<PAGE>
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 March 31, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from------------------------ to ----------------------
Commission file number 1-13840
PUDGIE'S CHICKEN, INC.
(Exact name of small business issuer as specified in its charter)
<TABLE>
<S> <C>
Delaware 31-1369735
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
333 Earle Ovington Boulevard, 11553
Suite 604, Uniondale, New York (zip code)
(Address of principal executive offices)
</TABLE>
(516) 222-8833
(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 [ ]
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 May 14, 1997, the registrant had 4,488,385 shares of its Common Stock,
$.01 par value, issued and outstanding.
Page 1 of 15
The Exhibit Index is on Page 14
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PUDGIE'S CHICKEN, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
INDEX
<TABLE>
<CAPTION>
PAGE
----
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PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited)
Consolidated Balance Sheets as of March 31, 1997
and December 31, 1996.................................................. 3
Consolidated Statements of Income for the three months ended
March 31, 1997 and March 31, 1996...................................... 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 1997 and March 31, 1996................................ 5
Notes to Consolidated Financial Statements............................. 6-9
Item 2 - Management's Discussion and Analysis or Plan of Operation.............. 10-11
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K....................................... 12
Signature Page................................................................... 13
Exhibit Index.................................................................... 14
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PUDGIE'S CHICKEN, INC. AND SUBSIDIARIES
Debtors-in-Possession
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
(unaudited)
<S> <C> <C>
Assets
Current assets
Cash $272,180 $167,190
Restricted cash 62,365 61,550
Franchise and advertising royalties receivable, net 129,908 170,150
Inventory 97,060 81,690
------------- ------------
Total current assets 561,513 480,580
Property and equipment, net 1,663,706 1,500,050
Other assets 164,175 163,170
------------- ------------
Total assets $2,389,394 $2,143,800
============= ============
Liabilities and Stockholders' Deficit
Liabilities not subject to compromise
Accounts payable and accrued expenses 536,106 $663,387
Note payable -- 250,000
Deferred franchise fees 297,500 297,500
Accrued Chapter 11 fees 344,971 533,044
Deferred rent 189,440 189,160
------------- ------------
Total current liabilities 1,368,017 1,933,091
Liabilities subject to compromise 8,056,704 8,056,704
------------- ------------
Total liabilities 9,424,721 9,989,795
------------- ------------
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, Series A $.01 par value;
550 shares authorized, 200 shares issued and outstanding
(redemption value of $2,520,000) 1,978,770 1,978,770
Stockholders' equity:
Preferred stock, 250,000 shares authorized(including 10,000 shares of
Redeemable Preferred Stock): $4 Cumulative Preferred Stock $.01 par value,
50,000 shares issued and outstanding
(liquidation value $500,000) 500 500
Common stock, $.01 par value, 10,000,000 shares authorized;
4,488,385 shares issued and outstanding 44,884 44,884
Additional paid-in capital 15,781,541 15,781,541
Accumulated deficit (25,856,492) (26,672,795)
Deferred compensation (53,530) (47,895)
Total stockholders' deficit (10,083,097) (10,893,765)
------------- ------------
Total liabilities and stockholders' deficit $2,389,394 $2,143,800
============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
(3)
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PUDGIE'S CHICKEN, INC. AND SUBSIDIARIES
Debtors-in-Possession
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
(unaudited)
1996 1997
<S> <C> <C>
Revenue
Restaurant sales $2,442,561 $1,509,095
Franchise and advertising royalties 241,316 205,884
Interest income and other revenue 22,532 18,969
------------- ------------
2,706,409 1,733,948
Expenses
Restaurant cost of sales 961,663 588,649
Restaurant operating expenses 1,468,109 813,320
Franchising costs 30,030 25,067
General and administrative 901,377 710,286
Advertising expenses 206,462 42,099
Depreciation and amortization 253,097 112,552
Interest expense 106,036 2,506
------------- ------------
3,926,774 2,294,479
------------- ------------
Loss before reorganization items (1,220,365) (560,531)
------------- ------------
Reorganization items
Loss on closing of restaurants -- 56,388
Professional fees -- 199,384
Net loss ($1,220,365) ($816,303)
============== ============
Loss per share ($0.28) ($0.18)
============== ============
Weighted average number of common shares outstanding 4,416,836 4,488,385
============== ============
</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
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
(unaudited)
1996 1997
<S> <C> <C>
Cash flows provided by (used in) operating activities
Net loss ($1,220,365) ($816,303)
Adjustments to reconcile net income
to net cash provided by operations
Depreciation and amortization 253,097 112,552
Provision for bad debt 9,160 30,376
Loss on closure of restaurants 56,388
Deferred compensation expense (5,633) 5,635
Changes in operating assets and liabilities
(Increase) decrease in operating assets
Franchise and advertising royalties receivable (86,575) (75,902)
Inventories 7,180 15,370
Other assets (68,945) 1,005
Increase (decrease) in operating liabilities
Accounts payable and accrued expenses 511,391 315,074
Deferred franchise fees (65,000) --
Other liabilities (41,893) --
------------- ------------
Net cash used in operating activities (707,583) (355,805)
------------- ------------
Cash flows used in investing activities
Purchase of property and equipment (28,117) --
------------- ------------
Net cash (used in) investing activities (28,117) --
------------- ------------
Cash flows provided by financing activities
Additions to notes payable -- 250,000
Net decrease in restricted cash -- 815
------------- ------------
Net cash provided by financing activities -- 250,815
------------- ------------
Net decrease in cash (735,700) (104,990)
Cash at beginning of period 823,440 272,180
Cash at end of period $87,740 $167,190
============ =============
</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 financial statements are unaudited and include all
adjustments (consisting of normal recurring adjustments and accruals) that
management considers necessary for a fair presentation of its financial position
and results of operations of Pudgie's Chicken, Inc. and its subsidiaries (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.
For financial reporting purposes, the Company has applied the provisions
of the American Institute of Certified Public Accountants Statement of Position
90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code" (SOP 90-7) in the accompanying consolidated financial statements.
Pudgie's Chicken, Inc. and all of its subsidiaries (the "Company") filed
voluntary petitions for relief under Chapter 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court for the Southern District of New York
(the "Bankruptcy Court") on various dates from September 18, 1996 through
October 10, 1996. On October 15, 1996, the individual petitions of the Company
were administratively consolidated by the Bankruptcy Court. The Company is
currently operating its business as debtors-in-possession, subject to the
approval of the Bankruptcy Court for certain proposed actions. Additionally,
certain creditor and equity committees have been formed which have the right to
review and object to non-ordinary course business transactions and are expected
to participate in the formulation and approval of any plan or plans of
reorganization. The Company's exclusivity period for filing a plan of
reorganization expired on April 27, 1997. The Company is currently working on
putting together a plan of reorganization.
The accompanying consolidated financial statements have been prepared on
a going concern basis, which contemplates continuity of operations, realization
of assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the Chapter 11 filings and circumstances relating to
this event, including the Company's recurring losses from operations as
reflected in the consolidated statement of operations, such realization of
assets and liquidation of liabilities is subject to significant uncertainty.
While under the protection of Chapter 11, the Company may sell or otherwise
dispose of assets, and liquidate or settle liabilities, for amounts other than
those reflected in the consolidated financial statements. Further, a plan of
reorganization could materially change the amounts reported in the consolidated
financial statements. The accompanying consolidated financial
6
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statements do not include any adjustments to the carrying value of assets or
amounts of liabilities that might be necessary should the Company be unable to
continue as a going concern or as a consequence of a plan of reorganization. The
appropriateness of using the going concern basis is dependent upon, among other
things, confirmation of a plan of reorganization, future profitable operations,
the ability to comply with debtor-in-possession and other financing agreements
and the ability to generate sufficient cash from operations and financing
sources to meet obligations.
The Company's ability to continue operations is dependent upon, among
other things, confirmation of a plan of reorganization that will enable the
Company to emerge from bankruptcy proceedings, obtain additional capital or
other financing to fund distributions under the plan of reorganization and to
provide working capital. There is no assurance that such reorganization or
financing will occur. These factors, among others, indicate that there is
substantial doubt that the Company can continue as a going concern.
The accompanying financial statements should be read in conjunction with
the Company's December 31, 1996 Form 10-KSB.
2. POST-PETITION FINANCING
On March 13, 1997, the Bankruptcy Court entered an order authorizing the
Company to obtain debtor-in-possession financing up to a maximum of $250,000
pursuant to a loan and security agreement dated February 28, 1997 and granted
the lender a secured claim for loans made up to a maximum of $250,000. The
facility bears interest at 16% payable monthly and is due the earlier of (i)
February 1, 1998, (ii) dismissal of the Chapter 11 case or (iii) at conversion
of the Chapter 11 case to a proceeding under Chapter 7 of the Bankruptcy Code.
The Company has borrowed $250,000 under this facility of which approximately
$189,000 has been utilized and approximately $61,000 is being held in the
Company's attorney's escrow account.
In the event of confirmation of a plan of reorganization, the lender
shall receive additional compensation in the form of such number of warrants to
purchase common stock of the Company ("Warrants") with an estimated fair value
of $100,000. The Warrants shall (1) be issued pursuant to a plan of
reorganization, (2) be delivered to Lender within 60 days after confirmation of
a plan of reorganization, (3) be exercisable during a period of seven years,
commencing six months after the date of confirmation of a plan of reorganization
and (4) have an exercise price equal to 115% of fair market value, as defined.
3. 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, among other claims, common law fraud and violations of the Franchise
Sales Act of the State of New York regarding its area development agreement with
the Company.
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
7
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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. On
September 18, 1996 the Company filed a voluntary petition for relief under the
provisions of Chapter 11 of the Bankruptcy Code. A motion to confirm this award
in the United States District Court for the Eastern District of Virginia had
initially been stayed as a result of the Company's bankruptcy filing. The amount
of the award has been recorded as a liability subject to compromise by the
Company.
On March 25, 1997, the Bankruptcy Court lifted the automatic stay
imposed upon filing the Chapter 11 petition in order to permit the Company to
petition the federal court in Virginia to vacate the arbitration award while
simultaneously allowing Gallus to petition for confirmation of the award.
On April 18, 1997, the Federal District Court denied a motion to vacate
the arbitration award. The Company intends to appeal the decision to the United
States Court of Appeals for the Fourth Circuit.
The Company is involved in other court proceedings and claims incidental
to Company business. As a result of the filing of the Chapter 11 Cases, lawsuits
in which the Company is named as a defendant are stayed as to the Company.
The Company is a defendant in eight separate causes of action brought by
a franchisee and its principals which allege that the Company misrepresented the
demographics of the franchisee's franchise territory. The franchisee seeks
$2,500,000 in damages and $1,000,000 in punitive damages under each cause of
action.
The Company is a defendant in litigation alleging infringement on the
plaintiff's franchise area. The plaintiff seeks damages of $1,250,000 and an
injunction prohibiting the Company from doing business within the exclusive
franchise area allegedly granted to the franchisee. The Company intended to file
a motion to dismiss the complaint based upon the fact that a franchise agreement
does not exist between the plaintiff and the Company and that any illicit
transfer of the franchise rights to a party not approved by the Company
constituted a termination of the franchisee's franchise. The motion to dismiss
was not filed due to the Company's voluntary petition under Chapter 11 of the
United States Bankruptcy code.
The Company has brought an action in New York against one of its
franchisees seeking approximately $77,000 in unpaid royalty and advertising
fees. The franchisee counterclaimed and seeks $15,000,000 for the alleged breach
of the franchise agreement.
The Company is the defendant in an action brought by a franchisee which
seeks damages of approximately $668,000 for the alleged breach of franchise
agreement and violations of the Texas Consumer Protection Act. The franchisee
was initially given the right to develop two restaurants in Texas. The
franchisee opened only one restaurant which was closed within one year after
opening. The complaint alleges that the Company is responsible for the
restaurant's failure. The Bankruptcy Court has lifted the automatic stay so that
the case can proceed for the purpose of arriving at a liquidation amount in
damages.
8
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Management believes that the Company has valid and meritorious defenses
against the claims described above. By virtue of the Chapter 11 petition (note
1), all of the above mentioned actions are pending confirmation of a
reorganization plan to be filed by the Company. At present, the claims are being
treated as unliquidated claims in that they have not yet been reduced to
judgment by a court of competent jurisdiction and no agreement between the
Company, as debtor, and the plaintiffs as creditors has been reached. It is
anticipated that the plan of reorganization will take into account all of the
forestalled claims and that each one of the claims will be resolved based upon a
formula contained within the plan of reorganization. As a consequence, the
amounts sought by the plaintiffs in their lawsuits are being treated as
unliquidated amounts subject to readjustments pursuant to the plan of
reorganization. Therefore, an estimate of the ultimate settlement of these
claims cannot be made and no provision has been recorded for such amounts in the
accompanying consolidated financial statements.
There are 243 claims scheduled and/or filed in the Company's bankruptcy
case. The face amount of the claims are $163,023,600. Many of these claims are
contingent, duplicate and/or disputed. Company management believes that the
claimed amounts are grossly overstated. The final determination of the allowed
claims is expected to invoke litigation of which the outcome is uncertain. The
Company's estimates of the allowed claims are presented in the financial
statements and are subject to change based upon the outcome of the Chapter 11
proceedings. Based on the review of the claims, the Company estimates that the
actual dollar amount of claims that will be allowed is approximately $7.4
million.
The maximum liability on all claims is subject to resolution under the
federal bankruptcy laws.
9
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PUDGIE'S CHICKEN, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1996
Total revenue was approximately $1.7 million for the three months ended
March 31, 1997, a decrease of approximately $972,000 or 36%, from revenue of
approximately $2.7 million for the three months ended March 31, 1996. This
decrease was primarily due to the decrease in the number of Company-owned
restaurants from 26 at March 31, 1996 to 17 at March 31, 1997.
System-wide sales at all Company-owned and franchised restaurants were
approximately $4.0 million for the three months ended March 31, 1997 and
approximately $5.3 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 March 31, 1997 was the primary cause of the decrease in sales.
Revenue from sales at Company-owned restaurants was approximately $1.5
million for the three months ended March 31, 1997, a decrease of approximately
$933,000 or 38%, from sales at Company-owned restaurants of approximately $2.4
million for the three months ended March 31, 1996. This decrease was primarily
due to the decrease in the number of Company-owned restaurants operating during
the three months ended March 31, 1997 as compared to the prior year period.
Franchise royalty and advertising fees earned from franchisees were
approximately $206,000 for the three months ended March 31, 1997, a decrease of
approximately $35,000 or 15%, from approximately $241,000 for the comparable
prior year period. The decrease resulted from the lower number of franchised
restaurants in operation during the three months ended March 31, 1997, from 36
open at March 31, 1996, as compared to 30 open at March 31, 1997.
With respect to Company-owned restaurants, costs of products sold and
restaurant operating expenses were approximately $1.4 million for the three
months ended March 31, 1997, a decrease of approximately $1.0 million or 42%,
from approximately $2.4 million for the three months ended March 31, 1996. This
decrease was due primarily to the closing of 12 unprofitable Company-owned
restaurants in 1996 and one unprofitable Company-owned restaurant in January
1997. General and administrative expenses were approximately $710,000 for the
three months ended March 31, 1997, a decrease of approximately $191,000 or 21%,
from approximately $901,000 for the comparable period in 1996, primarily due to
the reduction in corporate overhead expenses due to the Company reducing and
carefully monitoring spending.
Advertising expenses decreased approximately $164,000, or 80%, to
approximately $42,000 for the three months ended March 31, 1997 from
approximately $206,000 for the comparable prior year period. This was due to the
reduction of spending under the cash constraints of the Chapter 11 Cases.
10
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Depreciation and amortization was approximately $113,000 for the three
months ended March 31, 1997, a decrease of approximately $141,000, or 56%, from
approximately $253,000 for the three months ended March 31, 1996. The decrease
is attributable to the closing of 12 Company-owned restaurants during 1996 and
the writing off of the net value of the related assets and the write down of
long lived assets in 1996.
Interest expense was approximately $2,500 for the three months ended
March 31, 1997, a decrease of approximately $104,000, or 98%, from approximately
$106,000 for the comparable period in 1996. This decrease resulted from the
Company stopping interest accruals on an outstanding promissory note of $3.6
million as of the filing of the Chapter 11 Cases. This promissory note is
included in liabilities subject to compromise.
As a result of the Company's filing of the Chapter 11 Cases, one
Company-owned unprofitable restaurant was closed resulting in approximately
$56,000 of expenses. This restaurant was closed to further reduce cash outflow
and operating expenses. The reorganization professional fees of approximately
$199,000 for the three months ended March 31, 1997 were incurred in connection
with the Company's Chapter 11 Cases and related U.S. Trustee fees.
The Company incurred a net loss of approximately $816,000 during the
three months ended March 31, 1996, a decrease of approximately $404,000, or 33%,
from the net loss of approximately $1.2 million in the comparable 1996 period.
The decrease in the loss was attributable principally to decreased restaurant
operating expenses, as a result of the closing of unprofitable stores during
1996, the decrease in corporate overhead expenses, offset by approximately
$199,000 in bankruptcy related professional fees.
No provision for income taxes was required in either the three months
ended March 31, 1997 or 1996 because of the net losses incurred by the Company
for federal and state income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements are for restaurant operations
and franchise development. As of March 31, 1997 the Company had a working
capital deficit of $1,452,511 as compared to a working capital deficit of
$1,021,956 at March 31, 1996.
Cash used in operating activities of $355,805 for the three months ended
March 31, 1997 is primarily the result of the funding of the Company's operating
loss for the three months ended March 31, 1997.
Cash provided by financing activities of $250,815 for the three months
ended March 31, 1997 was primarily due to proceeds received from
debtor-in-possession financing.
Due to the Company's filing of the Chapter 11 Cases 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.
11
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) No reports on Form 8-K were filed the three months ended March 31,
1997.
12
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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.
May 14, 1997 /s/ Steven Wasserman
- ------------ ---------------------------------
Date Steven Wasserman
President/Chief Executive Officer
May 14, 1997 /s/ Helen Papa
- ------------ ----------------------------------
Date Helen Papa
Vice President/Chief Financial
Officer/Secretary
(and principal accounting officer)
13
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EXHIBIT INDEX
Exhibit Number Page Number
- -------------- -----------
27 Financial Data Schedule 15
14
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 167,190
<SECURITIES> 0
<RECEIVABLES> 170,150
<ALLOWANCES> (899,798)
<INVENTORY> 81,690
<CURRENT-ASSETS> 480,580
<PP&E> 1,500,050
<DEPRECIATION> 1,175,604
<TOTAL-ASSETS> 2,143,800
<CURRENT-LIABILITIES> 1,933,091
<BONDS> 0
3,047,770
500
<COMMON> 44,884
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,143,800
<SALES> 1,509,095
<TOTAL-REVENUES> 1,733,948
<CGS> 1,401,969
<TOTAL-COSTS> 2,294,479
<OTHER-EXPENSES> 255,772
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,506
<INCOME-PRETAX> (816,303)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (816,303)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> 0
</TABLE>
