN CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The Company was organized under the laws of the State of Florida in
November 1994 under the name Chicken Acquisition Corp. The Company was a
wholly-owned subsidiary of Stratcomm Media, Ltd., a Canadian corporation
and began operations, in November 1995, of a restaurant located in Miami,
Florida, under the trade name "Chicken Kitchen" pursuant to a licensing
agreement with Chicken Kitchen Corporation. In December 1996, the Company
issued 2,409,168 shares of common stock at $0.33 per share ($795,000 in the
aggregate) in a private placement ("the Offering"). In connection with the
Offering, the Company acquired all the rights, title and interest in and to
the name "Chicken Kitchen" and other intangibles. The Company then changed
its name from Chicken Acquisition Corporation to Chicken Kitchen
Corporation. As of September 30, 1999 and 1998, the Company operated six
restaurant locations.
During the year ended March 31, 1999, the Company commenced the selling of
franchise locations. The franchise agreement grants the franchisee a
non-exclusive license to open and operate a "Chicken Kitchen" restaurant
for a 20-year period, with one additional 20-year option. The Company
collects an initial franchise fee of $25,000, royalty fees and a percentage
of revenues for advertising. At September 30, 1999, 6 franchise agreements
have been signed; although, the restaurants have not yet opened.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
the Company have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions for Form 10-QSB and Item 310(b) of Regulation S-B. These
financial statements do not include all information and notes required by
generally accepted accounting principles for complete financial statements,
and should be read in conjunction with the audited financial statements and
notes thereto included in the Company's annual report on Form 10-SB for the
year ended March 31, 1999. The March 31, 1999 fiscal year end condensed
balance sheet data was derived from audited financial statements but does
not include all disclosures required by generally accepted accounting
principles. The financial information furnished reflects all adjustments,
consisting only of normal recurring accruals which are, in the opinion of
management, necessary for a fair presentation of the financial position,
results of operations and cash flows for the periods presented. The results
of operations are not necessarily indicative of results of operations,
which may be achieved in the future.
3. LOSS PER SHARE
Basic loss per common share is computed by dividing net loss attributable
to common stockholders (net loss of $271,083, $444,359, $235,658, and
$391,737 for the three and six months ended September 30, 1999 and 1998,
respectively, plus the pro rata portion of preferred dividends of $77,600,
$155,200, $79,100 and $79,100 for the three and six months ended September
30, 1999 and 1998, respectively) by the weighted average number of shares
of common stock outstanding during the year. Diluted loss per share, which
assumes that the convertible preferred stock is converted into Class A
voting common stock and the stock options to purchase shares of Class A
voting common stock are exercised, is not presented
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because the effect would be anti-dilutive for both 1999 and 1998. The
weighted average shares outstanding used in the computation of net loss
attributable to common shares are as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE SHARES OUTSTANDING
(UNAUDITED)
For the Three Months Ended For the Six Months Ended
September 30, September 30,
------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Class A common stock 11,807,954 11,001,067 11,792,130 10,890,873
Class B common stock 1,018,950 1,018,950 1,018,950 908,620
---------- ---------- ---------- ----------
12,826,904 12,020,017 12,811,080 11,799,493
========== ========== ========== ==========
</TABLE>
4. STOCKHOLDERS' EQUITY
In May 1999, 20,000 shares of Class A common stock held in treasury were
sold resulting in proceeds of $9,595. In accordance with generally accepted
accounting principles, the loss on the sale of treasury stock was recorded
directly to Accumulated Deficit.
In May 1999, 25 shares of Series A preferred stock were converted into
50,000 shares of Class A common stock, in accordance with the Second
Offering.
5. COMMITMENTS AND CONTINGENCIES
GUARANTEE
A non-interest bearing note payable (with an imputed principal balance and
accrued interest of $112,403 and $103,403 at September 30, 1999 and March
31, 1999, respectively) made in connection with the acquisition of
restaurant assets and a location is collateralized by 100,000 issued shares
of the Company's restricted Class A common stock held in escrow. The note
was due in February 1999 and has not yet been repaid by the Company. The
Company expects to repay the note by issuing the common stock. The holder
of the note is currently contesting the repayment; accordingly, the final
payment terms are not yet determinable.
6. SUBSEQUENT EVENT
On October 15, 1999, the Company entered into a preliminary agreement to
settle ("the Agreement") with all plaintiffs ("the Preferred
Shareholders"), except one ("the Non-settling Shareholder"), of the lawsuit
brought by Preferred Shareholders who purchased $4,000,000 of Series A
Convertible Preferred Stock in November 1997, for alleged breaches of a
subscription agreement to convert preferred shares into common stock. The
preliminary agreement indicates that a closing will take place within 50
days after execution and upon agreement to formal documentation. The
principle terms of the Agreement state that at closing, all shares of
preferred stock, except for the shares held by the Non-settling
Shareholder, shall be increased by 18%, for no additional consideration,
and then exchanged for Class A common stock at a fixed conversion rate of
$0.30 per dollar of preferred share ("the Exchanged Shares"). No dividends
will be due or paid on the preferred stock.
At the closing, the Company is required to place a promissory note ("the
Note") into escrow, which shall be payable to the Preferred Shareholders if
any event of default, as defined in the preliminary
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agreement, occurs within the earlier of (a) 12 months after the closing
(plus any days the Company is removed from trading on the OTC) or (b) while
the Preferred Shareholders continue to own more than 10% of the Exchanged
Shares. In the event of default, all of the remaining Exchanged Shares
still owned by the Preferred Shareholders will be delivered to the Company
in exchange for the Note. The amount of the Note would be determined as the
face value of the preferred shares prior to the conversion into common
stock, less any proceeds realized by the Preferred Shareholders from any
sales of the Exchanged Shares, multiplied by 1.35. The Note would accrue
simple interest at 10%, from the event of default, and would mature and be
due and payable at the later of (a) 60 days from the event of default or
(b) the return of all the remaining Exchanged Shares of common stock held
by the Preferred Shareholders.
Every 90 days after closing, and also upon the sale of a cumulative of 90%
of the Exchanged Shares, the Preferred Shareholders will report to the
Company the previous 90 days' sales of Exchanged Shares, the proceeds
realized from the sales, and the number of Exchanged Shares held
cumulatively and by each of the Preferred Shareholders.
The Company has made a non-refundable $50,000 payment to the Preferred
Shareholders' counsel, to be distributed to the Preferred Shareholders, and
has also placed $50,000 into an escrow account pending the closing of the
Agreement. The second $50,000 will be refunded to the Company unless the
closing doe not occur within 50 days after execution of the Agreement,
through fault of the Company. The escrowed amount will be delivered to the
Preferred Shareholders' counsel.
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1998
This Form 10-Q contains various "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements represent the Company's expectations or belief
concerning future events, including the following: any statements regarding
future sales or expenses, any statements regarding the continuation of
historical trends, and any statements regarding the sufficiency of the
Company's working capital and cash generated from operating and financing
activities for the Company's future liquidity and capital resources needs.
Without limiting the foregoing, the words "believes," "anticipates,"
"plans," "expects," and similar expressions are intended to identify
forward-looking statements. The Company cautions that those statements are
further qualified by important economic and competitive factors that could
cause actual results to differ materially from those in the forward-looking
statements, including, without limitation, risks of the restaurant
industry, including a highly competitive industry and the impact of changes
in consumer tastes, local, regional and national economic conditions,
demographic trends, traffic patterns, employee availability and cost
increases. In addition, the opening and success of new restaurants will
depend on various factors, including the availability of suitable sites for
new restaurants, the negotiation of acceptable lease or purchase terms for
new locations, permitting and regulatory compliance, the ability of the
Company to manage the anticipated expansion and hire and train personnel,
the financial viability of the Company's franchisees, particularly
multi-unit operators, and general economic and business conditions.
Accordingly, such forward-looking statements do not purport to be
predictions of future events or circumstances and may not be realized.
Restaurant sales for the three months ended September 30, 1999 increased by
$239,747 to $1,829,450 from $1,589,703 in the comparable period for an
increase of 15.8%. This was due to same store sales increases.
Cost of sales decreased as a percentage of sales to 36.81% compared to
45.24% in the comparable quarter of the prior year. This decrease was due
to operational controls and systems that were put in place during the
quarter.
Labor and employee benefits which consists of wages, payroll taxes and
other benefits and insurance costs for restaurant's salaried and hourly
employees decreased 4.58% as a percentage of sales to 28.01% in the 1999
quarter compared to the prior year's quarter. This decrease was due to
operational controls and systems that were put in place during the quarter.
Direct operating expenses consist of all restaurant-operating costs other
than cost of sales and payroll expenses and include occupancy costs,
utilities and other direct costs. These expenses increased by 1.48% to
12.80% of sales from 11.32%. This reflects increased rental costs due to
escalation clauses in existing leases.
Consulting fees decreased $706 to 20,100.
Administrative and general expenses for the 1999 quarter increased by
$284,184 when compared to the comparable 1998 quarter. The increase is
primarily attributable to increases in corporate payroll necessitated by
the greater number of company-owned stores and in the hiring of human
resources that will support our franchising growth. Contributing to the
increase were legal and professional fees. In addition, higher advertising
and promotional expenses were incurred to promote the Chicken Kitchen
brand.
Depreciation and amortization increased to $101,319 from $97,165 due to
the purchase of additional equipment.
The increase in the net loss from $218,590 to $269,347 is primarily
attributed to the increased investment in human resources to support future
growth and franchising activity and to legal fees incurred in settling the
preferred stockholder suit.
9
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LIQUDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company had cash on hand of $19,612, and
other current assets of $109,528, for total current assets of $129,140.
Total current liabilities are $829,359, and are comprised of $433,620 in
accounts payable, $346,336 in accrued expenses, and $112,403 in a Note
Payable. We had no long-term debt. As of September 30, 1999, we had working
capital (deficit) of ($763,219).
The current payables as of September 30, 1999 include a $112,403 Note
Payable that the Company expects to satisfy by the issuance of the
Company's Common Stock. The holder of the Note is contesting the payment
terms of this Note. Accordingly, the final payment terms are not yet
determinable causing the current payable classification.
The working capital deficit is primarily the result of result of continuing
losses. Also contributing to the working capital decrease was an advance to
an affiliate of $60,046. Included in current liabilities is a note payable
of $107,903 that the Company expects to satisfy by the issuance of the
Company's common stock as noted above.
LOSSES INCURRED IN OPERATIONS / MODIFIED ACCOUNTANTS' REPORT
We have incurred losses from our operations since inception and we had a
working capital deficit of $763,219 at September 30, 1999. Our independent
accountants have modified their report to our year-end, March 31, 1999,
financial statements to reflect doubt as to our ability to continue as a
going concern.
We currently operate six restaurants and are engaged in franchising
operations. Management believes that cash on hand and cash generated from
operations together with Franchise Fees and Royalty payments will be
sufficient to fund operations. However, no assurance can be given that
additional funds will not be required prior to the expiration of such
period or that any funds which may be required will be available, if at
all, on acceptable terms. If additional funds are required, the inability
of the Company to raise such funds will have an adverse effect upon its
operations. To the extent that additional funds are obtained by the sale of
equity securities, the stockholders may sustain significant dilution. If
adequate capital is not available, the Company will have to reduce or
eliminate its planned expansion activities, which could otherwise
ultimately provide significant revenue to the Company.
We have no arrangements or understandings with respect to additional
financings, and any expansion of the Company's restaurants could require
that the Company's raise additional funds. In addition, expansion of the
Company's restaurant and franchising expectations may require additional
capital. There can be no assurance that the Company will be able to
continue to expand or to obtain sufficient capital in the future, nor the
terms on which capital may be obtained. The Company has no lines of credit
available to it at this time.
Y2K RISK
We have reviewed the computers and software used in our business and have
determined that they are not affected by the Year 2000 Computer Problem.
Our major suppliers have assured us that our supplies will not be
interrupted due to the year 2000 Computer Problem. We could be adversely
affected if there is loss of electrical power due to the Year 2000 Computer
Problem.
10
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Company has
caused the undersigned, duly authorized, to sign this report on behalf of the
Company.
CHICKEN KITCHEN CORPORATION
By: /s/ Christian de Berdouare
--------------------------------
Christian de Berdouare, President
and Chief Executive Officer
Date: November 15, 1999
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
STATEMENT OF OPERATIONS - SEPTEMBER 30, 1999, CONDENSED BALANCE SHEET -
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 19,612
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 129,140
<PP&E> 744,736
<DEPRECIATION> 101,319
<TOTAL-ASSETS> 2,799,713
<CURRENT-LIABILITIES> 892,359
<BONDS> 0
3,905
0
<COMMON> 12,826,904
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,799,713
<SALES> 3,817,199
<TOTAL-REVENUES> 3,817,199
<CGS> 1,543,703
<TOTAL-COSTS> 4,261,493
<OTHER-EXPENSES> 65
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (444,359)
<INCOME-TAX> 0
<INCOME-CONTINUING> (444,359)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (444,359)
<EPS-BASIC> (.05)
<EPS-DILUTED> (.05)
</TABLE>
