UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
COMMISSION FILE NUMBER: 000-27015
CHICKEN KITCHEN, CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
FLORIDA 59-3283225
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
770 PONCE DE LEON, SUITE 200,
CORAL GABLES, FLORIDA 33134
(Address of Principal Executive Offices)
(305) 774-9700
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
None
.
Securities registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK, PAR VALUE $0.0005 PER SHARE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __ No __X__
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K._____
Revenue for the fiscal year totaled $7,898,661.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of October 30, 2000, was approximately $1,701356.20.
As of October 30, 2000, there were 11,782,201 shares of the Registrant's common
stock, par value $0.0005 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
We (Chicken Kitchen Corporation) own and operate five (5) restaurants
in leased premises featuring marinated grilled chicken and other menu items.
Additionally as of October 30, 2000, the Company has sold fifteen (15)
franchises. All restaurants operate under similar proprietary trade and service
marks, including design and distinctive logos and trade dress. Chicken Kitchen
Corporation was originally incorporated in the State of Florida in November
1994, as Chicken Acquisition Corporation ("CAC"). The corporate office is
located at 770 Ponce de Leon, Suite 200, Coral Gables, Florida 33134. The
Company's telephone number is (305) 774-9700 and the fax number is (305)
477-0345.
BACKGROUND
On November 21, 1995, we opened our first Chicken Kitchen(R) restaurant
in the food court of the Aventura Mall, located in North Miami, Florida. All
restaurants offer marinated grilled chicken and other complimentary menu items
including fresh salads, rice, baked potatoes, beans, corn, fruit salad, soups,
sauces, desserts and beverages, and operate under the trade name Chicken
Kitchen(R). "CKC" owns all service marks, trademarks, designs and logos,
operations manual, trade dress, marinating formulas, sauces and recipes. In
December 1996, the Company and Chicken Kitchen Corporation, a Delaware
predecessor company ("CK of Delaware"), owned by the founder and CEO, Mr.
Christian de Berdouare, consummated the Agreement and Plan of Reorganization,
which was entered into on November 30, 1996 (the "Agreement"). Pursuant to the
"Agreement", "CKC" purchased substantially all the assets of "CK of Delaware" in
exchange for 5,100,000 shares of the Company's Common Stock. Mr. de Berdouare,
as the sole owner of "CK of Delaware", thus gained control of the Company upon
consummation of the transactions contemplated by the "Agreement". Subsequently
the Company changed its name to Chicken Kitchen Corporation, a Florida
corporation, and "CK of Delaware" changed its name to Chicken Liquidating
Corporation.
On January 3, 1997, Ambassa Holdings, Inc. (an affiliate owned by the
President, who is the Principal Stockholder of the Company), acting for the
benefit of the Company, utilizing $229,899 advanced by the company, purchased a
55% ownership interest (for $229,899) in Patty & Cesar's Food Service, Inc.
("P&C"), pursuant to the terms of an agreement for sale of shares by
shareholders dated November 15, 1996. "P&C" held a franchise in a competing
restaurant chain, and had filed a voluntary petition to reorganize pursuant to
Chapter 11 of the United States Bankruptcy Code at the time of the purchase. The
bankruptcy proceedings were dismissed in May 1997. The 55% investment in P&C was
reflected as "Advances to Affiliate" in the Company's balance sheet at March 31,
1997 and the loan was repaid in full, by the assignment of its 55% ownership to
the Company in September 1997.
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In November 1997, the Company acquired the remaining 45% for $85,000
and the issuance of 15,000 shares of the Company's common stock valued at $0.65
per share ($9,750 in the aggregate), representing management's estimate of the
fair market value of the common stock on the date of issue after considering
trading restrictions and the stock's thin trading. As Ambassa Holdings, Inc. was
acting as the company's agent in this transaction, for no consideration, there
were no repayment terms (other that the assignment of any interest in "P&C"
acquired to the Company), and no written agreement. The transaction has been
accounted for under the purchase method of accounting. The total cost of the
acquisition of $320,000, not including net cash acquired of $19,858, was
allocated to equipment ($128,000), leasehold interest ($100,000), other assets
($22,000), net liabilities ($110,000) and was based on fair values with the
excess cost ($180,000) being amortized over 10 years. In November 1997, "CKC"
acquired the assets of two additional restaurants, operated as "Starr's Chicken
Grill located in South Miami and Kendall, from an independent seller for
$1,382,000, not including net cash acquired of $2,250. The stores are located at
7315 SW 57th AVE South Miami Fl, 33143 and 9067 SW 107 AVE Miami Fl, 33173. The
transaction has been accounted for under the purchase method of accounting. The
cost of the acquisition was allocated to equipment ($220,000), leasehold
interest ($300,000), other assets ($21,000) and was based on fair values with
the excess cost ($841,000) being amortized over 10 years.
In February 1998, we acquired a restaurant (Bayside Marketplace, Miami
Fl.) from Danalex Corporation for $330,000 and the issuance of 170,000
restricted shares of the Company's Class A common stock. 35,000 shares (issued
in March 1997) were valued at $0.33 ($11,550 in the aggregate and representing
the price used for the Company's private placement in December 1996, as the
Company did not begin trading until June 1997). The remaining 135,000 shares
were valued at $0.65 (representing management's estimate of the fair market
value of the Company's Class A common stock on the date of issue after
considering trading restrictions and the stock's thin trading). In March 1999,
in accordance with the acquisition agreement, an additional 135,000 shares of
Class A common stock were issued as the market value of the Class A common stock
was less than $2.00 per share at the one-year anniversary date of the closing.
The February 1998 acquisition was accounted for in accordance with EMERGING
ISSUES TASK FORCE 97-15 "CONTINGENCY ARRANGEMENTS BASED ON SECURITY PRICES IN
PURCHASE BUSINESS COMBINATIONS", which takes into consideration the shares which
were issued in March 1999. The cost of the acquisition of $517,000, not
including net cash acquired of $500, was allocated to equipment ($28,000),
leasehold interest ($30,000), other assets ($4,700), net liabilities ($3,800),
and was based on fair values with the excess cost ($458,100) being amortized
over 10 years. This store was operated as "Chick-to Chick" and is located at
Bayside Marketplace, Miami. The store was closed on April 21, 2000 due to low
sales and an escalation of ongoing operating costs. The closure was in violation
of the existing lease and resulted in loss of goodwill and the escalation of the
future rent payable under the lease.
We are not currently contemplating further acquisitions of stores.
RESTAURANT OPERATIONS
Our restaurants feature a menu focused on marinated grilled chicken
served whole, in halves or in quarters, and grilled boneless chicken breasts,
served in a variety of sandwiches, salads and platters. The Company believes
that the focus on grilled chicken capitalizes on the current consumer preference
for healthier, lower-fat foods. The focused menu also facilitates the
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consistent preparation of fresh, high quality foods, the execution of efficient
customer service and the accurate replication of the concept in new locations.
Our restaurants use fresh whole chickens, top grade produce and freshly
prepared rice, salads, soups, and homemade sauces and dressings, which are
prepared fresh daily in each restaurant. We maintain stringent quality standards
for the preparation and service of all food items. We believe that the menu
emphasis on freshness and quality, as well as its focus on grilled chicken, will
appeal to an increasingly health-conscious consumer who desire a wholesome and
healthy alternative to the fare served at other quick-service restaurants.
The restaurants deliver value by providing generous portions of
wholesome, flavorful food at economical prices. The Company emphasizes value
with menu prices typically in line with prices of comparable menu items offered
by other quick-service restaurants and frequently less than comparable menu
items found in full service establishments.
A premium is placed on quick-service and customer convenience. The
restaurants are typically open for lunch and dinner, seven days a week from
11:00 a.m. to 10:00 p.m. In addition to eat-in service, all the restaurants
offer take-out, delivery and catering services to accommodate the varied
schedules of families, business people, students and other time-sensitive
individuals. Prompt, accurate and courteous service is a priority in each mode
of food delivery. In addition, the menu offers a variety of portion sizes to
accommodate a single customer, family or large group.
Our restaurants feature an attractive interior decor and exterior
design that is easily replicable in its multi-unit system. While each restaurant
has a similar appearance, the restaurants' design is sufficiently flexible to
accommodate a variety of available sites. The restaurants are also designed to
conveniently serve a high volume of customer traffic while retaining an
inviting, casual atmosphere.
FRANCHISE PROGRAM
Fifteen franchises have been sold through October 30, 2000, one of
which was sold prior to FYE March 31,1999. The primary criteria considered by us
in the review and approval of franchisees is prior experience in operating
restaurants or other comparable business experience, and capital available for
investment.
The current franchise fee is $30,000, payable $15,000 on signing the
Uniform Franchise Offering Circular ("UFOC"), and $15,000 when the premises
lease is signed. The term of the franchise agreement is twenty years. The
Company believes that the twenty-year term is standard in the fast-food segment
of the restaurant industry. The principal terms are as follows:
Royalty: 4% of net sales paid to the Company weekly.
Advertising fees: 4% of net sales paid to third parties.
Capital investment: $225,000 to $400,000 paid to third parties
for leasehold improvements, furniture,
fixtures, equipment, inventory, training,
marketing, and working capital.
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Our future growth plans will be focused on selling and maintaining a
qualified franchise restaurant group as well as adding additional Company store
locations. We are building a staff of operations personnel to train and assist
franchisees in opening new restaurants and to monitor the operations of existing
restaurants. These services will be provided as part of our franchise program.
New franchisees will be required to complete a four-week program that features
various aspects of day-to-day operations and certification in all aspects of
restaurant operations. The program consists of formal classroom training and
in-restaurant training, including human resources, accounting, purchasing and
labor and food handling laws. Standard operating manuals are provided to each
franchisee. The franchise agreement requires franchisees to operate their
restaurants in accordance with our standards and operating procedures. Ongoing
advice and assistance is provided to franchisees in connection with the
operation and management of each restaurant.
SUPPLIERS
The Company and its franchisees purchase all of its supplies from
pre-approved suppliers. We believe that alternative suppliers for our supplies
are readily available. We do not have long term supply contracts. Our main
suppliers are, Cheney Brothers Inc., Martin Poultry, Inc., Coca Cola of South
Florida, Daily Bread, Inc., Better and Nice Produce, Inc. There are no Supplier
contracts to attach as Exhibits to this filing.
COMPETITION
The fast food restaurant industry is highly competitive and can be
significantly affected by many factors, including changes in local, regional or
national economic conditions, changes in consumer tastes, consumer concerns
about the nutritional quality of quick-service food and increases in the number
of, and particular locations of, competing restaurants. Factors such as
inflation, increases in food, labor and energy costs, the availability and cost
of suitable sites, fluctuating interest and insurance rates, state and local
regulations and licensing requirements and the availability of an adequate
number of managers and hourly paid employees can also adversely affect the fast
food restaurant industry. Multi-unit restaurant chains can also be substantially
adversely affected by publicity resulting from food quality, illness, injury, or
other health concerns. Major chains, which have substantially greater financial
resources and longer operating histories than the Company, dominate the fast
food restaurant industry. We compete primarily on the basis of location, food
quality and price. Changes in pricing or other marketing strategies by these
competitors can have an adverse impact on our sales, earnings and growth. There
can be no assurance that we will be able to compete effectively against our
competitors. In addition, with respect to the sale of franchises, we compete
with many franchisors of restaurants and other business concepts for qualified
and financially capable franchisees.
REGULATION
We are subject to a variety of federal, state, and local laws affecting
the conduct of its business. Operating restaurants are subject to various
sanitation, health, fire and safety standards and restaurants under, or proposed
for construction, are subject to state and local building codes, zoning
restrictions and alcoholic beverage regulations. Difficulties in obtaining or
failure to obtain required licenses or approvals could delay or prevent the
development or opening of a new restaurant in a particular area. We are also
subject to the Federal Fair Labor Standards Act, which governs minimum wages,
overtime, working conditions and other matters, and the Americans with
Disabilities Act, which became effective in January 1992. We believe that we
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are in compliance with such laws, and that our Restaurants have all applicable
licenses as required by governmental authorities. We are subject to regulations
of the Federal Trade Commission (the "FTC") and various states relating to
disclosure and other requirements in the sale of franchises and franchise
operations. The FTC's regulations require the Company to timely furnish
prospective franchisees a franchise offering circular containing prescribed
information. Certain state laws also require registration of the franchise
offering with state authorities. Other states regulate the franchise
relationship, particularly concerning termination and renewal of the franchise
agreement. We believe that we comply with the applicable franchise disclosure
and registration regulations of the FTC and the various states in which we
operate.
While we intend to comply with all federal, state and foreign laws and
regulations, there can be no assurance that we will continue to meet the
requirements of such laws and regulations, which, in turn, could result in a
withdrawal of approval to franchise in one or more jurisdictions. Any such loss
of approval may have a material adverse effect upon our ability to successfully
market franchises. Violations of franchising laws and/or state laws and
regulations regulating substantive aspects of doing business in a particular
state could subject the Company and its affiliates to rescission offers,
monetary damages, penalties, and/or injunctive proceedings. The state laws and
regulations concerning termination and non-renewal of franchisees are not
expected to have a material impact on our operations.
EMPLOYEES
As of October 30, 2000, we had approximately 157 full time and part
time staff, all at the restaurant level, and eight administrative employees.
TRADEMARKS
We market several menu item products under our Chicken Kitchen
Trademark, trade name and design logos, our Chop-Chop trade name, and other
trademarks under registration with the US Patent and Trademark Office. We have
received trademark and service mark protection of these names and related
designs logos from the USPTO and consider these trademarks and service marks to
be important to our business.
ITEM 2 DESCRIPTION OF PROPERTY
We own and operate the following restaurants. All restaurant premises
are leased from independent landlords. The corporate office is leased from an
independent landlord.
<TABLE>
<CAPTION>
Store Monthly Lease Lease expiration
No. Location Square Feet Payment Date
<S> <C> <C> <C> <C>
1 Red Road, 1,100 $2,649 8/2019
South Miami
2 Arthur Godfrey Rd. 1,400 $3,826 11/2006
Miami Beach
3 Kendall Mall 1,600 $4,704 10/2004
Miami/Dade County
4 Aventura Mall 750 $6,405 10/2005
Aventura
5 Washington Ave. 3,200 $7,466 3/2018
Miami Beach
Office 770 Ponce De Leon 2,000 $3,000 6/2003
Coral Gables
</TABLE>
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ITEM 3. LEGAL PROCEEDINGS.
On February 23, 1998, Mr. Daniel Hitchcock, landlord for the restaurant
located in South Miami, Florida, at 7315 S.W. 57th Avenue, filed a lawsuit Case
No.: 98-24433 CA 41, pending in the Circuit Court of the Eleventh Judicial
Circuit in and for Miami-Dade County, Florida, seeking eviction of the Company
for alleged non-monetary breaches of the provisions of the written lease
agreement, including a limitation on seating to 17 persons and a requirement of
no outdoor seating. The Company is vigorously defending the lawsuit, based on
the prior and subsequent oral agreement of the parties that the Company could
have as many seats within the premises as the law would otherwise allow. The
action remains pending, and while the Company is confident in its position, an
eviction from these premises would have a very adverse effect on the operating
cash flow of the Company, and the outcome at trial cannot be predicted. The case
has not yet been set for trial, and the Company has recently asserted claims
against the persons who designed the restaurant at issue, seeking recovery
against them for any damages the Company may suffer in this case.
The Company is defending a lawsuit filed on May 24, 1999 and styled
Agricola Coco Bohn, S.A., et al, v. Chicken Kitchen Corporation, etc., et al.:
Case number 99-4608 CA 0 pending in the Circuit Court of the Eleventh Judicial
Circuit in and for Miami-Dade County, Florida. The background of this lawsuit
surrounds the entitlement of the holders of the Series A Preferred Stock to
convert their preferred stock for restricted class A common stock in accordance
with the terms of the Subscription Agreement through which the Series A
Preferred Stock was issued. The Company is vigorously defending the lawsuit,
alleging as its primary defense that the holders of the Series A Preferred Stock
illegally and improperly manipulated the market for the Company's common stock,
and thus, would have no right to convert their Series A Preferred Stock to
common. The Company has agreed in principal to settle this litigation with all
of the Series A Preferred Stockholders (the "Shareholders"). The proposed
settlement would require the Company to: (i) convert the Shareholders' preferred
stock into 16,000,000 shares of the Company's restricted Series A common stock,
cumulatively (the "Exchanged Shares"); (ii) deliver $300,000.00 to the
Shareholders, and permit the Shareholders to retain an additional $50,000 being
held in escrow by counsel for the Shareholders; and (iii) one year after the
closing of formal documentation consistent with the parties agreement in
principal, the Company will pay $150,000 in the aggregate to a representative of
the Shareholders, the payment of which shall be evidenced by a promissory note
(the "Note") and secured by 500,000 of the Company's President's personal Series
A common stock in the Company. The agreement also would require the Shareholders
to enter into a voting agreement on behalf of themselves and their affiliates,
officers, directors, employees, and immediate family members, the terms of which
shall provide that the Shareholders will vote in accordance with the
recommendations of the Board of Directors of Chicken Kitchen on all matters
except where such matter would directly alter the terms of the Note, the
agreement in principal, or any of the closing documents. Upon the closing of
formal documentation consistent with the parties agreement in principal all
parties would
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dismiss all claims against all other parties to the litigation with prejudice
and exchange releases. The other non-monetary conditions of the agreement in
principal are included on the attached term sheet describing the proposed
settlement.
The Company has settled a lawsuit styled Cafe 1429, Inc. and SLML, Inc.
v. Chicken Kitchen Corporation, Case No.: 99-4709 CA 05, pending in the Circuit
Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida.
The claim against the Company stemmed from the purchase of the assets of a
restaurant on Miami Beach, Florida, and a related promissory note, lease, and
security agreement, all of which contain cross-default clauses. The
plaintiffs/sellers took back from the Company a $100,000 promissory note for
$100,000 of the purchase price of the assets. The Company issued and delivered
to an escrow agent 100,000 shares of its restricted Class A common stock as
security for the $100,000 note. The Company defended the action upon the belief
that the governing documents gave it the right to satisfy the $100,000
obligation with additional stock of the Company. The settlement requires the
Company to issue additional Series A Common Stock, in conversion of the $100,000
note, in an amount sufficient to sell to realize $95,000.00, exclusive of costs,
before May 20, 2001. The Company will also pay $3,000.00 per month to be applied
toward the $95,000.00 settlement number. In the event that as of May 20, 2001,
the net proceeds from the sale of stock referenced in this paragraph, together
with the sum of the monthly $3,000.00 payments, is less than $95,000.00, the
Company will have to satisfy the deficiency on or before May 20, 2001. If the
payment of such a deficiency is not timely made, the plaintiffs would receive an
immediate judgment against the Company for the amount of the deficiency. The
settlement agreement also provides for the entry of an immediate judgment
against the Company in the event that any of the $3,000.00 monthly payments
referenced herein is not made. The Company and the plaintiffs exchanged releases
and dismissed their respective claims with prejudice.
The Company is a defendant in an action filed on or about October 14,
1999 by a former supplier of its chicken products for nonpayment. The case is
styled International Prosperity, Inc. v. Chicken Kitchen Corporation; Case No.:
99-23992-CA 01, and is pending in the Circuit Court for the Eleventh Judicial
Circuit in and for Miami-Dade County, Florida. The Corporation is vigorously
defending the lawsuit and has asserted counterclaims for fraud and for breach of
contract on the grounds that the plaintiff-supplier allegedly had been
overcharging the Company and delivering product of a lesser quality than was
ordered. The case is not yet at issue and not yet set for trial. As a result, it
is too early to determine whether, and to what extent, the Company might suffer
an adverse or favorable judgment.
The Company is a defendant in two federal court actions: Alexis v.
Chicken Kitchen Corporation, Case number 00-3066 CIV GRAHAM TURNOFF, and
Jean-Jacques v. Chicken Kitchen Corporation, Case Number 00-3308 CIV HUCK BROWN,
filed September 17, 2000, pending in the United States District Court for Miami,
Florida. These lawsuits were brought by two former employees seeking damages for
alleged violations of federal and state anti-discrimination laws. The Company
believes the claims have no merit and is vigorously defending them. The cases
are newly filed, no discovery has been taken, and they are not yet set for
trial. It is impossible to determine at this early stage in the proceedings
whether, and what extent, the Company might suffer an adverse or favorable
judgment.
The Company is a defendant in a lawsuit filed on May 9, 2000 styled
Bayside Center LP v. Chicken Kitchen Corporation, Case No.: 00-11733 CA 30 in
Miami-Dade County, Florida, by a former landlord for enforcement of a landlord's
lien and distress for rent. The case is not yet at
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issue and not yet set for trial. As a result, it is too early to determine
whether, and to what extent, the Company might suffer an adverse or favorable
judgment, although the parties are in the midst of discussing settlement
options.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Company's Class A Common Stock has been listed on the NASD OTC
Electronic Bulletin Board sponsored by the National Association of Securities
Dealers, Inc. under the symbol "CKKC" since May 11, 1997. On March 31, 2000, the
closing bid price as reported by the Electronic Bulletin Board was $.44.
The following table sets forth the high and low bid prices for the
Class A Common Stock as reported on the Electronic Bulletin Board for each
quarter since March 31, 1997, for the periods indicated. Such information
reflects inter dealer prices without retail mark-up, mark down or commissions
and may not represent actual transactions. The Class B Common Stock does not
trade on any market.
QUARTER ENDED HIGH LOW
June 30, 1997 $2 3/4 $1 7/64
September 30, 1997 2 9/32 1 11/16
December 31, 1997 2 3/16 5/8
March 31, 1998 1 1/16 5/8
June 30, 1998 1 1/2 3/4
September 30, 1998 3/4 3/8
December 31, 1998 13/32 3/32
March 31, 1999 23/32 4/32
June 30, 1999 $ 0.25 $ 0.24
September 30, 1999 $ 0.15 $ 0.14
December 31, 1999 $ 0.42 $ 0.14
March 31, 2000 $ 0.52 $ 0.16
June 30, 2000 $ 0.54 $ 0.28
September 30,2000 $ 0.35 $ 0.17
The approximate number of record holders of our Class A Common Stock as
of March 30, 2000 was 215. There are 25 holders of Class B Common Stock.
We have not declared or paid any cash dividends on the Common Stock nor
do we anticipate that any such dividends will be paid in the near future. We
intend to retain any
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earnings it may realize to finance operations and potential expansion of its
business. There are no restrictions on payment of dividends on our Common Stock.
Holders of Series A Convertible Preferred Stock are entitled to receive
dividends at the rate of $80.00 per share per annum prior to the payout of
dividends to holders of common stock. The Preferred Stock dividend may be paid
in cash or in shares of Common Stock, at our option. The Company has suspended
payments of dividends on its Series A Preferred Stock pending resolution of its
litigation with its preferred shareholders.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
We are engaged in the business of operating Five Chicken Kitchen
restaurants and have sold fifteen franchises through March 31, 2000. Three
franchises opened during fiscal year 2000 and the remaining twelve are expected
to open during fiscal year 2001. It takes approximately six to eight months to
open a new restaurant. A portion of the Initial Franchise Fee is refundable, if
the franchisee does not sign a lease within 120 days of signing the UFOC. The
full franchise fee ($30,000) is recognized only when the franchise restaurant is
opened, and not when the Initial Franchise Fee is collected. Additionally, the
Company receives a 4% royalty based on the weekly sales. The recognition of
franchise fees and franchise royalties may fluctuate from quarter to quarter
since we do not directly control the timing of franchise openings or signing of
franchise agreements. We are continuing to develop a larger corporate
infrastructure to manage and administer the growth of our franchise program.
We are subject to the special risks attendant to companies which are
expanding operations, including but not limited to, the costs of evaluating and
establishing additional locations, the costs and complexities involved in
expanding administrative infrastructures, as well as the high level of
competition in the restaurant industry, changing consumer preferences and
tastes, and general economic conditions in Florida. Because of these risks, and
the costs of expansion, our operating results could be materially adversely
affected in any operating period.
RESULTS OF OPERATIONS
YEAR ENDED MARCH 31, 2000 COMPARES TO THE YEAR ENDED MARCH 31, 1999
Food and beverage sales ("Sales") for the year ended March 31, 2000 increased by
$1,163,465 to $7,839,962 from $6,676,497 in the prior year, for an increase of
17.4%. This was primarily attributed to increased customer traffic and a 4% menu
price increase in January 2000. Additionally, the Company realized $50,000 in
franchise fee income and $8,699 in royalty income during the fiscal year. Of the
six 6 company operated restaurants in operation at the end of the current year,
all were operational for the full year.
Cost of sales consists of the cost of chicken, food, produce, beverage
and paper costs. Cost of sales for the year ended March 31, 2000 increased by
$263,648 to $3,104,444 from $2,840,796, for an increase of 9.3%. As a percentage
of Sales, cost of sales decreased to 39.3% compared to 42.5% in fiscal 1999.
This improvement was the result of operational controls and systems that were
put in place during fiscal 2000.
Labor and employee benefits which consists of wages, payroll taxes, and
other benefit and insurance costs for restaurant salaried and hourly employees
increased $25,716 to
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$2,333,310 from $2,307,594 for an increase of 1.1%. As a percentage of Sales,
labor and employee benefits decreased 5% to 29.5% in the 2000 fiscal year
compared to 34.6% in the prior fiscal year. This decrease was attributable to
higher sales and stabilized staffing. If the minimum wage is increased during
the fiscal year ending March 31, 2001, it will have a moderately adverse effect
on the restaurant payroll expense due to the large number of hourly employees on
the payroll.
Direct operating expenses, consisting of all restaurant-operating costs
other than cost of sales and payroll expenses and include occupancy costs,
utilities and other direct costs, increased $360,319 to $1,210,680 from
$850,361, for an increase of 42.37%. As a percentage of Sales, these expenses
increased 2.6% to 15.3% of sales from 12.7%. The increase was due primarily to
increased occupancy costs.
Administrative and general expenses increased by $368,547 to $1,239,907
from $877,570, for an increase of 42.3%. This increase is primarily attributable
to increases in corporate payroll necessitated by the greater number of
company-owned stores and in the hiring of human resources that will support our
franchising growth. Contributing to the increase were legal fees incurred with
the acquisition of assets and defense of lawsuits. In addition, higher
advertising and promotional expenses were incurred to promote the Chicken
Kitchen brand.
Security gains of $1,833 are included in other income (expense) in
fiscal 2000. This compares to gains of $130,546 in the prior fiscal year. We do
not expect to achieve a similar level of security gains in the future. The
increase in net loss from $550,948 to $1,623,149, a 194.6% increase, is
primarily attributed to the anticipated settlement of the Preferred Stockholders
lawsuit and the impairment loss on assets associated with the closing of the
Bayside location. Net loss per common share was $0.15 in the current year
compared with a net loss per common share of $0.07 in the prior year.
YEAR ENDED MARCH 31, 1999 COMPARED TO THE YEAR ENDED MARCH 31, 1998
Food and beverage sales ("Sales") for the year ended March 31, 1999 increased by
$4,462,358 to $6,676,497 from $2,214,139 in the prior year, for an increase of
201%. This was primarily attributed to one restaurant that opened in fiscal 1999
and three restaurants in operation for the entire current fiscal year compared
to five months in the prior year for two restaurants and one month for the
third. Of the six 6 restaurants in operation at the end of the current year, all
were operational for the full year, except one, which was opened for only seven
months, starting August 1998.
On a pro forma basis, food and beverage sales for the year ended March
31, 1999 increased by $265,497 to $6,676,497 from pro forma $6,411,000, for a
pro forma increase of 4.14%. The increase was primarily attributed to Increased
customer acceptance and awareness.
Cost of sales consists of the cost of chicken, food, produce, beverage
and paper costs. Cost of sales for the year ended March 31, 1999 increased by
$1,807,822 to $2,840,796 from $1,032,974, for an increase of 175%. As a
percentage of Sales, cost of sales decreased to 42.5% compared to 46.7% in
fiscal 1998. This improvement was the result of operational controls and systems
that were put in place during fiscal 1999.
10
<PAGE>
On a pro forma basis, cost of sales for the year ended March 31, 1999
decreased by $93,843 to $2,840,796 from pro forma $2,934,639, for a pro forma
decrease of 3%. The decreased was primarily attributed to improved operating
efficiencies.
Labor and employee benefits which consists of wages, payroll taxes, and
other benefit and insurance costs for restaurant salaried and hourly employees
increased $1,596,669 to $2,307,594 from $710,925, for an increase of 225%. As a
percentage of Sales, labor and employee benefits increased 2.5% to 34.6% in the
1999 fiscal year compared to 32.1% in the prior fiscal year. This increase was
attributable to the higher personnel costs associated with the opening of an
additional restaurant and the competitive nature of the restaurant labor market.
If the minimum wage is increased during the fiscal year ending March 31, 2000,
it will have a moderately adverse effect on the restaurant payroll expense due
to the large number of hourly employees on the payroll.
On a pro forma basis, labor and employee benefits for the year ended
March 31, 1999 increased by $254,178 to $2,307,594 from pro forma $2,053,416,
for a pro forma increase of 12%. The increase was primarily attributed to
increased labor staffing to better serve customers and decrease service times.
Direct operating expenses, consisting of all restaurant-operating costs
other than cost of sales and payroll expenses and include occupancy costs,
utilities and other direct costs, increased $560,862 to $850,361 from $289,499,
for an increase of 194%. As a percentage of Sales, these expenses decreased by
0.4% to 12.7% of sales from 13.1%.
On a pro forma basis, direct operating expenses increased $27,124 to
$850,361 from pro forma $823,237, for a pro forma increase of 3%.
Administrative and general expenses increased by $190,947 to $877,560
from $686,613, for an increase of 28%. This increase is primarily attributable
to increases in corporate payroll necessitated by the greater number of
company-owned stores and in the hiring of human resources that will support our
franchising growth. Contributing to the increase were legal fees incurred with
the acquisition of assets. In addition, higher advertising and promotional
expenses were incurred to promote the Chicken Kitchen brand.
On a pro forma basis, administrative and general expenses decreased by
$81,975 to $877,560 from pro forma $959,535, for a pro forma decrease of 9%.
This decrease was primarily attributable to savings associated with staff
reorganizations. Depreciation and amortization increased by $240,536 to $375,563
from $135,027, for an increase of 178%. The increase was attributable to the
full year's depreciation and amortization in fiscal 1999 of business and assets
acquired in late fiscal 1998. On a pro forma basis, depreciation and
amortization increased by $15,155 to $375,563 from pro forma $360,408, for a pro
forma increase of 4%. This increase was due primarily to the larger equipment
purchases associated with new units.
Security gains of $130,546 are included in other income (expense) in
fiscal 1999; there were none in the prior fiscal year. The prior fiscal year did
include a $71,550 recovery of merger costs previously written-off. We do not
expect to achieve a similar level of security gains in the future. The reduction
in net loss from $1,362,642 to $550,948, a 60% decrease, is primarily attributed
to the reduction in consulting fees of $695,896 which were incurred in the prior
year.
11
<PAGE>
Net loss per common share was $0.07 in the current year compared with a
net loss per common share of $0.14 in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
We have incurred losses from our operations since inception and we had
a working capital deficit of $1,219,155 at March 31, 2000. Our independent
accountants have modified their report on our financial statements to reflect
doubt as to our ability to continue as a going concern.
We currently operate five restaurants and are engaged in franchising
operations. Management believes that cash on hand and cash generated from
operations together with Franchise Fees and Royalty payments will be sufficient
to fund operations. However, no assurance can be given that additional funds
will not be required prior to the expiration of such period or that any funds
which may be required will be available, if at all, on acceptable terms. If
additional funds are required, the inability of the Company to raise such funds
will have an adverse effect upon its operations. To the extent that additional
funds are obtained by the sale of equity securities, the stockholders may
sustain significant dilution. If adequate capital is not available, the Company
will have to reduce or eliminate its planned expansion activities, which could
otherwise ultimately provide significant revenue to the Company.
We have no arrangements or understandings with respect to additional
financing, and any expansion of the Company's restaurants could require that the
Company's raise additional funds. In addition, expansion of the Company's
restaurant and franchising expectations may require additional capital. There
can be no assurance that the Company will be able to continue to expand or to
obtain sufficient capital in the future, nor the terms on which capital may be
obtained. The Company has no lines of credit available to it at this time.
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are included herein:
Audited Financial Statements
Report of Independent Certified Public Accountant
Balance Sheets as of March 31, 2000 and 1999
Statements of Operations for the Years Ended March 31, 2000 and 1999
Statements of Stockholders' Equity for the Years Ended March 31, 2000
and 1999
Statements of Cash Flows for the Years Ended March 31, 2000 and 1999
Notes to Financial Statements.
12
<PAGE>
CHICKEN KITCHEN CORPORATION
FINANCIAL STATEMENTS AS OF
MARCH 31, 2000 AND 1999
TOGETHER WITH REPORT OF INDEPENDENT AUDITORS
13
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Chicken Kitchen Corporation:
We have audited the accompanying balance sheets of Chicken Kitchen Corporation
("the Company") as of March 31, 2000 and 1999, and the related statements of
operations, stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Chicken Kitchen Corporation as
of March 31, 2000 and 1999, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred losses from
operations since inception and may need additional funds to continue to operate.
The Company had a working capital deficit of $(1,219,155) at March 31, 2000 and,
as discussed in Note 9, is involved in litigation, which if resolved against the
Company could have a materially adverse effect on the operating cash flow of the
Company. These factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plan in regard to these matters is
described in Note 11. The accompanying financial statements do not include any
adjustments relating to the recoverability of asset carrying amounts or the
amount of liabilities that might result should the Company be unable to continue
as a going concern.
McKEAN, PAUL, CHRYCY, FLETCHER & CO.
Miami, Florida,
July 13, 2000. Except for footnote 10,
as to which the date is September 29, 2000.
14
<PAGE>
CHICKEN KITCHEN CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, March 31,
2000 1999
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 137,296 $ 183,430
Marketable securities -- 150,775
Prepaid advertising 100,000 --
Other current assets 100,655 140,874
----------- -----------
Total Current Assets 337,951 475,079
----------- -----------
PROPERTY AND EQUIPMENT, net 643,070 781,998
INTANGIBLE ASSETS, net 1,146,302 1,769,272
OTHER ASSETS 53,726 64,746
NOTE RECEIVABLE FROM AND ADVANCES TO PRINCIPAL STOCKHOLDER
213,490 22,040
----------- -----------
Total Assets $ 2,394,539 $ 3,113,135
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable and accrued interest $ 121,403 $ 103,403
Current portion of settlement fee due to preferred stockholders 300,000 --
Current portion of equipment notes 30,690 24,972
Accounts payable 485,500 345,892
Accrued expenses 399,513 310,546
Deferred franchise fees 120,000 25,000
Reserve for impairment loss 100,000
----------- -----------
Total Current Liabilities 1,557,106 809,813
----------- -----------
LONG TERM OBLIGATIONS:
Long term portion of settlement fee due to preferred stockholders 150,000 --
Long term portion of equipment notes 11,136 19,322
----------- -----------
161,136 19,322
----------- -----------
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
Series A, convertible preferred stock, $0.0005 par value; 1,000,000
shares authorized; 3,880 and 3,905 shares issued and outstanding,
respectively 2 2
Common stock Class A, $0.0005 par value; 50,000,000 shares
authorized; 11,907,954 and 11,857,954 issued; and 11,807,954 and
11,737,954 outstanding, respectively (Note 8) 5,904 5,880
Common stock Class B, $0.0005 par value; 15,000,000 shares
authorized; 1,018,950 issued and outstanding in 2000 and 1999 509 509
Additional paid-in capital 5,448,553 5,406,577
Accumulated deficit (4,778,671) (3,118,796)
Treasury shares, at cost -- (10,172)
----------- -----------
Total Stockholders' Equity 676,297 2,284,000
----------- -----------
Total Liabilities and Stockholders' Equity $ 2,394,539 $ 3,113,135
=========== ===========
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
15
<PAGE>
CHICKEN KITCHEN CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
March 31, 2000 March 31, 1999
2000 1999
---- ----
<S> <C> <C>
REVENUES:
Food and beverage sales $ 7,839,962 $ 6,676,497
Franchise revenues 58,699 --
------------ ------------
Total revenues 7,898,661 6,676,497
OPERATING EXPENSES:
Cost of sales 3,104,444 2,840,796
Labor and employee benefits 2,333,880 2,307,594
Direct operating expenses 1,210,120 850,361
Consulting fees 115,771 103,992
Administrative and general 1,276,046 877,560
Depreciation and amortization 404,271 375,563
------------ ------------
Total operating expenses 8,444,532 7,355,866
------------ ------------
Loss from operations (545,871) (679,369)
OTHER INCOME (EXPENSE):
Provision for impairment loss on closing of restaurant (503,080) --
Preferred stockholder litigation settlement and legal fees (600,000) --
Net realized and unrealized gains on sales of marketable securities 1,833 130,546
Other, net (including interest expense of $27,852 and $17,535,
respectively) (12,180) (2,125)
------------ ------------
Total other (expense) income, net (1,113,427) 128,421
------------ ------------
Loss before income taxes (1,659,298) (550,948)
------------ ------------
INCOME TAXES -- --
------------ ------------
Net loss (1,659,298) (550,948)
PRO RATA PORTION OF PREFERRED DIVIDENDS (310,400) (314,189)
------------ ------------
Net loss applicable to common stockholders $ (1,969,698) $ (865,137)
============ ============
Weighted Average Common Shares Outstanding 12,801,151 12,121,463
============ ============
Net Loss Per Common Share (Note 2) $ (0.15) $ (0.07)
============ ============
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
16
<PAGE>
CHICKEN KITCHEN CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
Preferred Class A Class B
Stock Common Stock Common Stock
Amount Shares Amount Shares Amount
------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance at April 1, 1998 $ 2 11,535,248 $ 5,768 -- $ --
Conversion of Class A common stock into
Class B common stock (Note 6) -- (1,018,950) (509) 1,018,950 509
Conversion of 95 shares of Series A preferred
stock into Class A common stock (Note 6) -- 524,744 262 -- --
Issuance of common stock for dividend on
Series A convertible, preferred stock (Note 6) -- 426,912 213 -- --
Acquisition of treasury stock -- (20,000) -- -- --
Issuance of common stock valued between
$0.10 and $0.34 per share to individuals for
professional services rendered (Note 6) -- 155,000 78 -- --
Issuance of common shares pursuant to prior
year acquisition agreement (Note 6) -- 135,000 68 -- --
Net loss for the year -- (550,948) (550,948)
----------- ----------- ----------- ----------- -----------
Balance at March 31, 1999 2 11,737,954 5,880 1,018,950 509
Conversion of 25 shares of Series A preferred
stock into Class A common stock (Note 6) -- 50,000 24 -- --
Sale of treasury stock (Note 6) -- 20,000 -- -- --
Issuance of stock options to purchase shares of
Class A common stock to a consultant,
which is related to the Principal Stockholder
(Note 8) -- -- -- -- --
Net loss for the year -- (1,659,298) (1,659,298)
----------- ----------- ----------- ----------- -----------
Balance at March 31, 2000 $ 2 11,807,954 $ 5,904 1,018,950 $ 509
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Additional
Paid-In Accumulated Treasury
Capital Deficit Shares Total
------- ------- ------ -----
<S> <C> <C> <C> <C>
Balance at April 1, 1998 $ 5,156,420 $(2,363,915) $ -- $ 2,798,275
Conversion of Class A common stock into
Class B common stock (Note 6) -- -- -- --
Conversion of 95 shares of Series A preferred
stock into Class A common stock (Note 6) (262) -- -- --
Issuance of common stock for dividend on
Series A convertible, preferred stock (Note 6) 203,720 (203,933) -- --
Acquisition of treasury stock -- -- (10,172) (10,172)
Issuance of common stock valued between
$0.10 and $0.34 per share to individuals for
professional services rendered (Note 6) 46,767 -- -- 46,845
Issuance of common shares pursuant to prior
year acquisition agreement (Note 6) (68) -- -- --
Net loss for the year
----------- ----------- ----------- -----------
Balance at March 31, 1999 5,406,577 (3,118,796) (10,172) 2,284,000
Conversion of 25 shares of Series A preferred
stock into Class A common stock (Note 6) (24) -- -- --
Sale of treasury stock (Note 6) -- (577) 10,172 9,595
Issuance of stock options to purchase shares of
Class A common stock to a consultant,
which is related to the Principal Stockholder
(Note 8) 42,000 -- -- 42,000
Net loss for the year
----------- ----------- ----------- -----------
Balance at March 31, 2000 $ 5,448,553 $(4,778,671) $ -- $ 676,297
=========== =========== =========== ===========
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
17
<PAGE>
CHICKEN KITCHEN CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
March 31, March 31,
20000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,659,298) $ (550,948)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 404,271 375,563
Provision for impairment loss on assets 503,080 --
Settlement of preferred stockholder litigation 600,000 --
Issuance of common stock or options for services 42,000 46,845
Net realized and unrealized gains on sales of marketable
securities (1,833) (130,546)
Changes in operating assets and liabilities:
Other current assets 40,219 (74,123)
Sale of marketable securities, net 152,608 159,770
Prepaid advertising (100,000) --
Advances to principal stockholder (180,430) (22,040)
Other assets -- 5,203
Settlement fee due to preferred stockholders (150,000) --
Accounts payable and accrued expenses 228,575 250,952
Increase in note payable due to interest 18,000 10,800
Deferred franchise fee 95,000 25,000
----------- -----------
Net cash provided by (used in) operating activities (7,808) 96,476
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (39,086) (259,930)
----------- -----------
Net cash used in investing activities (39,086) (259,930)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of equipment notes (8,835) --
Sale (purchase) of treasury stock 9,595 (10,172)
----------- -----------
Net cash provided by (used in) financing activities 760 (10,172)
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (46,134) (173,626)
----------- -----------
CASH AND CASH EQUIVALENTS, beginning of year 183,430 357,056
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 137,296 $ 183,430
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest expense $ 9,852 $ 6,734
=========== ===========
Cash paid for income taxes $ -- $ --
=========== ===========
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
18
<PAGE>
CHICKEN KITCHEN CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The Company is engaged in the business of operating "Chicken Kitchen"
restaurants and selling franchises. The restaurants feature a menu focused
on marinated grilled chicken and capitalizes on the current consumer
preference for healthier, lower-fat foods. During the year ended March 31,
1999, the Company began the selling of franchise locations. The franchise
agreement grants the franchisee a non-exclusive license to open and operate
a "Chicken Kitchen" restaurant for a 20 year period, with one additional 20
year option. The Company collects an initial franchise fee of $30,000,
royalty fees and a percentage of revenues for advertising. At March 31,
2000, the Company had 6 Company owned restaurants located in South Florida.
Two franchise restaurants were opened during fiscal 2000, and 10 additional
franchise locations will be opened during fiscal 2001.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and revenue and expenses during the period reported.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less at the date of acquisition to be cash equivalents. The
concentration of credit risk associated with cash and cash equivalents is
considered low due to the credit quality of the issuers of the financial
instruments.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization is
computed over the estimated useful lives (ranging from five to twenty
years) of the assets on a straight-line method.
Intangible Assets
Registered trademarks and trade names are being amortized over their
estimated useful lives of 15 years. In connection with the acquisition of
restaurant locations, the Company assigns a portion of the cost of the
acquisition to the value of the lease acquired ("Leasehold interest") and
amortizes the amount over the life of the lease (ranging from 4 to 20
years). The cost of acquisitions in excess of the fair value of net assets
acquired is being amortized on a straight-line basis over 10 years.
Impairment of Long-Lived Assets
The Company continually evaluates whether events and circumstances have
occurred that may warrant revision of the estimated useful lives of its
intangible and other long-lived assets or whether the remaining balance of
its intangible and other long-lived assets should be evaluated for possible
impairment. The Company uses an estimate of the related undiscounted cash
flows over the remaining lives of the intangible and other long-lived
assets in determining whether an impairment has occurred.
19
<PAGE>
Income Taxes
The Company has established deferred tax assets and liabilities for
temporary differences between financial statement and tax bases of assets
and liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
Loss Per Share
Basic loss per common share is computed by dividing net loss attributable
to common stockholders (the net loss plus the pro rata portion of preferred
dividends) by the weighted average number of shares of common stock
outstanding during the year. Diluted loss per share, which assumes that the
convertible preferred stock is converted into Class A voting common stock
and the stock options to purchase shares of Class A voting common stock
(see Notes 6 and 8) are exercised, is not presented because the effect
would be anti-dilutive for both 2000 and 1999. The weighted average shares
outstanding used in the computation of net loss attributable to common
shares are as follows:
Weighted Average Shares
Outstanding
For the Years Ended
-------------------
March 31,
2000 1999
---- ----
Class A common stock 11,782,201 11,157,527
Class B common stock 1,018,950 963,936
---------- ----------
12,801,151 12,121,463
========== ==========
Fair Value of Financial Instruments and Marketable Securities
Carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, accrued payroll, and other accrued
liabilities approximate fair value because of their short term maturities.
The marketable securities are classified as trading securities and are
recorded at fair value based upon quoted market prices. Both realized and
unrealized gains and losses are included in other income or expense during
the period incurred. The cost of securities sold is based on the specific
identification method.
Franchise Revenues
Franchise revenues consist of franchise fees, which are typically collected
upon execution of an area development and/or franchise agreement, and
continuing royalties, based upon gross sales. Franchise fees are initially
recorded as deferred franchise fee income and are recognized in earnings
either when franchised restaurants are opened, or upon forfeiture of such
fees by the franchisees pursuant to the terms of the franchise development
agreements, as applicable. Monthly franchise fees are accrued based on the
specified percentages of the franchisees' sales for the month. Advertising
fees received from the franchisees are reflected as a liability until the
advertising expenditures are made.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform
with the current year presentation.
20
<PAGE>
3. PROPERTY AND EQUIPMENT
Property and equipment, consisted of the following:
<TABLE>
<CAPTION>
March 31, March 31,
2000 1999
---- ----
<S> <C> <C>
Restaurant equipment $ 405,680 $ 414,143
Furniture, fixtures and office equipment 211,369 208,573
Leasehold improvements 354,153 351,181
Assets under capital lease 49,102 38,723
--------- ---------
Total cost 1,020,304 1,012,620
Less accumulated depreciation and amortization (377,234) (230,622)
--------- ---------
Property and equipment, net $ 643,070 $ 781,998
========= =========
</TABLE>
4. INTANGIBLE ASSETS
Intangible assets, consisted of the following:
<TABLE>
<CAPTION>
March 31, March 31,
2000 1999
---- ----
<S> <C> <C>
Trade name $ 12,245 $ 12,245
Leasehold interest 584,734 614,734
Excess of acquisition costs over net assets acquired
1,022,411 1,479,459
Total cost 1,619,390 2,106,438
Less accumulated amortization (473,088) (337,166)
---------- ----------
Intangible assets, net $1,146,302 $1,769,272
========== ==========
</TABLE>
Leasehold interest and excess of acquisition costs over net assets acquired
were recorded as a result of acquisitions.
5. PREFERRED STOCKHOLDER SETTLEMENT
In July 2000, the Company entered a settlement agreement for alleged
breaches of a subscription agreement to convert preferred shares into
restricted common stock, brought by preferred stockholders. The settlement
requires the Company to convert the preferred stock into 16,000,000 shares
of restricted Class A common stock, and further requires the Company to pay
the preferred stockholders $350,000 at the closing of formal documentation,
and, issue a promissory note for, at the election of the preferred
stockholders, either an additional $100,000 six months after the closing,
or $150,000 one year after the closing. The promissory note will be secured
by 500,000 shares of the Company's Class A common stock owned by the
Company's president. The preferred stockholders will also enter into a
voting agreement binding themselves to vote their exchanged shares pursuant
to the recommendation of the Company's board of directors. No dividends
will be due or paid on the converted preferred stock. For the year ended
March 31, 2000, the Company provided $500,000 ($50,000 which is held in
escrow at March 31, 2000) for settlement of this matter and incurred
$100,000 in legal fees.
21
<PAGE>
6. STOCKHOLDERS' EQUITY
Common Stock
In January 1998, the Company amended its Articles of Incorporation to
increase the total number of authorized common shares to 65,000,000,
divided into two classes (50,000,000 shares of Class A and 15,000,000
shares of Class B) and increase the total number of authorized preferred
shares to 1,000,000. In connection with the amendment, holders of Class A
common stock were given a one-time opportunity to convert their Class A
common stock into Class B common stock. In April 1998, 1,018,950 shares of
Class A common stock were converted into Class B common stock. The
dividends, distributions and relative rights, privileges and limitations of
the Class B common stock are identical to the Class A common stock, except
that each share of Class B common stock is entitled to 10,000 votes (the
Class A common stock is entitled to 1 vote), and the Class B common stock
is convertible at any time into Class A common stock.
In September and December 1998, 155,000 shares of restricted common stock
were issued for professional and consulting services and were valued at
$46,845 in the aggregate, representing the market value of the common stock
on the dates issued, (discounted by 10% due to trading restrictions and the
stock's thin trading).
In March 1999, 135,000 shares of Class A common stock were issued in
connection with an acquisition agreement entered into by the Company during
February 1998.
In May 1999, 20,000 shares of Class A common stock held in treasury were
sold resulting in proceeds of $9,595. The loss on the sale of treasury
stock was recorded directly to Accumulated Deficit.
Series A Convertible Preferred Stock
The Series A Convertible preferred stock is convertible at any time, at the
option of the holder, into a number of shares of common stock equal to
$1,000 divided by the lower of (a) 75% of the closing bid price of the
common stock on the first day that proceeds of the offering were disbursed
or (b) 65% of the average closing bid price of the common stock over the
five trading days immediately prior to the date of conversion. Dividends on
the Series A preferred stock are payable at the rate of 8% per annum
payable on July 1, in either cash or, at the option of the Company, in
Class A common stock. The preferred stock has a liquidation preference of
$1,300 per share over the common stock and has no voting rights.
During the years ended March 31, 2000 and 1999, 25 and 95 shares of Series
A preferred stock were converted into 50,000 and 524,744 shares,
respectively, of Class A common stock, in accordance with the Second
Offering. During the year ended March 31, 1999, 426,912 shares of Class A
common stock were issued for payment of the July 1, 1998 dividend. Pursuant
to an agreement to settle a lawsuit (see Note 5) Series A preferred stock
will be converted into 16,000,000 shares of Class A common stock and the
Company will not be required to pay any dividends in arrears.
22
<PAGE>
7. INCOME TAXES
The Company has net operating loss carryforwards for federal income tax
purposes of approximately $3,010,000 and $2,147,000, at March 31, 2000 and
1999, respectively, which begin to expire in 2011. Due to the change in
control in December 1996 of the Company (see Note 1) and acquisitions, a
portion of the net operating losses could be limited in the future. The
components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
March 31, March 31,
2000 1999
---- ----
<S> <C> <C>
Deferred tax (liabilities) assets
Net operating loss carryforwards $ 1,173,951 $ 837,281
Other temporary timing differences 157,201 6,246
Deferred franchise fees 46,800 -
Reserves and accruals 342,420 -
Difference in depreciation and
amortization of assets 42,504 (53,214)
---------- --------
1,762,876 790,313
Less valuation allowance (1,762,876) (790,313)
---------- --------
Net deferred tax (liabilities) assets $ - $ -
=========== ========
</TABLE>
Realization of the above deferred tax assets is dependent on generating
sufficient taxable income in the future to offset the deductible temporary
differences generating the deferred tax assets. Net deferred tax assets
have been fully reserved, as their net realizability is not assured at the
current time.
8. STOCK OPTIONS
The Company has adopted a stock option plan, as amended, which grants
options to employees or other individuals who perform services for the
Company. Options are granted with exercise prices equal to the fair market
value of the Company's common stock at the time of grant and are
exercisable over different periods, not exceeding ten years.
During the year ended March 31, 2000, 1,452,675 options were granted to
officers and employees which are exercisable at any time over a ten-year
period with an exercise price of $0.14 per share representing the market
value of the Company's common stock on the date of grant.
Also during the year ended March 31, 2000, 300,000 options were granted to
a consultant (who is related to the Principal Stockholder) which are
exercisable at any time over a ten-year period with an exercise price of
$0.14 per share representing the market value of the Company's common stock
on the date of grant. In accordance with SFAS No. 123, the value of the
options ($42,000), on the date of grant using the Black-Scholes
option-pricing model, was recorded as additional consulting fees.
23
<PAGE>
The following is a summary of stock option activity for the years ended
March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Employee Weighted Non-Employee Weighted
Option Average Option Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at April 1, 1998 1,000,000 $0.36 800,000 $1.99
Granted 100,000 0.20 - -
Cancelled or expired (100,000) 0.33 (100,000) 1.75
Exercised - - - -
--------- --------
-
Outstanding at March 31, 1999 1,000,000 0.35 700,000 2.03
Granted 1,452,675 0.14 300,000 0.14
Cancelled or expired (100,000) 0.20 (300,000) 1.70
Exercised - - - -
--------- --------
Outstanding at March 31, 2000 2,352,675 $0.23 700,000 $1.36
========= ========
Exercisable at March 31, 2000 2,132,675 700,000
========= ========
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock options granted to Company employees. Accordingly,
no compensation cost has been recognized for outstanding stock options
issued to those individuals. Had compensation cost for the Company's
outstanding stock options been determined based on the fair value at the
grant dates for those options consistent with SFAS No. 123, the Company's
net loss and loss per share would have differed as reflected by the pro
forma amounts indicated:
<TABLE>
<CAPTION>
For the Year Ended
March 31, March 31,
2000 1999
---- ----
<S> <C> <C>
Net loss applicable to common stock - as reported $(1,969,698) $(865,137)
=========== =========
Net loss applicable to common stock - pro forma $(2,156,273) $(884,897)
=========== =========
Net loss per common share - as reported $ (0.15) $ (0.07)
=========== =========
Net loss per common share - pro forma $ (0.17) $ (0.07)
=========== =========
</TABLE>
The value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model using the following weighted average
assumptions for the years ended March 31, 2000 and 1999, respectively:
expected volatility approximating 287% and 151%, risk-free interest rate of
8% and 7%, expected dividends of $0 and $0, and expected lives of 10 years
and 10 years.
9. COMMITMENTS AND CONTINGENCIES
(A) Closing of Restaurant Location
In May 2000, the Company closed one of its restaurant locations and
recognized an impairment loss of $403,080, which the Company recognized at
March 31, 2000, relating to the write-off of $379,543 of intangible assets
and $23,537 of equipment. The Company vacated the leased premises, and the
landlord is seeking damages for the remaining lease payments (approximately
$428,000) under the lease term. The Company has brought a counter-claim
against the landlord for breach of the lease agreement. While the parties
have begun to discuss settlement possibilities, legal counsel has indicated
that they are unable to determine whether and to what extent the Company
might suffer an adverse judgement. At March 31, 2000, the Company has
provided $100,000 for possible future lease and/or settlement payments.
24
<PAGE>
(B) Litigation
Leased Premises Litigation
The Company is currently a defendant in a lawsuit, filed by the lessor of a
restaurant site, for eviction, based on alleged non-monetary breaches of
the provisions of the written lease agreement. The Company is vigorously
defending the lawsuit. The action remains pending, and while the Company is
confident in its position, an eviction from the premises would have a
materially adverse effect on the operating cash flow of the Company. As the
case has not yet been set for trial, legal counsel has advised the Company
that it is not possible to determine whether, and to what extent if any,
the Company might suffer adverse judgements. The parties have recently
begun to discuss a possible settlement of the action.
Guarantee Litigation
A non-interest bearing note payable (with an imputed principal balance and
accrued interest of $121,403 and $103,403 at March 31, 2000 and 1999,
respectively) made in connection with the acquisition of restaurant assets
and a location is collateralized by 100,000 issued shares of the Company's
restricted Class A common stock held in escrow. The note was due in
February 1999 and has not yet been repaid by the Company. The Company
believes it has the right, under the governing documents, to satisfy the
note with the escrowed stock. The holder of the note declined to accept the
stock as payment and has brought a lawsuit for eviction, based on a
cross-default provision in the promissory note and lease. This lawsuit has
been set for trial, and the parties are engaging in settlement discussions.
If a settlement cannot be reached, and the case proceeds, legal counsel had
advised the Company that it is not possible to determine whether, and to
what extent if any, the Company might suffer adverse judgement. The Company
is vigorously defending the action.
Other Litigation
The Company is also currently a defendant in a lawsuit filed during October
1999 by a former supplier of its chicken products for non-payment. As the
lawsuit is in the discovery stage, legal counsel has advised the Company
that it is not possible to determine whether, and to what extent if any,
the Company might suffer adverse judgements. The Company is vigorously
defending the action and has asserted counter claims.
(C) Leases
The Company leases the facilities for office and restaurant locations under
various non-cancelable operating lease agreements, one of which is with a
related party (lease expense of approximately $30,000 annually). Certain of
these lease agreements contain provisions for rent overrides based on a
percentage of gross sales. Additionally, the Company, in certain instances,
is responsible for real estate taxes and common area maintenance costs. The
leases also provide for renewal options. Future minimum rental commitments
with unrelated parties, excluding renewal option periods, under the
operating lease agreements at March 31, 2000 are as follows: 2001 -
$213,086; 2002 - $199,490; 2003 - $180,545; 2004 - $184,202; 2005 -
$169,981 and thereafter - $1,376,421.
Total occupancy expense was $629,645 and $488,640, for the years ended
March 31, 2000 and 1999, respectively, and is included in "Direct operating
expenses" in the accompanying statements of operations.
25
<PAGE>
10. RELATED PARTIES
During the year ended March 31, 2000, the Company advanced funds to an
affiliate, which is controlled by the Principal Stockholder. On December
31, 1999, the Company converted the amount ($138,913) into a promissory
note receivable ("the Note"). The note accrues interest at an annual rate
of 12% and matures on December 31, 2001. In accordance with the terms of
the Note, the Company accepted $100,000 in advertising credit from the
Affiliate as partial repayment of the indebtedness. The advertising credit
is with an unrelated third party, and ads may be placed through December
31, 2001. No advertising has yet been placed with the third party;
therefore, the entire amount is reflected as "Prepaid Advertising" in the
accompanying Balance Sheets. Subsequent to year-end, the Affiliate re-paid
$41,000 to the Company.
Also during the year, the Company made advances to the Principal
Stockholder in the amount of $159,390, of which $70,000 was repaid in
September 2000. Subsequent to year-end, the Company made additional
advances to the Principal Stockholder in the amount of $125,000. During
September, the Principal Stockholder signed a promissory note in the amount
of $187,490. The note bears interest at 10% and is due September 30, 2003.
The note is collateralized by 1,000,000 shares of the Company's Class A
common stock owned by the Principal Stockholder, which is to be held in
escrow.
In June 2000, the Company entered into an employment agreement with the
Principal Stockholder. The agreement calls for a base salary of $300,000
per year and the right to open up to ten franchise locations which will be
exempt from the payment of the franchise fees and royalties (an "Exempt
Franchise"). The Principal Stockholder will receive a $1,000,000 settlement
payment if the Company terminates the agreement without cause or if the
Principal Stockholder terminates the agreement with cause. The employment
agreement also specifies that for each franchise agreement entered and
opened by the Company, including the franchises opened during fiscal 2000,
the Principal Stockholder will be granted the option to purchase 100,000
shares of Class A common stock, or the right to open an additional Exempt
Franchise. However, the issuance of the options or additional franchises
will only be made upon the occurrence of certain situations, as defined,
such as voluntary or involuntary termination of the Principal Stockholder,
change in control of the Board of Directors, leveraged buy-out, merger, or
court order.
The Company paid compensation in the form of consulting fees, to entities
owned by family members of the Principal Stockholder, of $115,771 and
$90,926 for the years ended March 31, 2000 and 1999, respectively.
11. GOING CONCERN AND MANAGEMENT'S PLANS
The Company has incurred losses from operations since inception, and at
March 31, 2000 the Company had a working capital deficit of $(1,219,155).
Management has indicated that cash generated from store locations and the
selling of franchisees should be sufficient to fund operations. However, no
assurance can be given that additional funds will not be required. If
additional funds are required, the inability to raise such funds may have
an adverse effect upon operations.
26
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CORPORATE PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The following table sets forth-certain information with respect to our
executive officers and directors. Each director holds such position until the
next annual meeting of the Company's shareholders and until his respective
successor has been elected. Our Board of Directors may remove with or without
cause any of our officers at any time.
NAME POSITION
Christian Mahe de Berdouare President, Chief Executive Officer
and Director
Frank Blackman Vice President of Franchising
and Secretary
Joseph A. Remsa Jr. Executive Vice President
Alan Barton Vice President of Training and
Human Resources
Joseph King Vice President of Purchasing
PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR: CHRISTIAN MAHE DE BERDOUARE
Mr. de Berdouare, age 44 has been President, Chief Executive Officer,
Director of the Company and a member of the Franchise Committee of the Board of
Directors, since December 1995. In addition, since 1988, he has been director,
President, Chief Executive Officer and holder of all of the issued and
outstanding shares of common stock of "CK of Delaware". From January 1984 to
December 1996, Mr. de Berdouare was the Founder, President and Director of
Chicken Kitchen, Ltd., Chicken Kitchen 52 OLP, Inc., Chicken Kitchen Corporation
of Delaware, all predecessor companies that operated as Chicken Kitchen(R)
restaurants in New York City and Miami. Prior to 1984, Mr. de Berdouare was a
Vice President, and founder of the Soft Commodities desk, at the London office
of Drexel Burnham Lambert, Inc. Subsequently, Mr. de Berdouare was hired by
France's largest commodities trading firm, Interagra, S.A., to establish their
Soft Commodities operation, which he left a few years later, to start his own
International Trading Operation, in Paris.
27
<PAGE>
VICE PRESIDENT & SECRETARY: FRANK BLACKMAN
Mr. Blackman, age 45, has been Vice President of Franchising and
Secretary since March 1997. Mr. Blackman was Director, Marketing Sales Training
and Performance Improvement of Republic Industries from 1997 to 1998. From 1991
to May 1997, he was Director, Training and Development, for Triarc Restaurant
Group, Arby's subsidiary. Mr. Blackman was Director, Training, Development, and
Area Manager for Miami Foods, Ltd. from 1985 to 1991. From 1982 to 1985 Mr.
Blackman was Sales Manager for Mangren Research and Development Corporation and
he held various staff positions including Area Supervisor for Wendy's
International, Inc. from 1977 to 1982. Mr. Blackman received a BS from Nova
Southeastern University and an MBA from Florida Atlantic University.
EXECUTIVE VICE PRESIDENT: JOSEPH A. REMSA, JR.
Mr. Remsa, age 49, has had a restaurant career encompassing both senior level
executive positions with restaurant franchisors and franchisees as well as
entrepreneurial ventures as concept founder and franchisee. Mr. Remsa has been
associated with Pizza Hut (National Pizza Company) as regional Vice President;
Sonic Restaurants as Director of Development and Franchisee; Sizzler as South
Florida Franchisee; Waffle House (Columbia Foods) franchise Vice President; and
most recently Offerdhal's Bagel Gourmet where he participated in the formative
merger, concept creation, and IPO of Einstein Brothers Bagels. Mr. Remsa is an
Adjunct Professor and Doctoral student at Florida Atlantic University in Boca
Raton, Florida. He has a MBA and BA degree in Economics from the University of
South Florida.
VICE PRESIDENT OF TRAINING AND HUMAN RESOURCES: ALAN BARTON
Alan Barton, age 37, recently joined the Company from his position with
Pollo Tropical, Inc., from 1995 to 1999, where he was responsible for opening
the company's franchised units and most recently served as Manager of the
Training Design and Delivery. Mr. Barton held similar posts at Arby's, Inc. from
1991 to 1994, where he first managed the franchising function for the
Northeastern US and then the State of Florida. Prior to Arby's, Inc., Alan
worked at the delivery division for Pizza Hut, Inc., of PepsiCo. Mr. Barton has
a Bachelor of Science degree in Personnel Management from Florida State
University.
VICE PRESIDENT OF PURCHASING: JOSEPH KING
Joseph King, age 59, has been Vice President of Purchasing since March
15, 1999. He was Director of Purchasing and R&D for Pollo Tropical Inc. from
1994 to 1998. Additionally, Joe's 10 years experience as the Southeastern
Regional Sales Manager for Tetley, Inc. and 8 years as Merchandising Manager
with the Martin Brower Corporation, McDonald's largest foodservice distributor
in the nation.
28
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth the total compensation paid to our chief
executive officer for the last three completed fiscal years. No other executive
officer of the Company received compensation of $100,000 or more during any such
year.
NAME AND FISCAL SALARY BONUS
PRINCIPAL POSITION YEAR
CHRISTIAN MAHE DE BERDOUARE 2000 $240,000 $0
PRESIDENT, CHIEF EXECUTIVE OFFICER 1999 $195,000 $0
AND DIRECTOR 1998 $180,000(1) $0
-------------
(1) Includes $12,406 for automobile expense.
In June 2000, the Company entered into an employment agreement with the
Principal Stockholder. The agreement calls for a base salary of $300,000 per
year and the right to open up to ten franchise locations which will be exempt
from the payment of the franchise fees and royalties (an "Exempt Franchise").
The Principal Stockholder will receive a $1,000,000 settlement payment if the
Company terminates the agreement without cause or if the Principal Stockholder
terminates the agreement with cause. The employment agreement also specifies
that for each franchise agreement entered and opened by the Company, including
the franchises opened during fiscal 2000, the Principal Stockholder will be
granted the option to purchase 100,000 shares of Class A common stock, or the
right to open an additional Exempt Franchise. However, the issuance of the
options or additional franchises will only be made upon the occurrence of
certain situations, as defined, such as voluntary or involuntary termination of
the Principal Stockholder, change in control of the Board of Directors,
leveraged buy-out, merger, or court order.
STOCK OPTION PLAN
The following table set forth certain information concerning options
granted to the Named Executive Officer in the foregoing Summary Compensation
Table for the fiscal year ended March 31, 2000. There were no options exercised
during the fiscal year ended March 31, 2000.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
Name No. of Securities Percent of Total Exercise or Base Expiration Date
Underlying Options Granted Price
Options Granted to Employees in
Fiscal Year
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Christian Mahe de 0 0
de Berdouare
CEO
------------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
The following table set forth certain information concerning options
held by the Named Executive Officer in the Summary Compensation table as of
March 31, 2000. No options were exercised during the fiscal year ended March 31,
2000.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
Name Number of shares of Class A Value of Unexercised in-the-
Common Stock Underlying money Options as of
Unexercised Options held as of 3/31/2000
3/31/2000
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
Christian Mahe de
Berdouare CEO 800,000 (all exercisable) $0.00
-----------------------------------------------------------------------------------------------------
</TABLE>
By resolution of our Board of Directors, we adopted a Stock Option Plan
("the Plan"). The Plan enables the Company to offer an incentive based
compensation system to employees, officers and directors and to employees of
companies who do business with the Company. At the sole discretion of its Board
of Directors, any employee of the Company or any our subsidiaries may be made
eligible to participate in the Plan.
2,000,000 shares are authorized for issuance under the Plan, of which
800,000 shares are issuable under incentive stock options to Mr. de Berdouare;
200,000 options to Mr. Remsa; 100,000 to Mr. Blackman and 22,675 options to Mr.
Barton. Mr. de Berdouare's options are exercisable for five years at a price of
$0.33 per share and the options to Mr. Remsa are exercisable at $0.14; Mr.
Blackman and Barton are exercisable at $0.65 and $0.43 respectively. We may
increase the number of shares authorized for issuance under the Plan or may make
other material modifications to the Plan without shareholder approval. However,
no amendment may change the existing rights of any option holder.
DIRECTORS COMPENSATION.
There are no standard or other arrangements pursuant to which any
director of the Company is or was compensated during our last fiscal year for
services as a director, for committee participation or for special assignments.
30
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information relating to the beneficial
ownership of our Class A and Class B Common Stock as of January 25, 2000 by (i)
each person known by us to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock (ii) each of our directors and executive
officers, and (iii) all of our directors and executive officers as a group.
<TABLE>
<CAPTION>
Title of Class Name and Address of Beneficial Owner Amount and Nature of Percentage of Class
Beneficial Owner
<S> <C> <C> <C>
Class A Christian Mahe de Berdouare (1) 4,385,000 34.23%
Director, President and Chief
Executive Officer
770 Ponce de Leon, Suite 200
Coral Gables, Fl 33134
Class B Christian Mahe de Berdouare (1) 1,000,000 98.14%
Director, President and Chief
Executive Officer
770 Ponce de Leon, Suite 200
Coral Gables, Fl 33134
Class A Joseph A. Remsa Jr.(2) 200,000 1.66%
Executive Vice President
770 Ponce de Leon, Suite 200
Coral Gables, Fl 33134
Class A Frank Blackman (3) 110,000 .92%
Vice President Franchising
Secretary
770 Ponce de Leon, Suite 200
Coral Gables, Fl 33134
Class A Alan Barton (4) 22,675 .19%
Vice President Training
770 Ponce de Leon, Suite 200
Coral Gables, Fl 33134
Class A Stratcomm Media, Ltd. 690,000 5.84%
1947 Lee Road Winter Park, FL 32789
Class A All Directors and Officers as A 4,717,675 36.65%
Group (5 persons)
</TABLE>
-----------
(1) Includes 800,000 shares of Class A common stock which may be acquired
on exercise of outstanding common stock purchase options at $0.33 for 5
years. Represents shares of Class B common stock which may be converted
into Class A common stock at the holder's option. Does not include
500,000 shares of Class B common stock owned by Mr. Mahe de Berdouare's
spouse to which he disclaims any beneficial interest.
(2) Includes 200,000 shares of common stock issuable upon exercise at $.14
per share for 5 years.
(3) Includes 100,000 shares of common stock issuable upon exercise of
option at $0.65 per share for 5 years.
(4) Includes 22,675 shares of common stock issuable upon exercise of option
at $.4343 per share for 5 years.
31
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
We were incorporated in Florida in November 1994 as a wholly owned
subsidiary of Stratcomm Media, Ltd. ("Stratcomm"), under the name Chicken
Acquisition Corporation. Stratcomm purchased 4,900,000 shares for $2,450 and
subsequently contributed $843,097 in capital to the Company. In December 1996,
Stratcomm canceled 2,950,000 shares in connection with the acquisition of "CK of
Delaware", owned by Mr. Berdouare. The purchase price for "CK of Delaware" was
5,100,000 shares of the Company's common stock that was valued at $10,000.
The Company leased its executive offices from its President under an
oral lease for $2,500 per month. The lease was on a month-to-month basis. On
July 1, 2000 the Company leased new office space at 770 Ponce De Leon, Suite
200, Coral Gables, Florida
In November 1997, the Company engaged Alain Berdouare, a brother of the
Company's President, as a financial and general advisor to identify sources of
capital, introduce potential franchisees, seek acquisition candidates and
general advisory services until December 31, 2001 or such earlier termination by
the Company. The Company issued 500,000 shares for such services.
During the year ended March 31, 2000, the Company advanced funds to an
affiliate, which is controlled by the Principal Stockholder. On December 31,
1999, the Company converted the amount ($138,913) into a promissory note
receivable ("the Note"). The note accrues interest at an annual rate of 12% and
matures on December 31, 2001. In accordance with the terms of the Note, the
Company accepted $100,000 in advertising credit from the Affiliate as partial
repayment of the indebtedness. The advertising credit is with an unrelated third
party, and ads may be placed through December 31, 2001. No advertising has yet
been placed with the third party; therefore, the entire amount is reflected as
"Prepaid Advertising" in the accompanying Balance Sheets. Subsequent to
year-end, the Affiliate re-paid $41,000 to the Company.
Also during the year, the Company made advances to the Principal
Stockholder in the amount of $159,390, of which $70,000 was repaid in September
2000. Subsequent to year-end, the Company made additional advances to the
Principal Stockholder in the amount of $125,000. During September, the Principal
Stockholder signed a promissory note in the amount of $187,490. The note bears
interest at 10% and is due September 30, 2003. The note is collateralized by
1,000,000 shares of the Company's Class A common stock owned by the Principal
Stockholder, which is to be held in escrow.
In June 2000, the Company entered into an employment agreement with
Christian de Berdouare, the Company's Principal Stockholder. The agreement calls
for a base salary of $300,000 per year and the right to open up to ten franchise
locations which will be exempt from the payment of the franchise fees and
royalties (an "Exempt Franchise"). The Principal Stockholder will receive a
$1,000,000 settlement payment if the Company terminates the agreement without
32
<PAGE>
cause or if the Principal Stockholder terminates the agreement with cause. The
employment agreement also specifies that for each franchise agreement entered
and opened by the Company, including the franchises opened during fiscal 2000,
the Principal Stockholder will be granted the option to purchase 100,000 shares
of Class A common stock, or the right to open an additional Exempt Franchise.
However, the issuance of the options or additional franchises will only be made
upon the occurrence of certain situations, as defined, such as voluntary or
involuntary termination of the Principal Stockholder, change in control of the
Board of Directors, leveraged buy-out, merger, or court order.
The Company paid compensation in the form of consulting fees, to
entities owned by family members of the Principal Stockholder, of $115,771 and
$90,926 for the years ended March 31, 2000 and 1999, respectively.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The following Exhibits were filed as exhibits to our registration statement on
Form 10SB12G/A (File No. 000-27015) with the same exhibit numbers and are
incorporated herein by this reference.
2.1 Agreement and Plan of Reorganization dated November 30, 1996 between
the Company and Chicken Kitchen Corporation (Delaware)
3.1 Articles of Incorporation
3.2 First Amendment to Articles (increase in authorized)
3.3 Second Amendment to Articles (increase in authorized)
3.4 Third Amendment to Articles (name change)
3.5 Fourth Amendment to Articles (dual class common)
3.6 Certificate of Designation for Series A Preferred Stock
3.7 Bylaws 10.1 Agreement with Danelex, Inc.
10.2 Consulting Agreement - Alain Berdouare
10.3 Consulting Agreement - Sammut & Associates
10.4 Standard Form of Franchise Agreement
10.5 Employment Agreement with Frank Blackman
10.6 Loan to Ambassa
10.7 Security Agreement
10.8 Stock Option Plan
10.9 Settlement Term Sheet
10.10 Agreement with Patty and Caesars
10.11 Agreements with Olympus Capital
10.11A Agreement with CRG
10.12 Starr's Chicken Grill F/S December 31, 1996
The following exhibits are file herewith:
10.13 Berdouare Note
10.14 Berdouare Employment Agreement
27 Financial Data Schedule
33
<PAGE>
Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended March 31,2000
SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned; thereunto duly authorized this 31 day of October 2000.
CHICKEN KITCHEN CORPORATION
By: /s/ Christian Mahe de Berdouare
-------------------------------
Christian Mahe de Berdouare, President, Chief Executive Officer, Director,
Principal accounting Officer, Principal Financial Officer.
34
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
10.13 Berdouare Note
10.14 Berdouare Employment Agreement
27 Financial Data Schedule
