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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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 No. 1-13840
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PUDGIE'S CHICKEN, INC.
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(Exact name of registrant as specified in its charter)
Delaware 31-1369735
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(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Earle Ovington Boulevard, Suite 604, Uniondale, NY 11553
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (516)222-8833
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Securities registered pursuant to Section 12(b) of the Exchange Act: None
Name of Each Exchange
Title of Class on which Registered
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Common Stock, par value $.01 per share The Boston Stock Exchange
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(Title of class)
Common Stock Purchase Warrants The Boston Stock Exchange
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(Title of class)
Securities registered under Section 12(g) of the Exchange Act: None
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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Check if there is no disclosure of delinquent filers in response to Items 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The issuer's revenues for the year ended December 31, 1996 were $11,404,006
The aggregate market value of the voting stock held by non-affiliates(1) of the
Registrant as of April 8, 1997 Common Stock, par value $.01 per share was
$3,961,819.
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
of reorganization confirmed by a US Bankruptcy Court. Yes X No
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State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date
Class Outstanding at April 8, 1997
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Common Stock, par value $.01 per share 4,488,385 shares
EXHIBIT Index Page 65. Page 1 of 66 pages.
Transitional Small Business Disclosure Format (check one): Yes No X
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1 As used herein, "voting stock held by non-affiliates" means shares of Common
Stock held by persons other than executive officers, directors and persons
holdings in excess of 5% of the registrant's Common Stock. The determination
of market value of the Common Stock is based on the last reported sale price
as reported by the Nasdaq National Market on the date indicated. The
determination of the "affiliate" status for purposes of this report on Form
10-K shall not be deemed a determination as to whether an individual is an
"affiliate" of the registrant for any other purposes.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Pudgie's Chicken, Inc. (the "Company") owns, operates and franchises
quick service Pudgie's"r" restaurants featuring Pudgie's specially prepared,
fresh, skinless fried chicken. The first Pudgie's restaurant was opened in 1981;
franchising activities began in 1988; the Company was incorporated in Delaware
in January 1993 and acquired the Pudgie's restaurant business from its founder
("Pudgie's Acquisition") in August 1993. Currently, there are 47 Pudgie's
restaurants in operation, consisting of 17 Company-owned and 29 franchised
restaurants in six states, chiefly in New York and New Jersey and one franchised
restaurant operating in Indonesia.
Pudgie's restaurants offer consumers tasty, wholesome food at low to
modest prices, based on their core menu of fresh, skinless fried chicken. The
Company attributes the good taste of Pudgie's fried chicken to the use of fresh,
bone-in chicken, which is never frozen, and the breading of the chicken in the
Company's proprietary "dry batter" mix. The use of skinless chicken reduces fat
and cholesterol content and, the Company believes, enhances the cooking process.
Pudgie's restaurants offer a variety of other main dishes, such as fried shrimp,
fried clams, baby back ribs and grilled chicken sandwiches, and a variety of
complementary side dishes, including french fries, mashed potatoes, corn on the
cob, potato salad and buttermilk biscuits. The suggested retail price of the
Pudgie's 12 Piece Chicken Dinner, which includes mashed potatoes, salad and
dinner rolls, and is intended to feed a family of four or more, is $14.99. The
average check for a Pudgie's order during 1996 was approximately $11.75. The
restaurants are designed to have a clean, efficient appearance, are typically
850 to 1,300 square feet in size and are usually situated inside shopping
centers and similar locations in residential areas. Most of the restaurants have
limited or no eat-in capacity and emphasize home delivery and take-out orders.
The Company's anticipated cash investment for a new Company-owned restaurant of
average size is approximately $150,000, inclusive of pre-opening costs.
The Company derives its revenues from Company-owned restaurants and from
franchise royalty and advertising fees paid by Pudgie's franchisees and from the
sale of franchisees.
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.
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 was stayed as
a result of the Company's bankruptcy filing (as described below).
The Company was also experiencing significant cash flow problems and
accumulated certain arrearages on account of sales tax, rent and supplies.
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On various dates from September 18, 1996 through October 10,1996, the
Company and its various subsidiaries filed voluntary petitions for relief under
the provisions of Chapter 11 of the Bankruptcy Code (the "Chapter 11 Cases").
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.
Following the commencement of the Chapter 11 Cases, the Company and its
subsidiaries continued to operate its business as "debtors-in-possession" under
the protection of the Bankruptcy Court. The Bankruptcy Court has certain
supervisory powers over the Debtors' operations during the Chapter 11 Cases,
which are generally limited to reviewing and ruling on any objections raised to
the Debtors' operations or proposed outside of the ordinary course transactions.
The Debtors must notify parties in interest and obtain Bankruptcy Court approval
of any transactions that are outside the ordinary course of business, such as
any sale of a major asset of the Debtors. In addition, the Debtors must obtain
Bankruptcy Court approval of certain other transactions, such as the borrowing
of money on a secured basis or the employment of attorneys, accountants and
other professionals.
An immediate effect of the filing of the Chapter 11 Cases was the
imposition of the automatic stay under the Bankruptcy Code which, with limited
exceptions, enjoins the commencement or continuation of all pre-petition
litigation against, and efforts to collect funds from, the Debtors. This
injunction remains in effect unless modified or lifted by order of the
Bankruptcy Court.
Bankruptcy proceedings are limited solely to the Debtors and their
assets and properties. The Company's franchises are not included in the
bankruptcy proceedings and, as such, are not subject to the provisions of the
federal bankruptcy laws or the supervision of the Bankruptcy Court.
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 limited period of time, its 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, obtaining additional
capital or other financing to fund distributions under the plan of
reorganization and provide working capital. There is no assurance that such
financing will occur. These factors, among others, indicate that there is
substantial doubt that the Company will be able to continue as a going concern.
COMPANY OBJECTIVES
The Company's objectives include the following:
Core, High Quality Menu. The Company offers a core menu featuring
fresh, skinless, fried chicken and a variety of side dishes designed to
complement the Company's chicken. The skinless bone-in chickens used at
Pudgie's restaurants are never frozen and are delivered to
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each restaurant twice a week in special air-tight packaging to help
ensure freshness. The skinless Chicken is breaded in the Company's
proprietary "dry batter" mix and then fried in low cholesterol vegetable
oil.
Value. The Company believes that its menu provides convenient,
moderate to low-cost multiple meal combinations for couples, families or
larger groups. For example, the Pudgie's 12 Piece Chicken Dinner, which
includes mashed potatoes, salad and dinner rolls, has a suggested retail
price of $14.99, and is intended to feed a family of four or more. The
average check for Pudgie's order during 1996 was approximately $11.75.
Emphasis on Delivery and Take-out Orders. The Company believes
that its emphasis on delivery and take-out orders has been integral to
the success of Pudgie's restaurants in the past and will continue to be
an important factor in the future. Delivery allows customers the
convenience of having Pudgie's food at home, and the Company believes
that its ability to provide delivery gives it a competitive advantage
over other fast food restaurants that do not provide delivery.
Franchise System. The Company is committed to developing a strong
franchise system by seeking experienced operators, by expanding in a
controlled manner and by monitoring closely the performance of each
franchisee to help ensure adherence to the Company's standards of
operation, subject to local and regional variances, where deemed
appropriate. The Company is committed to provide its franchisees with
assistance in employee training, marketing, site selection and
restaurant design. With its emphasis on delivery and take-out, rather
than eat-in facilities, the Company seeks to locate Pudgie's restaurants
at smaller secondary locations, thereby avoiding the larger spaces and
higher costs typically associated with eat-in facilities at higher rent
locations.
Site Selection. The Company's policy is to open (or have its
franchisees open) Pudgie's restaurants in secondary locations at
strip-shopping centers and similar sites in residential areas having a
population density of 30,000 to 50,000 persons within a three-mile
radius of the restaurant. Typically 850 to 1,300 square feet in size
(including 500 square feet for kitchen operations), Pudgie's restaurants
are designed to have a clean, efficient appearance, generally with
limited or no eat-in capacity.
Purchasing and Supplies. The Company sets quality standards for
all products used in Pudgie's restaurants and designates approved
outside suppliers of food and paper products that meet the Company's
quality standards. To ensure product quality and consistency, all
Pudgie's restaurants are required to purchase the Company's proprietary
"dry batter" mix. Franchisees may purchase other goods directly from
approved suppliers. The Company has negotiated national purchasing
agreements with most of its suppliers. These agreements typically enable
the Company's franchisees to purchase supplies at prices below those
that could normally be obtained by them independently. Currently, most
Pudgie's restaurants obtain their fresh, skinless chicken from Rocco
Chicken, Inc. and their other chicken products from Tyson Foods, Inc.
Distribution to the restaurants of chicken and other standardized
supplies is handled by Sysco Corporation, a nationwide food service
distributor. The Company's distribution system also takes advantage of
volume purchasing of food and supplies, and helps to maintain
consistency among the restaurants. The Company believes that alternative
suppliers of chicken are available at competitive prices.
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RESTAURANT LOCATIONS
The following table sets forth the locations and number of Company-owned
and franchised restaurants at December 31, 1996:
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NUMBER OF COMPANY-OWNED NUMBER OF FRANCHISED
STATE RESTAURANTS RESTAURANTS
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New York 17 23
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New Jersey 1 2
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Maryland 0 2
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Connecticut 0 1
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North Carolina 0 1
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Ohio 0 1
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California 0 1
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TOTAL 18 31
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The Company acquired one and six franchised restaurants, during 1996 and
1995, respectively and opened four additional Company-owned restaurants in each
year. Seven and five franchised restaurants were closed in 1996 and 1995,
respectively, due to the failure of the franchisee to comply with the provisions
of the franchise agreement. As a result of the foregoing, the number of
Company-owned restaurants in operation has decreased from 26 at December 31,
1995 to 18 at December 31, 1996. The number of franchised restaurants decreased
from 36 at December 31, 1995 to 31 at December 31, 1996.
COMPANY-OWNED RESTAURANT OPERATIONS
The Company closed one additional Company-owned restaurant in January
1997. The Company currently owns and operates 17 restaurants. A typical Pudgie's
restaurant employs a restaurant manager and 10 to 14 hourly employees, five to
seven of which are delivery personnel. Most of the employees work part-time and
are paid on an hourly basis.
THE FRANCHISE SYSTEM
The Company believes that its franchise system is vital to the Company's
continued operations. There are currently 29 franchised restaurants in six
states, primarily in New York and New Jersey and one franchised restaurant
operating in Indonesia. The Company is unable to access the impact the Chapter
11 filing will have on its franchising efforts going forward.
Approval. Franchisees are approved on the basis of the applicant's
business background, restaurant operating experience and financial resources.
The Company seeks to attract both qualified franchisees for single units and
experienced multi-unit franchisees willing to make a substantial investment in
development of targeted areas.
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Company Assistance and Support. Business format franchises, such as the
Company's, offer the franchise owner a trademark, logo and a system of doing
business. The Company furnishes each franchisee with assistance in selecting
sites and developing restaurants. Franchisees are responsible for selecting the
location for their restaurants but must obtain Company approval of each
restaurant design and each location based on accessibility and visibility of the
site and targeted demographic factors, including population density, income, age
and traffic. The franchisee also receives assistance with personnel training,
advertising and marketing and product supply. The Company provides training,
research and development and support for the entire franchise system.
Franchise Operations. The Company requires franchisees to comply with
its specifications as to space, menu items, principal food ingredients and
day-to-day operations. Design and decor vary among locations, subject to Company
approval. In addition, product preparation follows uniform ingredient
specifications and cooking processes. Standardized customer service procedures
are supported by a training curriculum for both franchisees and the Company's
restaurant management personnel. Employees receive standardized training from
the Company in food preparation, operating procedures and customer service. Each
franchisee has full discretion to determine the prices to be charged to its
customers.
Franchise Agreements. The initial term of a franchise agreement is 10
years. The Company has established an initial franchise fee of $30,000 per
location. The renewal fee is also currently $30,000. Franchisees pay a royalty
fee of 5% of gross sales and an advertising fee of 3% of gross sales. The
Company has both a right of first refusal and the right to approve or disapprove
the proposed transfer of a franchise. The Company also has the right to
terminate any franchise agreement for a variety of reasons, including a
franchisee's failure to make payments when due or failure to adhere to the
Company's policies and standards.
Franchise Financing. The Company has a financing agreement with
Stephen's Franchise Financing which provides a $15,000,000 credit facility
available to the Company's franchisees which meet both the Company's and
Stephen's credit approval requirements. The Company does not receive any
remuneration if financing is granted to a franchisee but believes the financing
agreement is beneficial in attracting franchisees. The specific terms of
financing by Stephen's are negotiated separately with each franchisee.
In the event that a franchisee is in default under the Stephen's
Agreement, the Company is required, for a period of 90 days, to use its best
efforts to either sell the restaurant or the equipment of the defaulted
franchisee to a successor franchisee who agrees to assume the obligations to
Stephen's of the defaulted franchisee. If a successor franchisee is not found
within 90 days, the Company must pay Stephen's all accrued interest then due
Stephens by the defaulted franchisee and must continue to seek a successor
franchisee for an additional 180 days. If at the end of such period a successor
franchisee has not been located, the Company must either assume all of the
defaulted franchisee's obligations under its agreement with Stephen's or pay
Stephen's the unamortized principal balance owed by the defaulted franchisee
plus certain other costs; however, the Company's liability for such a pay-off is
limited to $1,500,000 or 30% of the total amount funded by Stephen's under the
Stephen's Agreement, whichever is greater. As of December 31, 1996,
approximately $14,600,000 of this facility remained available. Pursuant to this
agreement, the Company is obligated to the financial institution for the
outstanding balances of two closed franchised locations for $225,000. At
December 31, 1996, such amount has been included in liabilities subject to
compromise. In addition, the Company is contingently liable for the remaining
balances of two franchised locations of $187,000.
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Area Development Agreements. Initiated in late 1988 by the Company's
predecessor, the franchise program was initially sold primarily to single
restaurant owner-operators in the Long Island and greater New York areas. The
Company has emphasized area development agreements since it began operating
Pudgie's restaurants in 1993. Parties to area development agreements agree to
develop an area by opening a predetermined number of units within a designated
span of time.
Area development agreements provide for the development of a specified
number of restaurants within a delineated territory in accordance with a
schedule of dates. The entire development schedule generally covers two to five
years and has restaurant operation benchmarks for the number of restaurants to
be opened and in operation at six-month intervals. An area developer's
restaurant development schedule may also encompass concurrent development by the
area developer in multiple area development agreements or sub-areas thereof.
Area developers currently pay a development fee, which is negotiated between the
Company and the developer. Such payments are made when the area development
agreement is executed and are nonrefundable. Area development agreements
generally provide that the area developer has the exclusive right to open
Pudgie's restaurants within the specified territory during the term of the
development schedule, except that the area development agreement generally
provides that the Company reserves the right to engage in special distribution
arrangements and, if the area developer does not choose to develop them, to
develop alternative retail concept sites and conversion sites within the area
developer's specified territory or sub-areas. Alternative retail concept sites
are sites that the Company believes should be developed for competitive or
market reasons regardless of the applicable development schedule or the location
of pre-existing sites.
Failure to meet development schedules or other breaches of the area
development agreement may lead to termination of the limited exclusivity
provided by the agreements, renegotiation of development and franchise
provisions, or termination of the right to build future restaurants, although
such termination does not generally affect existing franchise agreements for
developed locations.
Once an acceptable lease for an approved restaurant site has been fully
executed, the Company and the area developer enter into a franchise agreement
under which the area developer becomes the franchisee for the specific
restaurant to be developed at the site.
COMPETITION
The food service industry is intensely competitive with respect to food
quality, concept, restaurant location, service and price. In addition, there are
many well-established food service competitors with substantially greater
financial and other resources than the Company and with substantially longer
operating histories. The Company believes that it competes with other take-out
food service companies, fast-food restaurants, casual full-service dine-in
restaurants, delicatessens, cafeteria-style buffets, and prepared food stores,
as well as with supermarkets and convenience stores. Many of the Company's
competitors have achieved significant national, regional and local brand name
and product recognition and engage in extensive advertising and promotional
programs, both generally and in response to efforts by additional competitors to
enter new markets or introduce new products. In addition, the quick-service
delivery/takeout industry is characterized by the frequent introduction of new
products accompanied by substantial promotional campaigns. Also, the number of
chicken take-out or restaurant establishments and the number of larger national
restaurant, fast-food, and grocery chains offering chicken has increased in the
past few years providing more direct competition for certain customers. Also,
one or more national food service chains or other companies could introduce a
multi-unit chain of food service establishments that resemble the Company's
concept.
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The Company believes that it competes effectively with other fast food
restaurants primarily on the basis of food quality, taste, price and quick and
courteous service.
MARKETING
Franchised restaurants are currently required to remit 3% of their
revenues to cooperative advertising and promotion campaigns administered by the
Company. These campaigns make use of print and other media and emphasize the
trademarked Pudgie's name and Pudgie's chicken logo, known as the "Pudgster".
The Company circulates direct mail packages from time to time to place
promotional offers in the local consumer's hands. The Company uses the services
of a direct bulk mail facility and sends promotional offers to its existing
customer base to increase repeat customer sales. During 1996 the Company
expended approximately $745,000, on print advertising and other promotions.
TRADEMARKS AND SERVICE MARKS
The Company believes its rights in its trademarks and service marks are
significant to its business. The Company is the owner of the United States
registration of the trademark "Pudgie's" and of the Pudgie's chicken logo (known
as the "Pudgster"). The Company has also registered "Pudgie's Famous Chicken"
and design as a trademark in the United States. In addition, the Company has
registered in the United States "America's Favorite Skinless Chicken Since 1981"
and design as a trademark and service mark. "The Bird is the Word" and "The
In-Place to Take-Out" are registered as service marks. The Company has also
registered "Pudgie's Famous Chicken" and design in a number of foreign
countries. It is the Company's policy to pursue registration of its marks
whenever possible and to vigorously oppose any infringement of its marks.
GOVERNMENT REGULATION
The Company is subject to federal, state and local government
regulations, including those relating to the preparation and sale of food and
those relating to building and zoning requirements. The Company and its area
developers and franchisees are also subject to federal and state laws governing
their relationship with employees, including minimum wage requirements,
overtime, working and safety conditions, and citizenship requirements. The
Company believes that it and its franchisees are in material compliance with
these provisions.
In addition, the Company is subject to the Federal Trade Commission
("FTC") regulation and various state laws that govern the offer, sale and
termination of, and refusal to renew, franchises. Several state laws also
regulate substantive aspects of the franchisor-franchisee relationship. The FTC
requires the Company to furnish prospective franchisees a franchise offering
circular containing prescribed information. A number of states in which the
Company might consider franchising also regulate the sale of franchises and
require registration of the franchise offering circular with state authorities.
Substantive state laws that regulate the franchisor-franchisee relationship
presently exist in a substantial number of states. The state laws often limit,
among other things, the duration and scope on non-competition provisions and the
ability of a franchisor to terminate or refuse to renew a franchise. The Company
believes that its operations comply substantially with the FTC regulations and
state franchise laws.
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EMPLOYEES
As of December 31, 1996, the Company employed 304 persons (of whom 65
were full-time employees). None of the Company's employees are covered by a
collective bargaining agreement. The Company believes that its employee
relations are satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases its principal executive offices, located in
Uniondale, New York, at an annual rent of $145,000 subject to a 12% increase in
the next three years for a term expiring in November 1999. All Company
restaurant sites are leased by the Company from third parties. The restaurant
leases expire on dates ranging from January 1, 1999 to November 30, 2014, with
the majority providing for renewal options. All of the leases require the
Company to maintain the property and pay the cost of insurance and taxes.
ITEM 3. LEGAL PROCEEDINGS
On June 30, 1995, 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 11, 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 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 September 18, 1996 the Company filed a voluntary petition for relief
under the provisions of Chapter 11 of the Bankruptcy Code. For further
discussion, see Item 1 "Business Description" and Note 1 to the Consolidated
Financial Statements included in this Form 10-KSB.
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.
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
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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.
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. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock, and Common Stock Purchase Warrants ("Warrants") have
been traded under the symbol "PUDGQ" and "PUDGWQ", respectively, during the
Chapter 11 bankruptcy proceeding and previously under the symbols "PUDG" and
"PUDGW," respectively on the Nasdaq Small Cap Market ("Nasdaq") and under the
symbols "PCK" and "PCKW," respectively, the Boston Stock Exchange ("Boston")
since August 15, 1995, the effective date of the Company's initial public
offering. Prior to that date, there was no public market for the Company's
securities.
The following table sets forth the high and low bid prices of the
Company's Common Stock as reported by the Nasdaq Small Cap Market, the principal
trading market for the Company's Common Stock for the periods indicated,
commencing in the period the Company completed its initial public offering. The
quotations set forth represent interdealer prices and do not include retail
mark-ups, mark-downs or commissions and do not represent actual transactions.
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Year ended December 31, 1995 High Low
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Third Quarter $6 $5
(from August 15, 1995)
Fourth Quarter $5 7/8 $5
Year ended December 31, 1996 High Low
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First Quarter $5 5/8 $5
Second Quarter $5 1/2 $4 1/4
Third Quarter $4 1/2 $1 3/8
Fourth Quarter $2 1/4 $1
The last sales price of the Common Stock reported on the NASDAQ Small
Cap Market on April 8, 1997 was $1 5/16 per share. As of April 8, 1997, the
Company had 4,488,385 shares of Common Stock outstanding held by more than 1,000
beneficial holders.
DIVIDEND POLICY
The Company has not paid a dividend with respect to its Common Stock and
does not anticipate that it will pay dividends in the foreseeable future. As a
result of the filing of the Chapter 11 Cases, the Company is legally restricted
from paying any dividends. In any event, the payment of dividends by the Company
on the Common Stock would depend on its earnings and financial condition, and
such other factors as the Board may consider relevant. In addition, no dividend
may be paid or declared and set apart for payment on the Common Stock as long as
the Series A Preferred Stock is outstanding and unless the Redeemable Preferred
Stock is fully redeemed together with dividends accrued thereon, and cumulative
dividends on the Company's outstanding $4 Cumulative Preferred Stock are paid or
set aside for payment.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and the notes presented
following the financial statements. The discussion of results, causes and trends
should not be construed to imply any conclusion that such results or trends will
necessarily continue in the future.
The first Pudgie's restaurant was opened on Long Island, New York in
1981 under the name "Pudgie's Famous Chicken." A second Pudgie's restaurant was
opened on Long Island in 1984. Franchising operations commenced in late 1988.
The Company acquired the Pudgie's operations pursuant to the Pudgie's
Acquisition in August 1993.
The Company, organized as a Delaware Corporation in February 1993, is a
holding company for Pudgie's Famous Chicken, Ltd. which operates and franchises
Pudgie's Famous Chicken restaurants. Pudgie's Famous Chicken, Ltd. was founded
in 1981, by George Sanders. George Sanders and Steven Wasserman were the sole
owners until 1993, when Pudgie's Famous Chicken, Ltd. was acquired by the
Company (the "Acquisition") in a leveraged buy-out. The Company began
franchising in 1989. The Company filed for Chapter 11 protection on September
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18, 1996 after the Company received an adverse decision in an arbitration
proceeding with a former franchisee. The Company was also experiencing liquidity
problems at the time, which played a significant role in the Company's decision
to file.
Since the Chapter 11 Bankruptcy filing, the Company has taken a number
of steps to restructure its operations, with a view towards making the Company a
much more streamlined entity like the entity which had prospered in the early
1990's. Under the Company's new initiative, the Company has made progress toward
significantly reducing its general and administrative overhead and in downsizing
its operations staff to conform with continuing operations. Under performing
units have been closed and over 100 full and part time employees have been
relieved of their duties. Consequently, the Company continues to "steam line"
its organization and refocus its efforts primarily on franchised operations. The
Company will continue to restructure its operations, not only to improve margins
at the store level, but also corresponding to "right size" its costs for the
future.
During the Bankruptcy the Company was able to obtain Debtor in
Possession ("DIP") financing in the sum of $250,000 for working capital
purposes.
Management also has devoted significant time and effort to attracting
new equity and debt financing to enable the Company to confirm a plan of
reorganization that will provide significant distributions to creditors, and to
provide adequate working capital for the future.
The Company's revenue is derived from sales at Company-owned restaurants
and, to a lesser extent, from up-front franchise fees, royalties and other
franchise related fees. The Company does not derive revenue from the sale of
restaurant or other supplies to franchisees (except for an immaterial amount of
revenue obtained from the sale of breading). All franchised restaurants pay a
franchising fee of 5% of gross sales and advertising royalties of 3% of gross
sales, except for the two restaurants operated by Pudgie's founder which pay a
flat licensing fee. Payments from franchisees are required to be made weekly or
monthly (depending on when the franchises were acquired). The Company has taken
legal action in the past to close franchises for failure to remit franchise fees
and royalties.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Total revenue was approximately $11.4 million for the year ended
December 31, 1996, an increase of approximately $204,000 or 2%, over revenue of
approximately $11.2 million for the year ended December 31, 1995. This increase
was primarily due to the increase in the number of Company-owned restaurants
from 26 open at December 31, 1995 to 30 open during 1996, offset by the closing
of 12 Company-owned restaurants during the year ended December 31, 1996. This
resulted in a net decrease in the number of Company-owned restaurants from 26 at
December 31, 1995 to 18 at December 31, 1996. The number of franchised
restaurants decreased from 36 at December 31, 1995 to 31 at December 31, 1996.
The decrease was the result of two new franchised restaurants opening, two
franchised restaurants closing and being reopened as Company-owned restaurants
and five franchised restaurants closing during the year ended December 31, 1996.
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System-wide sales at all Company-owned and franchised restaurants were
approximately $21.8 million for 1996 and approximately $24.9 million for 1995.
The effect of the lower average number of Pudgie's restaurants in operation in
1996 resulted in the decrease in system sales. The Company also believes that
revenues for the first quarter of 1996 were adversely affected by severe weather
conditions.
Revenue from sales at Company-owned restaurants was approximately $10.1
million for the year ended December 31, 1996, an increase of approximately
$703,000 or 8%, over sales at Company-owned restaurants of approximately $9.4
million for the year ended December 31, 1995. This increase was due to the
increased number of Company-owned restaurants operating during 1996. Franchise
royalty and advertising fees paid by franchisees were approximately $967,000 for
the year ended December 31, 1996, a decrease of approximately $322,000 or 25%,
from approximately $1.3 million for the year ended December 31, 1995. This
decrease resulted from the lower number of franchised restaurants in operation
during the year ended December 31, 1996 compared to the year ended December 31,
1995. The reduction in the number of franchised restaurants in operation was a
result of the Company repurchasing one franchised restaurant to be operated as a
Company-owned restaurant, the Company reopening two previously franchised
restaurants as Company-owned, and the closing of five franchised restaurants due
to the failure of the franchisee to remit royalties or to comply with other
provisions of the franchise agreement. Franchise fees were approximately
$270,000 for the year ended December 31, 1996, a decrease of $140,000 or 34%,
from $410,000 for the year ended December 31, 1995. The decrease was primarily
attributable to the recognition of higher revenue for fees relating to area
developers who forfeited their development rights in 1995.
The Company has reserved for the full amount of receivables due from two
of its franchisees (approximately $300,000 at December 31, 1996) which are
withholding payment pending the resolution of litigation with the Company. For
further discussion, see Item 3 "Legal Proceedings" and Note 13 to the
Consolidated Financial Statements. Such receivables represent approximately 34%
of the allowance for uncollectible receivables at December 31, 1996. The balance
of the reserve is made up of identified potential bad debts of individual
receivable balances of franchisees and a general reserve.
With respect to Company-owned restaurants, costs of products sold and
restaurant operating expenses were approximately $9.6 million for the year ended
December 31, 1996, an increase of approximately $1.0 million or 12%, from
approximately $8.6 million for the year ended December 31, 1995. This increase
was due primarily to the increased number of Company-owned restaurants operating
during 1996 and an adjustment for lease escalations of approximately $190,000.
General and administrative expenses were approximately $4.8 million for the year
ended December 31, 1996, an increase of approximately $1.1 million or 29%, from
approximately $3.7 million for the year ended December 31, 1995. The increase
was primarily due to approximately a $425,000 increase in bad debt expense
during 1996, approximately $110,000 in legal expenses incurred for the
arbitration of a dispute with Gallus, and an increase in professional fees and
insurance costs for the year ended December 31, 1996, as result of the IPO in
August 1995.
The arbitration award of approximately $1.7 million during the year
ended December 31, 1996 was the result of an award rendered by the American
Arbitration Association relating to a decision on an action against the Company.
Restaurant closing expenses of approximately $347,000 for the year ended
December 31, 1996 were the result of costs expenses in conjunction with the
closing of three Company-owned unprofitable restaurants prior to the Chapter 11
petition.
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Advertising expenses were approximately $745,000 for the year ended
December 31, 1996, a decrease of approximately $458,000 or 38%, from
approximately $1.2 million for the year ended December 31, 1995. The decrease
was principally due to a change in the type of advertising undertaken by the
Company in 1996.
For the year ended December 31, 1996, the Company has taken a non-cash
charge of $8,097,897 as a result of the write down of long-lived assets. As a
result of the reduced carrying value for the affected long-lived assets that
will continue to be used in the business, the Company expects future annual
depreciation to be reduced by approximately $270,000. As the initial charge was
based upon estimated cash flow forecasts requiring judgment by management,
actual results could differ significantly from the estimates used.
Depreciation and amortization was approximately $906,000 for the year
ended December 31, 1996, an increase of approximately $20,000 or 2%, from
approximately $887,000 for the year ended December 31, 1995. The slight increase
was attributable to the initial increase in Company-owned restaurants during
1996, the purchase and depreciation of equipment for those restaurants and the
closing of Company-owned restaurants in September and October 1996 and the
writing off of the net value of the related assets.
Interest expense was approximately $321,000 for the year ended December
31, 1996, a decrease of approximately $451,000 or 58%, from approximately
$770,000 for the year ended December 31, 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, on which interest accruals
were stopped as of the filing of the Chapter 11 Cases, 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.
Interest income and other revenue was approximately $97,000 for the year
ended December 31, 1996, a decrease of approximately $37,000 or 27%, from
approximately $134,000 for the year ended December 31, 1995. This decrease was
primarily due to a decreased interest income resulting from lower investment
balances maintained.
As a result of the Company filing of the Chapter 11 Cases, nine
Company-owned unprofitable restaurants were closed resulting in approximately
$1.4 million of expenses . These restaurants were closed to reduce cash outflow
and operating expenses. The reorganization professional fees of approximately
$443,000 for the year ended December 31, 1996 were incurred in connection with
the Company's bankruptcy filing and related U.S. Trustee fees.
The Company incurred a net loss of approximately $17.0 million for the
year ended December 31, 1996, an increase of approximately $12.8 million or
305%, from the net loss of approximately $4.2 million for the year ended
December 31, 1995. The increase in the loss was attributable principally to the
non-cash charge of approximately $8.1 million as a result of the write down of
long-lived assets, an accrual for an arbitration award of approximately $1.7
million, approximately $1.4 million expensed in conjunction with the closing of
nine Company-owned restaurants in 1996 as a result of the Company's filing of
the Chapter 11 Cases, approximately $347,000 of expenses incurred in conjunction
with the closing of three Company-owned unprofitable restaurants, approximately
$443,000 in bankruptcy related professional fees and an increase of
approximately 10% in operating expenses.
No provision for income taxes was required in either the year ended
December 31, 1996 or 1995 because of the net losses incurred by the Company for
federal and state income tax purposes.
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FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 1996, the Company recorded an impairment
adjustment to goodwill of approximately $8,098,000 due to the diminution of the
carrying value of this asset. The Company also recorded additional accrued
expenses of approximately $766,000 in the fourth quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements are for restaurant operations
and franchise development. As of December 31, 1996, the Company had a working
capital deficit of $806,504 as compared to working capital of $49,455 at
December 31, 1995. This change in working capital is primarily attributable to
timing of the payment of current liabilities.
Cash used in operating activities was $1,751,706 for the year ended
December 31, 1996 and $1,898,749 for the year ended December 31, 1995. The
cash used in operating activities is primarily the result of the funding of the
Company's loss for 1996.
Cash used in investing activities of $375,141 was utilized for the
purchase of property and equipment primarily relating to the opening of new
Company-owned restaurants during 1996.
Cash provided by financing activities of $1,575,587 for 1996 was
primarily due to net proceeds received from a private placement of stock in the
amount of $1,637,952 offset by restricted cash balances in escrow of $62,365 for
the year ended December 31, 1996.
Immediately upon the commencement of the Chapter 11 Cases, the Company
obtained a post-petition credit facility in the form of food and supply advances
(the "Sysco Credit Facility") from Sysco up to the amount of $250,000. The Sysco
Credit Facility further provides that the obligations of the Company to Sysco
under the Sysco Credit Facility constitutes administrative expense obligations
with priority over any and all administrative expenses of the kinds specified in
Sections 503(b) and 507(b) of the Bankruptcy Code (with limited exceptions),
secured by a superpriority lien on substantially all of the Company's assets.
During the Chapter 11 Cases the Bankruptcy Court approved the Sysco Credit
Facility on interim and final bases, respectively. The Company currently owes
Sysco under the Sysco Credit Facility the approximate amount of $85,000, with
costs, interest and fees thereon.
The Company has also obtained Bankruptcy Court approval for a certain
"debtor-in-possession" credit facility (the "DIP Credit Facility") with Jeffrey
Zisselman ("Zisselman") up to the amount of $250,000, subject to the terms and
limitations of a stipulation entered into between the Company and Herbert Turk,
which limits senior indebtedness to Mr. Turk's secured claims in the aggregate
amount of $375,000. In consideration for the DIP Credit Facility, Zisselman has
been granted (a) a second lien on all of the Company's assets and (b) a warrant
to be issued within sixty days after confirmation of a reorganization plan to
purchase Reorganized Pudgie's Common Stock on terms such that, under the Black
Scholes formula the warrant will have an estimated fair value of approximately
$100,000. The loan provides for interest at a rate of 16% per annum, payable
monthly on all amounts drawn down on and is due the earlier of February 1, 1998,
dismissal of the Chapter 11 Cases or at conversion of the Chapter 11 Cases to a
proceeding under Chapter 7 of the Bankruptcy Code. The Company currently has
approximately $190,000 outstanding under the DIP Credit Facility.
In May 1996, the Company received $2,000,000, exclusive of expenses of
approximately $360,000, from a private placement, which consists of 200 shares
of Redeemable Convertible Preferred
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Stock, Series A and 100,000 common stock purchase warrants. The preferred stock
is convertible into common stock at the option of the holder at a price of the
lower of $4.47 or 82% of the average closing price on the trading day
immediately preceding the conversion date and automatically convert into shares
of common stock on April 30, 1998. The preferred stock has a redemption and
liquidation value of $12,200 per share plus unpaid dividends, as defined, or
cash at the option of the Company. The preferred stockholders also receive
penalty shares since a Registration Statement for the sale of common stock was
not registered by July 29, 1996.
This class of preferred stock also contains a redemption 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. The redemption option was triggered
subsequent to September 18, 1996 and as a result of the Company's bankruptcy
filing, this provision has been stayed until a plan of reorganization has been
approved by the Bankruptcy Court.
The Company's promissory note to Herbert Turk in the amount of
$3,606,837 has been litigated in the Bankruptcy Court. For further discussion,
see Item 12 "A. Turk" and Note 8 to the Consolidated Financial Statements
included in this Form 10-KSB.
The terms of the Company's Redeemable Preferred Stock have been
modified. For further discussion, see Item 12 "C. Sanders" and Note 11 to the
Consolidated Financial Statements in this Form 10-KSB.
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.
SEASONALITY
The Company's business is affected by seasonal fluctuations.
Historically, sales and earnings have been lower in the months of November,
December, January and February as a result of the holiday season and inclement
weather. The Company's revenues and expenses may be affected by a variety of
other factors, including, but not limited to, general economic trends,
competition, marketing programs and special events.
IMPACT OF INFLATION
The Company believes that inflation has not had a material impact on its
operations to date. Substantial increases in labor, food and other operating
expenses could adversely affect the operations of the Company and the restaurant
industry.
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are included in this Report:
Index To Consolidated Financial Statements
- --------------------------------------------------------------------------------
Page
STATEMENTS OF PUDGIE'S CHICKEN, INC. AND SUBSIDIARIES
Independent Auditor's Report.............................................F-2
Consolidated Balance Sheet - December 1996...............................F-4
Consolidated Statement of Operations -
For the year ended December 31, 1996.....................................F-5
Consolidated Statement of Stockholders' Deficit -
For the year ended December 31, 1996.....................................F-6
Consolidated Statement of Cash Flows -
For the year ended December 31, 1996.....................................F-7
Notes to Consolidated Statements.........................................F-8
Report of Independent Accountants........................................F-27
Consolidated Statement of Operations -
For the year ended December 31, 1995.....................................F-28
Consolidated Statement of Changes in Stockholders' Equity -
For the year ended December 31, 1995.....................................F-29
Consolidated Statement of Cash Flows -
For the year ended December 31, 1995.....................................F-30
Notes to Consolidated Statements.........................................F-32
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
DISCLOSURE.
On November 11, 1996, the Company dismissed Price Waterhouse LLP as its
independent auditors. 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) 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 auditors as of November 15, 1996. The decision to change accountants
was recommended and approved by the Company's board of directors.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
Information Concerning Directors and Executive Officers
Name Age Position
- ---- --- --------
Steven Wasserman 36 President/Chief Executive Officer,
Director (Class I)
Helen Papa 29 Vice President, Chief Financial Officer and Secretary
Udi Toledano 46 Director (Class I)
Joseph Vittoria 61 Director (Class II)
STEVEN WASSERMAN has been the President and Chief Executive Officer of the
Company since April 1995 and a director of the Company since August 1993. Mr.
Wasserman has been the President of Pudgie's Famous Chicken, Ltd. a wholly owned
subsidiary of the Company ("PFC") since 1991. From August 1987 to December 31,
1990, Mr. Wasserman was a practicing attorney with the law firm Phillips, Nizer,
Benjamin, Krim & Ballon in New York City.
HELEN PAPA was elected Vice President and Secretary of the Company in May 1995
and has been the Company's Chief Financial Officer since June 1, 1994. She
previously was an accountant with Price Waterhouse from August 1989 to May 1994.
Ms. Papa is a Certified Public Accountant.
UDI TOLEDANO has been a Director of the Company since January 1993. Mr. Toledano
has been the President of Andromeda Enterprises, Inc., a private investment
company, since December 1993. Prior to that, he was the President of CR Capital,
Inc., a private investment company, for more than five years. He has been an
advisor to various public and private corporations, none of which competes with
the Company. Since May 1996, Mr. Toledano has
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been a director of Alyn Corporation, a public advanced materials company, and
since January 1997 its Chairman of the Board. Since May 1996, Mr. Toledano has
been a director of HumaScan Inc., a public medical device company, and since
April 1995, he has been a director of Global Pharmaceutical Corporation, a
public generic pharmaceutical manufacturing company. Since July 1994, Mr.
Toledano has been a director of Universal Stainless & Alloy Products, Inc., a
public specialty steel producing company.
JOSEPH VITTORIA has been a director of the Company since July 1994. Mr. Vittoria
was the Chairman of the Board of Avis, Inc., a multi-national car rental
company, from 1982 to January 31, 1997. Mr. Vittoria is a director of UAL Corp.,
the parent of United Airlines and a Vice-Chairman of the Business Committee of
the Metropolitan Museum of Art. In addition, Mr. Vittoria serves as a member of
the Development Board of Yale University, president of the board of directors of
the Alumni Association of Columbia University Graduate School of Business and is
the founding chairman and current member of the board of visitors of the
Georgetown University School of Organization and Management.
The Board of Directors consists of three directors divided into two
classes of directors: Class I Directors and Class II Directors. The Company's
current Class I Directors and Class II Directors will serve until the annual
meeting of the Company's stockholders to be held in 1998 and 1997, respectively,
and until their respective successors are duly elected and qualified or until
their earlier resignation or removal. Directors of each Class will be elected
for a full term of three years (or any lesser period representing the balance of
the previous term of such Class) and until their respective successors are duly
elected and qualified or until their earlier resignation or removal. Officers
are appointed by and serve at the discretion of the Board.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers, directors and persons who beneficially own more
than ten percent of the Company's Common Stock to file reports of ownership and
changes in ownership with the Securities and Exchange Commission, the National
Association of Securities Dealers, Inc. and the Boston Stock Exchange. These
reporting persons also are required to furnish the Company with copies of all
Section 16(a) forms they file. To the Company's knowledge, based solely on its
review of the copies of such forms furnished to it and representations that no
other reports were required, the Company believes that all Section 16(a)
reporting requirements were complied with during the year ended December 31,
1996.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation for
1996 and 1995, earned by or paid to the Company's chief executive officer and
each other executive officer whose compensation exceeded $100,000 in 1996:
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SUMMARY COMPENSATION TABLE
Annual Compensation
Name And Principal Position Year Salary
- --------------------------------------------------------------------------------
Steven Wasserman, 1996 237,000
President and Chief Executive Officer 1995 237,000
1994 222,000
- --------------------------------------------------------------------------------
(1) The named executive routinely receives other benefits from the Company,
the aggregate amounts of which during the years indicated did not exceed
the lesser of either $50,000 or 10% of the total annual salary and bonus
set forth above.
COMPENSATION ARRANGEMENTS
Effective June 1, 1995, Mr. Wasserman was employed as President and
Chief Executive Officer of the Company under an employment agreement expiring
May 31, 2000, at an annual base salary of $237,000 subject to his entitlement to
an annual incentive bonus of up to a maximum of 60% of his base salary based
upon a formula tied to the Company's performance in any given year.
DIRECTOR COMPENSATION
Directors of the Company do not receive compensation for their services.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of December 31,
1996 (on which date 4,488,385 shares of Common Stock were outstanding), except
as indicated below, with respect to (i) those person or groups known to the
Company to beneficially own more than 5% of the Company's Common Stock, (ii)
each director, (iii) each executive officer whose compensation exceeded $100,000
in 1996, and (iv) all directors and officers as a group. The information is
determined in accordance with Rule 13d-3 promulgated under the Securities
Exchange Act of 1934 based upon information furnished by the persons listed or
contained in filings made by them with the Securities Exchange Commission.
Except as indicated below, the stockholders listed possess sole voting and
investment power with respect to their shares.
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- --------------------------------------------------------------------------------
Name And Address Of Amount And Nature Of Percent Of Class Of
Beneficial Owner Beneficial Ownership Common Stock
- --------------------------------------------------------------------------------
George Sanders 615,500 13.8%
16 Plainview Road
Bethpage, NY 11714
- --------------------------------------------------------------------------------
Herbert & Edith Turk (1) 491,364 10.9%
2132 Cedarwood Lane
San Jose, CA 95125
- --------------------------------------------------------------------------------
Steven Wasserman 191,929 4.3%
c/o Pudgie's Chicken, Inc.
333 Earle Ovington Blvd.
Uniondale, NY 11553
- --------------------------------------------------------------------------------
Udi Toledano (2) 112,041 2.5%
c/o Pudgie's Chicken, Inc.
333 Earle Ovington Blvd.
Uniondale, NY 11553
- --------------------------------------------------------------------------------
Joseph Vittoria (3) 40,993 *
c/o Pudgie's Chicken, Inc.
333 Earle Ovington Blvd.
Uniondale, NY 11553
- --------------------------------------------------------------------------------
All Executive Officers and (4) 363,013 8%
Directors as a Group
(4 persons)
- --------------------------------------------------------------------------------
- -----------
*less than one percent
(1) Includes 145,524 shares of Common Stock held by Mr. and Mrs. Turk's
daughters over which Mr. Turk has power of attorney to direct the voting
and as to which Mr. Turk disclaims beneficial ownership. Includes 67,307
shares of Common Stock issuable upon the exercise of Investor Warrants
which were exercisable beginning in September 1996. Includes 55,122 shares
of common stock issuable upon the exercise of warrants granted to Mr. Turk
which warrants are exercisable between August 9, 1996 and August 9, 2000.
(2) Includes 61,489 shares held by Mr. Toledano's wife and 24,596 shares held
by a trust for the benefit of Mr. Toledano's minor children of which Mr.
Toledano's wife serves as trustee.
(3) Shares are held in the name of Fincon Enterprises, Inc. for the benefit of
Mr. Vittoria.
(4) Includes 18,029 shares issued to one executive officer of the Company
pursuant to the Restricted Stock Plan. See also footnotes 2 and 3 above.
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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
A. TURK
In 1994, the Company obtained a total of five bridge loans from Herbert
Turk (a principal stockholder) in the aggregate principal amount of
approximately $3.9 million with interest at 3.5% plus the prime rate. Such loans
were evidenced by promissory notes issued between February 19, 1994 and December
1, 1994 with maturity dates that ranged from two to four months from the date of
issuance. The Company issued 16,397 shares of Common Stock to Mr. Turk as a fee
for the loans. In August 1995, the Company paid $600,000 to repay a portion of
the promissory notes and issued to replace those promissory notes a new
promissory note in principal equal to the remaining principal of the original
notes ($3,606,837). The Company also issued to that stockholder warrants to
purchase 50,000 shares of Common Stock at a price of $6.00 per share in
consideration of the replacement note transaction exercisable August 9, 1996
through August 6, 2000. The replacement note is secured by a first lien on the
Company's principal assets and will mature in February 1997, subject to
mandatory prepayment by the Company to the extent of any net proceeds from the
sale of Common Stock by the Company. Interest on the replacement note accrues at
a variable rate of 3.5% above prime. Pursuant to the terms of the replacement
note, the Company is not permitted to incur additional indebtedness in excess of
$500,000 without the consent of the holder except for certain unsecured
obligations incurred in the ordinary course of business.
In January 1995, the Company sold 81,986 shares of Common Stock to
certain investors (including 45,092 shares to Mr. Turk and family members) in a
private placement at a purchase price of $6.10 per share and granted the
investors certain demand and "piggyback" registration rights (including rights
to register those shares in the Company's initial public offering). In exchange
for the cancellation by such investors of such registration rights, at the
closing of the Company's initial public offering the Company issued such
investors 111,522 investor warrants "Investor Warrants" (including 61,337
Investor Warrants to Mr. Turk and family members) and granted to such investors
new "piggyback" registration rights. The terms of the Investor Warrants are
identical to the terms of the Warrants, except that the Investor Warrants are
not redeemable and are not registered under the Securities Act of 1933 as
amended. The new registration rights are exercisable as to not more than two
registration statements filed by the Company after the Company's initial public
offering in August 1995, and will require the Company to register the shares of
Common Stock purchased by such investors in the January 1995 private placement
and the shares of Common Stock issuable upon exercise of the Investor Warrants.
In November 1996, Turk commenced an adversary proceeding in the Chapter
11 case seeking, inter alia, a determination as to the nature, extent and
validity of his security interests in and to the assets of the Company. The
Adversary Proceeding also sought injunctive relief requiring, inter alia, for
the Company to continue to escrow its franchise royalties/fees as per prior
interim cash collateral orders.
Turk had objected to the Company's continued use of cash collateral and,
prior to a December 4, 1996 hearing to consider the Company's request to use
cash collateral, Turk filed, under the Adversary Proceeding, an Order to Show
Cause for an order, inter alia, continuing the escrow of the Company's franchise
fees and proceeds from the auction sale of certain restaurant equipment and
granting Turk a preliminary injunction (the "Turk Motion").
21
<PAGE>
<PAGE>
At the December 4th hearing, the Court denied the Turk motion, and Mr.
Turk immediately filed an appeal of the denial of the Turk Motion in the United
States District Court for the Southern District of New York (the "Turk Appeal").
After vigorous negotiation, Mr. Turk, the Company, the official
Creditors' Committee and the official Equity Committee agreed to settle and
compromise all issues concerning Mr. Turk's claims and security interests as
well as all issues concerning the Company's use of cash collateral on a final
basis.
In order to resolve all outstanding issues between the Company, Mr. Turk
and the respective committees with respect to the Adversary Proceeding, the
claim of Mr. Turk and the Company's use of cash collateral, respectively, the
parties, after substantial negotiation entered into a certain Stipulation (the
"Turk Stipulation" which was approved by the Bankruptcy Court on February 12,
1997). The Stipulation: (1) resolved all issues raised in the Adversary
Proceeding; (2) authorized the Company's continued use of cash collateral on a
final basis; (3) authorized the release to the Company of all sums held in
escrow by the Company's counsel, which sums were badly needed in order to help
sustain the Company's operations; (4) avoided further costly and time consuming
litigation; and (5) helped "pave the way" towards confirmation of a consensual
plan of reorganization.
The Stipulation validated Mr. Turk's security interests and liens and
further provided that in the event a plan of reorganization is confirmed on or
before October 1, 1997, and provides for a payment on account of Mr. Turk's
secured claim in the amount of $1,000,000, then Mr. Turk would agree to vote his
remaining claims, on account of which he will receive no further monetary
consideration (only common stock), in favor of such plan of reorganization.
Moreover, the Stipulation permitted Mr. Turk's secured claim to be subordinated
to senior secured financing and professional carveouts in the aggregate amount
of $375,000. Finally, the Stipulation resulted in the dismissal of the Turk
Advisory Proceeding and the Turk Appeal, with prejudice.
B. WASSERMAN
In May 1995, Steven Wasserman, currently the Company's President and
Chief Executive Officer, received from escrow, 54,652 shares of Common Stock.
These shares had been purchased by Mr. Wasserman in 1993 for nominal
consideration and held in escrow pending performance under his employment
agreement.
C. SANDERS
In August 1995, the Company repaid in full a promissory note to Pudgie's
founder, the outstanding balance of which was then $4,669,000, through (i)
payment of $1.5 million in cash from the net proceeds of the IPO, (ii) issuance
of 525,000 shares of Common Stock and (iii) issuance of 10,000 shares of the
Company's Redeemable Preferred Stock having an aggregate redemption price and
liquidation value initially equal to $1,069,000.
22
<PAGE>
<PAGE>
Pursuant to an agreement dated February 12, 1997, the preferred
stockholder amended the terms of the preferred stock so that the stock is
redeemable for the Company's $.01 par value common stock, but is not, under any
circumstances, redeemable for cash. Additionally, pursuant to an agreement dated
February 20, 1997, the preferred stockholder irrevocably waived his right to
sell or otherwise transfer the preferred stock to another party unless such
party executes and delivers to the Company a confirmation and agreement which
binds the party to the terms of the aforementioned agreements.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits Filed
27. Financial Data Schedule
b. Reports on Form 8-K
Two reports on Form 8-K were filed during the year ended
December 31, 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.
23
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Steven Wasserman
-----------------------------------------
Steven Wasserman
President and Chief Executive Officer
Dated: April 14, 1997
In accordance with the Securities Exchange Act of 1934, this Report has
been signed below by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.
Date
----
/s/ Steven Wasserman April 14, 1997
- ------------------------------------------------ -----------------------
Steven Wasserman
President/Chief Executive Officer (and Principal
Executive Officer), Director
/s/ Helen Papa April 14, 1997
- ------------------------------------------------ -----------------------
Helen Papa
Vice President/Chief Financial Officer/Secretary
(and Principal Financial and Accounting Officer)
/s/ Joseph Vittoria April 14, 1997
- ------------------------------------------------ -----------------------
Joseph Vittoria, Director
/s/ Udi Toledano April 14, 1997
- ------------------------------------------------ -----------------------
Udi Toledano, Director
24
<PAGE>
<PAGE>
Pudgie's Chicken, Inc.
And Subsidiaries
Index To Consolidated Financial Statements
- --------------------------------------------------------------------------------
Page
STATEMENTS OF PUDGIE'S CHICKEN, INC. AND SUBSIDIARIES
Independent Auditor's Report.............................................F-2
Consolidated Balance Sheet - December 1996...............................F-4
Consolidated Statement of Operations -
For the year ended December 31, 1996.....................................F-5
Consolidated Statement of Stockholders' Deficit -
For the year ended December 31, 1996.....................................F-6
Consolidated Statement of Cash Flows -
For the year ended December 31, 1996.....................................F-7
Notes to Consolidated Statements.........................................F-8
Report of Independent Accountants........................................F-27
Consolidated Statement of Operations -
For the year ended December 31, 1995.....................................F-28
Consolidated Statement of Changes in Stockholders' Equity -
For the year ended December 31, 1995.....................................F-29
Consolidated Statement of Cash Flows -
For the year ended December 31, 1995.....................................F-30
Notes to Consolidated Statements.........................................F-32
F-1
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
and Stockholders
Pudgie's Chicken, Inc.
and subsidiaries
Debtors-in-Possession:
We have audited the accompanying consolidated balance sheet of Pudgie's
Chicken, Inc. and subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, stockholders' deficit and cash flows
for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pudgie's
Chicken, Inc. and subsidiaries as of December 31, 1996, and the results of
its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, Pudgie's
Chicken, Inc. and all of its subsidiaries 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 on various
dates from September 18, 1996 through October 10, 1996. The effects, if any,
arising from these filings by Pudgie's Chicken, Inc. and its subsidiaries on
its operations or consolidated financial statements as of and for the year
ended December 31, 1996 cannot be determined.
As discussed in notes 2(o) and 3 of the notes to consolidated financial
statements, the Company adopted the provisions of Statement of Financial
Accounting Standards No.121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" in 1996.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
the second preceding paragraph, Pudgie's Chicken, Inc. and all of its
subsidiaries 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 on various dates from September 18, 1996
through October 10, 1996. This event and circumstances relating to this
event, including the Company's recurring losses from operations resulting in
cumulative stockholder's deficit, raise substantial doubt about its ability
to continue as a going concern. Although the Company is currently operating
their business as a debtor-in-possession under the jurisdiction of the
Bankruptcy
F-2
<PAGE>
<PAGE>
Court, the continuation of the business as a going concern is contingent
upon, among other things, (1) the successful consummation of a plan of
reorganization and (2) the achievement of satisfactory levels of future
operating profit. The consolidated financial statements as of and for the
year ended December 31, 1996 neither include any adjustments relating to the
recoverability and classification of reported asset amounts or the amounts
and classification of liabilities that might be necessary should the Company
not be able to continue as a going concern, nor do those consolidated
financial statements include any adjustments relating to establishment,
settlement and classification of liabilities that may be required in
connection with the restructuring the Company and its subsidiaries as they
reorganize under Chapter 11 of the United States Bankruptcy Code.
KPMG PEAT MARWICK LLP
Jericho, New York
April 8, 1997
F-3
<PAGE>
<PAGE>
PUDGIE'S CHICKEN, INC.
AND SUBSIDIARIES
DEBTORS-IN-POSSESSION
Consolidated Balance Sheet
December 31, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash $ 272,180
Restricted cash 62,365
Franchise and advertising royalties, net of allowance for doubtful
accounts of approximately $888,000 129,908
Inventory 97,060
------------
Total current assets 561,513
Property and equipment, net 1,663,706
Other assets 164,175
------------
Total assets $ 2,389,394
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities not subject to compromise:
Accounts payable and accrued expenses 536,106
Deferred franchise fees 297,500
Accrued Chapter 11 fees 249,971
Accrued professional fees 95,000
Deferred rent 189,440
------------
Total current liabilities 1,368,017
Liabilities subject to compromise 8,056,704
------------
Total liabilities 9,424,721
Redeemable Preferred Stock, $.01 par value; 10,000 shares authorized,
issued and outstanding (redemption and liquidation value of $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
Stockholders' equity:
Preferred stock - 250,000 shares authorized (including 10,000 shares of
Redeemable Convertible Preferred Stock): $4 Cumulative Preferred Stock $.01
par value, 50,000 shares issued and outstanding (liquidation value $500,000) 500
Common stock - $.01 par value, 10,000,000 shares authorized, 4,488,385 shares
issued and outstanding 44,884
Additional paid-in capital 15,781,541
Accumulated deficit (25,856,492)
Deferred compensation (53,530)
------------
Total stockholders' deficit (10,083,097)
------------
Total liabilities and stockholders' deficit $ 2,389,394
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<PAGE>
PUDGIE'S CHICKEN, INC.
AND SUBSIDIARIES
DEBTORS-IN-POSSESSION
Consolidated Statement of Operations
Year ended December 31, 1996
<TABLE>
<S> <C>
Revenues:
Restaurant sales $ 10,069,748
Franchise and advertising royalties 966,908
Franchise fees 270,000
Interest income and other revenue 97,350
------------
11,404,006
Expenses:
Restaurant cost of sales 3,929,726
Restaurant operating expenses 5,696,573
Franchising costs 116,562
General and administrative 4,765,352
Arbitration award 1,707,404
Restaurant closing expenses 347,010
Advertising expenses 744,536
Depreciation and amortization 906,333
Interest expense 320,543
------------
18,534,039
------------
Loss before reorganization items (7,130,033)
------------
Reorganization items:
Impairment of long-lived assets 8,097,897
Loss on closing of restaurants 1,366,002
Professional fees 443,325
------------
Net loss $(17,037,257)
============
Loss per share ($ 3.80)
============
Weighted average number of common shares outstanding 4,486,404
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<PAGE>
PUDGIE'S CHICKEN, INC.
AND SUBSIDIARIES
DEBTORS-IN-POSSESSION
Consolidated Statement of Stockholders' Deficit
Year ended December 31, 1996
<TABLE>
<CAPTION>
PREFERRED COMMON TOTAL
STOCK STOCK ADDITIONAL DEFERRED STOCK-
NUMBER NUMBER PAID-IN COMPEN- ACCUMULATED HOLDERS'
OF SHARES AMOUNT OF SHARES AMOUNT CAPITAL SATION DEFICIT DEFICIT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 50,000 $500 4,506,972 $45,070 $16,159,920 $(225,362) $ (8,699,235) $ 7,280,893
Issuance of common stock purchase
warrants -- -- -- -- 100,000 -- -- 100,000
Private placement issuance costs -- -- -- -- (360,818) -- -- (360,818)
Accrual of Convertible Preferred
Stock Dividend Shares -- -- -- -- -- -- (60,000) (60,000)
Accrual of Convertible Preferred
Stock Penalty Shares -- -- -- -- -- -- (20,000) (20,000)
Issuance of Convertible Preferred
Stock Penalty Shares -- -- 12,964 130 39,870 -- (40,000) --
Forfeit of restricted stock -- -- (31,551) (316) (157,431) 157,747 -- --
Amortization of deferred compensation
relating to restricted stock -- -- -- -- -- 14,085 -- 14,085
Net loss -- -- -- -- -- -- (17,037,257) (17,037,257)
------ ---- --------- ------- ----------- -------- ------------ ------------
Balance at December 31, 1996 50,000 $500 4,488,385 $44,884 $15,781,541 $(53,530) $(25,856,492) $(10,083,097)
====== ==== ========= ======= =========== ======== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<PAGE>
PUDGIE'S CHICKEN, INC.
AND SUBSIDIARIES
DEBTORS-IN-POSSESSION
Consolidated Statement of Cash Flows
Year ended December 31, 1996
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss $(17,037,257)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 906,333
Provision for bad debts 690,647
Write down of intangible assets 8,097,897
Loss on closure of restaurants 1,713,012
Loss on arbitration 1,707,404
Deferred compensation expense 14,085
Change in assets and liabilities:
Increase in franchise and advertising royalties receivable (592,433)
Decrease in inventory 26,610
Decrease in other assets 254,400
Increase in accounts payable and accrued expenses 161,710
Increase in deferred franchise fees 67,500
Decrease in other liabilities (135,823)
Increase in liabilities subject to compromise 2,374,209
------------
Net cash used in operating activities (1,751,706)
------------
Cash flows from investing activities:
Proceeds from sale of equipment 62,815
Capital expenditures (437,956)
------------
Net cash used in investing activities (375,141)
------------
Cash flows from financing activities:
Increase in restricted cash (62,365)
Net proceeds from private placement 1,637,952
------------
Net cash provided by financing activities 1,575,587
------------
Net decrease in cash and cash equivalents (551,260)
Cash and cash equivalents, beginning of year 823,440
------------
Cash and cash equivalents, end of year $ 272,180
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
<PAGE>
PUDGIE'S CHICKEN, INC.
AND SUBSIDIARIES
DEBTORS-IN-POSSESSION
Notes to Consolidated Financial Statements
December 31, 1996
(1) PROCEEDINGS UNDER CHAPTER 11 AND BASIS OF PRESENTATION OF 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
expires on April 27, 1997, which is shared as of March 27, 1997 with the
Equity and Creditors Committees.
As of the petition date, actions to collect pre-petition indebtedness are
stayed and other contractual obligations may not be enforced against the
Company. These claims are reflected in the December 31, 1996 consolidated
balance sheet as "liabilities subject to compromise". In addition, the
Company has rejected executory contracts and lease obligations and parties
affected by these rejections may file claims ("liabilities subject to
compromise") with the Bankruptcy Court in accordance with the
reorganization process through the claim expiration date of January 31,
1997 (note 9). Additional claims may also arise from determination by the
Bankruptcy Court (or agreed to by parties in interest) of allowed claims
for contingencies and other disputed amounts. Substantially all
liabilities as of the petition date are subject to settlement under a plan
of reorganization to be filed by the Company and subsequently voted upon
by all impaired classes of creditors and equity security holders and
approved by the Bankruptcy Court.
The Company has discontinued accruing interest on its pre-petition debt
obligation, as well as dividends and related penalties on its redeemable
convertible preferred stock effective September 18, 1996. For financial
reporting purposes, all pre-petition debt obligations have been included
in "liabilities subject to compromise" on the December 31, 1996
consolidated balance sheet. The ultimate adequacy of the security for any
secured pre-petition debt obligations cannot be determined until a plan or
reorganization is confirmed.
On October 15, 1996, the Bankruptcy Court granted an order allowing a
secured claim on amounts not to exceed $250,000 to a supplier, to provide
the Company with a credit facility to purchase food and other operating
supplies.
On November 22, 1996, effective November 14, 1996, the Bankruptcy Court
approved an order allowing the rejection of the leases for twelve stores
closed by the Company (note 4).
On February 12, 1997, the Bankruptcy Court granted an order which provided
the holder of a $3.6 million secured note replacement liens on principally
all of the Company's assets,
(Continued)
F-8
<PAGE>
<PAGE>
PUDGIE'S CHICKEN, INC.
AND SUBSIDIARIES
DEBTORS-IN-POSSESSION
Notes to Consolidated Financial Statements
(1), CONTINUED
subordinate only to liabilities for debtor-in-possession financing, U.S.
Trustees fees, a supplier lien and professional fees not to exceed
$375,000 in the aggregate (note 8). The order allows the pre-petition
claim of the noteholder amounting to approximately $3,600,000 plus
interest and releases cash held in escrow by Company counsel of
approximately $60,000. The order also provides that if a plan of
reorganization is confirmed before October 1, 1997, which plan provides
for the payment of $1,000,000 to the noteholder, the noteholder will be
deemed to have an allowed secured claim in the amount of $1,000,000 and an
allowed unsecured claim for the balance. The noteholder would agree to
vote in favor of the Company sponsored plan of reorganization and upon the
receipt of $1,000,000, would release the security interest. If the
$1,000,000 is not paid or if the plan of reorganization is not approved by
the stipulated dates, the noteholder would not be bound by the foregoing
terms.
On March 13, 1997, the Bankruptcy Court granted 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 as of February
28, 1997 and granted the lender a secured claim for loans made up to a
maximum of $250,000 (note 8). The order amended the first priority
supplier's lien to $150,000 and the remaining balance would be pari-passu
with the other secured claims. The order also provides for the
reimbursement to the supplier of certain attorney fees and granted the
supplier an administrative priority claim of approximately $98,000
relating to the supplier's reclamation claim.
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.
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 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.
(Continued)
F-9
<PAGE>
<PAGE>
PUDGIE'S CHICKEN, INC.
AND SUBSIDIARIES
DEBTORS-IN-POSSESSION
Notes to Consolidated Financial Statements
(1), CONTINUED
While the Company believes it has adequate financing to operate during the
bankruptcy proceeding for a limited period of time, its 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.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) NATURE OF BUSINESS
Pudgie's Chicken, Inc. was incorporated in Delaware on January 28,
1993. The Company operates and franchises food service restaurants.
In exchange for franchise fees and royalties, the Company provides
franchisees with site approval, interior layout plans, training and
operations advice. The Company also provides marketing and
advertising support.
(B) OPERATION OF RESTAURANTS
During 1996, the Company acquired the net assets of one franchised
restaurant, in exchange for forgiveness of amounts due the Company in
the amount of $56,607. The excess of the aggregate purchase price
over the fair value of net assets acquired of $96,634, was recorded
as goodwill and is being amortized over 30 years (note 3).
During 1996, the Company opened three Company-owned restaurants in
locations previously operating as franchised restaurants. Revenues
and expenses related to the operation of these restaurants from the
dates of acquisition are included in food sales and restaurant
opening costs, respectively. In 1996, the Company closed twelve
stores, including three prior to its Chapter 11 filing and nine
subsequent to the filing. In January 1997, the Company closed an
additional store (note 4).
(C) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
(D) RESTRICTED CASH
Restricted cash represents funds received from asset sales and the
collection of franchisee receivables which are held in escrow by
Company counsel. Pursuant to an Order of the Bankruptcy Court on
February 12, 1997 (note 1), such funds were realized from escrow.
(Continued)
F-10
<PAGE>
<PAGE>
PUDGIE'S CHICKEN, INC.
AND SUBSIDIARIES
DEBTORS-IN-POSSESSION
Notes to Consolidated Financial Statements
(2), CONTINUED
(E) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market value and consist of food and paper products.
(F) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated on the
straight-line method over estimated useful lives of the assets.
Leasehold improvements are amortized over the lesser of the life of
the lease or five years. The estimated useful lives are as follows:
Furniture and fixtures 5 years
Restaurant equipment 8 years
Computer equipment and software 4-5 years
Vehicles 7 years
(G) INTANGIBLE ASSETS
Goodwill represents the excess of cost over fair value of net assets
acquired and is amortized on a straight-line basis over the expected
period to be benefited, thirty years.
The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating
cash flows (note 3).
The costs incurred to develop and register the Company's trademarks
have been capitalized and are being amortized on the straight-line
method over 40 years. Legal costs associated with incorporation were
capitalized and are being amortized over a 10 year period.
Amortization expense, excluding the impact of the write-off of
goodwill associated with the closing of restaurants (note 4) and a
charge associated with the impairment of goodwill (note 3), was
approximately $336,000.
(H) REVENUE RECOGNITION
Revenue from franchised restaurants is derived from the initial sale
of franchises for a fee of $30,000 for an individual restaurant, from
area development agreements for a predesignated number of restaurants
to be opened within a designated span of time at negotiated contract
prices and from royalty fees for franchising support and advertising
at 5% and 3%, respectively, of retail product sales. Revenue from the
sale of individual franchises is recognized at the time of
substantial performance of the obligations of the Company, as
described in note 7. Revenue from area development agreements is
recognized as each restaurant is opened and royalties are recorded on
the accrual basis.
(Continued)
F-11
<PAGE>
<PAGE>
PUDGIE'S CHICKEN, INC.
AND SUBSIDIARIES
DEBTORS-IN-POSSESSION
Notes to Consolidated Financial Statements
(2), CONTINUED
(H), CONTINUED
Revenue from Company-owned restaurants is recognized in the period
the related products are sold.
(I) PREOPENING COSTS
The Company expenses preopening costs as incurred.
(J) CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to credit
risk consist principally of franchisee receivables, which are not
collateralized. Approximately 83% of the Company's franchised
restaurants are in the same geographical area. Credit risk is
affected by conditions or occurrences within the economy and the
geographic area. The Company maintains reserves for potential credit
losses for trade accounts receivable and discontinues recording
revenue when amounts are deemed uncollectible based upon factors
surrounding the credit risk of specific customers, historical trends
and other information.
(K) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences and carryforwards are expected to
be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(L) NET LOSS PER COMMON SHARE
Net loss per common share is determined on the basis of weighted
average number of shares of common stock outstanding. For 1996, a
weighted average number of shares was not calculated for options,
warrants and convertible preferred stock outstanding due to their
anti-dilutive effect on the Company's net loss per share calculation.
(M) FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No.107, "Disclosure about
Fair Value of Financial Instruments" ("SFAS No.107"), requires the
Company to disclose estimated fair values for its financial
instruments. The Company has determined that cash, notes payable
which are included in liabilities subject to compromise (note 9) and
its preferred
(Continued)
F-12
<PAGE>
<PAGE>
PUDGIE'S CHICKEN, INC.
AND SUBSIDIARIES
DEBTORS-IN-POSSESSION
Notes to Consolidated Financial Statements
(2), CONTINUED
(M), CONTINUED
stock meet the definition of financial instruments. The carrying
amount of cash approximates its fair value because of the short-term
maturities of the investments. The fair value of the other financial
instruments depends upon the terms and conditions of a confirmed plan
of reorganization which will resolve certain uncertainties. These
uncertainties preclude the Company from determining the fair value of
these financial instruments during the pendency of its reorganization
proceedings.
(N) USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosures of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from these estimates.
(O) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED
OF
The Company adopted the provisions of SFAS No.121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, on January 1, 1996. This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs
to sell.
As a result of the Company's Chapter 11 filing, management of the
Company determined that the carrying value of intangible assets was
impaired and recorded a charge of $8,097,897 (note 3).
(P) STOCK-BASED COMPENSATION
The Company records compensation expense for stock options only if
the current market price of the underlying stock exceeds the exercise
price on the date the options are granted. On January 1, 1996, the
Company adopted Statement of Financial Accounting Standards No.123,
Accounting for Stock-Based Compensation ("Statement 123"). The
Company has elected not to implement the fair value based accounting
method for stock options, but has elected to disclose the proforma
net earnings and proforma earnings per share for stock option grants
made as if such method had been used to account for stock-based
compensation costs as described in Statement 123. As of December 31,
1996, the Company has not granted any stock options to employees.
(Continued)
F-13
<PAGE>
<PAGE>
PUDGIE'S CHICKEN, INC.
AND SUBSIDIARIES
DEBTORS-IN-POSSESSION
Notes to Consolidated Financial Statements
(Q) SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 140,870
=========
Income taxes $ 11,845
=========
In 1996, the Company charged $120,000 to accumulated deficit for
dividends and penalties associated with its $.01 par value series A
redeemable convertible preferred stock. Of this amount, $40,000 was
paid in common stock and $80,000 was recorded in preferred stock.
The Company acquired one franchised store (note 2(b)) and the
equipment of three additional franchised operations in 1996 in
exchange for the forgiveness of approximately $149,000 of accounts
receivable and the issuance of a note payable for approximately
$125,000. The Company received approximately $177,000 of equipment
and recorded approximately $97,000 of goodwill as a result of this
transaction.
Operating cash payments resulting from reorganization items:
U.S. Trustee fees paid $ 2,750
Chapter 11 filing fees paid 17,700
Professional fees paid for services rendered
in connection with the Chapter 11
proceedings 43,000
-------
Total reorganization payments $ 63,450
=======
(3) IMPAIRMENT OF LONG-LIVED ASSETS
As discussed in note 2 (o), the Company adopted SFAS No.121 as of January
1, 1996 for purposes for determining and measuring impairment of certain
long-lived assets to be held and used in the business. Assets are grouped
and evaluated for impairment at the lowest level for which there are
identifiable cash flows that are independent of the cash flows of other
groups of assets. The Company has identified the appropriate grouping of
assets to be individual Company-owned restaurants and the Corporate
franchising part of the business. The asset groups are deemed to be
impaired if a forecast of undiscounted future operating cash flows,
including disposal value, if any, is less than its carrying amount. The
loss is measured as the amount by which the carrying amount of the assets
exceed its fair value.
The Company recorded an impairment charge of $8,097,897 to fully write-off
its intangible assets.
(Continued)
F-14
<PAGE>
<PAGE>
PUDGIE'S CHICKEN, INC.
AND SUBSIDIARIES
DEBTORS-IN-POSSESSION
Notes to Consolidated Financial Statements
(4) STORE CLOSINGS
In fiscal 1996, the Company closed twelve stores, including three prior to
its Chapter 11 filing and nine subsequent to the filing. In January 1997,
the Company closed an additional store. On October 22, 1996, effective
November 14, 1996, the Bankruptcy Court approved an order authorizing the
rejection of the leases for the twelve stores closed by the Company.
Included in liabilities subject to compromise at December 31, 1996, is a
provision for $324,436, representing management's estimate of the lease
termination liability pursuant to Section 502 of the Bankruptcy Code (note
9).
Included in the accompanying 1996 consolidated statement of operations are
losses of $347,010 and $1,366,002 relating to the pre and post-petition
store closures, respectively, including the write-off of goodwill for
acquired stores and the above-mentioned lease termination liability.
(5) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1996:
Restaurant equipment $ 1,157,590
Furniture and fixtures 158,529
Computer equipment 129,282
Truck 7,690
Leasehold improvements 1,252,484
-----------
2,705,575
Less accumulated depreciation and
amortization 1,041,869
-----------
Property and equipment, net $ 1,663,706
===========
Depreciation and amortization expense on property and equipment amounted
to approximately $571,000 in 1996.
(6) INTANGIBLE ASSETS
Intangible assets consist of the following at December 31, 1996:
Goodwill $ 8,596,164
Restrictive covenants 30,000
Trademarks 61,000
Other 61,121
-----------
8,748,285
Less accumulated amortization 8,748,285
-----------
Intangible assets, net $ --
===========
(Continued)
F-15
<PAGE>
<PAGE>
PUDGIE'S CHICKEN, INC.
AND SUBSIDIARIES
DEBTORS-IN-POSSESSION
Notes to Consolidated Financial Statements
(7) DEFERRED FRANCHISE FEES
At December 31, 1996, four area development agreements were signed
however, the restaurants had not opened for business. Franchise fee
revenue related to franchise agreements is recognized when substantial
performance of all obligations and services as outlined in the franchise
agreements has occurred and ratably as restaurants are opened for area
development agreements. The obligations and duties of the Company pursuant
to the franchise agreement include approval of a restaurant location;
providing interior layout plans; providing training for the franchisee
prior to the restaurant opening; and having representatives available for
consultation. During 1996, two franchise restaurants were opened for
business and seven restaurants were closed due to failure to comply with
the provisions of the franchise agreement or failure to remit royalties.
During 1996, two area developers forfeited their development rights and
$200,000 of franchise fees previously paid to the Company were recognized
as revenue.
(8) FINANCING ARRANGEMENTS
(A) NOTES PAYABLE TO STOCKHOLDERS
In August 1995, the Company renegotiated a note payable to a
stockholder. The $3.6 million note required monthly payments of
interest at 3.5% above the prime rate as defined, was secured by
principally all of the Company's assets and matured in its entirety
in February 1997.
As indicated in footnote 1, the Company filed a Chapter 11 petition
on September 18, 1996 and discontinued accruing interest expense at
that time. On November 11, 1996, the noteholder commenced an
adversary proceeding against the Company.
On February 12, 1997, the Bankruptcy Court granted an Order which
provided the $3.6 million noteholder with replacement liens on
principally all of the Company's assets, subordinate only to
liabilities for debtor-in-possession financing, U.S. Trustees fees, a
supplier lien and professional fees not to exceed $375,000 in the
aggregate. The order allows the pre-petition claim of the noteholder
amounting to approximately $3,600,000 plus interest and releases cash
held in escrow by Company counsel of approximately $60,000. The Order
also provides that if a plan of reorganization is confirmed before
October 1, 1997, which plan provides for the payment of $1,000,000 to
the noteholder, subject to certain other conditions, the noteholder
will be deemed to have an allowed secured claim in the amount of
$1,000,000 and an allowed unsecured claim for the balance. The
noteholder would agree to vote in favor of the Company sponsored plan
of reorganization and upon the receipt of $1,000,000, would release
the security interest. If the $1,000,000 is not paid or if the plan
of reorganization is not approved by the stipulated dates, the
noteholder would not be bound by the foregoing terms.
At December 31, 1996, included in liabilities subject to compromise
is the aforementioned note payable and interest accrued through the
Chapter 11 filing date aggregating $177,649.
(Continued)
F-16
<PAGE>
<PAGE>
PUDGIE'S CHICKEN, INC.
AND SUBSIDIARIES
DEBTORS-IN-POSSESSION
Notes to Consolidated Financial Statements
(8), CONTINUED
(B) POST-PETITION FINANCING
On October 30, 1996, the Bankruptcy Court granted an Order allowing a
secured claim not to exceed $250,000 to a supplier pursuant to an
agreement dated as of October 1, 1996, under which the supplier would
provide the Company with a credit facility to purchase food and other
operating supplies.
On March 13, 1997, the Bankruptcy Court granted 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. Subsequently, the Company has borrowed $190,000 under this
facility.
The order amended the first priority supplier's lien to $150,000 and
the remaining balance would be pari-passu with the other secured
claims. The order also provides for the reimbursement to the supplier
of certain attorney fees and granted the supplier an administrative
priority claim of approximately $98,000 relating to the supplier's
reclamation claim.
In the event of confirmation of a Plan of reorganization, the lender
shall receive additional compensation (the "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 (1) shall be issued pursuant to a plan of
reorganization, (2) shall be delivered to Lender within 60 days after
confirmation of a plan of reorganization, (3) shall be exercisable
during a period of seven years, commencing six months after the date
of confirmation of a plan of reorganization and (4) shall have an
exercise price equal to 115% of fair market value, as defined.
(9) LIABILITIES SUBJECT TO COMPROMISE IN BANKRUPTCY REORGANIZATION
Liabilities subject to compromise consist of the following at December 31,
1996:
Note payable to stockholder $ 3,606,837
Arbitration award 1,707,404
Accounts payable and accrued
expenses 2,050,492
Sales tax payable 514,322
Interest payable 177,649
-----------
$ 8,056,704
===========
(Continued)
F-17
<PAGE>
<PAGE>
PUDGIE'S CHICKEN, INC.
AND SUBSIDIARIES
DEBTORS-IN-POSSESSION
Notes to Consolidated Financial Statements
(9), CONTINUED
The expiration date for filing creditor claims against the Company with
the Bankruptcy Court was January 31, 1997. Approximately $163,000,000 of
creditor claims have been filed with the Bankruptcy Court. The Company is
in the process of reviewing each proof of claim to reconcile the claimed
amount with the Company's books and records. Company manage-ment 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 (note 13). The Company's estimates of the allowed
claims as presented in the accompanying consoli-dated financial statements
are therefore subject to change based upon the outcome of the Chapter 11
proceedings. The additional liability or reduction of liabilities arising
from this reconciliation process, if any, is not subject to reasonable
estimation. As a result, no provision has been recorded for these possible
claims. The Company will recognize the additional liability or reduction,
if any, as the amounts become subject to reasonable estimation.
Included in liabilities subject to compromise is approximately $324,000 of
claims related to rejected leases (notes 1 and 4), representing
management's estimate of the Company's liability pursuant to Section 502
of the Bankruptcy Code. Also included in liabilities subject to compromise
at December 31, 1996 is approximately $225,000 relating to Company
guarantees of franchisees' financing obligations. Additionally, as
indicated in note 13, management has not established a provision for
settlement of outstanding litigation in liabilities subject to compromise
at December 31, 1996.
A plan of reorganization ultimately confirmed by the Bankruptcy Court may
materially change the amounts and terms of these prepetition liabilities.
(10) REORGANIZATION COSTS
The net expense incurred as a result of the Chapter 11 filings and
subsequent reorganization efforts has been segregated from ordinary
operations in the consolidated statement of operations for the year ended
December 31, 1996. Reorganization costs are comprised of the following:
Impairment of goodwill $ 8,097,897
Loss on closing of restaurants 1,366,002
Professional fees and other expenses
related to bankruptcy 443,325
-----------
$ 9,907,224
===========
Reorganization costs include expenses from closing of restaurants,
consolidation of operations, certain expenses incurred in the general
restructuring of business operations and the write-off of impaired
intangible assets (note 3).
(Continued)
F-18
<PAGE>
<PAGE>
PUDGIE'S CHICKEN, INC.
AND SUBSIDIARIES
DEBTORS-IN-POSSESSION
Notes to Consolidated Financial Statements
(11) CAPITAL STRUCTURE
(A) AUTHORIZATION OF COMMON AND PREFERRED STOCK
In May 1995, the Board of Directors and Stockholders authorized
amendments to the Certificate of Incorporation which provided for an
increase in the number of authorized shares of Common Stock from
125,000 to 10,000,000 and Preferred Stock from 50,000 to 250,000
including 10,000 shares of Redeemable Preferred Stock. On April 23,
1996, the Board of Directors and Stockholders authorized the issuance
of 550 shares of Redeemable Convertible Preferred Stock, Series A.
The Board of Directors also authorized Warrants to purchase up to
1,350,000 shares of Common Stock.
(B) REDEEMABLE CONVERTIBLE PREFERRED STOCK, SERIES A
In May 1996, the Company received $2,000,000, exclusive of expenses
of approxi-mately $360,000, from a private placement, which consists
of 200 shares of Redeemable Convertible Preferred Stock, Series A and
100,000 common stock purchase warrants. The preferred stock is
convertible into common stock at the option of the holder at a price
of the lower of $4.47 or 82% of the average closing price on the
trading day immediately preceding conversion and automatically
converts into shares of common stock on April 30, 1998. The preferred
stock has a redemption and liquidation value of $12,200 per share
plus unpaid dividends, as defined, or cash at the option of the
Company. The preferred stockholders also receive penalty shares since
a Registration Statement for the sale of common stock was not
registered by July 29, 1996. Through the Chapter 11 filing date,
approximately $60,000 of dividends and $20,000 of penalties were
accrued. Dividends and penalties have not been accrued since
September 18, 1996.
This class of preferred stock also contains a redemption 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 that
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. The redemption option was
triggered subsequent to September 18, 1996 and as a result of the
Company's bankruptcy filing, this provision has been stayed until a
plan of reorganization has been approved by the Bankruptcy Court.
(C) REDEEMABLE PREFERRED STOCK
In August 1995, in connection with the initial public offering of its
common stock, the Company issued 10,000 shares of Redeemable
Preferred Stock in partial satisfaction of its promissory note to the
founder. The Redeemable Preferred Stock ranks senior to all other
preferred stock of the Company in priority of dividends, right of
redemption and payment upon liquidation. The principal terms of the
Redeemable Preferred Stock are as follows:
(Continued)
F-19
<PAGE>
<PAGE>
PUDGIE'S CHICKEN, INC.
AND SUBSIDIARIES
DEBTORS-IN-POSSESSION
Notes to Consolidated Financial Statements
(11), CONTINUED
(C), CONTINUED
LIQUIDATION PREFERENCE
In the event of a liquidation of the Company, the holder of the
Redeemable Preferred Stock is entitled to receive $106.90 per
share, plus any dividends accrued and unpaid to date.
REDEMPTION
The Redeemable Preferred Stock is subject to redemption at any
time at the option of the Board at a redemption price of $106.90
per share, plus any declared, accrued and unpaid dividends.
The Redeemable Preferred Stock is subject to mandatory redemption
by the Company, at the redemption value plus cumulative unpaid
declared dividends, to the extent of the net proceeds of any sale
of Common Stock by the Company (after any required application of
such proceeds to the payment of outstanding indebtedness of the
Company for borrowed money).
DIVIDENDS
Dividends are payable when declared by the Company and then
accrue on the Redeemable Preferred Stock at an annual rate equal
to 150 basis points in excess of the rate on three year U.S.
Treasury obligations on the date of issuance. As of December 31,
1996, no dividends have been declared.
Pursuant to an agreement dated February 12, 1997, the preferred
stockholder amended the terms of the preferred stock so that the
stock is redeemable for the Company's $.01 par value common
stock, but is not, under any circumstances, redeemable for cash.
Additionally, pursuant to an agreement dated February 20, 1997,
the preferred stockholder irrevocably waived his right to sell or
otherwise transfer the preferred stock to another party unless
such party executes and delivers to the Company a confirmation
and agreement which binds the party to the terms of the
agreements dated February 12, 1997 and February 20, 1997.
(D) $4 CUMULATIVE PREFERRED STOCK
The principal terms of the $4 Cumulative Preferred Stock are as
follows:
LIQUIDATION PREFERENCE
In the event of a liquidation of the Company, the holders of the
Preferred Stock are entitled to receive a $100 per share
liquidation preference, plus accrued dividends.
(Continued)
F-20
<PAGE>
<PAGE>
PUDGIE'S CHICKEN, INC.
AND SUBSIDIARIES
DEBTORS-IN-POSSESSION
Notes to Consolidated Financial Statements
(11), CONTINUED
(D), CONTINUED
REDEMPTION
The Preferred Stock has no mandatory redemption but can be
redeemed by the Company at any time at a redemption price of $100
plus accrued dividends.
DIVIDENDS
The holders of the Preferred Stock are entitled to receive
dividends at the rate of $4 per annum only after the outstanding
Stockholders Notes are first satisfied in full and the Redeemable
Preferred Stock is fully redeemed with dividend accrued thereon.
As of December 31, 1996, no dividends have been declared.
(E) COMMON STOCK PURCHASE WARRANTS
In August 1995, the Company sold 1,150,000 common stock purchase
warrants ("the Warrants"). Each of the Warrants entitles the
registered holder to purchase one share of common stock at a price of
$5.50 per share at any time during the period September 6, 1996
through August 9, 2000. The Warrants are subject to redemption by the
Company at a redemption price of $.10 per Warrant commencing October
9, 1996 upon 30 days prior written notice to the Warrant holders,
provided the average closing bid quotation of the common stock as
reported on the NASDAQ Stock Market has been at least 150% of the
then current exercise price of the Warrants (initially $8.25 per
share) for a period of 20 consecutive trading day ending on the third
day prior to the date on which the Company gives notice of
redemption.
Pursuant to a January 1995 private placement of common stock, the
Company issued 111,522 common stock purchase warrants at an exercise
price of $5.50.
In August 1995, the Company issued 50,000 Common Stock Purchase
Warrants to a stockholder as consideration for the renegotiation of a
loan. They are exercisable at $6.00.
Additionally, in August 1995, the Company granted 200,000 common
stock purchase warrants exercisable at $8.25 per share and 100,000
common stock purchase warrants exercisable at a $5.66 per share to
its underwriter in connection with its initial public offering, and
20,000 common stock purchase warrants exercisable at $8.25 per share
relating to a financing.
(F) RESTRICTED STOCK
In May 1995, the Board of Directors approved the adoption of a
Restricted Stock Plan pursuant to which a maximum of 72,115 shares of
common stock may by awarded to officers of the Company. In May 1995,
these shares were awarded to four executive officers of the Company.
The shares awarded to three of the officers have been forfeited.
(Continued)
F-21
<PAGE>
<PAGE>
PUDGIE'S CHICKEN, INC.
AND SUBSIDIARIES
DEBTORS-IN-POSSESSION
Notes to Consolidated Financial Statements
(11), CONTINUED
(G) STOCK OPTION PLAN
The Company has adopted the 1995 Stock Option Plan ("the Option
Plan"), pursuant to which options to acquire an aggregate of 250,000
shares of Common Stock may be granted to employees, officers or
directors of, or consultants to, the Company. The Option Plan
authorizes the Board to issue incentive stock options ("ISOs"), as
defined in Section 422A(b) of the Internal Revenue Code (the "Code"),
and stock options that do not conform to the requirements of that
Code section ("Non-ISOs"). The Board has discretionary authority to
determine the types of stock options to be granted, the persons among
those eligible to whom options may be granted, the number of shares
to be subject to such options and the terms of the stock option
agreements. Officers, directors and consultants who are not also
employees of the Company may only be granted Non-ISOs. The exercise
price of an ISO will be equal to the fair market value of the
underlying shares of stock as of the date of the grant. The exercise
price of a Non-ISO will be determined by the Board at the time the
option is granted. The exercise price may be paid in cash, certified
or bank check or by promissory note on terms prescribed by the Board.
Notwithstanding the foregoing, no option may be issued pursuant to
the Option Plan with an exercise price less than either (i) the
initial public offering price per share of Common Stock in this
Offering or (ii) 85% of the fair market value per share on the date
of grant.
As of December 31, 1996, no options have been granted under the terms
of the Plan.
(12) INCOME TAXES
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 1996 is presented
below:
Deferred tax assets:
Accounts receivable, principally due to
allowance for doubtful accounts $ 337,102
Property and equipment, principally due to
differences in depreciation 12,141
Deferred Rent 71,911
Liabilities subject to compromise 1,689,170
Net operating loss carryforwards 4,549,852
-----------
Total deferred tax assets 6,630,176
Less valuation allowance (3,640,183)
----------
Net deferred tax assets 2,989,993
Deferred tax liability:
Intangible assets, principally due to impairment
charge 2,989,993
-----------
Net deferred tax assets $ --
===========
(Continued)
F-22
<PAGE>
<PAGE>
PUDGIE'S CHICKEN, INC.
AND SUBSIDIARIES
DEBTORS-IN-POSSESSION
Notes to Consolidated Financial Statements
(12), CONTINUED
The valuation allowance for deferred tax assets as of January 1, 1996 was
$3,245,510. The change in the total valuation allowance for the year ended
December 31, 1996 was $394,673. In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. In order to
fully realize the deferred tax asset, the Company will need to generate
future taxable income of approximately $17,448,000. At December 31, 1996,
the Company has net operating loss carryforwards for Federal income tax
purposes of approximately $11,986,000 (the NOL carryforwards), which
expire in varying amounts through 2011. Losses for income tax purposes for
the year ended December 31, 1996 was approximately ($3,982,000). Based
upon the Company's Chapter 11 filing and losses incurred to date,
management believes that the value of the deferred tax asset is impaired
and has fully reserved the deferred tax asset.
In accordance with Section 382 of the Internal Revenue Code of 1986, as
amended, as it applies to the NOL carryforwards, a change in more than 50%
in the beneficial ownership of the Company within a three-year period (an
"Ownership Change") will place an annual limitation on the Company's
ability to utilize its existing NOL carryforwards to offset United States
Federal taxable income in future years. Generally, such limitation would
be equal to the value of the Company as of the date of the Ownership
Change multiplied by the Federal long-term tax exempt interest rate, as
published by the Internal Revenue Service. The Company had significant
changes in ownership in 1993 and 1995 that would cause the annual
limitations as described above to apply. Further limitations on the NOL
carryforward may occur if further ownership changes as contemplated in a
plan of reorganization are confirmed by the Bankruptcy Court. The Company
has not determined what the maximum annual amount of taxable income is
that can be reduced by the NOL carryforwards.
(13) COMMITMENTS AND CONTINGENCIES
(A) COMMITMENTS
The Company leases certain office and restaurant facilities under
noncancelable operating lease agreements. Certain leases contain
contingent rental provisions based upon a percent of gross sales and
or provide for scheduled rent escalations during the initial terms of
such leases. Included in "deferred rent" in the accompanying
consolidated balance sheet at December 31, 1996 are accruals related
to such rent deferrals of approximately $189,000. For financial
reporting purposes, such leases are accounted for on a straight-line
basis. Future minimum annual lease commitments under these leases,
excluding leases rejected by the Company pursuant to an order of the
Bankruptcy Court effective November 14, 1996 (note 4), are as
follows:
(Continued)
F-23
<PAGE>
<PAGE>
PUDGIE'S CHICKEN, INC.
AND SUBSIDIARIES
DEBTORS-IN-POSSESSION
Notes to Consolidated Financial Statements
(13), CONTINUED
(A), CONTINUED
1997 $ 670,297
1998 706,188
1999 626,139
2000 298,600
2001 207,835
2002 and thereafter 789,012
----------
$ 3,298,071
===========
Contingent rental payments on building leases are based upon the
percentage of gross sales on the individual restaurants that exceed
predetermined levels. The percentage of gross sales to be paid and
related gross sales level vary by unit. No contingent rentals
expenses were incurred in 1996.
Rent expense was $1,509,186 for 1996.
The Company has a financing agreement with a financial institution
which provides a $15,000,000 credit facility available to the
Company's franchisees which meet both the Company's and the financial
institution's credit requirements. In the event that a franchisee is
in default under the Agreement, the Company is required, for a period
of 90 days, to use its best efforts to either sell the restaurant or
the equipment of the defaulted franchisee to a successor franchisee
who agrees to assume the obligations of the defaulted franchisee. If
a successor franchisee is not found within 90 days, the Company must
pay all accrued interest then due by the defaulted franchisee and
must continue to seek a successor franchisee for an additional 180
days. If at the end of such period a successor franchisee has not
been located, the Company must either assume all of the defaulted
franchisee's obligations under the Agreement or pay the unamortized
principal balance owed by the defaulted franchisee plus certain other
costs; however, the Company's liability for such a pay-off is limited
to $1,500,000 or 30% of the total amount funded under the Agreement,
whichever is greater. Pursuant to this agreement, the Company is
obligated to the financial institution for the outstanding balances
of two closed franchised locations, aggregating approximately
$225,000. At December 31, 1996, such amount has been included in
liabilities subject to compromise. In addition, the Company is
contingently liable for the remaining balances of two franchise
locations of approximately $187,000. As of December 31, 1996,
approximately $14.6 million of this facility remained available.
The Company entered into employment agreements effective June 1, 1995
with the President and Chief Executive Officer and the Chief
Financial Officer which expire on May 31, 2000 and May 31, 1998,
respectively. The employment agreements provide for aggregate annual
base salaries of approximately $327,000, certain benefits and annual
incentive bonuses based on a formula tied to the Company's
performance.
(Continued)
F-24
<PAGE>
<PAGE>
PUDGIE'S CHICKEN, INC.
AND SUBSIDIARIES
DEBTORS-IN-POSSESSION
Notes to Consolidated Financial Statements
(13), CONTINUED
(B) CONTINGENCIES
On June 30, 1995, an area developer of the Company's franchised
restaurants, commenced an action against the Company alleging common
law fraud and violations of the Franchise Sales Act of the State of
New York regarding its area development agreement with the Company.
The action sought damages of an unspecified amount not less than
$50,000 and punitive damages of an unspecified amount. On September
12, 1996, a panel of the American Arbitration Association ruled in
favor of the area developer, finding that the Company has violated
the Franchise Sales Act of the State of New York and awarded the
developer $1,375,888 in damages and $331,516 in attorney fees. A
motion to confirm this award has 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 (note 9) by the
Company. The area developer and its principal have asserted
additional claims aggregating approximately $10,500,000 in the
Company's Chapter 11 case.
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 on filing 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 in 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 of opening. The compliant
alleges that the Company is responsible for the restaurant's failure.
On November 19, 1996, a secured creditor of the Company who was owed
an approximate principal amount of $3,600,000 commenced an adversary
proceeding in
(Continued)
F-25
<PAGE>
<PAGE>
PUDGIE'S CHICKEN, INC.
AND SUBSIDIARIES
DEBTORS-IN-POSSESSION
Notes to Consolidated Financial Statements
(13), CONTINUED
(B), CONTINUED
the Bankruptcy Court which sought to determine the nature, extent and
validity of the creditor's claims against the Company and sought
injunctive relief requiring the Company to continue to escrow certain
of its royalty fees. Subsequent to December 31, 1996 the proceeding
was settled (notes 1 and 8).
The Company is also a party to various other lawsuits and claims
arising in the ordinary course of business.
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 readjustment
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.
(14) FOURTH QUARTER ADJUSTMENT
During the fourth quarter of 1996, the Company recorded an impairment
adjustment to intangible assets of approximately $8,098,000 due to the
diminution of the carrying value of this asset. The Company also recorded
additional accrued expenses of $765,700 in the fourth quarter of 1996.
F-26
<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Pudgie's Chicken, Inc.
In our opinion, the accompanying consolidated statements of operations, of
changes in stockholders' equity and of cash flows present fairly, in all
material respects, the results of operations, changes in stockholders' equity
and cash flows of Pudgie's Chicken, Inc. and subsidiaries (the "Company") for
the year ended December 31, 1995, in conformity with generally accepted
accounting principles. These statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these statements
based on our audit. We conducted our audit of these statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statements, assessing the
accounting principles used and significant estimates made by management and
evaluating the overall statement presentation. We believe that our audit
provides a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Jericho, New York
March 11, 1996
F-27
<PAGE>
<PAGE>
Pudgie's Chicken Inc.
and Subsidiaries
Consolidated Statement of Operations
- --------------------------------------------------------------------------------
For The
Year Ended
December 31, 1995
REVENUE
Restaurant sales $ 9,366,689
Franchise and
advertising royalties 1,289,025
Franchise fees 410,000
Interest income and
other revenue 134,054
-----------
11,199,768
-----------
COSTS AND EXPENSES
Restaurant cost of sales 3,730,273
Restaurant operating expenses 4,914,788
Franchising costs 158,155
General and administrative 3,680,481
Research and development 20,000
Advertising expenses 1,202,714
Depreciation and amortization 886,536
Interest expense 771,438
-----------
15,364,385
-----------
NET LOSS $ (4,164,617)
-----------
NET LOSS PER COMMON SHARE $ (1.44)
-----------
SHARES USED IN COMPUTATION 2,892,182
-----------
The accompanying notes are an integral part of these consolidated statements.
F-28
<PAGE>
<PAGE>
Pudgie's Chicken, Inc.
and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For The Year Ended December 31, 1995
Preferred Stock Common Stock Additional Total
Number Of Number Of Paid-in- Deferred Accumulated Stockholders
Shares Amount Shares Amount Capital Compensation Deficit Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 50,000 $ 500 1,730,803 $17,308 $ 4,913,803 $ - $(4,534,618) $ 396,993
Private Placement of Common Stock - - 98,383 984 494,832 - - 495,816
Sale of Common Stock, net of issuance
costs of approximately $2.2 million - - 2,000,000 20,000 7,779,133 - - 7,799,133
Issuance of Common Stock as fee for loan - - 8,199 82 40,913 - - 40,995
Issuance of Common Stock in partial
satisfaction of promissory note and
for additional contingent
consideration for sale of Company - - 615,500 6,155 2,546,345 - - 2,552,500
Sale of Common Stock Purchase Warrants - - - - 115,000 - - 115,000
Deferred Compensation arising from
award of Restricted Common Stock
to employees - - 54,087 541 269,894 (270,435) - -
Amortization of deferred
compensation relating to
restricted stock - - - - - 45,073 - 45,073
Net loss - - - - - - (4,164,617) (4,164,617)
------ ----- --------- ------- ----------- ---------- ------------ ------------
Balance at December 31, 1995 50,000 $ 500 4,506,972 $45,070 $16,159,920 $(225,362) $(8,699,235) $ 7,280,893
====== ===== ========= ======= =========== ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-29
<PAGE>
<PAGE>
Pudgie's Chicken, Inc.
and Subsidiaries
Consolidated Statement of Cash Flows
- --------------------------------------------------------------------------------
For The Year Ended
December 31, 1995
Cash flows provided by (used in) operating activities
Net loss $(4,164,617)
Adjustments to reconcile net income
to net cash provided by operations
Interest paid in stock 197,385
Loan fee paid in stock 40,995
Deferred compensation expense 45,073
Depreciation and amortization 886,536
Bad debt expense 268,811
Changes in operating assets and liabilities
(Increase) decrease in operating assets
Franchise and advertising
royalties receivable (221,769)
Inventories (54,721)
Other assets (171,442)
Increase (decrease) in operating liabilities
Accounts payable and
accrued expenses (713,923)
Deferred franchise fees (530,000)
Sales tax payable 31,088
Other liabilities 93,145
-----------
Net Cash Used In
Operating Activities (4,293,439)
-----------
Cash flows used in investing activities
Purchase of property and equipment (516,532)
Acquisition of stores (1,102,068)
-----------
Net Cash Used In
Investing Activities (1,618,600)
-----------
Cash flows provided by
financing activities
Additions to notes payable 1,436,312
Repayment of borrowings (3,276,642)
Proceeds from issuance of
Common and Preferred Stock, net of issuance costs 8,409,949
-----------
Net Cash Provided By
Financing Activities 6,569,619
-----------
Net Increase (Decrease) In Cash 657,580
Cash At Beginning Of Year 165,860
-----------
Cash At End Of Year $ 823,440
===========
The accompanying notes are an integral part of these consolidated statements.
F-30
<PAGE>
<PAGE>
Pudgie's Chicken, Inc.
and Subsidiaries
Consolidated Statement of Cash Flows (continued)
- --------------------------------------------------------------------------------
For The
Year Ended
December 31, 1995
Supplemental disclosures of
cash flow information:
Cash paid during the year for:
Interest $ 494,402
Taxes $ 22,452
Supplemental schedule of noncash activities:
In connection with the acquisition of six franchised restaurants during 1995,
the Company forgave amounts due from franchisees totaling $46,632 in exchange
for restaurant equipment, leasehold improvements and intangibles.
In August 1995, in connection with the completion of an initial public offering
of its common stock, the Company repaid in full a promissory note to Pudgie's
founder, the outstanding balance of which was then $4,669,000, through (i)
payment of $1.5 million, (ii) issuance of 615,500 shares of Common Stock and
(iii) issuance of 10,000 shares of Redeemable Preferred Stock.
In April 1995, the Company issued 8,199 shares of Common Stock as a fee for a
loan.
F-31
<PAGE>
<PAGE>
Pudgie's Chicken, Inc.
and Subsidiaries
Notes to Consolidated Statements
- --------------------------------------------------------------------------------
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Pudgie's Chicken, Inc. was incorporated in Delaware on January 28, 1993
(Pudgie's Chicken Inc. and Subsidiaries are herein defined as the
"Company"). The Company operates and franchises food service restaurants.
In exchange for franchise fees and royalties, the Company provides
franchisees assistance with site approval, interior layout plans,
training and operations advice. The Company also provides marketing and
advertising support.
OPERATION OF RESTAURANTS
During 1995, the Company acquired the net assets of six franchised
restaurants in exchange for cash of $878,000 and forgiveness of $46,632
due the Company. The excess of the aggregate purchase price over the fair
value of net assets acquired of $648,546 was recorded as goodwill and is
being amortized over 30 years. At December 31, 1995, there were 62
Pudgie's restaurants in operation, consisting of 26 Company-owned and 36
franchised restaurants in nine states.
During 1995, the Company opened three Company-owned restaurants in
locations previously operating as franchised restaurants.
Revenues and expenses related to the operation of these restaurants from
the dates of acquisition are included in food sales and restaurant
operating costs, respectively.
USE OF ESTIMATES IN FINANCIAL STATEMENT PREPARATION
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
BASIS OF PRESENTATION
The consolidated statements include the accounts of the Company and its
subsidiaries. All significant intercompany transactions have been
eliminated in consolidation.
INVENTORIES
Inventories included in restaurant cost of sales are stated at the lower
of cost (first-in, first-out) or market and consist of food and paper
products.
F-32
<PAGE>
<PAGE>
Pudgie's Chicken, Inc.
and Subsidiaries
Notes to Consolidated Statements
- --------------------------------------------------------------------------------
REVENUE RECOGNITION
Revenue from franchised restaurants is derived from the initial sale of
franchises for a fee of $30,000 for an individual restaurant, from area
development agreements for a predesignated number of restaurants to be
opened within a designated span of time at negotiated contract prices and
from royalty fees for franchising support and advertising at 5% and 3%,
respectively, of retail product sales. Revenue from the sale of
individual franchises is recognized at the time substantial performance
of the obligations of the Company, as described in Note 2, has occurred.
Revenue from area development agreements is recognized ratably as each
restaurant is opened. Franchise and advertising royalties are recorded as
earned and include approximately $146,000 in finance charges for 1995.
Revenue from Company-owned restaurants is recognized in the period the
related products are sold.
DEPRECIATION AND AMORTIZATION
Depreciation is provided on the straight line method over estimated
useful lives of the assets as follows: furniture and fixtures, 5 years;
restaurant equipment, 8 years; computer equipment and software, 4-5
years; and trucks, 7 years. Leasehold improvements are amortized over the
lesser of the term of the lease or 5 years.
INTANGIBLE ASSETS
The costs incurred to develop and register the Company's trademarks have
been capitalized and are being amortized on the straight line method over
40 years. Legal costs associated with incorporation of Pudgie's were
capitalized and are being amortized over 10 years.
Goodwill represents the excess of cost over fair value of net assets
acquired and is being amortized over 30 years using the straight line
method. Periodically, the Company reviews the recoverability of goodwill
based on estimated undiscounted future cash flows from operating
activities compared with the carrying value of goodwill. Should the
aggregate future cash flows be less than the carrying value, a write down
would be required, measured by the difference between the undiscounted
cash flows and the carrying value of goodwill. At December 31, 1995, no
impairment of such assets was indicated.
PREOPENING COSTS
The Company expenses preopening costs as incurred.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to credit
risk consist principally of trade receivables. Approximately 75% of the
Company's franchised restaurants are in the same geographical area.
Receivables from franchisees are not collateralized. Credit risk is
affected by conditions or occurrences within the economy and the
geographic area. The Company provides reserves for potential credit
losses for trade accounts receivable and discontinues recording revenue
when amounts are deemed uncollectible based upon factors surrounding the
credit risk of specific customers, historical
F-33
<PAGE>
<PAGE>
Pudgie's Chicken, Inc.
and Subsidiaries
Notes to Consolidated Statements
- --------------------------------------------------------------------------------
trends and other information. Such losses have historically been within
management's expectations.
NET LOSS PER COMMON SHARE
Net loss per common share is determined on the basis of weighted average
number of shares of Common Stock outstanding during the year. The
weighted average number of shares outstanding during the year has been
retroactively adjusted using the modified treasury stock method to
reflect common stock that was issued within a one year period prior to
the initial public offering at a price below the proposed initial public
offering price.
STOCK SPLIT
The Company completed an initial public offering of common stock in
August 1995. The Company was recapitalized to provide for a distribution
of shares to effect the equivalent of a 16.39717 for one stock split of
all common stock at a par value of $.01, which became effective on August
15, 1995. All share and per share data have been restated to reflect the
stock split.
ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standard Board Issued Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of" ("SFAS
121"). The Company will adopt SFAS 121 in 1996 and believes that such
adoption will not have a material effect on the financial position or
results of operations of the Company.
In October 1995, the Financial Accounting Standard Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). The Company will adopt the disclosure method
permitted by SFAS 123 in 1996.
2. DEFERRED FRANCHISE FEES
At December 31, 1995, four area development agreements were signed;
however, the restaurants had not opened for business. Franchise fee
revenue related to franchise agreements is recognized when substantial
performance of all obligations and services as outlined in the franchise
agreements has occurred and ratably as restaurants are opened for area
development agreements. The obligations and duties of the Company
pursuant to the franchise agreement include: approval of a restaurant
location; providing interior layout plans; providing training for the
franchisee prior to the restaurant opening; approval of the opening of
the restaurant for business; assisting in restaurant opening; and having
representatives available for consultation. During 1995, two franchise
restaurants were opened for business and seven restaurants were closed
due to failure to comply with the provisions of the franchise agreement
or failure to remit royalties. During 1995, two area developers forfeited
their development rights and $350,000 of franchise fees previously paid
to the Company were recognized as revenue.
F-34
<PAGE>
<PAGE>
Pudgie's Chicken, Inc.
and Subsidiaries
Notes to Consolidated Statements
- --------------------------------------------------------------------------------
3. NOTES PAYABLE
In August 1995, the Company renegotiated a Stockholder Note in the amount
of $3,606,837 which bears interest at the prime rate plus 3.5%,
calculated on the first day of each month. The note is due in February
1997. Interest expense related to this loan was approximately $467,000
for 1995.
4. REDEEMABLE PREFERRED STOCK
In August 1995, in connection with the initial public offering of its
common stock, the Company issued 10,000 shares of Redeemable Preferred
Stock in partial satisfaction of its promissory note to the founder. The
Redeemable Preferred Stock ranks senior to all other preferred stock of
the Company in priority of dividends, right of redemption and payment
upon liquidation. The principal terms of the Redeemable Preferred Stock
are as follows:
LIQUIDATION PREFERENCE
In the event of a liquidation of the Company, the holder of the
Redeemable Preferred Stock is entitled to receive $106.90 per share,
plus any dividends accrued and unpaid to date.
REDEMPTION
The Redeemable Preferred Stock is subject to redemption at any time
at the option of the Board at a redemption price of $106.90 plus any
declared, accrued and unpaid dividends.
The Redeemable Preferred Stock is subject to mandatory redemption by
the Company, at the redemption value plus cumulative unpaid declared
dividends, to the extent of the net proceeds of any sale of Common
Stock by the Company (after any required application of such
proceeds to the payment of outstanding indebtedness of the Company
for borrowed money).
DIVIDENDS
Dividends are payable when declared by the Company and then accrue
on the Redeemable Preferred Stock at an annual rate equal to 150
basis points in excess of the rate on three year U.S. Treasury
obligations on the date of issuance.
5. STOCKHOLDERS' EQUITY
AUTHORIZATIONS OF COMMON AND PREFERRED STOCK
In May 1995, the Board of Directors and Stockholders authorized
amendments to the Certificate of Incorporation which provided for an
increase in the number of authorized shares of Common Stock from 125,000
to 10,000,000 and Preferred Stock from 50,000 to 250,000 including 10,000
shares of Redeemable Preferred Stock. The Board of Directors also
authorized Warrants to purchase up to 1,350,000 shares of Common Stock.
F-35
<PAGE>
<PAGE>
Pudgie's Chicken, Inc.
and Subsidiaries
Notes to Consolidated Statements
- --------------------------------------------------------------------------------
INITIAL PUBLIC OFFERING
In August 1995, the Company completed an initial public offering ("IPO")
of 2,000,000 shares of Common Stock and 1,150,000 Common Stock Purchase
Warrants for a total purchase price of $10,115,000. Costs related to the
IPO were approximately $2,200,000, which have been accounted for as a
reduction of the related proceeds.
SALE OF COMMON AND PREFERRED STOCK
In January 1995, the Company raised approximately $500,000 of capital
through a private sale of 98,383 shares of Common Stock. The holders of
the stock received 111,522 warrants to purchase the Company's Common
Stock at an exercise price of $5.50.
ISSUANCE OF COMMON STOCK
In April 1995, the Company issued 8,199 shares of Common Stock as a fee
for a loan. The fair value of the stock of $40,995 was accounted for as a
general and administrative expense during 1995.
In August 1995, in connection with the IPO, the Company issued 525,000
and 90,500 shares of Common Stock to the Company's former owner as
partial satisfaction of a promissory note and as additional contingent
consideration, respectively.
PREFERRED STOCK
The principal terms of the Preferred Stock are as follows:
LIQUIDATION PREFERENCE
In the event of a liquidation of the Company, the holders of the
Preferred Stock are entitled to receive a $100 per share liquidation
preference.
REDEMPTION
The Preferred Stock has no mandatory redemption but can be redeemed
by the Company at any time at a redemption price of $100 plus
accrued dividends.
DIVIDENDS
The holders of the Preferred Stock are entitled to receive dividends
only after the outstanding Stockholders Notes are first satisfied in
full and the Redeemable Preferred Stock is fully redeemed with
dividends accrued thereon.
COMMON STOCK PURCHASE WARRANTS
In August 1995, the Company sold 1,150,000 Common Stock Purchase
Warrants. Each of the Warrants entitles the registered holder to purchase
one share of Common Stock at a price of $5.50 per share at any time
during the period September 6, 1996 through August 9, 2000. The Warrants
are subject to redemption by the Company at a redemption price of $.10
per Warrant commencing October 9, 1996 upon 30 days prior written notice
to the Warrant holders, provided the average closing bid quotation of the
Common Stock as
F-36
<PAGE>
<PAGE>
Pudgie's Chicken, Inc.
and Subsidiaries
Notes to Consolidated Statements
- --------------------------------------------------------------------------------
reported on the Nasdaq Stock Market has been at least 150% of the then
current exercise price of the Warrants (initially $8.25 per share) for a
period of 20 consecutive trading days ending on the third day prior to
the date on which the Company gives notice of redemption.
In August 1995, the Company issued 50,000 Common Stock Purchase Warrants
to a Stockholder as consideration for the renegotiation of a loan. They
are exercisable at $6.00.
RESTRICTED STOCK
In May 1995, the Board of Directors approved the adoption of a Restricted
Stock Plan pursuant to which a maximum of 72,115 shares of common stock
may be awarded to officers the Company. In May 1995, these shares were
awarded to four executive officers of the Company. The shares awarded to
one such officer have been forfeited and, as a result, 18,028 shares
remain available for award under the Restricted Stock Plan. In connection
with these awards, the Company recorded approximately $270,000 of
deferred compensation expense which approximated fair value of these
shares and which is being amortized over the vesting period of four
years.
In May 1995, the Board of Directors and Stockholders approved the
adoption of a stock option plan which permits the issuance of up to
250,000 shares of Common Stock to employees, officers, directors and
consultants of the Company. No options have been granted.
6. INCOME TAXES
At December 31, 1995, the Company had net operating loss carry forwards
for tax purposes of approximately $8,000,000 which expire in 2008 and
2009.
The Company had significant changes in its ownership during 1995 and
1993, which resulted in a statutory annual limitation on utilization of
net operating loss carryforwards pursuant to the change in ownership
rules enacted under the Tax Reform Act of 1986. Any additional changes in
ownership may result in further limitations of the loss carryforwards.
7. COMMITMENTS AND CONTINGENCIES
The Company is obligated under operating leases for office and restaurant
space. At December 31, 1995, the Company had minimum annual lease
obligations under these leases as follows:
1996 $1,208,437
1997 1,214,105
1998 1,240,640
1999 1,200,563
2000 and thereafter 3,369,048
----------
$8,232,793
==========
F-37
<PAGE>
<PAGE>
Pudgie's Chicken, Inc.
and Subsidiaries
Notes to Consolidated Statements
- --------------------------------------------------------------------------------
Rent expense was $1,057,620 for 1995.
On June 30, 1995, 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. The
Company has interposed federal counterclaims against the developer for
its fraudulent misrepresentations which induced the Company to enter into
development agreements. The Company also instituted a separate federal
action in August 1995 for wrongful conduct of the developer's company.
The Company believes that is has meritorious defenses to the action which
has been stayed pending arbitration and expects to succeed on its claim
for fraudulent inducement to contract. Although a range of possible loss
cannot be reasonably estimated at this time, the Company believes that
the ultimate resolution of this matter will not have a material adverse
effect on its financial position, results of operations or liquidity.
The Company is subject to various other legal proceedings and claims
which arose in the ordinary course of its business. In the opinion of
management, the amount of ultimate liability, if any, which may arise as
the result of these proceedings will not materially affect the Company's
financial position or results of operations.
The Company entered into employment agreements effective June 1, 1995
with the President and Chief Executive Officer and the Chief Financial
Officer which expire on May 31, 2000 and May 31, 1998, respectively. The
employment agreements provide for a base salary, certain benefits and an
annual bonus under specific conditions.
STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed by...."r"
F-38
<PAGE>
<PAGE>
EXHIBIT INDEX
Exhibit Number Description Page
- -------------- ----------- ----
27 Financial Data Schedule 66
----
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 334,545
<SECURITIES> 0
<RECEIVABLES> 129,908
<ALLOWANCES> (888,000)
<INVENTORY> 97,060
<CURRENT-ASSETS> 561,513
<PP&E> 2,705,575
<DEPRECIATION> (1,041,869)
<TOTAL-ASSETS> 2,389,394
<CURRENT-LIABILITIES> 1,531,167
<BONDS> 0
3,047,770
500
<COMMON> 44,884
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,389,394
<SALES> 10,069,748
<TOTAL-REVENUES> 11,404,006
<CGS> 9,789,449
<TOTAL-COSTS> 18,697,189
<OTHER-EXPENSES> 320,543
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 320,543
<INCOME-PRETAX> (17,200,407)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,200,407)
<EPS-PRIMARY> 3.83
<EPS-DILUTED> 0
</TABLE>
