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UNITED STATES
CONFORMED
SECURITY AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- - ---- EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 1996 or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- - --- EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-19548
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KOO KOO ROO, INC.
- - --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 22-3132583
- - ------------------------------- ------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
11075 Santa Monica Boulevard, Suite 225, Los Angeles, CA 90025
- - --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(310) 479-2080
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(Registrant's Telephone Number, Including Area Code)
Not Applicable
- - --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
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 X No
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As of May 13, 1996, the registrant had outstanding 14,766,999 shares of
common stock, $.01 par value per share (excluding 84,352 shares held in the
Treasury) and 1,200,000 shares of 5% Convertible Preferred stock, liquidation
preference $25.00 per share.
Page 1 of 13
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KOO KOO ROO, INC. AND SUBSIDIARIES
INDEX FORM 10-Q
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<CAPTION>
PAGE NO.
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PART I. FINANCIAL INFORMATION
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 1995 and March 31, 1996 3
Condensed Consolidated Balance Sheets
December 31, 1995 and March 31, 1996 4
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 1995 and March 31, 1996 5
Notes to Condensed Consolidated Financial Statements 6-7
Management's Discussion and Analysis
of Financial Condition and Results of Operation 8-11
PART II. OTHER INFORMATION
Item 6. Exhibits required under Rule 601 12
Exhibits and Reports on Form 8-K
Signatures 13
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KOO KOO ROO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED SATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three THREE
Months Ended MONTHS ENDED
March 31, MARCH 31,
1995 1996
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<S> <C> <C>
Revenues:
Sales $3,650,732 $ 7,357,373
Interest and Other 49,740 118,630
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Total revenues 3,700,472 7,476,003
Cost of Sales 2,707,728 5,145,408
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Gross profit 992,744 2,330,595
Operating Expenses 2,172,663 4,107,120
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Loss before minority interest (1,179,919) (1,776,525)
Minority interest in loss 74,313 73,955
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Net loss (1,105,606) (1,702,570)
Preferred Dividends -- (49,200)
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Net Loss Applicable to Common Stockholders $ (1,105,606) $ (1,751,770)
============= ===============
Net loss per common share: ($0.12) ($0.12)
============= ===============
Weighted average number of common and
common equivalent shares 9,587,210 14,357,204
============= ===============
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Page 3 of 13
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KOO KOO ROO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, MARCH 31,
1995 1996
ASSETS (UNAUDITED)
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<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 3,501,815 $31,960,509
Marketable securities 3,663,111 1,499,767
Inventories 186,742 175,004
Prepaid expense and other 680,703 743,603
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Total current assets 8,032,371 34,378,883
Property and equipment 14,270,703 17,408,750
Lease Acquisition costs 1,511,328 1,785,059
Pre-opening costs 840,891 915,293
Intangibles and other assets 1,899,367 1,815,657
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$26,554,660 $56,303,642
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $1,660,899 $2,186,092
Accrued payroll 491,169 249,772
Accrued store closing costs 546,463 551,956
Notes and loans payable - short term 13,823 113,824
Other accrued liabilities 1,402,413 1,861,731
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Total current liabilities 4,114,767 4,963,375
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Notes and loans payable - long term 178,646 175,219
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Minority interest 718,109 638,901
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Stockholder's Equity
Preferred stock, $.01 par value, 5,000,000
shares authorized; 1,200,000 shares of
5% Convertible Preferred Stock issued
and outstanding (liquidation preference
$30,000,000) -- 12,000
Common stock, $.01 par value, 50,000,000
shares authorized; 14,329,851 and
14,844,351 shares issued and
outstanding 143,299 148,444
Additional paid-in capital 40,467,687 71,145,946
Accumulated deficit (18,274,719) (20,026,489)
Treasury stock, 84,352 shares at cost (2,242) (2,242)
Common stock issued for unearned
compensation (790,887) (751,512)
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Total stockholders' equity 21,543,138 50,526,147
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$26,554,660 $56,303,642
=============== ===============
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Page 4 of 13
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KOO KOO ROO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three THREE
Months Ended MONTHS ENDED
March 31, MARCH 31,
1995 1996
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<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (1,105,606) $ (1,702,570)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 305,563 753,143
Deferred franchise revenue (50,000) --
Minority interest in net loss (74,313) (73,956)
Common stock issued for expenses and other 111,000 70,499
Changes in operating assets and liabilities:
Inventories 5,388 11,738
Prepaid expenses & other current assets (71,644) (62,900)
Accounts payable 161,534 525,193
Accrued expenses and other liabilities (280,433) 319,988
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Net cash used in operating activities (998,511) (158,865)
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Cash Flows From Investing Activities:
Sale of marketable securities -- 2,163,344
Acquisition of property and equipment (1,132,873) (3,515,786)
Lease acquisition and other costs (209,697) (315,036)
Pre-opening costs -- (285,416)
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Net cash used in investing activities (1,342,570) (1,952,894)
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Cash Flows From Financing Activities:
Minority capital contributions 77,795 --
Proceeds from notes payable 175,000 --
Proceeds from private placements, net 4,243,500 30,455,153
Distributions to shareholders (19,847) (49,200)
Exercise of common stock options and warrants 448,333 164,500
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Net cash provided by financing activities 4,924,781 30,570,453
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Net Increase in Cash and Cash Equivalents 2,583,700 28,458,694
Cash and Cash Equivalents, beginning of period 544,185 3,501,815
--------------- ----------------
Cash and Cash Equivalents, end of period $3,127,885 $31,960,509
=============== ================
</TABLE>
Page 5 of 13
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KOO KOO ROO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The consolidated financial statements include the accounts of the Company,
its wholly-owned and majority-owned subsidiaries, and one limited
partnership in which the Company has a controlling interest (see note 4
below). All significant intercompany transactions and balances are
eliminated.
2. The Company received net proceeds of approximately $30.5 million from two
private placements completed in March 1996. A Common Stock offering
grossed $3,260,000 before transaction costs for 450,000 shares. Subject to
certain exceptions, the Company would be required to issue additional
shares if during the first twelve months following issuance, the company
issued Common Stock at an effective price below that of the private
placement ($7.245 per share). The Company also issued 1,200,000 shares of
a newly established series of preferred stock designated as 5% Convertible
Preferred Stock (the "Convertible Preferred Stock") for $25.00 per share
resulting in gross proceeds to the Company of $30.0 million before
transaction costs. The Convertible Preferred Stock has a liquidation
preference of $25.00 per share, is non-voting and is entitled to receive
dividends quarterly at the rate of 5% per annum, which dividends may be
paid in cash or, subject to certain restrictions, by issuing shares of
Common Stock. The Convertible Preferred Stock becomes convertible ratably
over the fourth through thirteenth month after issuance at discounts to the
future market price of Common Stock increasing from 13% to 29% over the
same period. Accordingly, the exact number of shares of Common Stock
issuable upon conversion of the Convertible Preferred Stock cannot be
presently determined and will depend on the future market price of the
Common Stock. The placement agents in the transaction were issued five-
year warrants to purchase 108,000 shares of Convertible Preferred Stock at
$25.00 per share and 40,500 shares of Common Stock at $7.75 per share and
received 7.5% of the gross proceeds as cash consideration for such
services. See "Management's Discussion and Analysis of Financial Condition
and Results of Operation - Liquidity and Capital Resources."
3. On March 25, 1996, the Company acquired 90% of the outstanding stock of
Color Me Mine, Inc. ("Color Me Mine") a chain of paint-your-own ceramics
studios with three company and one franchise locations in Southern
California. The consideration consisted solely of 377,000 shares of
restricted, unregistered shares of Koo Koo Roo Common Stock. Of this
total, shares aggregating $900,000 in value are subject to registration at
the end of one year, and 100,000 shares are subject to a lock-up to be
released at the end of three years. The founders of Color Me Mine will
continue to manage the concept with their own separate management team and
will develop it through franchised area development agreements and company-
owned stores. The founders of Color Me Mine have five-year employment
contracts. This acquisition has been accounted for utilizing
Page 6 of 13
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the pooling of interests accounting method and accordingly, prior period
financial statements have been restated to include Color Me Mine.
4. Minority interest represents (i) the other partners' interest in one
partnership formed to establish new Koo Koo Roo California Kitchen(TM)
restaurants, which are controlled by the Company, and pursuant to the
partnership agreement, profits and losses are allocated equally; and (ii) a
10% ownership interest in Color Me Mine held by its founders.
5. The accompanying unaudited consolidated financial statements were prepared
on the accrual basis of accounting. In the opinion of management, all
adjustments (consisting only of normal, recurring accruals) which are
necessary for a fair presentation of the financial results for the periods
presented have been made. The interim period results of operations are not
necessarily indicative of the results of operation for the full year.
Page 7 of 13
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
HIGHLIGHTS FOR THE QUARTER ENDED MARCH 31, 1996
In accordance with the Company's business plan to rapidly replicate the Koo Koo
Roo California Kitchen(TM) concept, nationally and internationally, three new
stores were opened during the period. In addition, two private placements were
completed in March 1996, a letter of intent was signed with a Canadian joint
venture partner and a majority interest in a small complementary chain of paint-
your-own ceramics studios was acquired.
Stores were opened in Studio City, Larchmont (Los Angeles) and Venice Beach,
California.
The Company received gross proceeds totaling approximately $33.2 million for
450,000 shares of Common Stock for $7.245 per share (subject to adjustment) and
1,200,000 shares of a newly designated class of 5% Convertible Preferred Stock
(the "Convertible Preferred Stock") for $25.00 per share. See "- Liquidity and
Capital Resources."
The Company has entered into a Letter of Intent to form a new entity, Koo Koo
Roo Canada, Ltd., with a group in Toronto, Canada. The joint venture will
develop the Koo Koo Roo California Kitchen(TM) restaurant concept and Arrosto
Coffee Company outlets in Canada. The Letter of Intent is subject to the
pending execution of a joint venture agreement which is satisfactory to both
parties, which had not been completed as of the date of this Report.
The Company also acquired a 90% ownership stake in Color Me Mine, Inc., a
complementary concept of paint-your-own ceramics studios with three company-
owned stores and one franchise located in southern California. Based on the
similarity between the customers of the Color Me Mine studios and Koo Koo Roo
California Kitchen restaurants, the Company plans to locate the two
complementary concepts in adjacent facilities to take advantage of certain real
estate locations which have attractive demographics but which are too large to
be economically efficient for a Koo Koo Roo California Kitchen alone. Color Me
Mine is also seeking to enter into area development agreements with third
parties to develop locations independently. Color Me Mine also owns a ceramic
bisqueware factory in California which will continue to supply all of the
Company's needs for over 400 high quality ceramic pieces.
RESULTS OF OPERATIONS
The Company incurred an operating loss during the quarter ended
March 31, 1996 in accordance with the Company's continued policy of building the
management team and other infrastructure necessary to pursue the Company's
corporate strategy of growing through the construction and operation of Company-
owned stores. The Company's corporate overhead contemplates a greater number of
stores than are presently open and will support a greater rate of new store
development than is presently occurring. The current quarter also includes
approximately $175,000 in costs associated with the acquisition of Color Me Mine
which were expensed in accordance with the pooling of interests accounting
method.
The net loss for the quarter ended March 31, 1996 was $1,702,570 (before
preferred stock dividends) compared to a net loss of $1,105,606 for the quarter
ended March 31, 1995.
Page 8 of 13
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Revenues for the quarter ended March 31, 1996 were $7,476,003 compared to
$3,700,472 for the quarter ended March 31, 1995, an increase of 102%.
Page 9 of 13
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Sales for the current quarter were produced by eight stores which were
operating during the current quarter and the same period of the prior year and
10 additional stores opened subsequent to March 31, 1995. Three new stores were
opened during the current quarter in Studio City, Larchmont (Los Angeles), and
Venice Beach, California. In addition, one location acquired from a former
franchise in La Jolla, California was closed during the period.
Revenues for the quarter ended March 31, 1996, doubled to $7.5 million
compared to $3.7 million during the same period of the prior year. Average
weekly sales for the eight stores open the full three months of the first
quarter of both the current and prior year increased 17.8%. Four Arrosto
locations open in both periods generated $206,631 in revenues for the current
period and $175,339 during the same period of the prior year, an increase of
17.6%. Management believes that these sales improvements are due to a number of
factors including greater awareness of the Company's operation, increased
customer penetration, the Company's ability to upgrade its store management
through the use of more experienced and highly trained managerial personnel and
improved training programs, the addition of new products in late 1995 including
hand-tossed, gourmet salads offered at stores retrofitted with The Vegetable
Stand, and regional and local marketing programs. As of March 31, 1996, all but
two Koo Koo Roo locations had been retrofitted with The Vegetable Stand.
Cost of sales were $5,145,408 in the current quarter compared to $2,707,728
in the same period of the prior year. These costs, which include food, paper
and labor, declined to 69.9% compared to 74.2% in the same period last year due
to efficiency improvements in product preparation and labor scheduling and
increased volumes.
Gross profit net of other income for the quarter ended March 31,1996,
increased to 31.7% compared with 27.2% in the same period of the prior year.
These results are due to the sales and cost improvements referred to above and
to the impact of a higher number of "mature" stores (i.e., stores open longer
than three months). There were 15 mature stores in the current quarter compared
with eight in the same quarter of the prior year.
Store operating profits for the eight stores open the full 13 weeks of the
first quarter of both the current and prior year increased 60.9%. This increase
was due to sales increases and to the efficiencies referred to above.
Operating expenses amounted to $4,107,120 for the current quarter compared
to $2,172,663 for the prior quarter. This increase was primarily due to the
Company's expansion. Operating expenses as a percentage of revenues decreased to
55.8% from 59.5% in the same period of the prior year due to increased store
sales and higher per store volumes which resulted in a decrease in occupancy
expenses from 12.8 % for the quarter ended March 31, 1995 to 9.0% in the current
quarter. Management expects overall operating expenses to continue to decline
as a percentage of revenues. Personnel and corporate expense increased due to
infrastructure added in preparation for the Company's planned growth.
Management expects the growth of corporate overhead to continue, but at a slower
rate. Approximately $175,000 in expenses associated with the acquisition of
Color Me Mine are also included in the current quarter's operating expenses due
to the accounting treatment of the acquisition as a pooling of interests.
Page 10 of 13
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LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. Total cash, cash equivalents, and marketable securities at
March 31, 1996 amounted to $33,460,276. The Company has been expending cash
resources to build income producing assets in the form of new Koo Koo Roo
California Kitchen(TM) stores. The Company completed the construction of three
restaurants during the quarter. Purchases of property, equipment, and computer
hardware and software together with costs for acquiring certain locations
amounted to $3,830,822 compared with $1,342,570 during the same quarter last
year.
Corporate expenses for the development of the Koo Koo Roo California
Kitchen(TM) concept, real estate development and the management infrastructure
necessary to manage store growth have resulted, to date, in net operating
losses. The Company's strategy is to build sufficient new stores to generate
positive overall operating cash flow as quickly as possible. With the
acceleration of the new store openings planned for the third quarter, management
expects the Company to achieve a positive net cash flow from operations in the
fourth quarter of 1996, or sooner. This strategy requires acquisition and
development of successful new sites, and while management has been successful in
opening new California Kitchen restaurants in the past, there can be no
assurance that this success will continue in the future.
CAPITAL RESOURCES. During the current quarter the Company received $33.2
million before expenses of $2.7 million from two private placements relating to
the issuance of 450,000 shares of Common Stock for $7.245 per share (subject to
adjustment) and 1,200,000 shares of a newly-designated class of Convertible
Preferred Stock for $25.00 per share as well as related warrants paid to its
placement agents. The number of shares of Common Stock issuable in connection
with such transactions is subject to adjustment and will depend upon factors
which cannot be predicted by the Company at this time including, primarily, the
future market price of the Common Stock.
The Company is also a partner in one limited partnership formed to
establish new Koo Koo Roo restaurants which are controlled by the Company in the
Florida area. Financial results of this partnership has been consolidated into
those of the Company. During the current quarter no cash was contributed to
these partnerships by the outside partners.
The Company has approximately $175,000 of long term notes and loans payable
which were assumed with the acquisition of Color Me Mine and has no other long
term debt or store level debt financing as of March 31, 1996. In order to
achieve its present goal of 45 to 50 Koo Koo Roo stores open or under
construction by December 31, 1996, management estimates that an investment of
approximately $22,000,000 will be required, which management plans to fund
through the use of existing cash and marketable securities, and potentially,
store level financing of equipment and leasehold improvements as a possible,
non-dilutive source of capital for continued expansion which management is
currently investigating.
The timing of future capital requirements will be affected by the number of
stores opened, operational results, real-estate development, and potential other
corporate opportunities, including joint ventures in the United States and
internationally, and acquisitions of small entities with the objective of
converting locations to the Koo Koo Roo California Kitchen concept or dual
branding. The Company has been successful to date in raising sufficient capital
from outside sources to meet its growth requirement, however, as the Company's
capital requirements increase, the company may seek additional funds from public
or private offerings of debt or equity, or may seek bank financing facilities.
There can be no assurance, however, that the company will be able to raise such
capital on acceptable terms when needed.
Page 11 of 13
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PART II. OTHER INFORMATION
--------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) 10.1 Agreement for Acquisition of Color Me Mine, Inc.
10.2 Canadian Letter of Intent
(b) There were three reports on Form 8-K filed for the three months
ended March 31, 1996.
1. Form 8-K, dated January 12, 1996, regarding shareholder
approval of amendment increasing authorized Common Stock. No
financial statements were filed.
2. Form 8-K, dated March 18, 1996 regarding a Private Placement
Issuance. No financial statements were filed.
3. Form 8-K, dated March 27, 1996 regarding an acquisition. No
financial statements were filed.
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KOO KOO ROO, INC.
-----------------
Date: May 13, 1996 /s/ KENNETH BERG
--------------- ------------------------------------------------
KENNETH BERG, CHAIRMAN OF THE BOARD
Date: May 13, 1996 /s/ ROBERT KAUTZ
---------------- -----------------------------------------------
ROBERT KAUTZ, CHIEF FINANCIAL OFFICER
Page 13 of 13
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EXHIBIT 10.1
AGREEMENT FOR ACQUISITION
OF
COLOR ME MINE, INC.
THIS AGREEMENT FOR ACQUISITION ("Agreement") is made as of the 25th
day of March, 1996 among Koo Koo Roo, Inc., a Delaware corporation ("Buyer"), on
the one hand, and Robin Monroe ("Robin") and Josh Culver ("Josh"), on the other
hand. Robin and Josh are sometimes hereinafter referred to collectively as the
"Selling Parties".
RECITALS
A. Selling Parties own all of the issued and outstanding shares of
the capital stock of Color Me Mine, Inc., a California corporation
("Corporation") and desire, subject to the terms and conditions of this
Agreement, to sell ninety percent (90%) of the shares of the Corporation
("Shares") to the Buyer.
B. Subject to the terms and conditions of this Agreement, the Buyer
desires to purchase the Shares.
NOW, THEREFORE, IN CONSIDERATION OF THE MUTUAL PROMISES AND
UNDERTAKINGS HEREIN CONTAINED AND FOR OTHER GOOD AND VALUABLE CONSIDERATION, THE
RECEIPT AND SUFFICIENCY OF WHICH IS HEREBY ACKNOWLEDGED, THE PARTIES HERETO
AGREE AS FOLLOWS:
ARTICLE ONE
PURCHASE AND SALE OF SHARES
1. Subject to the terms and conditions set forth in this Agreement,
on the Closing Date (as hereinafter defined), Selling Parties will transfer and
convey the Shares to the Buyer, and the Buyer will acquire the Shares from
Selling Parties.
ARTICLE TWO
CONSIDERATION FROM THE BUYER AT CLOSING
2. As full payment for the transfer of the Shares by Selling Parties
to the Buyer, the Buyer shall deliver at the Closing, in accordance with the
provisions of Article 11 of this Agreement, the following:
2.1 Two Hundred Seventy-Seven Thousand (277,000) shares of the
Buyer's common stock issued to the Selling Parties,
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fully paid and nonassessable, subject to applicable state and federal
restrictions against transfer, with respect to so many of such shares as shall
have a fair market value of $900,000 at the time the registration statement is
filed, the Buyer shall file a registration statement with the Securities and
Exchange Commission ("Commission") within 12 months of the Closing, which
registration statement shall remain effective for a period of one year from the
first anniversary of the Closing Date (as defined herein). The "fair market
value" of the Company's common stock shall be the average of the closing bid and
asked price for the Company's common stock as listed on NASDAQ or an equivalent
exchange during the 10 consecutive trading days immediately preceding the date
of filing the registration statement.
2.2 One Hundred Thousand (100,000) shares of the Buyer's common
stock shall be issued to the Selling Parties, fully paid and nonassessable,
subject to applicable state and federal securities laws restrictions against
transfer, to be held in escrow ("Escrowed Shares") by Harry S. Stahl, Esq.
("Escrow Holder"), for a period of 36 months from the Closing Date. During such
36 month period, Selling Parties shall have voting and dividend rights with
respect to the Escrowed Shares.
2.3 The Buyer further agrees that until the effective date of a
registration statement filed for an initial public offering of the Corporation's
shares or shares of a surviving corporation into which it is merged, the Selling
Parties' 10% interest in the Corporation shall not be diluted by the issuance of
stock, warrants, options, preferred stock with conversion rights, convertible
debentures, or other grants of rights or interests in the Corporation which, if
issued, exercised or converted would have the effect of diluting the Selling
Parties' interest in the Corporation at the Closing to less than ten percent
(10%) of the issued and outstanding shares of the Corporation after the issuance
of all shares required to be issued or reserved for issuance pursuant to any
agreements, warrants, options, or other rights granted with respect to the
Corporation's capital stock of any class, unless approved by the unanimous
consent of the Corporation's Board of Directors.
ARTICLE THREE
OTHER AGREEMENTS OF THE PARTIES
3. The Buyer and Selling Parties further agree that:
3.1 MANAGEMENT CONTRACTS.
The Buyer and the Selling Parties shall prepare and execute, prior to
the Closing Date, management contracts between the Corporation and Josh and
Robin, respectively. Each such management contract shall contain the following
terms:
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(a) Annual minimum salary of Fifty Thousand Dollars ($50,000) to be
increased as determined by the Corporation's Board of Directors after the first
twelve month period.
(b) Performance bonus equal to 5% of the second million of income of
the Corporation; 4% of the third million, and 3% of the next eight million,
where "income" means the pre-tax income of the Corporation calculated before any
allocation of the Buyer's overhead charged to the Corporation but after any
charges from the Buyer to the Corporation which are approved by the unanimous
written consent of the Corporation's Board of Directors.
(c) All compensation shall be paid whether or not the management
contracts are terminated.
(d) Robin shall serve as President, and Josh as Vice President, of the
Corporation, until changed by the unanimous consent of the Corporation's Board
of Directors.
(e) Robin and Josh shall serve as directors on the Corporation's Board
(i) so long as they are employed by the Corporation, or (ii) so long as they
hold a ten percent (10%) interest in the Corporation and Robin and Josh have not
been terminated for cause (as "cause" is defined in the management contracts
referred to in this Paragraph 3.1) or have not voluntarily terminated their own
employment other than for "Good Reason," hereby defined as any one or more of
the following, occurring without the express written consent of Robin and Josh:
(a) the assignment to Robin or Josh, as the case may be, of any duties
inconsistent with his or her status or a substantial alteration in Robin or
Josh's title (other than a change which solely reflects the Corporation's status
as a division or subsidiary of another entity, resulting from a Change in
Control), or the nature of Robin's or Josh's responsibilities; (b) the
Corporation's requiring Robin or Josh to be based anywhere outside a 25-mile
radius from the location at which Robin or Josh was based as of the Closing
Date; (c) after a Change in Control, a reduction by the Corporation in Robin or
Josh's annual base salary as in effect immediately prior to a Change in Control;
(d) after a Change in Control, the failure of the Corporation to grant Robin or
Josh a performance bonus reasonably equivalent to the same bonus Robin or Josh
received prior to a Change in Control, given comparable performance by the
Corporation, or (e) after a Change in Control, the failure by the Corporation to
provide Robin or Josh with the number of paid vacation days to which Robin or
Josh is entitled. For purposes of this Paragraph, "Change in Control" shall
mean any one or more of the following: (a) a merger of the Corporation with or
into any other corporation in which the Corporation is not the surviving
corporation or in which the Corporation survives as a subsidiary of another
corporation; (b) a consolidation of the Corporation with any other corporation;
or (c) a sale or disposition of all or substantially all of the Corporation's
assets
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or the adoption of a plan of complete liquidation of the Corporation.
(f) The term of the contracts shall be five (5) years.
(g) Termination for cause shall be defined as a binding arbitration
finding of (a) gross misconduct in the performance of the duties of employment
causing material harm to the Corporation, or (b) intentional fraud or
embezzlement involving the business of the Corporation causing material harm to
the Corporation.
(h) Disputes arising out of the interpretation or enforcement of any
provision of the management contracts shall be resolved by binding arbitration
according to the commercial rules of the American Arbitration Association.
3.2 LOANS TO THE CORPORATION
The Buyer agrees to loan the Corporation, prior to the effective date
of a registration statement filed for an initial public offering for stock of
the Corporation, at the minimum interest rate required by the Internal Revenue
Code of 1986 as amended: (i) up to $100,000 for each of up to 24 stores, in the
24 months commencing with the Closing Date; (ii) up to $100,000 for factory
expansion within the nine months following the Closing Date; (iii) other working
capital necessary to implement franchising area development relationships and
conduct the business of the Corporation; (iv) $100,000 to repay the
Corporation's debt to the Small Business Administration ("SBA Loan"); and (v)
$75,000 to repay a loan in like amount to _______________.
3.3 CONFIDENTIALITY
Neither the Selling Parties nor the Buyer shall issue any
communications of any nature to any third party regarding the transactions
contemplated by this Agreement until the issuance of a public announcement
mutually agreed upon by the Selling Parties and the Buyer.
3.4 USE OF TRADE NAMES AND LOGOS
The Corporation, and the Buyer, each grants the other the right to use
its respective Trade Names and Logos in press releases or other written
materials, provided that the other first approves the manner and nature of such
use.
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ARTICLE FOUR
REPRESENTATIONS AND WARRANTIES
OF ROBIN AND JOSH
4. Robin and Josh represent and warrant that:
4.1 ORGANIZATION, STANDING, AND QUALIFICATION OF CORPORATION
The Corporation is a corporation duly organized, validly existing, and
in good standing under the laws of California and has all necessary corporate
powers to own its properties and to operate its business as now owned and
operated by it. Neither the ownership of its properties nor the nature of its
business requires Corporation to be qualified in any jurisdiction other than the
state of its incorporation.
4.2 CAPITAL STRUCTURE
The authorized capital stock of Corporation consists of 100,000 shares
of common stock, having no par value, of which 37,500 shares are issued and
outstanding. All the Shares are validly issued, fully paid, and nonassessable,
and such Shares have been so issued in full compliance with all federal and
state securities laws. There are no outstanding subscriptions, options, rights,
warrants, convertible securities, or other agreements or commitments obligating
Corporation to issue or to transfer from treasury any additional shares of its
capital stock of any class.
4.3 TITLE TO SHARES
The Corporation's issued and outstanding shares are duly issued, fully
paid, nonassessable, and are solely owned by Robin and Josh beneficially and of
record. None of said shares are subject to any pledge, option, hypothecation,
lien, or rights in any third party by grant of a Selling Party or by operation
of law, nor has the Corporation issued any options, warrants, promises,
agreements, or other rights with respect to any of its authorized but unissued
shares.
4.4 INTERESTS IN OTHER ENTITIES
The Corporation does not own, directly or indirectly, any interest or
investment (whether equity or debt) in any corporation, partnership, business,
trust, or other entity, except for Color Me Mine Franchising, Inc. and Caulk N'
Paw, Inc., both California corporations.
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4.5 FINANCIAL STATEMENTS
To the best of their knowledge, the Corporation's financial statements
provided to BDO Seidman, LLP are true and accurate in all material respects.
4.6 DESCRIPTION OF REAL PROPERTY
The Corporation leases property at 633 North La Brea Avenue, Los
Angeles, CA 90036, 16101 Ventura Boulevard, Encino, CA 91436, 1109 Montana
Avenue, Santa Monica, CA 90403, 239 South Beverly Drive, Beverly Hills, CA
90212, 14810-12 Oxnard Street, Van Nuys, CA 91411, and 5269 East Second Street,
Long Beach, CA. All of such leases are valid and in full force and there does
not exist any default or event that with notice or lapse of time or both would
constitute a default under any of these leases. The Corporation does not own
any real property.
4.7 OTHER TANGIBLE PROPERTY
From the date hereof to the Closing Date, there will be no material
change in the machinery, equipment, furniture and supplies and other tangible
personal property owned by, in the possession of, or used by the Corporation in
connection with its business.
4.8 TRADE NAMES, TRADEMARKS AND COPYRIGHTS
On February 16, 1994, the California Secretary of State issued to
Color Me Mine a certificate of registration for the service mark "Color Me
Mine". The trademark "Color Me Mine" has been registered with the U.S. Patent
and Trademark Office ("PTO") in the name of Color Me Mine Partnership
("Partnership"). An assignment of rights in such federal trademark from the
Partnership to the Corporation was filed with the PTO in August 1995.
4.9 ASSETS
Corporation has a good and marketable title to all its assets and
interests in assets, whether real, personal, mixed, tangible, or intangible,
which constitute all the assets and interests in assets that are used in the
businesses of Corporation. All these assets are free and clear of restrictions
on or conditions to transfer or assignment, and free and clear of mortgages,
liens, pledges, charges, encumbrances, equities, claims, easements, rights of
way, covenants, conditions, or restrictions, except for (a) those disclosed in
Corporation's consolidated balance sheet as of ________________, or included in
the financial statements provided to the Buyer; (b) the lease of the
Corporation's Jeep; (c) the loan on the Corporation's van; (d) the assets of the
Corporation which secure the SBA Loan; (e) the lien of current taxes not yet due
and payable; and (f) possible minor
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matters that, in the aggregate, are not substantial in amount and do not
materially detract from or interfere with the present or intended use of any of
these assets or materially impair business operations. Corporation is not in
default or in arrears in any material respect under any lease. All real property
and tangible personal property of Corporation is in good operating condition and
repair, ordinary wear and tear excepted. Corporation is in possession of all
premises leased to them from others. Neither Selling Parties; nor any officer,
director, or employee of Corporation; nor any spouse, child, or other relative
of any of these persons, owns, or has any interest, directly or indirectly, in
any of the real or personal property owned by or leased to Corporation or any
copyrights, patents, trademarks, trade names, or trade secrets licensed by
Corporation. Corporation does not occupy any real property in violation of any
law, regulation, or decree.
4.10 COMPLIANCE WITH LAWS
Corporation has complied in all material respects with all federal,
state, and local laws and regulations and has not been cited for any violation
of any such law or regulation, except for potential inadvertent non-payment of
taxes or other legally required fees which can be rectified through payment.
4.11 LITIGATION
In July 1995, a former employee of the Corporation threatened a suit
for wrongful termination; however, no action has been taken with respect to such
suit. In a matter unrelated to that in the preceding sentence, the Corporation
is waiting for the scheduling of an arbitration proceeding with respect to its
breach of contract claim in the amount of approximately $6,000. Except for the
matters described in the preceding two sentences (collectively referred to as
the "Claims"), there is not pending, or, to the best knowledge of the Selling
Parties, threatened, any suit, action, arbitration, or legal, administrative, or
other proceeding, or governmental investigation against or affecting Corporation
or its businesses, assets, or financial condition. The Claims, if decided
adversely to the Corporation, will not result in a material adverse change in
the business, assets, or financial condition of Corporation.
4.12 AGREEMENT WILL NOT CAUSE BREACH OR VIOLATION
Except as set forth herein, the consummation of the transactions
contemplated by this Agreement will not result in or constitute any of the
following: (a) a breach of any term or provision of this Agreement; (b) a
default or an event that, with notice or lapse of time or both, would be a
default, breach, or violation of the articles of incorporation or bylaws of
Corporation or any lease, license, promissory note (other than any promissory
note evidencing a loan which will be paid off prior to or at
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Closing), conditional sales contract, commitment, indenture, mortgage, deed of
trust, or other agreement, instrument, or arrangement to which Selling Parties
or Corporation is a party or by which any of them or the property of any of them
is bound; (c) an event that would permit any party to terminate any agreement or
to accelerate the maturity of any indebtedness or other obligation of
Corporation; or (d) the creation or imposition of any lien, charge, or
encumbrance on any of the properties of Corporation.
4.13 AUTHORITY AND CONSENTS
The Selling Parties have the right, power, legal capacity, and
authority to enter into, and perform their respective obligations under this
Agreement; and no approvals or consents of any persons other than the Selling
Parties are necessary in connection with it.
ARTICLE FIVE
REPRESENTATIONS AND WARRANTIES OF BUYER
5. Buyer represents and warrants that:
5.1 The Buyer is a corporation duly organized, validly existing,
and in good standing under the laws of Delaware and has all necessary corporate
powers to own its properties and to operate its business as now owned and
operated by it. The Buyer is qualified to do business in each jurisdiction
where the nature of its business requires it to be qualified.
5.2 Except as set forth in any exhibit hereto, the consummation
of the transactions contemplated by this Agreement will not result in or
constitute any of the following: (a) a breach of any term or provision of this
Agreement; (b) a default or an event that, with notice or lapse of time or both,
would be a default, breach, or violation of the articles of incorporation or
bylaws of Buyer or any lease, license, promissory note, conditional sales
contract, commitment, indenture, mortgage, deed of trust, or other agreement,
instrument, or arrangement to which Buyer is a party or by which Buyer or the
property of Buyer is bound; (c) an event that would permit any party to
terminate any agreement or to accelerate the maturity of any indebtedness or
other obligation of Buyer; or (d) the creation or imposition of any lien,
charge, or encumbrance on any of the properties of Buyer.
5.3 The Buyer has the right, power, legal capacity and authority
to enter into and to perform its obligations under this Agreement and no
approvals or consents of any persons other than its Board of Directors are
necessary in connection with it.
5.4 The shares of its common stock to be issued to Selling
Parties pursuant to Sections 2.1 and 2.2 hereof will, when
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issued, have been duly authorized, validly issued, fully paid and nonassessable.
ARTICLE SIX
SELLING PARTIES' OBLIGATIONS BEFORE SELLING
6. The Selling Parties on behalf of the Corporation covenant that
from the date of this Agreement until the Closing:
6.1 The Buyer and its counsel, accountants, and other
representatives shall have full access during normal business hours to all
properties, books, accounts, records, contracts, and documents of or relating to
Corporation. The Selling Parties shall furnish or cause to be furnished to the
Buyer and its representatives all data and information concerning the business,
finances, and properties of Corporation that may reasonably be requested.
Nothing in this Agreement shall obligate Selling Parties to disclose
any classified information or provide any access to representatives of the Buyer
prohibited or not authorized by applicable governmental authority.
6.2 The Corporation will carry on its business and activities
diligently and in substantially the same manner as it previously has been
carried out and shall not make or institute any unusual or novel methods of
manufacture, purchase, sale, lease, management, accounting, or operation that
vary materially from those methods used by Corporation as of the date of this
Agreement.
6.3 The Corporation will use its best efforts to preserve its
business organization intact, to keep available to the Corporation its present
officers and employees, and to preserve its present relationships with
suppliers, customers, and others having business relationships with them.
6.4 The Corporation will not (a) amend its articles of
incorporation or bylaws; (b) issue any shares of its capital stock; (c) issue or
create any warrants, obligations, subscriptions, options, convertible
securities, or other commitments under which any additional shares of its
capital stock of any class might be directly or indirectly authorized, issued,
or transferred from treasury; or (d) agree to do any of the acts listed above.
6.5 The Corporation will continue to carry its existing
insurance, subject to variations in amounts required by the ordinary operations
of their businesses. At the request of the Buyer and at the Buyer's sole
expense, the amount of insurance against fire and other casualties that, at the
date of this Agreement, the Corporation carry on any of its properties or in
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respect of its operations shall be increased by the amount or amounts the Buyer
shall specify.
6.6 The Corporation will not do, or agree to do, any of the
following acts: (a) make any change in compensation payable or to become payable
by the Corporation, to any officer, employee, sales agent, or representative; or
(b) make any change in benefits payable to any officer, employee, sales agent,
or representative under any bonus or pension plan or other contract or
commitment.
6.7 The Corporation will not do or agree to do, without the
Buyer's consent, any of the following acts:
(a) Enter into any contract, commitment, or transaction not in
the usual and ordinary course of its business;
(b) Enter into any contract, commitment, or transaction in the
usual and ordinary course of business involving an amount exceeding $50,000,
individually, or $200,000 in the aggregate;
(c) Make any capital expenditure in excess of $25,000 for any
single item or $50,000 in the aggregate, or enter into any leases of capital
equipment or property under which the annual lease charge is in excess of
$5,000; or
(d) Sell or dispose of any capital assets.
6.8 The Corporation will not:
(a) Declare, set aside, or pay any dividend or make any
distribution in respect of its capital stock;
(b) Directly or indirectly purchase, redeem, or otherwise acquire
any shares of its capital stock; or
(c) Enter into any agreement obligating it to do any of the
foregoing prohibited acts.
6.9 The Corporation will not do, or agree to do, any of the
following acts: (a) pay any obligation or liability, fixed or contingent, other
than current liabilities; (b) waive or compromise any right or claim; or (c)
cancel, without full payment, any note, loan, or other obligation owing to the
Corporation.
6.10 The Corporation will not modify, amend, cancel, or
terminate any of its existing contracts or agreements, or agree to do any of
those acts.
All representations and warranties of the Selling Parties set forth in
this Agreement and in any written statements delivered
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to the Buyer by the Selling Parties under this Agreement will also be true and
correct as of the Closing Date as if made on that date.
ARTICLE SEVEN
CONFIDENTIAL INFORMATION
7. Each party to this Agreement will not intentionally disclose, and
will use its best efforts to prohibit the unintentional disclosure, to any third
party of any trade secrets or other confidential or proprietary information
concerning the other party unless the disclosure is expressly assented to in
writing by the other party from the date of this Agreement until the Closing
Date. All information furnished to one party by the other party will be
considered confidential or proprietary information unless otherwise so indicated
by the party furnishing the information.
ARTICLE EIGHT
CONDITIONS PRECEDENT TO THE BUYER'S PERFORMANCE
8. The obligations of the Buyer to purchase the Shares under this
Agreement are subject to the satisfaction, at or before the Closing, of all the
conditions set out below in this Article. The Buyer may waive any or all of
these conditions in whole or in part without prior notice; provided, however,
that no such waiver of a condition shall constitute a waiver by the Buyer of any
of its other rights or remedies, at law or in equity, if Selling Parties or the
Corporation shall be in default of any of their representations, warranties, or
covenants under this Agreement.
8.1 ACCURACY OF SELLING PARTIES' REPRESENTATION AND WARRANTIES
Except as otherwise permitted by this Agreement, all representations
and warranties by the Selling Parties in this Agreement, or in any written
statement that shall be delivered to the Buyer by any of them under this
Agreement, shall be true in all material respects on and as of the Closing Date
as though made at that time.
8.2 PERFORMANCE BY SELLING PARTIES
The Selling Parties shall have performed, satisfied, and complied with
all covenants, agreements, and conditions required by this Agreement to be
performed or complied with by them, or any of them, on or before the Closing
Date.
8.3 NO MATERIAL ADVERSE CHANGE
During the period from the date of most recent financial statement to
the Closing Date, there shall not have been any material adverse change in the
financial condition or the results
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of operations of the Corporation, and the Corporation shall not have sustained
any material loss or damage to its assets, whether or not insured, that
materially affects their ability to conduct a material part of its business.
8.4 ABSENCE OF LITIGATION
No action, suit, or proceeding before any court or any governmental
body or authority, pertaining to the transaction contemplated by this Agreement
or to its consummation, shall have been instituted or threatened by a third
party on or before the Closing Date.
8.5 APPROVAL OF DOCUMENTATION
The form and substance of all certificates, instruments, opinions, and
other documents delivered to the Buyer under this Agreement shall be
satisfactory in all reasonable respects to the Buyer and its counsel and Buyer's
counsel shall be satisfied that the transactions described herein will qualify
as a tax-free reorganization under the Internal Revenue Code of 1986, as
amended.
ARTICLE NINE
CONDITIONS PRECEDENT TO SELLERS' PERFORMANCE
9. The obligations of the Selling Parties to sell and transfer the
Shares under this Agreement are subject to the satisfaction, at or before the
Closing, of all the following conditions. The Selling Parties may waive any or
all of these conditions in whole or in part without prior notice; provided,
however, that no such waiver of a condition shall constitute a waiver by the
Selling Parties of any of their other rights or remedies, at law or in equity,
if the Buyer should be in default of any of its representations, warranties, or
covenants under this agreement.
9.1 ACCURACY OF THE BUYER'S REPRESENTATION AND WARRANTIES
All representations and warranties by the Buyer contained in this
Agreement or in any written statement delivered by the Buyer under this
Agreement shall be true on and as of the Closing Date as though such
representations and warranties were made on and as of that date.
9.2 THE BUYER'S PERFORMANCE
The Buyer shall have performed and complied with all covenants and
agreements and satisfied all conditions that it is required by this Agreement to
perform, comply with, or satisfy before or at the Closing.
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9.3 THE BUYER'S CORPORATE APPROVAL
The board of directors of the Buyer shall have duly authorized and
approved the execution and delivery of this Agreement and all corporate action
necessary or proper to fulfill the Buyer's obligations to be performed under
this Agreement on or before the Closing Date.
9.4 NO MATERIAL ADVERSE CHANGE
During the period from the date of most recent financial statement to
the Closing Date, there shall not have been any material adverse change in the
financial condition or the results of operations of the Buyer, and the Buyer
shall not have sustained any material loss or damage to its assets, whether or
not insured, that materially affects its ability to conduct a material part of
its business.
9.5 ABSENCE OF LITIGATION
No action, suit, or proceeding before any court or any governmental
body or authority, pertaining to the transaction contemplated by this Agreement
or to its consummation, shall have been instituted or threatened by a third
party on or before the Closing Date.
9.6 APPROVAL OF DOCUMENTATION
The form and substance of all certificates, instruments, opinions, and
other documents delivered to the Buyer under this Agreement shall be
satisfactory in all reasonable respects to the Selling Parties and its counsel
and Selling Parties' counsel shall be satisfied that the transactions described
herein will qualify as a tax-free reorganization under the Internal Revenue Code
of 1986, as amended.
ARTICLE TEN
CONDITIONS PRECEDENT TO BUYERS AND SELLERS PERFORMANCE
10. The obligations of Buyer and Seller to consummate the transaction
contemplated by this Agreement shall be subject to the following:
10.1 The execution of separate Management Contracts between the
Buyer, on the one hand, and Robin and Josh, on the other hand;
10.2 The execution of separate Shareholders Agreements between
the Buyer, on the one hand, and Robin and Josh, on the other hand, providing,
among other things, that the Selling Parties will receive tagalong rights in the
event Buyer sells its shares in the Corporation to a third party and the right
to put
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their shares in the Corporation to the Buyer in the event that their employment
is terminated other than for "cause" or for "Good Reason" as described in
Paragraph 3.1 herein.
10.3 An executed Escrow Agreement with respect to the Escrowed
Shares between the Buyer and the Selling Parties, on the one hand, and the
Escrow Holder, on the other hand; and
10.4 To the extent required by the terms of the leases referred
to in Section 4.6, the consent of the relevant landlord to the sale and transfer
of the Shares contemplated by this Agreement.
ARTICLE ELEVEN
THE CLOSING
11. The transfer of the Shares by Selling Parties to the Buyer
("Closing"), shall take place at the offices of Koo Koo Roo, Inc., at 11075
Santa Monica Boulevard, Suite 225, Los Angeles, California, at 10:00 a.m. local
time, on March 22, 1996, or at such other time and place as the parties may
agree to in writing ("Closing Date").
At the Closing, the Selling Parties shall deliver to the Buyer the
following instruments in form and substance satisfactory to the Buyer and its
counsel against the delivery of the items specified in Paragraph 10.
11.1 A certificate or certificates representing the Shares
registered in the name of the Selling Parties, duly endorsed by the Selling
Parties for transfer or accompanied by an assignment of the Shares duly executed
by the Selling Parties.
11.2 The stock books, stock ledgers, minute books and corporate
seals of the Corporation.
ARTICLE TWELVE
THE BUYER'S OBLIGATION AT CLOSING
At the Closing, the Buyer shall deliver the following:
12.1 A share certificate, bearing the appropriate state and
federal legend restrictions against transfer, for Two Hundred Seventy-Seven
Thousand (277,000) shares the Buyer's common stock, issued in the name of the
Selling Parties as husband and wife, as joint tenants with right of
survivorship.
12.2 A share certificate, bearing the appropriate state and
federal legend restrictions against transfer, for One Hundred Thousand (100,000)
shares of the Buyer's common stock, issued in the name of the Selling Parties as
husband and wife, as joint tenants with right of survivorship, to be delivered
to Harry
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S. Stahl, Esq. to be held in escrow as provided in paragraph 2.3 of this
Agreement.
12.3 The loans referred in Section 3.2 (iv) and (v),
respectively.
ARTICLE THIRTEEN
SELLERS' INDEMNITY
13. The Selling Parties shall indemnify, defend, and hold harmless
the Buyer against and in respect of any and all claims, demands, losses, costs,
expenses, obligations, liabilities, damages, recoveries, and deficiencies,
including interest, penalties, and reasonable attorneys' fees, that it shall
incur or suffer, which arise, result from, or relate to any breach of, or
failure by the Selling Parties to perform, any of their representations,
warranties, covenants, or agreements in this Agreement or in any schedule,
certificate, exhibit, or other instrument furnished or to be furnished by the
Selling Parties under this Agreement; provided, however, that the indemnity
-------- -------
provided for herein shall only apply to claims which in the aggregate exceed the
sum of $100,000.
The Buyer shall promptly notify the Selling Parties of the existence
of any claim, demand, or other matter to which the Selling Parties's
indemnification obligations would apply and shall give them a reasonable
opportunity to defend the same at their own expense and with counsel of their
own selection; provided that the Buyer shall at all times also have the right to
fully participate in the defense at its own expense. If the Selling Parties
shall, within a reasonable time after this notice, fail to defend, the Buyer
shall have the right, but not the obligation, to undertake the defense of, and
to compromise or settle (exercising reasonable business judgment), the claim or
other matter on behalf, for the account, and at the risk, of the Selling
Parties. If the claim is one that cannot by its nature be defended solely by the
Selling Parties (including, without limitation, any federal or state tax
proceeding), then the Buyer shall make available all information and assistance
that Selling Parties may reasonably request.
ARTICLE FOURTEEN
THE BUYER'S INDEMNITY
14. The Buyer agrees to indemnify and hold harmless the Selling
Parties against, and in respect of, any and all claims, losses, expenses, costs,
obligations, and liabilities that they may incur by reason of the Buyer's breach
of or failure to perform any of its warranties, guaranties, commitments, or
covenants in this Agreement, or by reason of any act or omission of the Buyer,
or any of its successors or assigns, after the Closing Date, that constitutes a
breach or default under, or a failure to perform, any obligation, duty, or
liability of any of the Selling Parties under
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any loan agreement, lease, contract, order, or other agreement to which it is a
party or by which it is bound at the Closing Date, but only to the extent to
which the Buyer expressly assumes these obligations, duties, and liabilities
under this Agreement; provided, however, that the indemnity provided for herein
-------- -------
shall only apply to claims which in the aggregate exceed $100,000.
Notwithstanding the foregoing, the Buyer agrees to indemnify Robin and
Josh, as individuals, against any claims brought against them by West Coast
Capital, LLC in connection with a certain investment banking letter of
engagement dated September 4, 1995, executed between the Corporation and West
Coast Capital, LLC.
The Selling Parties shall promptly notify the Buyer of the existence
of any claim, demand, or other matter to which the Buyer's indemnification
obligations would apply and shall give it a reasonable opportunity to defend the
same at its own expense and with counsel of its own selection; provided that the
Selling Parties shall at all times also have the right to fully participate in
the defense at their own expense. If the Buyer shall, within a reasonable time
after this notice, fail to defend, the Selling Parties shall have the right, but
not the obligation, to undertake the defense of, and to compromise or settle
(exercising reasonable business judgment), the claim or other matter on behalf,
for the account, and at the risk, of the Buyer. If the claim is one that cannot
by its nature be defended solely by the Buyer (including, without limitation,
any federal or state tax proceeding), then the Selling Parties shall make
available all information and assistance that Buyer may reasonably request.
ARTICLE FIFTEEN
NATURE AND SURVIVAL OF REPRESENTATIONS AND OBLIGATIONS
15. SURVIVAL OF REPRESENTATION AND OBLIGATIONS
No representations or warranties whatsoever are made by any party,
except as specifically set forth in this Agreement, or in an instrument,
certificate, opinion, or other writing provided for in this agreement. All
statements contained in any of these instruments, certificates, opinions, or
other writings shall be deemed to be representations and warranties under this
Agreement. The representations, warranties, and indemnities made by the parties
in this Agreement or in instruments, certificates, opinions, or other writings
provided for in the covenants and agreements to be performed or complied with by
the respective parties under it before the Closing Date, shall be deemed to be
continuing and shall survive the Closing, but shall expire on the first
anniversary date following the Closing Date, unless a specific claim in writing
with respect to these matters shall have been made, or an action at law or in
equity shall have been commenced or filed, before this anniversary date. Nothing
in this
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paragraph shall affect the obligations and indemnities of the parties with
respect to covenants and agreements contained in this agreement that are
permitted to be performed, in whole or in part, after the Closing Date.
ARTICLE SIXTEEN
GENERAL PROVISIONS
16.1 GOVERNING LAW AND JURISDICTION; BINDING ARBITRATION
This Agreement shall be governed by and interpreted in accordance with
the laws of the State of California. Each of the Parties hereto consents to
such jurisdiction for the enforcement of this Agreement and matters pertaining
to the transaction and activities contemplated hereby. Any dispute arising out
of the interpretation or enforcement of any provision of this Agreement shall be
submitted to binding arbitration according to the commercial rules of the
American Arbitration Association.
16.2 NOTICES
All notices and other communications provided for or permitted
hereunder shall be made by hand delivery, first class mail, telex or telecopies,
addressed as follows:
PARTY ADDRESS
----- -------
Buyer Michael D. Mooslin, President
Koo Koo Roo, Inc.
11075 Santa Monica Boulevard, Suite 225
Los Angeles, California 90025
Telecopier No:. 310-479-8843
with a copy, which shall not constitute notice, to:
Harry S. Stahl, Esq.
McKenna & Stahl
2603 Main Street, Suite 1010
Irvine, California 92714
Telecopier No.: 714-752-6723
Selling Parties Robin Monroe and Josh Culver
16101 Ventura Boulevard
Encino, California 91436
Telecopier No.: 818-379-9665
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with a copy, which shall not constitute notice, to:
Darcy L. Simon, Esq.
Ervin, Cohen & Jessup
9401 Wilshire Boulevard, Suite 900
Beverly Hills, California 90212
Telecopier No.: 310-859-2325
All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; when answered back, if
telexed; and when receipt is acknowledged or confirmed, if telecopied.
16.3 ATTORNEYS' FEES
In the event a dispute arises with respect to this Agreement, the
party prevailing in such dispute shall be entitled to recover all expenses,
including, without limitation, reasonable attorneys' fees and expenses incurred
in ascertaining such party's rights, in preparing to enforce or in enforcing
such party's rights under this Agreement, whether or not it was necessary for
such party to institute suit.
16.4 COMPLETE AGREEMENT
This Agreement supersedes any and all of the other agreements, either
oral or in writing, between the Parties with respect to the subject matter
hereof and contains all of the covenants and agreements between the Parties with
respect to such subject matter in any manner whatsoever. Each Party to this
Agreement acknowledges that no representations, inducements, promises or
agreements, oral or otherwise, have been made by any Party, or anyone herein,
and that no other agreement, statement or promise not contained in this
Agreement shall be valid or binding. This Agreement may be changed or amended
only by an amendment in writing signed by all of the Parties or their respective
successors-in-interest.
16.5 BINDING
This Agreement shall be binding upon and inure to the benefit of the
successors-in-interest, assigns and personal representatives of the respective
Parties.
16.6 UNENFORCEABLE TERMS
Any provision hereof prohibited by law or unenforceable under the law
of any jurisdiction in which such provision is applicable shall as to such
jurisdiction only be ineffective without affecting any other provision of this
Agreement. To the full extent, however, that such applicable law may be waived
to the end that this Agreement be deemed to be a valid and binding
18
<PAGE>
agreement enforceable in accordance with its terms, the Parties hereto hereby
waive such applicable law knowingly and understanding the effect of such waiver.
16.7 EXECUTION IN COUNTERPARTS
This Agreement may be executed in several counterparts and when so
executed shall constitute one agreement binding on all the Parties,
notwithstanding that all the Parties are not signatory to the original and same
counterpart.
16.8 FURTHER ASSURANCE
From time to time each Party hereby agrees to and shall execute and
deliver such further instruments and will take such other action as any other
Party may reasonable request in order to discharge and perform their obligations
and agreements hereunder and to give effect to the intentions expressed in this
Agreement.
16.9 INCORPORATION BY REFERENCE
All exhibits referred to in this Agreement are incorporated herein in
their entirety by such reference.
16.10 ACKNOWLEDGEMENT OF ATTORNEY REPRESENTATION
Selling Parties acknowledge that McKenna & Stahl has acted only as
attorneys for Buyer in connection with the negotiation and execution of this
Agreement; that it has been advised by McKenna & Stahl to seek independent
representation by counsel of its own choice; and that it is not relying upon
said law firm to act as its personal attorney in connection with any matter
relating to this Agreement.
16.11 MISCELLANEOUS PROVISIONS
The various headings and numbers herein and the grouping of provisions
of this Agreement into separate articles and paragraphs are for the purpose of
convenience only and shall not be considered a party hereof. The language in
all parts of this agreement shall in all cases by construed in accordance with
its fair meaning as if prepared by all Parties to the Agreement and not strictly
for or against any of the Parties.
(Signature on page 20)
19
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as
of the day and year first above written.
BUYER SELLING PARTIES
Koo Koo Roo, Inc.
A Delaware Corporation
By: /s/ Kenneth Berg /s/ Robin Monroe
---------------------------- -------------------
Kenneth Berg, Chairman & CEO Robin Monroe
/s/ Josh Culver
-------------------
Josh Culver
\ \ \ \ \ \ \
(Signature page to Agreement for Acquisition
of Color Me Mine, Inc.)
20
<PAGE>
- - --------------------------------------------------------------------------------
CONFIDENTIAL
LETTER OF INTENT
- - --------------------------------------------------------------------------------
This Letter of Intent is between Koo Koo Roo, Inc., a Delaware corporation ("Koo
Koo Roo" or the "Company") and 3207706 Canada Limited ("CanadaCo") to form a
joint venture entity in Canada, Koo Koo Roo Canada Ltd. ("KKRC"). Koo Koo Roo
and CanadaCo intend to enter into definitive and legally binding agreements as
outlined in the term sheet attached as Exhibit A. However, this Letter of
Intent is not intended to, and does not constitute a legally binding commitment
or create any liability for either the Company or CanadaCo. Both the Company
and CanadaCo confirm their intention to negotiate in good faith to complete
definitive and legally binding agreements on or before March 31, 1996.
For
KOO KOO ROO, INC. 3207706 CANADA LIMITED
/s/ Kenneth Berg /s/ N.W. Kirchmann
- - ---------------------------- ----------------------
Kenneth Berg N.W. Kirchmann
Chairman and CEO
Date: March 15, 1996 Date: March 15, 1996
Witness: /s/ Robert F. Kautz /s/ Craig F. Findlay
------------------- ----------------------
Robert F. Kautz Craig F. Findlay
<PAGE>
EXHIBIT A
KOO KOO ROO INC. - CANADA JOINT VENTURE
TERM SHEET IN CONNECTION WITH A LETTER OR INTENT DATED MARCH 15, 1996
DESCRIPTION: An exclusive joint venture to be formed between Koo Koo Roo, Inc.
("KKRO") and 3207706 Canada Limited ("CanadaCo") to form a new
entity, Koo Koo Roo Canada Ltd. ("KKRC"), which will use the
trademarks, operating systems, concepts, and expertise of Koo Koo
Roo and Arrosto to rapidly build out California Kitchen Stores
and Arrosto outlets.
TERRITORY: Exclusive territory for all of Canada as of the execution of
this agreement.
TRADEMARKS: All current and future trademarks of Koo Koo Roo, Inc. including
the California Kitchen concept and Arrosto Coffee Company which
shall be licensed to KKRC but ownership and protection shall
remain the property of and responsibility of Koo Koo Roo, Inc.
STORE QUOTA: A minimum store opening quota of 2, 5-6, 8, 9 in years 1, 2, 3, 4
shall be required to maintain exclusivity of the territory, with
such quota to be reasonably adjusted by mutual agreement.
TERM: The relationship shall be in perpetuity.
LICENSING: Revenue royalty: 2% on first two stores after store contribution
turns positive, and 2% on all other stores.
OWNERSHIP: KKRO and CanadaCo shall each own the joint venture entity "KKRC"
proportional to invested equity. KKRO shall contribute 40% of
the equity and CanadaCo shall contribute 60%. Profits and cash
flow shall be distributed according to ownership. The definitive
agreement will deal with calls for additional capital, the sale
and joint approvals of ownership interest and circumstances that
could cause dilution to either or both joint venture partners
equity interest.
FINANCING: Debt financing of approximately 60-65% of per store investment
shall be arranged for and provided by KKRC after the first two
stores.
<PAGE>
2.
COST SHARING: KKRC ABSORBED COSTS:
(I) All operating costs of the restaurants and corporate JV
costs up to and including COO management level.
(ii) CanadaCo provided services to be agreed (e.g. allocated
overhead, direct development, operational support, pre-
approved travel, jointly approved G&A Budgets).
(iii) KKRO provided products and services to be agreed (e.g.
systems or accounting support, pre-approved direct costs
for training, travel or other services, and jointly pre-
approved proprietary products provided through KKRO's
Food-Eez subsidiary at the lowest price charged to any
KKRO stores).
KKRO ABSORBED COSTS:
(I) Senior management time, legal and other costs incurred
directly by KKRO associated with the evaluation and
planning prior to execution of Joint-Venture agreement.
CANADACO ABSORBED COSTS:
(I) Senior management time, legal and other costs incurred
directly by CanadaCo associated with the evaluation and
planning prior to execution of Joint-Venture agreement.
OPERATIONS: KKRC shall have full responsibility and authority to develop
sites and operate restaurants and systems with the following
caveats:
(I) KKRO and CanadaCo shall jointly have the opportunity to
review and approve site selection, closings, menu
adjustments, and departures from operating procedures.
(ii) KKRO shall have the right to add 1 or 2 employees at
store expense if KKRO deems this necessary to correct
product or service quality issues.
(iii) KKRO and CanadaCo shall jointly approve any press release
or other public use (including advertising) of the name
and/or logo of the other party.
(iv) A liaison shall be designated by each for approvals with
time of the essence.
<PAGE>
3.
LEGAL STRUCTURE
AND DECISIONS: The joint venture will take the form of a corporation (or
other legal entity if agreed to by both KKRO and CanadaCo),
and both parties agree to act reasonably in considering
structural alternatives that may best minimize tax for the
partners. The joint venture will be governed by a board of
directors appointed by KKRO and CanadaCo in proportion to
their share holdings. All major decisions of the joint venture
will be determined by unanimous decisions of the board and all
operational decisions, except as set out above, shall be made
by simple majority of the board.
LIQUIDITY: The definitive legally binding agreements shall contain mutual
rights of first refusal (and, after a period of time, buy-sell
provisions) and other liquidity provisions customarily found
in agreements of this nature.
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<PAGE>
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<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1994 JAN-01-1995
<PERIOD-END> MAR-31-1995 MAR-31-1996
<CASH> 3,501,815 31,960,509
<SECURITIES> 3,663,111 1,499,767
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<NET-INCOME> (1,105,606) (1,751,770)
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