<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 December 31, 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
February 15, 2000: 12,756,904
<PAGE> 2
Chicken Kitchen Corp.
Index
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheet at December 31, 1999 and March 31, 1999 4
Condensed Statements of Operations for the three months
and nine months ended December 31, 1999 and 1998 5
Condensed Statement of Cash Flows for the nine months ended
December 31, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
</TABLE>
2
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CHICKEN KITCHEN CORPORATION
CONDENSED FINANCIAL STATEMENTS AS OF
DECEMBER 31, 1999
3
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CHICKEN KITCHEN CORPORATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
----------- -----------
(Unaudited) As restated see
Note 2
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 93,219 $ 183,430
Marketable securities -- 150,775
Other current assets 133,268 140,874
----------- -----------
Total Current Assets 226,487 475,079
----------- -----------
ADVANCES TO AFFILIATE, non-interest bearing with no
fixed maturity date 240,400 22,040
PROPERTY AND EQUIPMENT, net 712,813 781,998
INTANGIBLE ASSETS, net 1,590,632 1,769,272
OTHER ASSETS 78,236 64,746
----------- -----------
Total Assets $ 2,848,568 $ 3,113,135
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 421,581 $ 345,892
Accrued expenses 438,376 379,840
Note payable 116,903 103,403
----------- -----------
Total Current Liabilities 976,860 829,135
----------- -----------
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, respectively 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 5,406,552 5,406,577
Accumulated deficit (3,541,260) (3,118,796)
Treasury shares, at cost -- (10,172)
----------- -----------
Total Stockholders' Equity 1,871,708 2,284,000
----------- -----------
Total Liabilities and Stockholders' Equity $ 2,848,568 $ 3,113,135
=========== ===========
</TABLE>
The accompanying notes to condensed financial statements are an
integral part of these statements.
4
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CHICKEN KITCHEN CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
December 31, December 31,
------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
FOOD AND BEVERAGE SALES, net $ 1,931,737 $ 1,757,961 $ 5,748,936 $ 4,782,740
OPERATING EXPENSES:
Cost of sales 770,272 716,637 2,313,975 2,083,402
Labor and employee benefits 487,181 819,494 1,607,925 1,830,014
Direct operating expenses 333,782 232,130 958,287 589,355
Consulting fees 15,825 15,909 52,786 60,000
Administrative and general 219,065 78,904 952,429 525,278
Depreciation and amortization 96,646 97,162 295,305 278,886
------------ ------------ ------------ ------------
Total operating expenses 1,922,771 1,960,236 6,180,707 5,366,935
------------ ------------ ------------ ------------
Income (loss) from operations 8,966 (202,275) (431,771) (584,195)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Net realized and unrealized gains (losses) on sales
of marketable securities (3,442) -- 3,633 --
Other, net 13,391 62,144 6,251 55,884
------------ ------------ ------------ ------------
Total other expenses, net 9,949 62,144 9,884 55,884
------------ ------------ ------------ ------------
Income (loss) before income taxes 18,915 (140,131) (421,887) (528,311)
------------ ------------ ------------ ------------
INCOME TAXES -- -- -- --
------------ ------------ ------------ ------------
Net income (loss) 18,915 (140,131) (421,887) (528,311)
PRO RATA PORTION OF PREFERRED DIVIDENDS
(77,600) (76,100) (232,800) (234,300)
------------ ------------ ------------ ------------
Net loss applicable to common stockholders $ (58,685) $ (216,231) $ (654,687) $ (762,611)
============ ============ ============ ============
Weighted Average Common Shares Outstanding 12,826,904 12,250,905 12,816,355 11,943,926
============ ============ ============ ============
Net Loss Per Common Share (Note 3) $ (0.00) $ (0.02) $ (0.05) $ (0.06)
============ ============ ============ ============
</TABLE>
The accompanying notes to condensed financial statements are an
integral part of these statements.
5
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CHICKEN KITCHEN CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended
December 31,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(421,887) $(528,311)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 295,305 278,886
Issuance of common stock for services -- 12,390
Gain on sale of marketable securities (3,633) --
Changes in operating assets and liabilities:
Other current assets 7,606 (135,712)
Advances to affiliate (218,360) --
Other assets (13,490) 4,234
Accounts payable and accrued expenses 134,225 288,195
--------- ---------
Net cash used in operating activities (220,234) (80,318)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (47,480) (274,340)
Sale of marketable securities 154,408 5,507
--------- ---------
Net cash provided by (used in) investing activities 106,928 (268,833)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale (purchase) of treasury stock 9,595 (10,172)
Increase in note payable 13,500 2,267
--------- ---------
Net cash provided by (used in) financing activities 23,095 (7,905)
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (90,211) (357,056)
--------- ---------
CASH AND CASH EQUIVALENTS, beginning of period 183,430 357,056
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 93,219 $ --
========= =========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for preferred dividend $ -- $ 203,933
========= =========
Conversion of preferred stock into common stock $ -- $ 262
========= =========
Loss on sale of treasury stock $ 577 $ --
========= =========
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.
6
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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 December 31, 1999 and March 31, 1999, the Company
operated six and six restaurant locations, respectively.
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 December 31, 1999, eight franchise
agreements have been signed; although, the restaurants have not yet opened.
2. BASIS OF PRESENTATION
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.
RESTATEMENT
Subsequent to the issuance of the March 31, 1999 financial statements, the
Company determined that the fair value (ranging from $0.675 to $1.575)
utilized to record certain of the common shares issued during fiscal 1998,
for acquisitions and services rendered should have been $0.65 per share
because of the significant number of shares issued, the trading
restrictions, and the stock's thin level of trading. As a result, the
accompanying financial statements present the restated results.
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3. LOSS PER SHARE
Basic loss per common share is computed by dividing net loss attributable
to common stockholders (net loss plus the pro rata portion of preferred
dividends) 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 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 Nine Months Ended
December 31, December 31,
-------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Class A common stock 11,807,954 11,231,955 11,797,405 10,998,261
Class B common stock 1,018,950 1,018,950 1,018,950 945,665
---------- ---------- ---------- ----------
12,826,904 12,250,905 12,816,355 11,943,926
========== ========== ========== ==========
</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. Also, 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
LEASED PREMISES LITIGATION
The Company is currently a defendant in a lawsuit, filed by the lessor of a
restaurant site, for eviction, based on alleged non-monetary breaches of
the provisions of the written lease agreement. The Company is vigorously
defending the lawsuit. The action remains pending, and while the Company is
confident in its position, an eviction from the premises would have a
materially adverse effect on the operating cash flow of the Company. As the
case has not yet been set for trial, legal counsel has advised the Company
that it is not possible to determine whether, and to what extent if any,
the Company might suffer adverse judgements. The parties have recently
begun to discuss a possible settlement of the action.
GUARANTEE LITIGATION
A non-interest bearing note payable (with an imputed principal balance and
accrued interest of $116,903 and $103,403 at December 31, 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 gave notice of its intention to satisfy the note with the escrowed
stock. The holder of the note declined to accept the stock as payment and
has brought a lawsuit for eviction, based on a cross-default provision in
the promissory note and lease. As the lawsuit is in the discovery stage,
legal counsel had advised the Company that it is not possible
8
<PAGE> 9
to determine whether, and to what extent if any, the Company might suffer
adverse judgement. The Company is vigorously defending the action.
6. SUBSEQUENT EVENT
PREFERRED SHAREHOLDER LITIGATION
In October 1999, the Company agreed in principle to settle a lawsuit for
alleged breaches of a subscription agreement to convert preferred shares
into common stock, brought by Preferred Shareholders who purchased
$4,000,000 of Series A Convertible Preferred Stock (4,000 shares) in
November 1997 with all but one of the Series A Preferred Stockholders. The
proposed settlement would require the Company to convert the settling
preferred stockholders' preferred stock into restricted Class A common
stock at an exchange rate of $0.30 per share. No dividends will be due or
paid on the exchanged preferred stock. The effect on the financial
statements will approximate the following:
<TABLE>
<CAPTION>
Preferred Stock Class A Common Stock Additional
----------------------- -------------------------- Paid In
Shares Amount Shares Amount Capital
------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Shares to be (redeemed) issued (3,510) $(2) 13,806,000 $6,903 $(6,901)
</TABLE>
If certain events of default occur, as defined in the proposed settlement,
the Company would be obligated to deliver a note to the holders of the
Series A preferred stock (who will then only own common stock) in exchange
for the return of their restricted Class A common stock to the Company,
along with documents supporting the sale of any of the exchanged common
stock. The Company has made a non-refundable $50,000 payment to the
Preferred Shareholders, and has placed an additional $50,000 into an escrow
account pending the closing of the Agreement.
The removal of the Company as a security trading on the OTCBB for a period
exceeding 120 consecutive days constitutes an event of default. The Company
was de-listed on October 21, 1999; therefore, the Company is required to
regain listing by February 18, 2000 in order to avoid being in default. If
the Company is unable to achieve re-listing by February 18, 2000, the
amount of the note issued to the former preferred shareholders would
approximate $5,600,000. The note would be due on the later of 60 days from
the event of default or the return of all shares held by the former
preferred shareholders. Management is presently exploring alternatives to
cure the event of default or obtain sources of additional financing. There
can be no assurance that the Company will regain listing by February 18,
2000, or that the event of default can be cured. Furthermore, there can be
no assurance that the Company will be able to obtain new financing. Under
these circumstances, the Company's ability to continue as a going concern
depends upon the successful resolution of these matters. Accordingly, the
accompanying financial statements do not include any adjustments that might
result from the outcome of this significant uncertainty.
OTHER LITIGATION
The Company is also currently a defendant in a lawsuit filed during October
1999 by a former supplier of its chicken products for non-payments. As the
lawsuit is in the discovery stage, legal counsel had advised the Company
that it is not possible to determine whether, and to what extent if any,
the Company might suffer adverse judgements. The Company is vigorously
defending the action and has asserted counter claims.
9
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MANAGEMENT'S DISCUSSION AND ANALYSIS
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO
THREE MONTHS ENDED DECEMBER 31, 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 December 31, 1999 increased by
$173,776 to $1,931737 from $1,757961 in the comparable period for an increase of
9.8%. This was due to same store sales increases.
Cost of sales decreased as a percentage of sales to 39.81% compared to
40.8% 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 20.6% as a percentage of sales to 25.2% 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 4% to 17.20% of sales from
13.2%. This reflects increased rental costs due to escalation and percentage
rent clauses in existing leases.
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Consulting fees decreased $84 to $15825.
Administrative and general expenses for the 1999 quarter increased by
$140,161 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 decreased to $96,646 from $97,162.
The Company realized a net profit of $18,915 during the 1999 quarter
compared to a loss of $140,131 during the comparable quarter. This is the result
of operational efficiencies achieved through the implementation of a series of
operational controls.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, the Company had cash on hand of $93,219, and other
current assets of $133,268, for total current assets of $226,487. Total current
liabilities are $976,860, and are comprised of $421,581 in accounts payable,
$438,376 in accrued expenses, and $116,903 in a Note Payable. We had no
long-term debt. As of December 31, 1999, we had working capital (deficit) of
($750,373).
The current payables as of December 31, 1999 include a $116,903 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.
LOSSES INCURRED IN OPERATIONS / MODIFIED ACCOUNTANTS' REPORT
With the exception of the current quarter, we have incurred losses from our
operations since inception and we had a working capital deficit of $750,373 at
December 31, 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
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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 did not experience any disruption through the
date of this filing.
12
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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: February 15, 2000
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 93,219
<SECURITIES> 0
<RECEIVABLES> 38,143
<ALLOWANCES> 0
<INVENTORY> 20,000
<CURRENT-ASSETS> 226,487
<PP&E> 1,053,116
<DEPRECIATION> (340,303)
<TOTAL-ASSETS> 2,848,568
<CURRENT-LIABILITIES> 976,860
<BONDS> 0
0
2
<COMMON> 5,905
<OTHER-SE> 509
<TOTAL-LIABILITY-AND-EQUITY> 2,848,568
<SALES> 5,748,936
<TOTAL-REVENUES> 5,748,936
<CGS> 2,313,975
<TOTAL-COSTS> 6,180,707
<OTHER-EXPENSES> (9,884)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,801
<INCOME-PRETAX> (421,887)
<INCOME-TAX> 0
<INCOME-CONTINUING> (421,887)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (421,887)
<EPS-BASIC> (0.05)
<EPS-DILUTED> 0
</TABLE>
