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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 1996
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OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
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Commission file number 1-13840
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PUDGIE'S CHICKEN, INC.
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(Exact name of small business issuer as specified in its charter)
<TABLE>
<S> <C>
Delaware 31-1369735
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(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
</TABLE>
333 Earle Ovington Boulevard, Suite 604, Uniondale, New York 11553
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(Address of principal executive offices) (zip code)
(516) 222-8833
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
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Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
(Not applicable because a plan has not yet been confirmed by the court.)
As of November 18, 1996, the registrant had 4,475,421 shares of its Common
Stock, $.01 par value, issued and outstanding.
Page 1 of 17
The Exhibit Index is on Page 15
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PUDGIE'S CHICKEN, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
INDEX
<TABLE>
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PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1 - Financial Statements (unaudited)
Consolidated Balance Sheets as of September 30, 1996
and December 31, 1995.........................................................3
Consolidated Statements of Income for the three and the nine months ended
September 30, 1996 and September 30, 1995.....................................4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1996 and September 30, 1995...............................5
Notes to Consolidated Financial Statements..................................6-8
Item 2 - Management's Discussion and Analysis or Plan of Operation..................8-12
PART II. OTHER INFORMATION
Item 5 - Other Information - Changes in Registrant's Certifying Accountant............12
Item 6 - Exhibits and Reports on Form 8-K.............................................13
Signature Page .............................................................................14
Exhibit Index...............................................................................15
</TABLE>
2
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PUDGIE'S CHICKEN, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
Consolidated Balance Sheets
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<TABLE>
<CAPTION>
December 31, September 30,
Assets 1995 1996
(unaudited) (unaudited)
<S> <C> <C>
Current assets
Cash $823,440 $323,030
Franchise and advertising royalties receivable,net 376,975 472,520
Inventories 123,670 115,560
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Total current assets 1,324,085 911,110
Property and equipment, net 2,729,600 2,114,220
Intangible assets ,net 8,759,100 8,211,990
Other assets 418,575 186,500
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Total assets $13,231,360 $11,423,820
=========== ===========
Liabilities, Redeemable Preferred Stock,
Redeemable Convertible Preferred Stock and
Stockholders' Equity
Liabilities not subject to compromise
Accounts payable and accrued expenses $830,137 $35,423
Deferred franchise fees 230,000 150,000
Sales tax payable 78,670 29,473
Other liabilities 135,823 -----
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Total current liabilities 1,274,630 214,896
Note payable to stockholder 3,606,837 -----
Liabilities subject to compromise ----- 7,621,458
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Total liabilities 4,881,467 7,836,354
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Redeemable Preferred Stock; $.01 par value;
10,000 shares authorized, issued and outstanding
(redemption and liquidation value of $1,069,000) 1,069,000 1,069,000
Redeemable Convertible Preferred Stock; $.01 par value;
200 Series A shares authorized, issued and outstanding
(redemption and liquidation value of $2,440,000) ----- 1,788,920
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Stockholders' equity
Preferred stock, 250,000 shares authorized
(including 10,000 shares of Redeemable
Preferred Stock issued and outstanding,
200 shares of Redeemable Convertible
Preferred Stock issued and outstanding and 50,000
shares of $4 Cumulative Preferred Stock,
$.01 par value, issued and outstanding), 500 500
(liquidation value of $500,000)
Common stock, $.01 par value, 10,000,000
shares authorized; 4,506,972 and 4,475,421
shares, issued and outstanding, respectively 45,070 44,750
Additional paid in capital 16,159,920 16,002,489
Accumulated deficit (8,699,235) (15,259,033)
Deferred Compensation (225,362) (59,160)
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Total stockholders' equity 7,280,893 729,546
Commitments and contingencies
Total liabilities, redeemable preferred stock
redeemable convertible preferred stock and ----------- -----------
stockholders' equity $13,231,360 $11,423,820
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statement.
(3)
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PUDGIE'S CHICKEN, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
Consolidated Statements of Operations
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(unaudited (unaudited
1995 1996 1995 1996
<S> <C> <C> <C> <C>
Revenue
Restaurant sales $2,567,480 $2,949,955 $6,833,505 $8,133,105
Franchise and advertising royalties 371,466 245,275 1,057,538 729,072
Franchise fees 220,000 ----- 280,000 255,000
Interest income and other revenue 35,505 28,218 75,983 71,347
---------- ---------- ---------- ----------
3,194,451 3,223,448 8,247,026 9,188,524
---------- ---------- ---------- ----------
Costs and Expenses
Restaurant cost of sales 1,026,479 1,202,018 2,693,831 3,191,067
Restaurant operating expenses 1,305,446 1,611,069 3,516,488 4,444,703
Franchising costs 56,051 28,063 100,040 89,216
General and administrative 873,820 1,255,399 2,510,532 3,233,469
Arbitration award ----- 1,707,404 ----- 1,707,404
Restaurant closing expenses ----- 347,010 ----- 347,010
Research and development ----- ----- 20,000 ----
Advertising expenses 192,514 227,345 936,241 674,997
Depreciation and amortization 212,214 230,169 661,421 714,848
Interest expense 197,607 108,846 660,071 320,543
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3,864,131 6,717,323 11,098,624 14,723,257
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Loss before reorganization items ($669,680) ($3,493,875) ($2,851,598) ($5,534,733)
---------- ---------- ---------- ----------
Reorganization items
Loss on closing of restaurants ----- 831,029 ----- 831,029
Professional fees ----- 43,000 ----- 43,000
Net loss ($669,680) ($4,367,904) ($2,851,598) ($6,408,762)
========== ========== ========== ==========
Net loss per common share ($0.20) ($0.98) ($1.21) ($1.43)
========== ========== ========== ==========
Shares used in computation 3,369,799 4,475,421 2,353,609 4,484,866
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
(4)
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PUDGIE'S CHICKEN, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
Consolidated Statements of Cash Flows
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<CAPTION>
Nine Months
Ended
September 30,
(unaudited)
1995 1996
<S> <C> <C>
Cash flows provided by (used in) operating activities
Net loss ($2,851,598) ($6,408,822)
Adjustments to reconcile net income
to net cash provided by operations
Deferred compensation expense 27,110 8,451
Depreciation and amortization 661,421 714,848
Bad debt expense 112,688 241,506
Changes in operating assets and liabilities
(Increase)decrease in operating assets
Franchise and advertising royalties receivable (161,041) (263,555)
Inventories (48,481) 8,110
Other assets 87,663 232,075
Increase(decrease)in operating liabilities
Accounts payable and accrued expenses (593,988) (794,714)
Deferred franchise fees (280,000) (80,000)
Sales tax payable 24,526 (49,197)
Other liabilities 44,942 (135,823)
Liabilities subject to compromise ---- 3,784,573
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Net cash (used in) operating activities (2,976,758) (2,742,548)
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Cash flows used in investing activities
Purchase of property and equipment (943,390) (484,558)
Acquisition of stores (1,124,486) (181,634)
Disposal of restaurants ---- 1,102,286
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Net cash (used in) provided by investing activities (2,067,876) 436,094
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Cash flows provided by financing activities
Additions to notes payable ---- 318,518
Repayments of borrowings (4,788,695) (178,396)
Proceeds from issuance of
Preferred Stock, net of issuance costs 12,155,649 1,665,922
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Net cash provided by financing activities 7,366,954 1,806,044
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Net increase (decrease) in cash 2,322,320 (500,410)
Cash at beginning of period 165,860 823,440
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Cash at end of period $2,488,180 $323,030
=========== ==========
</TABLE>
The accompanying notes are an
integral part of these consolidated financial statements.
(5)
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PUDGIE'S CHICKEN INC. AND SUBSIDIARIES
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with instructions to Form 10-QSB and Item 310(b) of Regulation S-B
promulgated under the Securities Act of 1934, as amended, and, therefore, do not
include all information and footnotes normally included in financial statements
prepared in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements are unaudited and
include all adjustments (consisting of normal recurring adjustments and
accruals) that management considers necessary for a fair presentation of the
financial position and results of operations of Pudgie's Chicken, Inc.
("Pudgie's") and its subsidiaries (collectively, the "Company") for the interim
periods presented. The results of operations for the interim periods are not
necessarily indicative of the results that may be expected for the entire year.
On September 18, 1996, the Company filed a voluntary petition for relief
under the provisions of Chapter 11 of the Bankruptcy Code. The accompanying
consolidated financial statements do not purport to reflect or provide for the
potential consequences of the bankruptcy proceedings of the Company. In
particular, the consolidated financial statements do not purport to show (a) as
to assets, their realizable value on a liquidation basis or their availability
to satisfy liabilities; (b) as to prepetition liabilities, the amounts that may
be allowed for claims or contingencies or the status and priority thereof; (c)
as to shareholder accounts, the effect of any changes that may be made to the
capitalization of the Company; or (d) as to operations, the effect of any
changes that may be made in its business. The outcome of these matters is not
presently determinable. Accordingly, the consolidated financial statements do
not include adjustments that might result from the ultimate outcome of these
uncertainties.
The accompanying consolidated financial statements have been prepared on
a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
been operating as a debtor-in-possession since filing for bankruptcy protection.
While the Company believes it has adequate financing to operate in bankruptcy
for a reasonable period of time, its ability to successfully continue operations
is dependent upon, among other things, confirmation of a plan of reorganization
that will enable the Company to emerge from bankruptcy proceedings, obtaining
adequate postconfirmation financing to fund restructuring and working capital
requirements, successfully implementing the restructuring program, and
generating sufficient cash from operations and financing sources to meet
obligations. Management believes that the Company should be able to restructure
its existing debt and obtain adequate postconfirmation financing in connection
with the confirmation of a plan of reorganization, but there is no assurance
that such restructuring or financing will occur. These factors among others may
indicate that the Company will be unable to continue as a going concern for a
reasonable period of time.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
The accompanying consolidated financial statements should be read in
conjunction with the Company's December 31, 1995 Form 10-KSB.
6
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2. PETITION FOR RELIEF UNDER CHAPTER 11
On September 18, 1996, the Company filed a voluntary petition for relief
under Chapter 11 of the Bankruptcy Code and the Company became
debtors-in-possession subject to the supervision of the U.S. Bankruptcy Court
for the Southern District of New York (the "Bankruptcy Court"). The Company
continues to conduct ordinary business operations as debtors-in-possession
subject to the jurisdiction of the Bankruptcy Court and plans to propose a plan
of reorganization. As debtors-in-possession, the Company may not engage in
transactions outside the ordinary course of business without approval of the
Bankruptcy Court.
Under the Bankruptcy Code, actions to enforce claims against the Company
are stayed if the claims arose, or are based on events that occurred, on or
before the petition date of September 18, 1996, and such claims cannot be paid
or restructured prior to the conclusion of the bankruptcy proceedings or
approval of the Bankruptcy Court. These claims are reflected in the September
30, 1996, balance sheet as "liabilities subject to compromise."
During the three months ended September 30, 1996, the Company closed 10
Company-owned unprofitable restaurants to reduce cash outflow and operating
expenses. This resulted in costs expensed in the amount of $1,178,099. Seven of
the Company-owned restaurants were closed as a result of the filing under the
Bankruptcy Code and accounted for $831,029 of the total costs expensed.
Reorganization items consist of losses resulting from the closing of
seven Company-owned restaurants, professional fees for services rendered and
petition filing fees.
3. LIABILITIES SUBJECT TO COMPROMISE IN BANKRUPTCY REORGANIZATION
Liabilities subject to compromise consist of the following at September
30, 1996:
Note payable to Stockholder $ 3,606,837
Arbitration award 1,707,404
Accounts payable and accrued expenses 1,491,712
Sales tax payable 485,322
Interest payable 177,649
Note payable 78,253
Other liabilities 74,281
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$ 7,621,458
Liabilities subject to compromise in bankruptcy reorganization reflect
the Company's estimate of the aggregate prepetition liabilities. Until the
Company completes a review of all submitted proofs of claim, and the Bankruptcy
Court has determined the aggregate amount of allowed claims, the recorded
liability is subject to revision. Furthermore, the recorded liability does not
include any amounts for claims that may arise from the rejection of executory
contacts, including leases, or for bankruptcy reorganization expenses or other
claims that may arise as a result of the bankruptcy reorganization process.
The satisfaction of liabilities subject to compromise in bankruptcy
reorganization is subject to confirmation of a plan of reorganization by the
Bankruptcy Court. Such liabilities may be settled for amounts other than those
reflected in the consolidated financial statements.
4. CONTINGENCIES
On June 30, 1995, Gallus Investments, L.P. ("Gallus"), an area developer
of the Company's franchised restaurants, commenced an action against the Company
alleging common law fraud and alleging violations of the Franchise Sales Act of
the State of New York regarding its area development agreement with the Company.
7
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On September 12, 1996, a panel of the American Arbitration Association
rendered an award against the Company in favor of Gallus. In rendering the
award, the arbitrators determined that the Company had violated the Franchise
Sales Act of the State of New York. The award was in the amount of $1,375,888 in
damages and $331,516 in attorney fees. A motion to confirm this award in the
United States District Court for the Eastern District of Virginia has been
stayed as a result of the Company's bankruptcy filing. The amount of the award
has been recorded as a liability by the Company.
The Company is involved in other litigation incident to its business
primarily involving disputes with franchisees, but does not believe that any
such litigation is material to its business or financial condition.
The Company has outstanding 200 shares of Series A Convertible Preferred
Stock that contain a purchase option that requires the Company to purchase the
Preferred Shares if at any time after May 3, 1996, the conversion price on any
20 trading days during any 30 consecutive trading day period is less than $2.00.
Each holder of any Preferred Shares is then, upon notice from the Company,
entitled to elect to have the Company purchase all, but not less than all of the
Preferred Shares then held by such holder for a cash purchase price of $10,800
per Preferred Share together with all accrued and unpaid dividends thereon. As a
result of the Company's bankruptcy filing, this provision has been stayed.
A $3.6 million note payable matures in February 1997. Repayment of the
note is stayed until either a plan of reorganization is filed and approved by
the Bankruptcy Court or subject to further order of the court.
5. SUBSEQUENT EVENTS
On October 10, 1996, the Company closed two additional Company-owned
unprofitable restaurants to further reduce cash outflow and operating expenses.
This resulted in costs expensed in the amount of $309,724.
Subsequent to September 30, 1996, the purchase option provision of the
Series A Convertible Preferred Stock was triggered by the conversion price of
the Company's Common Stock trading below $2.00 for 20 trading days during a 30
consecutive trading day period. This provision has been stayed as a result of
the Company's bankruptcy filing.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1995
Total revenue was approximately $3.2 million for the three months ended
September 30, 1996, an increase of approximately $29,000, or 1%, over revenue of
approximately $3.2 million for the three months ended September 30, 1995. This
increase was primarily due to the increase in the number of Company-owned
restaurants from 26 open at September 30, 1995 to 30 open during the three
months ended September 30, 1996, offset by the closing of 10 Company-owned
restaurants during the three months ended September 30, 1996. This resulted in a
net decrease in the number of Company-owned restaurants from 26 at September 30,
1995 to 20 at September 30, 1996. The number of franchised restaurants decreased
from 37 at September 30, 1995 to 31 at September 30, 1996. The net decrease was
the result of one new franchised restaurant opening, two closing and being
reopened as Company-owned restaurants and five franchised restaurants closing
during the nine months ended September 30, 1996.
8
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System-wide sales at all Company-owned and franchised restaurants were
approximately $6.0 million for the three months ended September 30, 1996 and
approximately $6.5 million for the comparable prior year period. The effect of
the lower average number of Pudgie's restaurants in operation for the three
months ended September 30, 1996 was the primary cause of the decrease in sales.
Revenue from sales at Company-owned restaurants was approximately $2.9
million for the three months ended September 30, 1996, an increase of
approximately $382,000, or 15%, over sales at Company-owned restaurants of
approximately $2.6 million for the three months ended September 30, 1995. This
increase was due to the increased number of Company-owned restaurants operating
during the period. Franchise royalty and advertising fees paid by franchisees
were approximately $245,000 for the three months ended September 30, 1996, a
decrease of approximately $126,000, or 34%, from approximately $371,000 for the
comparable prior year period. This decrease resulted from the lower number of
franchised restaurants in operation during the three months ended September 30,
1996 compared to the three months ended September 30, 1995. Franchise fees
decreased approximately $220,000 for the three months ended September 30, 1996
over the comparable prior year period. The decrease was attributable to no new
franchised restaurants opening during the three months ended September 30, 1996
and the recognition of revenue for fees relating to an area developer who
forfeited his area development rights during the period ended September 30,
1995.
With respect to Company-owned restaurants, costs of products sold and
restaurant operating expenses were approximately $2.8 million for the three
months ended September 30, 1996, an increase of approximately $481,000, or 21%,
from approximately $2.3 million for the three months ended September 30, 1995.
This increase was due primarily to the increased number of Company-owned
restaurants operating during the three months ended September 30, 1996. General
and administrative expenses were approximately $1.3 million for the three months
ended September 30, 1996, an increase of approximately $382,000, or 44%, from
approximately $874,000 for the comparable period in 1995, primarily due to
approximately $200,000 in corporate overhead due to the expansion of the
corporate infrastructure in comparison to the prior year period and an increase
of approximately $158,000 in bad debt reserves over the comparable prior year
period.
The arbitration award of approximately $1.7 million during the three
months ended September 30, 1996 was the result of an award rendered by the
American Arbitration Association relating to a decision on an action against the
Company brought by Gallus. Restaurant closing expenses of approximately $347,000
for the three months ended September 30, 1996 were the result of costs expensed
in conjunction with the closing of three Company-owned unprofitable restaurants.
Restaurant cost of sales and restaurant operating expenses, as a
percentage of restaurant sales, were 95% in the three months ended September 30,
1996, compared to 91% in the comparable 1995 period. The decreased margins
resulted primarily from increased operating and startup costs incurred by the
Company for the Company-owned restaurants opened during the three months ended
September 30, 1996.
Advertising expenses increased approximately $35,000, or 18%, to
approximately $227,000 for the three months ended September 30, 1996 from
approximately $193,000 for the comparable prior year period. The increase in
advertising cost was primarily due to additional advertising for new
Company-owned restaurant openings during the three months ended September 30,
1996.
Depreciation and amortization was approximately $230,000 for the three
months ended September 30, 1996, compared to approximately $212,000 for the
comparable period in 1995. The increase was attributable to the purchase and
depreciation of equipment for new Company-owned restaurants.
9
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Interest expense was approximately $109,000 for the three months ended
September 30, 1996, a decrease of approximately $89,000, or 45%, from
approximately $198,000 for the comparable period in 1995. This decrease resulted
from the payments by the Company in August 1995 to reduce outstanding promissory
notes from an aggregate of $3.9 million to $3.6 million, the repayment in full
in August 1995 of a separate promissory note held by Pudgie's founder, the
outstanding balance of which was then $4.7 million, and the repayment in August
1995 of bridge notes issued by the Company in May 1995 in the aggregate of $1.0
million.
The reorganization loss on closing of restaurants of approximately
$831,000 during the three months ended September 30, 1996 is the result of the
Company closing seven Company-owned unprofitable restaurants to reduce cash
outflow and operating expenses as a result of the Company's bankruptcy filing.
The reorganization professional fees of approximately $43,000 were incurred in
connection with the Company's bankruptcy filing during the three months ended
September 30, 1996.
The Company incurred a net loss of approximately $4.4 million during the
three months ended September 30, 1996, an increase of approximately $3.7
million, or 552%, from the net loss of approximately $670,000 in the comparable
1995 period. The increase in the loss was attributable principally to an accrual
for an arbitration award of approximately $1.7 million, approximately $1.2
million expensed in conjunction with the closing of 10 Company-owned restaurants
during the three months ended September 30, 1996 and the growth of total revenue
by approximately 1% from the comparable prior year period as compared to an
increase of approximately 21% in operating expenses.
No provision for income taxes was required in either the three months
ended September 30, 1996 or 1995 because of the net losses incurred by the
Company.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1995
Total revenue was approximately $9.2 million for the nine months ended
September 30, 1996, an increase of approximately $941,000, or 11%, over revenue
of approximately $8.2 million for the nine months ended September 30, 1995. This
increase was primarily due to the increase in the number of Company-owned
restaurants from 26 open at September 30, 1995 to 30 open during the nine months
ended September 30, 1996, offset by the closing of 10 Company-owned restaurants
during the three months ended September 30, 1996. This resulted in a net
decrease in the number of Company-owned restaurants from 26 at September 30,
1995 to 20 at September 30, 1996. The number of franchised restaurants decreased
from 37 at September 30, 1995 to 31 at September 30, 1996. The net decrease was
the result of one new franchised restaurant opening, two closing and being
reopened as Company-owned restaurants and five franchised restaurants closing
during the nine months ended September 30, 1996.
System-wide sales at all Company-owned and franchised restaurants were
approximately $17.0 million for the nine months ended September 30, 1996 and
approximately $19.1 million for the comparable prior year period. The effect of
the lower average number of Pudgie's restaurants in operation for the nine
months ended September 30, 1996 was the primary cause of the decrease in sales.
Revenue from sales at Company-owned restaurants was approximately $8.1
million for the nine months ended September 30, 1996, an increase of
approximately $1.3 million, or 19%, over sales at Company-owned restaurants of
approximately $6.8 million for the nine months ended September 30, 1995. This
increase was due to the increased number of Company-owned restaurants operating
during the period. Franchise royalty and advertising fees paid by franchisees
were approximately $729,000 for the nine months ended September 30, 1996, a
decrease of approximately $328,000, or 31%, from approximately $1.1 million for
the comparable prior year period. This decrease resulted from the lower number
of franchised restaurants in operation during the nine months ended September
30, 1996
10
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compared to the nine months ended September 30, 1995.
With respect to Company-owned restaurants, costs of products sold and
restaurant operating expenses were approximately $7.6 million for the nine
months ended September 30 1996, an increase of approximately $1.4 million, or
23%, from approximately $6.2 million for the nine months ended September 30,
1995. This increase was due primarily to the increased number of Company-owned
restaurants in operation during the nine months ended September 30, 1996.
General and administrative expenses were approximately $3.2 million for the nine
months ended September 30, 1996, an increase of approximately $723,000, or 29%
from approximately $2.5 million for the comparable period in 1995, primarily due
to increases in corporate overhead due to the expansion of the corporate
infrastructure in comparison to the prior year period, an increase of
approximately $117,000 in bad debt reserves for the comparable nine month period
and approximately $110,000 in legal expenses incurred for the arbitration of a
dispute with Gallus.
The arbitration award of approximately $1.7 million during the nine
months ended September 30, 1996 was the result of an award rendered by the
American Arbitration Association relating to a decision on an action against the
Company brought by Gallus. Restaurant closing expenses of approximately $347,000
for the nine months ended September 30, 1996 were the result of costs expensed
in conjunction with the closing of three Company-owned unprofitable restaurants.
Restaurant cost of sales and restaurant operating expenses, as a
percentage of restaurant sales, were 94% in the nine months ended September 30,
1996, compared to 91% in the comparable 1995 period. The decreased margins
resulted primarily from increased operating and other costs incurred by the
Company during the first three months of 1996 as a result of the impact on
revenues of the severe weather conditions and increased operating costs
associated with the opening of new Company-owned restaurants during the nine
months ended September 30, 1996.
Advertising expenses decreased approximately $261,000, or 28%, to
approximately $675,000 for the nine months ended September 30, 1996 from
approximately $936,000 for the comparable prior year period, principally due to
a change in the kind of advertising undertaken by the Company.
Depreciation and amortization was approximately $715,000 for the nine
months ended September 30, 1996, compared to approximately $661,000 for the
comparable period in 1995. The increase was attributable to the purchase and
depreciation of equipment for new Company-owned restaurants.
Interest expense was approximately $321,000 for the nine months ended
September 30, 1996, a decrease of approximately $340,000, or 51%, from
approximately $660,000 for the comparable period in 1995. This decrease resulted
from the payments by the Company in August 1995 to reduce outstanding promissory
notes from an aggregate of $3.9 million to $3.6 million, the repayment in full
in August 1995 of a separate promissory note held by Pudgie's founder, the
outstanding balance of which was then $4.7 million, and the repayment in August
1995 of bridge notes issued by the Company in May 1995 in the aggregate of $1.0
million.
The reorganization loss on closing of restaurants of approximately
$831,000 during the nine months ended September 30, 1996 is the result of the
Company closing seven Company-owned unprofitable restaurants to reduce cash
outflow and operating expenses as a result of the Company's bankruptcy filing.
The reorganization professional fees of approximately $43,000 were incurred in
connection with the Company's bankruptcy filing during the nine months ended
September 30, 1996.
The Company incurred a net loss of approximately $6.4 million during the
nine months ended September 30, 1996, an increase of approximately $3.6 million,
or 125%, from the net loss of approximately $2.9 million in the comparable 1995
period. The increase in the loss was attributable
11
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principally to an accrual for an arbitration award of approximately $1.7
million, approximately $1.2 million in costs expensed in conjunction with the
closing of 10 Company-owned restaurants during the nine months ended September
30, 1996 and the growth of total revenue by approximately 11% from the
comparable prior year period as compared to an increase of approximately 14% in
operating expenses from the prior year comparable period.
No provision for income taxes was required in either the nine months
ended September 30, 1996 or 1995 because of the net losses incurred by the
Company.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had working capital of $696,214 as
compared to a working capital deficit of $1,733,430 at September 30, 1995. This
change in working capital is primarily attributable to the reclassification of
approximately $2.1 million of current liabilities to long term liabilities as a
result of the Company's bankruptcy filing.
Stockholders' equity was $729,546 at September 30, 1996 as compared to
$9,727,340 at September 30, 1995. The decrease in stockholders' equity is
primarily due to continued losses since September 30, 1995 and the recording of
an arbitration award in the amount of $1,707,404 in September 1996.
Cash decreased from $823,440 at December 31, 1995 to $323,030 at
September 30, 1996. The decrease of $500,410 is primarily due to cash spent to
help fund the losses during the nine months ended September 30, 1996.
Cash used in operating activities of $2,742,548 for the nine months
ended September 30, 1996 is primarily attributable to funding the Company's loss
of $6,408,822, offset by an accrued arbitration award in the amount of
$1,707,404 and a loss on closing of 10 Company-owned restaurants in the amount
of $1,178,099, the increase in accounts payable and other liabilities and offset
by depreciation and amortization of $714,848.
Cash provided by investing activities of $436,094 was for the purchase
of property and equipment and the acquisition of one franchised restaurant
during the nine months ended September 30, 1996 offset by disposals for closed
restaurants in the amount of $1,102,286.
Cash provided by financing activities of $1,806,044 for the nine months
ended September 30, 1996 is primarily due to a private placement of 200 units of
Series A Convertible Preferred Stock at $10,000 per unit, net issuance costs.
Due to the Company's recent filing of a voluntarily petition under
Chapter 11 of the Bankruptcy Code and pending the filing of the Company's plan
of reorganization, the Company is currently unable to predict its needs for
liquidity and capital resources. The Company has retained an investment banking
firm to assist in its debtor-in-possession financing and bankruptcy proceedings.
The investment banking firm will also explore the possibility of strategic
equity transactions for the Company.
PART II
ITEM 5. OTHER INFORMATION -
CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
On November 11, 1996, the Company dismissed Price Waterhouse LLP
as its independent accountants. The reports by Price Waterhouse LLP on the
consolidated financial statements of the Company for the fiscal years ended
December 31, 1994 and December 31, 1995, (i)
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did not contain an adverse opinion or disclaimer of opinion and (ii) were not
qualified or modified as to uncertainty, audit scope or accounting principles.
In connection with the audits for the two most recent fiscal years and through
November 11, 1996, the Company had no disagreements with Price Waterhouse LLP on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of Price Waterhouse LLP would have caused them to make
reference thereto in their report on the financial statements for such years.
The Company engaged the services of KPMG Peat Marwick LLP as its
new independent accountants as of November 15, 1996. The decision to change
accountants was recommended and approved by the Company's board of directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Two reports on Form 8-K were filed during the nine months ended
September 30, 1996:
(i) On September 18, 1996, a Form 8-K was filed reporting the
filing of a voluntary petition under Chapter 11 of the Bankruptcy Code and an
award against the Company by a panel of the American Arbitration Association.
(ii) On September 30, 1996, a Form 8-K was filed reporting the
Company's altering of its business and financial plans in light of its recent
filing of a voluntary petition under the Bankruptcy Code.
13
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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.
PUDGIE'S CHICKEN, INC.
November 18, 1996 /s/Steven Wasserman
- --------------------------------- ----------------------------------
Date Steven Wasserman
President/Chief Executive Officer
November 18, 1996 /s/Helen Papa
- --------------------------------- ----------------------------------
Date Helen Papa
Vice President/Chief Financial
Officer/Secretary
(and principal accounting officer)
14
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EXHIBIT INDEX
EXHIBIT NUMBER PAGE NUMBER
16 Letter re: Change in certifying accountants.............16
27 Financial Data Schedule.................................17
15
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EXHIBIT 16
November 18, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Ladies and Gentlemen:
Pudgie's Chicken, Inc.
We have read the first paragraph of Item 5 of Pudgie's Chicken, Inc.'s quarterly
report on Form 10-QSB for the quarterly period ended September 30, 1996 and are
in agreement with the statements contained therein.
Yours very truly,
/s/ Price Waterhouse LLP
16
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 323,030
<SECURITIES> 0
<RECEIVABLES> 934,149
<ALLOWANCES> (461,629)
<INVENTORY> 115,560
<CURRENT-ASSETS> 911,110
<PP&E> 12,222,455
<DEPRECIATION> 1,896,245
<TOTAL-ASSETS> 11,423,820
<CURRENT-LIABILITIES> 214,896
<BONDS> 0
2,857,920
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<COMMON> 44,750
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 11,423,820
<SALES> 8,133,105
<TOTAL-REVENUES> 9,188,524
<CGS> 7,635,770
<TOTAL-COSTS> 14,723,257
<OTHER-EXPENSES> 874,029
<LOSS-PROVISION> 241,506
<INTEREST-EXPENSE> 320,543
<INCOME-PRETAX> (6,408,762)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,408,762)
<EPS-PRIMARY> (1.43)
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