<PAGE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to __________________________
Commission file number 1-13840
PUDGIE'S CHICKEN, INC.
(Exact name of small business issuer as specified in its charter)
<TABLE>
<S> <C>
Delaware 31-1369735
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
</TABLE>
333 Earle Ovington Boulevard, Suite 604, Uniondale, New York 11553
(Address of principal executive offices) (zip code)
(516) 222-8833
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of November 13, 1997, the registrant had 4,488,385 shares of its Common
Stock, $.01 par value, issued and outstanding.
Page 1 of 19
The Exhibit Index is on Page 18
<PAGE>
<PAGE>
PUDGIE'S CHICKEN, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C> <C>
Item 1 - Financial Statements (unaudited)
Consolidated Balance Sheets as of September 30, 1997
and December 31, 1996......................................................... 3
Consolidated Statements of Income for the three and the nine months ended
September 30, 1997 and September 30, 1996..................................... 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1997 and September 30, 1996............................... 5
Notes to Consolidated Financial Statements.................................... 6
Item 2 - Management's Discussion and Analysis or Plan of Operation.................... 11
PART II. OTHER INFORMATION
Item 5 - Other Information............................................................ 16
Item 6 - Exhibits and Reports on Form 8-K............................................. 16
Signature Page ....................................................................... 17
Exhibit Index......................................................................... 18
</TABLE>
2
<PAGE>
<PAGE>
PUDGIE'S CHICKEN, INC. AND SUBSIDIARIES
DEBTORS-IN-POSSESSION
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash $272,180 42,310
Restricted cash 62,365 116,000
Franchise and advertising royalties receivable, net 129,908 117,740
Inventory 97,060 70,936
------------- -------------
Total current assets 561,513 346,986
Property and equipment, net 1,663,706 1,277,929
Other assets 164,175 171,220
------------- -------------
Total assets $2,389,394 1,796,135
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities not subject to compromise
Accounts payable and accrued expenses 536,106 1,003,290
Note payable --- 250,000
Unsecured notes payable - administrative claim --- 225,000
Deferred franchise fees 297,500 272,500
Accrued Chapter 11 fees 344,971 743,044
Deferred rent 189,440 168,460
------------- -------------
Total current liabilities 1,368,017 2,662,294
Liabilities subject to compromise 8,056,704 8,056,704
------------- -------------
Total liabilities 9,424,721 10,718,998
------------- -------------
Redeemable Preferred Stock; $.01 par value;
10,000 shares authorized, issued and outstanding
(redemption and liquidation value of $1,069,000) 1,069,000 1,069,000
Redeemable Convertible Preferred Stock, Series A $.01 par value;
550 shares authorized, 200 shares issued and outstanding
(redemption value of $2,520,000) 1,978,770 1,978,770
Stockholders' equity:
Preferred stock, 250,000 shares authorized (including
10,000 shares of Redeemable Preferred Stock): $4 Cumulative
Preferred Stock $.01 par value, 50,000 shares issued and outstanding
(liquidation value $500,000) 500 500
Common stock, $.01 par value, 10,000,000 shares authorized;
4,488,385 shares issued and outstanding 44,884 44,884
Additional paid-in capital 15,781,541 15,737,401
Accumulated deficit (25,856,492) (27,753,418)
Deferred compensation (53,530) ---
------------- -------------
Total stockholders' deficit (10,083,097) (11,970,633)
------------- -------------
Total liabilities and stockholders' deficit $2,389,394 1,796,135
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
(3)
<PAGE>
<PAGE>
PUDGIE'S CHICKEN, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(UNAUDITED) (UNAUDITED)
1996 1997 1996 1997
<S> <C> <C> <C> <C>
REVENUE
Restaurant sales $2,949,955 $1,403,002 $8,133,105 $4,513,133
Franchise and advertising royalties 245,275 172,375 729,072 587,841
Franchise fees --- 10,000 255,000 25,000
Interest income and other revenue 28,218 46,439 71,347 87,408
-------------- ------------ ------------- -------------
3,223,448 1,631,816 9,188,524 5,213,382
-------------- ------------ ------------- -------------
COSTS AND EXPENSES
Restaurant cost of sales 1,202,018 538,384 3,191,067 1,751,326
Restaurant operating expenses 1,611,069 797,080 4,444,703 2,388,769
Franchising costs 43,063 22,022 134,216 97,466
General and administrative 1,240,399 639,232 3,188,469 1,956,668
Arbitration award 1,707,404 --- 1,707,404 ---
Restaurant closing expenses 347,010 --- 347,010 ---
Advertising expenses 227,345 4,223 674,997 79,965
Depreciation and amortization 230,169 110,952 714,848 334,038
Interest expense 108,846 10,148 320,543 22,626
-------------- ------------ ------------- -------------
6,717,323 2,122,041 14,723,257 6,630,858
-------------- ------------ ------------- -------------
Loss before reorganization items ($3,493,875) ($490,225) ($5,534,733) ($1,417,476)
-------------- ------------ ------------- -------------
Reorganization items
Loss on closing of restaurants 831,029 --- 831,029 56,388
Professional fees $43,000 $60,000 $43,000 $423,062
-------------- ------------ ------------- -------------
Net loss ($4,367,904) ($550,225) ($6,408,762) ($1,896,926)
============== ============ ============= =============
Net loss per common share ($0.98) ($0.12) ($1.43) ($0.42)
============== ============ ============= =============
Shares used in computation 4,475,421 4,488,385 4,484,866 4,488,385
============== ============ ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
(4)
<PAGE>
<PAGE>
PUDGIE'S CHICKEN, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
(UNAUDITED)
1996 1997
<S> <C> <C>
Cash flows from operating activities
Net loss (6,408,822) (1,896,926)
Adjustments to reconcile net income
to net cash provided by operations
Depreciation and amortization 714,848 334,038
Provision for bad debt 241,506 121,753
Loss on closure of restaurants 831,029 56,388
Deferred compensation expense 8,451 9,390
Changes in operating assets and liabilities
(Increase) decrease in operating assets
Franchise and advertising royalties receivable (263,555) (109,585)
Inventories 8,110 26,124
Other assets 232,075 (7,045)
Increase (decrease) in operating liabilities
Accounts payable and accrued expenses (843,911) 844,277
Deferred franchise fees (80,000) (25,000)
Other liabilities (135,823) ---
Liabilities subject to compromise 3,784,573 ---
-------------- -----------
Net cash (used in) operating activities (1,911,519) (646,586)
-------------- -----------
Cash flows from investing activities
Purchase of property and equipment (484,558) (4,649)
Net proceeds from disposal of restaurants 89,623 ---
-------------- -----------
Net cash provided by (used in) investing activities (394,935) (4,649)
-------------- -----------
Cash flows from financing activities
Additions to notes payable 318,518 475,000
Repayments of borrowings (178,396) ---
Proceeds from issuance of
Preferred Stock, net of issuance costs 1,665,922 ---
Net decrease in restricted cash --- (53,635)
-------------- -----------
Net cash provided by financing activities 1,806,044 421,365
-------------- -----------
Net decrease in cash (500,410) (229,870)
Cash at beginning of period 823,440 272,180
------------- -----------
Cash at end of period 323,030 42,310
============= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
(5)
<PAGE>
<PAGE>
PUDGIE'S CHICKEN, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with instructions to Form 10-QSB and Item 310(b) of Regulation S-B
promulgated under the Securities Act of 1934, as amended, and, therefore, do not
include all information and footnotes normally included in financial statements
prepared in conformity with generally accepted accounting principles.
The accompanying financial statements are unaudited and include all
adjustments (consisting of normal recurring adjustments and accruals) that
management considers necessary for a fair presentation of its financial position
and results of operations of Pudgie's Chicken, Inc. ("PCI") and its subsidiaries
(the "Company") for the interim periods presented. The results of operations for
the interim periods are not necessarily indicative of the results that may be
expected for the entire year.
For financial reporting purposes, the Company has applied the provisions
of the American Institute of Certified Public Accountants Statement of Position
90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code" (SOP 90-7) in the accompanying consolidated financial statements.
PCI and all of its subsidiaries filed voluntary petitions for relief
under Chapter 11 of the United States Bankruptcy Code ("Chapter 11") 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 (the "Chapter 11 Cases"). On October 15, 1996, the individual petitions of
the Company were procedurally 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,
an official unsecured creditors committee and an official equity committee have
been formed which have the right to review and object to non-ordinary course
business transactions and are expected to participate in the formulation and
approval of any plan or plans of reorganization. The Company's exclusivity
period for filing a plan of reorganization expired on April 27, 1997.
On October 3, 1997, PCI and certain of its subsidiaries filed a proposed
Plan of Reorganization (the "Plan") and a related proposed Disclosure Statement
with the Bankruptcy Court. The Plan provides for distributions to various
classes of creditors and further provides for the existing equity to retain a
portion of its existing interests, though existing equity will be substantially
diluted under the Plan.
Funding of the Plan is based upon the issuance of Certificates of
Indebtedness (the "Certificates") pursuant to Section 364(b) and (f) of the
Bankruptcy Code, as authorized by an order of the Bankruptcy Court entered on
September 18, 1997 approving a DIP Financing Agreement entered into between
PCI and ReCap Partners, LLC ("ReCap") on August 15, 1997 (the "ReCap DIP
Financing Order"). The order authorizes PCI to issue and sell two classes of
6
<PAGE>
<PAGE>
unsecured promissory notes, i.e., the Certificates, on the terms set forth
below. Pursuant to the express language of Section 364(f), the sale of the
Certificates is exempt from all federal and state securities registration
requirements. Additionally, because the issuance of the Certificates has been
approved by the Bankruptcy Court for a debtor-in-possession under title 11, the
Certificates are also exempt pursuant to section 3(a)(7) of the Securities Act
of 1933, as amended.
Initially, in order to raise interim operating capital, PCI will issue,
and ReCap will use its best efforts to locate and identify (directly or
indirectly through NASD member broker/dealers) potential lenders to purchase,
Class A Certificates of Indebtedness (the "Class A Certificates") in the sum of
up to approximately $750,000.00. Class A Certificate Holders may elect in
writing to exchange the entire amount of their Certificates for new common stock
in the reorganized PCI ("New Common Stock") as follows: Class A Certificate
Holders may exchange the entire amount of their Class A Certificates at the rate
of one (1) share of New Common Stock for each $2.50 of principal amount of their
administrative claim evidenced by the Certificates, at the rates of interest
specified in the respective Certificates, subject to the fractional share
provisions of this Plan. As of September 30, 1997, PCI had issued $225,000 of
Class A Certificates.
Secondly, in order to raise sufficient plan funding capital to make the
Plan feasible under Section 1129 of the Code, PCI will issue, and ReCap will use
its best efforts to locate and identify (directly or indirectly through NASD
member broker/dealers) potential purchasers of a minimum of $3.75 million to a
maximum of $5.25 million of Class B Certificates (the "Class B Certificates").
Class B Certificate Holders may exchange the entire amount of their Class B
Certificates at the rate of one (1) share of New Common Stock for each $5.00 of
principal amount of their administrative claim evidenced by the Certificates.
The Company expects to receive approval of the Disclosure Statement in
November, 1997 and to confirm the Plan in early 1998.
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 are 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.
7
<PAGE>
<PAGE>
The Company's ability to continue operations is dependent upon, among
other things, confirmation of a plan of reorganization that will enable the
Company to emerge from bankruptcy proceedings, obtain additional capital or
other financing to fund distributions under the plan of reorganization and
provide working capital. There is no assurance that such reorganization or
financing will occur. These factors, among others, indicate that there is
substantial doubt that the Company can continue as a going concern.
The accompanying financial statements should be read in conjunction with
the Company's December 31, 1996 Form 10-KSB.
2. POST-PETITION FINANCING
On March 13, 1997, the Bankruptcy Court entered a final order
authorizing the Company to obtain debtor-in-possession financing of up to a
maximum of $250,000 pursuant to a loan and security agreement dated February 28,
1996, to grant the lender (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 upon the earlier of (i) February 1, 1998, (ii) the dismissal of the Chapter
11 Cases or (iii) the conversion of the Chapter 11 Cases to a proceeding under
Chapter 7 of the Bankruptcy Code. The Company has borrowed $250,000 under this
facility.
In the event of confirmation of a plan of reorganization, the Lender
shall receive additional compensation in the form of warrants to purchase common
stock of the Company ("Warrants") with an estimated fair value of $100,000. The
Warrants shall (1) be issued pursuant to a plan of reorganization, (2) be
delivered to the Lender within 60 days after confirmation of a plan of
reorganization, (3) be exercisable during a period of seven years, commencing
six months after the date of confirmation of a plan of reorganization and (4)
have an exercise price equal to 115% of the fair market value of the Company's
common stock (as defined in the Warrant).
On October 30, 1996, the Bankruptcy Court entered a final order
authorizing the Company to obtain credit in the form of food supply advances
from Sysco Foodservices of Connecticut. A first priority lien was granted to
Sysco Foodservices of Connecticut up to the amount of $250,000. On September 16,
1997, the Bankruptcy Court approved the substitution of DiCarlo Distributors,
Inc. as the Company's primary food supplier, replacing Sysco Foodservices of
Connecticut. As a result of the change in suppliers, the Company believes that
it has rectified certain difficulties encountered with Sysco, has accomplished a
smooth transition between suppliers and has established favorable credit and
supply terms with DiCarlo on an ongoing basis.
3. CONTINGENCIES
On June 30, 1995, Gallus Investments, L.P. ("Gallus"), an area developer
of the Company's franchised restaurants, commenced an action against the Company
alleging, among other claims, common law fraud and violations of the Franchise
Sales Act of the State of New York regarding its area development agreement with
the Company.
On September 12, 1996, a panel of the American Arbitration Association
rendered an award
8
<PAGE>
<PAGE>
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 the Gallus award in the United States
District Court for the Eastern District of Virginia had initially been stayed as
a result of the Company's bankruptcy filing. The amount of the award has been
recorded as a liability subject to compromise by the Company.
On March 25, 1997, the Bankruptcy Court lifted the automatic stay
imposed upon filing the Chapter 11 petition in order to permit the Company to
petition the federal court in Virginia to vacate the arbitration award while
simultaneously allowing Gallus to petition for confirmation of the award.
On April 18, 1997, the Federal District Court denied a motion to vacate
the arbitration award. The Company has appealed the decision to the United
States Court of Appeals for the Fourth Circuit.
On October 28, 1997, the Company appeared in the United States Court of
Appeals for the Fourth Circuit to reverse the award made by the American
Arbitration Association. A decision is expected in the near future.
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 a
franchisee's franchise area. The plaintiff seeks damages of $1,250,000 and an
injunction prohibiting the Company from doing business within the exclusive
franchise area allegedly granted to the franchisee. The Company intended to file
a motion to dismiss the complaint based upon the fact that a franchise agreement
does not exist between the plaintiff and the Company and that any illicit
transfer of the franchise rights to a party not approved by the Company
constituted a termination of the franchisee's franchise. The motion to dismiss
was not filed due to the Company's voluntary petition under Chapter 11.
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 an alleged breach
of its franchise agreement.
The Company is the defendant in an action brought by a franchisee which
seeks damages of approximately $668,000 for the alleged breach of franchise
agreement and violations of the Texas Consumer Protection Act. The franchisee
was initially given the right to develop two restaurants in Texas. The
franchisee opened only one restaurant which was closed within one year after
opening. The complaint alleges that the Company is responsible for the
restaurant's failure. The Bankruptcy Court has lifted the automatic stay so that
the case can proceed for the purpose of arriving at a liquidation amount in
damages.
9
<PAGE>
<PAGE>
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 stayed pending confirmation of a
reorganization plan to be filed by the Company. At present, the claims are being
treated as unliquidated claims in that they have not yet been reduced to
judgment by a court of competent jurisdiction and no agreement between the
Company, as debtor, and the plaintiffs as creditors, has been reached. It is
anticipated that the plan of reorganization will take into account all of the
forestalled claims and that each one of the claims will be resolved based upon a
formula contained within the plan of reorganization. As a consequence, the
amounts sought by the plaintiffs in their lawsuits are being treated as
unliquidated amounts subject to readjustments pursuant to the plan of
reorganization. Therefore, an estimate of the ultimate settlement of these
claims cannot be made and no provision has been recorded for such amounts in the
accompanying consolidated financial statements.
There are 243 claims scheduled and/or filed in the Company's bankruptcy
case. The face amount of the claims are $163,023,600. Many of these claims are
contingent, duplicates and/or disputed. Company management believes that the
claimed amounts are grossly overstated. The final determination of the allowed
claims is expected to invoke litigation of which the outcome is uncertain. The
Company's estimates of the allowed claims are presented in the financial
statements and are subject to change based upon the outcome of the Chapter 11
proceedings. Based on the review of the claims, the Company estimates that the
actual dollar amount of claims that will be allowed is approximately $7.4
million.
The maximum liability on all claims is subject to resolution under the
federal bankruptcy laws.
10
<PAGE>
<PAGE>
PUDGIE'S CHICKEN INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1996
Total revenue was approximately $1.6 million for the three months ended
September 30, 1997, a decrease of approximately $1.6 million or 50%, from
revenue of approximately $3.2 million for the three months ended September 30,
1996. This decrease was primarily due to the decrease in the number of
Company-owned restaurants from 20 at September 30, 1996 to 17 at September 30,
1997 and to declining same-store sales resulting from reduced advertising
expenditures due to cash constraints associated with its Bankruptcy filing.
System-wide sales at all Company-owned and franchised restaurants were
approximately $3.5 million for the three months ended September 30, 1997 and
approximately $6.0 million for the comparable prior year period. The effect of
the lower average number of Pudgie's restaurants in operation for the three
months ended September 30, 1997 and declining same-store sales resulting from
reduced advertising expenditures were the primary causes of the decrease in
sales.
Revenue from sales at Company-owned restaurants was approximately $1.4
million for the three months ended September 30, 1997, a decrease of
approximately $1.5 million or 52%, from sales at Company-owned restaurants of
approximately $2.9 million for the three months ended September 30, 1996. This
decrease was primarily due to the decrease in the number of Company-owned
restaurants operating during the three months ended September 30, 1997 as
compared to the prior year period. Franchise royalty and advertising fees earned
from franchisees were approximately $172,000 for the three months ended
September 30, 1997, a decrease of approximately $73,000 or 30%, from
approximately $245,000 for the comparable prior year period. The decrease
resulted from the lower average number of franchised restaurants in operation
during the third quarter from 31 at September 30, 1996, to 29 at September 30,
1997.
With respect to Company-owned restaurants, costs of products sold and
restaurant operating expenses were approximately $1.3 million for the three
months ended September 30, 1997, a decrease of approximately $1.5 million or
54%, from approximately $2.8 million for the three months ended September 30,
1996. This decrease was due primarily to lower average number of Company-owned
restaurants in operation during the three months ended September 30, 1997 and to
reduced same-store sales. General and administrative expenses were approximately
$639,000 for the three months ended September 30, 1997, a decrease of
approximately $561,000 or 47%, from approximately $1.2 million for the
comparable period in 1996, primarily due to the reduction in corporate overhead
expenses as a result of the Company reducing and carefully monitoring spending.
The arbitration award of approximately $1.7 million during the three
months ended September 30, 1996 was the result of an award rendered by the
American Arbitration Association relating to a decision on an action against the
Company brought by Gallus. Restaurant closing expenses of approximately $347,000
for the three months ended September 30, 1996 were the result of costs expensed
in conjunction with the closing of three Company-owned unprofitable restaurants.
11
<PAGE>
<PAGE>
Advertising expenses decreased approximately $223,000, or 98%, to
approximately $4,000 for the three months ended September 30, 1997 from
approximately $227,000 for the comparable prior year period. This was due to the
reduction of spending under the cash constraints of the Chapter 11 Cases.
Depreciation and amortization was approximately $111,000 for the three
months ended September 30, 1997, a decrease of approximately $119,000, or 52%,
from approximately $230,000 for the three months ended September 30, 1996. The
decrease is attributable to the closing of 12 Company-owned restaurants during
1996 and the writing off of the net value of the related assets and the write
down of long lived assets in 1996.
Interest expense was approximately $10,000 for the three months ended
September 30, 1997, a decrease of approximately $99,000, or 91%, from
approximately $109,000 for the comparable period in 1996. This decrease resulted
from the Company stopping interest accruals on an outstanding promissory note of
$3.6 million as of the filing of the Chapter 11 Cases. This promissory note is
included in liabilities subject to compromise.
The reorganization loss on closing of restaurants of approximately
$831,000 during the three months ended September 30, 1996 due to the Company
closing seven Company-owned unprofitable restaurants to reduce cash outflow and
operating expenses as a result of the Company's bankruptcy filing. The
reorganization professional fees of approximately $60,000 and $43,000 for the
three months ended September 30, 1997 and 1996, respectively, were incurred in
connection with the Company's Chapter 11 Cases and related United States Trustee
fees.
The Company incurred a net loss of approximately $550,000 during the
three months ended September 30, 1996, a decrease of approximately $3,818,000,
or 87%, from the net loss of approximately $4,368,000 in the comparable 1996
period. The decrease in the loss was attributable principally to the accrual for
the arbitration award of approximately $1.7 million and approximately $1.2
million expensed in conjunction with the closing of 10 Company-owned restaurants
during the third quarter of 1996, as well as decreased restaurant operating
expenses and corporate overhead expenses in the third quarter of 1997.
Certain expenses included in the general and administrative expenses
are specifically related to the chapter 11 proceedings.
No provision for income taxes was required in either the three months
ended September 30, 1997 or 1996 because of the net losses incurred by the
Company for federal and state income tax purposes.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1996
Total revenue was approximately $5.2 million for the nine months ended
September 30, 1997, a decrease of approximately $4.0 million or 44%, from
revenue of approximately $9.2 million for the nine months ended September 30,
1996. This decrease was primarily due to the decrease in the number of
Company-owned restaurants from 20 at September 30, 1996 to 17 at September 30,
1997 and to declining same-store sales resulting from reduced advertising
expenditures due to cash constraints associated with its Bankruptcy filing.
12
<PAGE>
<PAGE>
System-wide sales at all Company-owned and franchised restaurants were
approximately $6.3 million for the nine months ended September 30, 1997 and
approximately $10.7 million for the comparable prior year period. The effect of
the lower average number of Pudgie's restaurants in operation for the nine
months ended September 30, 1997 and declining same-store sales resulting from
reduced advertising expenditures were the primary causes of the decrease in
sales.
Revenue from sales at Company-owned restaurants was approximately $4.5
million for the nine months ended September 30, 1997, a decrease of
approximately $3.6 million or 44%, from sales at Company-owned restaurants of
approximately $8.1 million for the nine months ended September 30, 1996. This
decrease was primarily due to the decrease in the average number of
Company-owned restaurants operating during the nine months ended September 30,
1997 as compared to the prior year period and to declining same-store sales
resulting from reduced advertising expenditures due to cash restraints
associated with its Bankruptcy filing. Franchise royalty and advertising
fees earned from franchisees were approximately $588,000 for the nine months
ended September 30, 1997, a decrease of approximately $141,000 or 19%, from
approximately $729,000 for the comparable prior year period. The decrease
resulted from the lower number of franchised restaurants in operation during the
nine months ended September 30, 1997, from 31 at September 30, 1996, to 26 at
September 30, 1997.
With respect to Company-owned restaurants, costs of products sold and
restaurant operating expenses were approximately $4.1 million for the nine
months ended September 30, 1997, a decrease of approximately $3.5 million or
46%, from approximately $7.6 million for the nine months ended September 30,
1996. This decrease was due primarily to the closing of 12 unprofitable
Company-owned restaurants in the second half of 1996 and one unprofitable
Company-owned restaurant in January 1997. General and administrative expenses
were approximately $2.0 million for the nine months ended September 30, 1997, a
decrease of approximately $1.2 million or 38%, from approximately $3.2 million
for the comparable period in 1996, primarily due to the reduction in corporate
overhead expenses due to the Company reducing and carefully monitoring spending.
The arbitration award of approximately $1.7 million during the nine
months ended September 30, 1996 was the result of an award rendered by the
American Arbitration Association relating to a decision on an action against the
Company brought by Gallus. Restaurant closing expenses of approximately $347,000
for the nine months ended September 30, 1996 were the result of costs expensed
in conjunction with the closing of three Company-owned unprofitable restaurants.
Advertising expenses decreased by approximately $595,000, or 88%, to
approximately $80,000 for the nine months ended September 30, 1997 from
approximately $675,000 for the comparable prior year period. This was due to the
reduction of spending under the cash constraints of the Chapter 11 Cases.
Depreciation and amortization was approximately $334,000 for the nine
months ended September 30, 1997, a decrease of approximately $381,000, or 53%,
from approximately $715,000 for the nine months ended September 30, 1996. The
decrease is attributable to the closing of 12 Company-owned restaurants during
the second half of 1996 and one restaurant in January 1997, and the writing off
of the net value of the related assets and the write down of long lived assets
in 1996.
13
<PAGE>
<PAGE>
Interest expense was approximately $23,000 for the nine months ended
September 30, 1997, a decrease of approximately $298,000, or 93%, from
approximately $321,000 for the comparable period in 1996. This decrease resulted
from the Company stopping interest accruals on an outstanding promissory note of
$3.6 million as of the filing of the Chapter 11 Cases. This promissory note is
included in liabilities subject to compromise.
The reorganization loss on closing of restaurants of approximately
$56,000 during the nine months ended September 30, 1997 and $831,000 for the
nine months ended September 30, 1996, is the result of the Company closing one
Company-owned unprofitable restaurant in 1997 and seven restaurants in 1996 to
reduce cash outflow and operating expenses as a result of the Company's
bankruptcy filing. The reorganization professional fees of approximately
$423,000 and $43,000 were incurred in connection with the Company's Chapter 11
Cases and related United States Trustee fees during the nine months ended
September 30, 1997 and 1996, respectively.
The Company incurred a net loss of approximately $1.9 million during
the nine months ended September 30, 1996, a decrease of approximately $4.5
million, or 70%, from the net loss of approximately $6.4 million in the
comparable 1996 period. The decrease in the loss was attributable principally to
the accrual for the arbitration award of approximately $1.7 million and
approximately $1.2 million expensed in conjunction with the closing of 10
Company-owned stores during the third quarter of 1996 as well as decreased
restaurant operating expenses and corporate overhead expenses during the first
nine months of 1997, offset by approximately $423,000 in bankruptcy related
professional fees.
No provision for income taxes was required in either the nine months
ended September 30, 1997 or 1996 because of the net losses incurred by the
Company for federal and state income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements are for restaurant
operations and franchise development and for bankruptcy proceedings. As of
September 30, 1997 the Company had a working capital deficit of $2,315,308 as
compared to a working capital deficit of $696,214 at September 30, 1996.
Cash used in operating activities of $646,586 for the nine months ended
September 30, 1997 is primarily the result of the funding of the Company's
operating loss for the nine months ended September 30, 1997.
Cash provided by financing activities of $421,365 for the nine months
ended September 30, 1997 was primarily due to proceeds received from
debtor-in-possession financing.
During the third quarter of 1997, the Company raised $225,000 through
the issuance of Class A Certificates. Of these proceeds, $109,000 has been
received as of September 30, 1997. Subsequent to September 30, 1997, the Company
raised an additional $200,000 through the sale of Class A Certificates.
Management believes that such proceeds will be sufficient to fund the Company's
operations through December 31, 1997. However, additional financing will be
required to enable the Company to meet its current obligations in the future.
At September 30, 1997, the Company had $158,310 in cash and restricted
cash and a working capital deficit of $2,315,308. Unless additional financing
can be obtained, the Company will not be able to meet its current obligations.
14
<PAGE>
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement 128,
"Earnings Per Share" (Statement 128). Statement 128 establishes standards for
computing and presenting earnings per share (EPS). The Statement simplifies the
standards for computing EPS and makes them comparable to international EPS
standards. The provisions of Statement 128 are effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods. The Statement does not permit early application and requires
restatement of all prior EPS data presented. In the opinion of management,
adoption of Statement 128 will not have a material effect on the Company's
financial position, results of operation, or previously reported EPS.
The information set forth in this Report and in all publicly
disseminated information about the Company, including the narrative contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" above, includes "forward-looking statements" within the meaning of
Section 21E of the Securities and Exchange Act of 1934, as amended, and is
subject to the safe harbor created by that section. Readers are cautioned not to
place undue reliance on these forward-looking statements as they speak only as
of the date hereof and are not guaranteed.
15
<PAGE>
<PAGE>
PART II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION
In early July 1997, the Company's shares of common stock and warrants
were delisted from the Nasdaq SmallCap Market. Previously, the Company's shares
of common stock and warrants were delisted from the Boston Stock Exchange. The
Company's shares of common stock and warrants continue to trade in the
over-the-counter market.
As of September 6, 1997, Helen Papa the Company's Chief Financial
Officer resigned from the Company. As of such date the Company has been
operating without an acting Chief Financial Officer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) No reports on Form 8-K were filed the three months ended September
30, 1997.
16
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PUDGIE'S CHICKEN, INC.
November 14, 1997 /s/ Steven Wasserman
- ------------------------ -------------------------------
Date Steven Wasserman
President and Chief Executive Officer
(and Principal Accounting Officer)
17
<PAGE>
<PAGE>
EXHIBIT INDEX
Exhibit Number Page Number
- -------------- -----------
27 Financial Data Schedule 19
18
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 158,310
<SECURITIES> 0
<RECEIVABLES> 117,740
<ALLOWANCES> 1,009,798
<INVENTORY> 70,936
<CURRENT-ASSETS> 346,986
<PP&E> 1,277,929
<DEPRECIATION> 1,230,713
<TOTAL-ASSETS> 1,796,135
<CURRENT-LIABILITIES> 2,662,294
<BONDS> 0
3,047,770
500
<COMMON> 44,884
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,796,135
<SALES> 4,513,133
<TOTAL-REVENUES> 5,213,382
<CGS> 4,140,095
<TOTAL-COSTS> 6,630,858
<OTHER-EXPENSES> 479,450
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,626
<INCOME-PRETAX> (1,896,926)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,896,926)
<EPS-PRIMARY> (.42)
<EPS-DILUTED> 0
</TABLE>
