<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
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OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
PERIOD FROM __________ TO __________
Commission file number: 0-19548
[LOGO OF KOO KOO ROO]
KOO KOO ROO, INC.
(Exact name of Registrant as specified in its charter)
Delaware 22-3132583
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification #)
11075 Santa Monica Boulevard, Suite 225, Los Angeles, CA 90025
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (310) 479-2080
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of class)
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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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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ___
As of March 7, 1997, 16,352,596 shares of Registrant's Common Stock were
outstanding. The aggregate market value of the Registrant's Common Stock held
by non-affiliates of the Registrant as of March 7, 1997, was approximately $93.1
million based on the closing price of $6.9375 per share on that date on the
Nasdaq National Market. All directors and officers and more than 5%
stockholders of Registrant are deemed "affiliates" of Registrant for the purpose
of calculating such aggregate market value. Registrant, however, does not
represent that such persons, or any of them, would be deemed "affiliates" of
Registrant for any other purpose under the Securities Exchange Act of 1934 or
the Securities Act of 1933.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Current Report on Form 8-K dated March 18, 1996 are
hereby incorporated herein by reference into Item 5 of Part II of this Report.
In addition, portions of the Company's Proxy Statement with respect to its 1996
Annual Meeting of Stockholders to be filed not later than 120 days after the end
of the fiscal year are incorporated by reference in Part III.
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PART I
ITEM 1. BUSINESS
GENERAL INFORMATION
The principal business of Koo Koo Roo, Inc. (the "Company" or "Koo Koo
Roo") is the operation of restaurants in the emerging food category of fresh,
convenient meals--meals with the convenience and value associated with quick
service, but the quality, freshness and variety associated with upscale, casual
full-service restaurants. The Company's signature concept, Koo Koo Roo
California Kitchen(TM), features the Company's proprietary Original Skinless
Flame-Broiled Chicken(TM), fresh oven-roasted hand-carved turkey, country herb
rotisserie chicken, made to order tossed salads, specialty sandwiches on fresh
baked rolls, a signature vegetable soup and more than 23 side dishes including
hand-mashed potatoes, stuffing, steamed green beans and other vegetables, rices
and grains. With few exceptions, all are prepared fresh in small batches on-site
throughout the day. As of March 7, 1997, the Company operated 28 Koo Koo Roo
restaurants: 26 company owned and operated restaurants located in California
(24); New York (1); and Colorado (1), as well as two joint venture restaurants
in Florida, which are operated by the Company. See "--Restaurants in Operation
and Expansion Plans."
The Company's restaurants are designed to appeal to consumers who look for
good tasting, freshly prepared food, and who also appreciate menu items that are
wholesome and healthy. The products are easy to understand, high in quality and
generally low in fat, calories and cholesterol, without the negative connotation
or taste of "health food." The sights and smells of fresh food preparation, such
as turkey carving and salad tossing, are displayed in glass enclosed stations
featuring "chefs" in restaurant whites and toques. The average check ranges
between $8 and $9 and the restaurants generally range in size from approximately
2,000 to 4,000 square feet.
The Company opened its first restaurant in Los Angeles, California in
August 1988 in a fast food format with a menu limited to the proprietary
Original Skinless Flame-Broiled Chicken(TM) and a half-dozen hot and cold side
dishes. In 1990 Kenneth Berg (the Company's current Chairman and Chief Executive
Officer) purchased a financial interest of 50% in Koo Koo Roo, which had only
two stores at the time, from the Company's founders for $2.0 million. The
Company then completed an initial public offering in October 1991 and the
founders attempted to roll out the fast food format concept in several states.
In July 1992, Mr. Berg led the buyout of the remaining shares held by the
Company's founders and became the Company's Chairman and Chief Executive
Officer. Also in 1992, Mr. Berg hired Michael D. Mooslin, an experienced chain
restaurant executive, to be President and to help reposition the Company's
concept from a standard fast food format to a broad menu restaurant with full
service cooking standards while continuing to offer counter service. Over the
next several years, executive management, together with the Company's corporate
chef and professional designers, developed the layout, menu and appearance of
the Koo Koo Roo California Kitchen(TM).
In 1994 the Company initiated an area development and franchising program,
but the performance and nature of the concept led management to focus on a
quality-oriented brand strategy and to begin an expansion program starting in
1995. The expansion program focused on Company ownership or joint venture
relationships rather than franchising. During 1995, and 1996, additional real
estate, marketing, human resources, operations, construction and purchasing
executives, as well as store managers, were recruited to join the Company from
restaurant industry leaders such as The Cheesecake Factory, California Pizza
Kitchen, Houston's and Acapulco Restaurants. In February 1995, Mr. Berg
recruited Robert Kautz to join the Company as Chief Financial Officer. Over the
next two years, Mr. Kautz was principally responsible for raising over $75
million in new equity for the Company. Mr. Kautz was recently named President of
Koo Koo Roo, Inc. while retaining his title of Chief Financial Officer. In June
of 1995, Iacocca Capital Partners, L.P. served as placement agent in raising
$14.3 million in common stock and warrants. Subsequent to the June private
placement, Lee A. Iacocca, retired Chairman of Chrysler Corporation, was elected
to the Company's Board of Directors. In September 1996, John Kaufman joined the
Company as President of Koo Koo Roo USA responsible for all domestic operations.
Mr. Kaufman was previously Chief Executive Officer of Rosti and also opened 64
restaurants over nine years during his tenure at California Pizza Kitchen where
he was Vice President of Operations. In September 1996, Mr. Mooslin was
appointed the President and Chief Operating Officer of Koo Koo Roo
International. See "--Recent Developments" and "Executive Officers, Directors
and Key Employees."
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In 1996, the Company also acquired 90% of Color Me Mine, Inc. ("Color Me
Mine"), a chain of paint-your-own ceramics studios. Color Me Mine is a retail
chain of studios where customers paint ceramics primarily for entertainment
which are fired overnight in kilns located on site. The Company acquired Color
Me Mine with a view to open units next to Koo Koo Roo restaurants to utilize
larger real estate locations. Color Me Mine has been built in two Koo Koo Roo
locations and two additional dual-brand locations are presently under
construction. Color Me Mine has its own management team and plans to grow
independently through company-owned and franchise operations. As of March 1,
1997, Color Me Mine operated nine company-owned ceramics studios and is a joint
venture partner in six other studios through its franchising subsidiary. The
stores have unpainted ceramic items which are purchased by the customer and all
supplies are provided for the customer to design and paint their selection.
Color Me Mine also operates a ceramics manufacturing facility in Van Nuys,
California where over 400 different items are produced for distribution to its
owned stores and franchises.
As of March 7, 1997, eleven of the Company's Koo Koo Roo restaurants also
featured the specialty products of the Arrosto Coffee Company ("Arrosto"), a
wholly-owned subsidiary of the Company. Arrosto offers fresh roasted coffee and
espresso drinks along with regular and reduced-fat pastries and desserts.
Inclusion of Arrosto in the Koo Koo Roo California Kitchen(TM) locations allows
for increased facility utilization across day-parts, including early morning,
mid-afternoon, and evening. Arrosto operates a coffee bean micro-roastery in Van
Nuys, California and ships beans to its locations three to four times per week
to ensure the freshness of its end products. In addition, Arrosto has begun
construction of a test location for a family coffee house concept and, depending
on the results of the test location, may make additional investments in
locations strategically located near or adjacent to Koo Koo Roo California
Kitchen restaurants or Color Me Mine ceramics studios.
RECENT DEVELOPMENTS
PRIVATE PLACEMENTS
In February 1997, the Company completed a private placement of 6% Series B
Convertible Preferred Stock, liquidation preference $100 per share (the "Series
B Convertible Preferred Stock"), and received net proceeds of approximately
$26.9 million (after deducting cash fees to the placement agent and estimated
transaction expenses). The Series B Convertible Preferred Stock is convertible
into shares of the Company's Common Stock at a conversion price generally equal
to the market price of the Common Stock at the time of conversion, less a
discount initially equal to 3% and increasing over time to 25% at the end of 13
months from the date of original issuance. Dividends may be paid in cash or by
issuing additional shares of Series B Convertible Preferred Stock (valued at
$100 per share). The Company also agreed to issue to the placement agent three
year warrants to purchase 29,000 shares of Series B Convertible Preferred Stock
at $100 per share.
In March 1996, the Company completed two related private placement
offerings and received net proceeds aggregating approximately $30.4 million
(after deducting cash fees to the placement agents and transaction expenses). In
these offerings, the Company issued (i) 1,200,000 shares of 5% Convertible
Preferred Stock, liquidation preference $25 per share (the "Series A Convertible
Preferred Stock"), and (ii) 450,000 shares of Common Stock, subject to
adjustment. The Series A Convertible Preferred Stock is convertible into shares
of the Company's Common Stock at a conversion price generally equal to the
market price of the of the Common Stock at the time of conversion, less a
discount initially equal to 13% and increasing over time to 29% thirteen months
from the date of original issuance. Dividends may be paid in cash or by issuing
shares of Common Stock (valued at market value). To date, the Company has
issued a total of 285,417 additional shares of Common Stock in respect of the
Common Stock placement in accordance with the adjustment mechanism. The Company
also issued to the placement agent five year warrants to acquire 108,000 shares
of Series A Convertible Preferred Stock for $25 per share and 40,500 shares of
Common Stock for $7.75 per share.
The number of shares of Common Stock issuable upon conversion or the Series
A and Series B Convertible Preferred Stock is dependent on future events,
consisting of, among other things, future trading prices of the Common Stock in
the marketplace and the conversion decisions of the holders. See Item 7.,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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PURCHASE AGREEMENT FOR 14 HAMBURGER HAMLET RESTAURANTS
On March 21, 1997, the Company entered into a purchase agreement to acquire
14 Hamburger Hamlet restaurants for a total consideration consisting of $9.7
million in cash, 150,000 shares of restricted common stock and assumption of
$250,000 in debt as well as assumption of the related real property leases. The
purchase agreement is subject to the approval of the bankruptcy court. Ten
restaurants are located in California and four in the Washington, DC Beltway
area. If consummated, certain of the acquired locations would be converted to or
co-located with Koo Koo Roo California Kitchen(TM) restaurants. In certain of
the acquired locations, the Company also intends to test market a menu insert
profiling Koo Koo Roo California Kitchen(TM) and offering selected Koo Koo Roo
California Kitchen(TM) menu items in the full service Hamburger Hamlet
restaurant environment. The Company presently intends to finance the acquisition
with cash on hand or with borrowings under a debt package which is presently
being negotiated. There can be no assurance that this acquisition will be
completed.
ACQUISITION OF COLOR ME MINE, INC.
On March 25, 1996, the Company acquired 90% of the outstanding capital
stock of Color Me Mine, the operator of a small chain of paint-your-own-ceramics
studios located in Southern California. As consideration for its 90% interest,
the Company issued to the shareholders of Color Me Mine a total of 377,000
restricted shares of unregistered Common Stock, of which shares with a value of
$900,000 are subject to registration under the Securities Act of 1933 as amended
(the "Securities Act") and another 100,000 shares will be held in escrow to be
released at the end of three years. The transaction has been designed to be a
tax-free reorganization under the federal income tax laws and has been accounted
for utilizing the pooling of interests accounting method. See "--Business
Development Agreement."
CANADIAN JOINT VENTURE
The Company entered into an agreement in 1995 with a group of Canadian
business leaders to form a joint venture to develop the Koo Koo Roo California
Kitchen(TM) restaurant concept in Canada ("Koo Koo Koo Canada"). The Company has
a 40% ownership interest in Koo Koo Roo Canada and a pro rata participation in
the earnings and responsibility to provide it's proportionate share of capital.
Koo Koo Roo Canada has entered into three lease agreements and is negotiating
for a fourth site, all in the greater Toronto area. The first Canadian Koo Koo
Roo is under construction and presently is scheduled to open in late spring of
1997. The second restaurant, also under construction, is presently expected to
open in late spring or early summer of 1997 and the third is scheduled for the
fall of 1997. The management was hired from successful, high volume, full-
service restaurants in the Toronto area and have been training at the Company's
corporate headquarters in California.
INTERNATIONAL
In September 1996, Michael Mooslin, who led the development of the Koo Koo
Roo California Kitchen(TM) concept, became President of the Company's
International division, Koo Koo Roo International. In this role, Mr. Mooslin is
responsible for seeking joint venture partners and licensees in international
markets. Mr. Mooslin will also be charged with establishing the necessary
systems and culture by international operators to facilitate the replication of
Koo Koo Roo products and quality.
In addition to the Canadian joint venture described above, the Company is
actively pursuing other international opportunities. Among these is a licensing
agreement which the Company is negotiating with restaurant operators based in
the Middle East to cover Lebanon, Kuwait, United Arab Emirates and Egypt. In
addition, the Company has signed an initial memorandum of understanding with a
prominent multi-national company to develop Koo Koo Roo restaurants in Asia in a
joint venture partnership. The terms of any such joint venture in Asia are
subject to, among other things, the development of a mutually acceptable
business plan, which has not been completed as of the date of this Report. At
this time, the Company cannot predict whether these activities will lead to the
establishment of further international operations, or the terms thereof.
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BUSINESS DEVELOPMENT AGREEMENT
On May 8, 1996, the Company retained Restaurant Marketing Corp. ("RMC") to
provide business development services. RMC's principal responsibility will be to
pursue additional joint venture partners for Koo Koo Roo and Color Me Mine. RMC
identified the Company's Canadian partners and facilitated the structuring and
establishment of Koo Koo Roo Canada. In consideration for the agreement, the
Company issued options to purchase one million shares of the Company's Common
Stock at an exercise price of $8.00 per share which will become exercisable 33-
1/3% per year so long as the business development agreement with RMC remains in
place. The business development agreement may be canceled with six months notice
by the Company's Chief Executive Officer in his sole discretion. These options
will also vest upon change in control (as defined in the business development
agreement). RMC is an affiliate of Mel Harris, a director of the Company.
FLORIDA/SOUTHERN GEORGIA AREA DEVELOPMENT AGREEMENT
The Company's sole remaining franchisee was granted rights pursuant to a
1994 Area Development Agreement covering Florida and certain counties in
Southern Georgia (the "Florida/Southern Georgia Area Development Agreement"). In
August 1995, the Company entered into a First Amendment to the Florida/Southern
Georgia Area Development Agreement pursuant to which the local area developer in
that market (the "Developer") granted the Company a right of first refusal to
participate as a joint venture partner with the Developer in future Koo Koo Roo
store locations in the Florida/Southern Georgia territory. Under this
arrangement, it is anticipated that the Company and the Developer will jointly
develop stores in Florida through equal ownership in newly-formed partnerships.
For financial reporting purposes, the results of these stores will be
consolidated with the Company's operations subject to the minority interest of
the Developer. The first such joint venture restaurant opened in South Miami in
November 1995 and an additional location in North Miami opened in July 1996. In
May 1996, the Company further amended the Florida/Southern Georgia Area
Development Agreement to remove the right of the Developer to franchise stores
and, thereby, require that all stores built will be developed as joint ventures.
As consideration for the May 1996 amendment, the Developer was issued options to
purchase 350,000 shares of Common Stock at $8.00 per share. The developer is an
affiliate of Mel Harris, a director of the Company.
BUSINESS STRATEGY
The Company believes that its Koo Koo Roo California Kitchen(TM)
restaurants are positioned in a new dining niche being created by a number of
emerging trends: the aging of the population and market segment's growing
interest in eating healthier; the rapidly developing interest among young adults
and parents of young children in food that's "better for you"; the increasing
demand for fresh, understandable food that tastes good and offers the comfort of
home cooking; the replacement of beef with poultry as an everyday protein; the
growing propensity for restaurants to provide a source of visual entertainment;
the increasing demand for quality carry-out food; and the preference for branded
high quality coffees and espresso drinks. Management believes the Koo Koo Roo
California Kitchen(TM) concept, when combined with an Arrosto Coffee Bar,
addresses each of these trends in a unique direct way.
The Company's goal is to become a leader in the convenient, fresh food
market niche. Therefore, its strategic objective is to grow and attain brand
awareness and economies of scale. To achieve this objective, the Company has
assembled a management team and invested in research and development and
corporate infrastructure to: acquire real estate locations; design and build its
restaurants; manage the systems and services required to maintain quality and
safety in a high growth environment; and finance the investment necessary to
achieve economies of scale. The Company believes that in its core market of West
Los Angeles it has established a brand name which represents convenient, high
quality, fresh food, at affordable prices. The Company's business plan is to
replicate the Koo Koo Roo California Kitchen(TM) concept, with an initial focus
on building clusters of stores in a limited number of major metropolitan areas
which are demographically similar to the core Los Angeles market. The Company
intends to grow in the long-term through the replication of Company-owned
stores, license or joint venture arrangements in national and international
markets, acquisitions for conversion, dual-branding and co-locating and other
strategic alliances or acquisitions which will increase the distribution and
awareness of its fresh food brand and attain economies of scale in its
convenient, fresh food market niche. As of the date of this report, the Company
has no agreement regarding any such venture, alliance or acquisition beyond that
discussed herein under the caption "--Recent Developments" and there can be no
assurance that any such opportunity will be identified or realized.
In 1996, the Company also acquired 90% of Color Me Mine, Inc. The Company
acquired Color Me Mine with a view to open it next to Koo Koo Roo restaurants to
utilize larger real estate locations. Color Me Mine has been built in three Koo
Koo Roo locations and two additional dual-brand locations are presently under
construction. However, Color Me Mine has its own management team and plans to
grow independently through company-owned and franchised operations.
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GROWTH PHILOSOPHY
GROWTH THROUGH REPLICATING COMPANY STORES. The Company's present emphasis
in the United States will be the development of additional Koo Koo Roo
California Kitchen(TM) stores which will either be owned and operated by the
Company or owned in partnership and operated by the Company. Management
currently intends to focus its 1997 expansion in California, Florida, the New
York City area, the Washington DC Beltway area, and, opportunistically, in other
areas as appropriate. See "Restaurants in Operation and Expansion Plans."
GROWTH IN SALES OF EXISTING RESTAURANTS. The Company intends to continue to
focus on growth in sales of existing restaurants. New initiatives will include a
Grab and Go case with ready made sandwiches and salads, expanded catering,
delivery and take-out services, new products and enhanced marketing programs.
FUTURE POTENTIAL GROWTH. In the future, the Company expects to act
opportunistically to establish joint ventures and/or pursue acquisitions as
appropriate with experienced, major operators. The Company recently sign an
agreement to acquire 14 Hamburger Hamlet restaurants. See "--Recent
Developments."
FOCUSED RESTAURANT REAL ESTATE STRATEGY. Based on the success of the
restaurants, the Company tries to locate most of the Company's restaurants in
highly accessible, free-standing locations and strip shopping centers in mixed
use, high-traffic locations which facilitate take-out business. The Company also
has stores in alternative real estate venues in a shopping mall and a street
level site in an urban, high rise building, and will take advantage of these
alternative sites as appropriate. The Company has hired experienced real estate
professionals to secure locations in California, Southern Florida, the Northeast
(tri-state area) and Washington DC Beltway area. The Company has been and will
be pursuing discussions from time to time with other entities regarding possible
acquisitions of existing restaurants with the intent to secure locations. In
addition, the Company has hired a former developer to focus on strategic
alliances with banks and retailers who have need to restructure their real
estate. As of the date of this Report, the Company has no agreement regarding
any such alliance, joint venture or acquisition beyond that discussed herein
under the caption "--Recent Developments" and there can be no assurance that any
such opportunity will be identified or realized.
MULTIPLE COMPLEMENTARY BRANDS FOR REAL ESTATE LEVERAGE. In 1993, the
Company purchased the Arrosto Coffee Company, which created the foundation for
sales opportunities during hours other than the Koo Koo Roo peak lunch and
dinner periods. These include retail goods and specialty coffee and espresso
beverages, a breakfast program and afternoon and evening dessert/snack business.
After testing several approaches, the Company has designed a retail concept with
a credible coffee house identity, fresh baked goods, additional breakfast items
and reduced fat and regular desserts. The Company began implementation of the
refined coffee concept with the opening of the South Miami store and to date,
has included an Arrosto location in 11 Koo Koo Roo California Kitchen(TM)
locations. In March of 1996, the Company also acquired 90% of Color Me Mine, a
chain of paint-your-own ceramics studios. In certain locations, the Company has
located Koo Koo Roo and Color Me Mine stores in adjacent facilities in order to
take advantage of real estate locations which have attractive demographics, but
which are too large to be economically efficient for a Koo Koo Roo California
Kitchen(TM) store alone. See "--Recent Developments."
EXPERIENCED CORPORATE AND STORE MANAGEMENT. During 1996, the Company
continued building its management team with multi-unit retail and high growth
chain restaurant personnel. Real estate, marketing, human resources, operations,
construction and purchasing executives, as well as store managers, have been
recruited to join the Company from restaurant industry leaders, such as The
Cheesecake Factory, California Pizza Kitchen, Perkins Family Restaurants, Taco
Bell, Houston's and Acapulco Restaurants. See "--Executive Officers, Directors
and Key Employees."
INFORMATION TECHNOLOGY. The Company has invested in sophisticated touch
screen point-of-sale systems. These systems enable management to monitor sales
and costs according to day-part (morning, lunch, mid-day, dinner, evening), menu
item (skinless chicken, turkey, rotisserie chicken, etc.), customer type (eat-
in, take-out or catering), and by hour throughout the day. In addition, these
systems are connected via modem to a network which enables store polling and
updating of prices and menus from a central corporate coordination point.
Moreover, open databases, which the Company is currently implementing and
connecting via communication systems, will facilitate electronic invoicing,
accounting and purchasing designed to allow the Company to grow with a more
efficient use of clerical and supervisory staff. During 1997, the Company
currently plans to complete a wide area network application and add an executive
information system for analytical information reporting.
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HIGHLY MOTIVATED FIELD MANAGEMENT. The philosophy of the Company's
entrepreneurial chairman has led to an innovative, individual store management
team approach with a general manager and production chef, who receive
incentives, including store performance-driven bonuses and stock options in the
Company. The Company recognizes that the distinguishing features of the
restaurants are highly dependent on quality and hand preparation and the Company
monitors and rewards its managers with the objective to ensure that its high
standards are maintained. The Company believes that its sophisticated training
systems and motivated store management teams will provide a competitive
advantage in the Company's convenient fresh food market niche.
KOO KOO ROO CALIFORNIA KITCHEN(TM) CONCEPT
KOO KOO ROO'S MISSION. The mission of the Koo Koo Roo California
Kitchen(TM) is "to provide a dining experience that contributes to healthier,
happier and longer lives" as stated by the Company's Chairman, Ken Berg.
Utilizing ingredients and products that provide the best possible taste while
also achieving a healthy compromise on nutrition, convenience and fresh food,
the executive chef has created a variety of menu items which range from zero to
average levels of fat and sodium at affordable prices. In addition, the Company
aims to maintain a sense of fun and excitement in its restaurants, embodied in
the Koo Koo Roo name and its signature "winking" chickenhead logo. The Company's
management focus on cleanliness in the brightly lit restaurants, consistently
fast and friendly service and enjoyable fresh roasted coffees and pastries
through the Arrosto Coffee Company brand all contribute to achieving the
Company's mission.
"FRESH, HEALTHY AND DELICIOUS" FOOD CONCEPT. The Company's premium poultry,
rices/grains, vegetables and fruits are freshly prepared in small quantities on-
site throughout the day. Research with customers shows that the primary reasons
for customers choosing to frequent the Company's stores involve the good taste,
variety and freshness of the food. Management believes that its "from scratch"
approach to food preparation provides a distinguishable difference in taste from
most similarly priced competition.
CLEAN DINING AREAS AND SUPERIOR SERVICE. The Company also tries to
distinguish its concept by maintaining a management focus on clean surfaces,
sanitized containers and tools, and food that is touched as little as possible
by human hands. This noticeably clean environment is further enhanced by a
training and management focus on giving courteous, friendly service with a
heightened sense of urgency. Quality monitoring and training for food
preparation and other key service standards is supported by a self-managed,
multi-lingual, card and audio tape training system to assist management in
maintaining consistency as the Company grows.
PROPRIETARY, SIGNATURE PRODUCTS AND DISPLAYS. The Company's signature
product, Original Skinless Flame-Broiled Chicken(TM), has never been duplicated
to the Company's knowledge and requires marinating and basting in a proprietary
sauce. The Company has developed other proprietary dishes and received a patent
for its Turkey Bar, which features hand-carved, fresh steam-roasted turkey. A
wide array of side dishes are shown in brightly-lit glass cases. The Vegetable
Stand, surrounded by up to 14 fresh produce items in wooden, refrigerated
displays, is reminiscent of a farm fresh produce stand and provides an
exhibition work station for the salad maker.
VERSATILE PROTOTYPES. The Koo Koo Roo California Kitchen(TM) concept has
been designed for three prototypical sizes: a 3,500 square foot restaurant with
Arrosto coffee bar in free-standing or in-line locations; a 2,000 square foot
restaurant for smaller, lower density, in-line locations; and a 600 to 700
square foot kitchen outlet for high traffic, shared seating, and take-away
locations such as airports or the foot traffic of office buildings. The
Company's present locations range from 1,400 to 5,600 feet. Present development
plans for 1997 include building 30% of the stores with the larger, 3,500 foot
prototype and 70% of the stores with the 2,000 square foot prototype. As of the
date of this Report, none of the 600 to 700 square foot sites or the 2,000
square foot sites have been built, although the Company plans to open a small
number of 600 to 700 foot test sites. See "Restaurants in Operation and
Expansion Plans--Restaurants in Operation as of December 31, 1996."
RESTAURANTS IN OPERATION AND EXPANSION PLANS
To date, all restaurants, with the exception of the Beverly Boulevard store
in Los Angeles, have been partially or entirely renovated to provide the
Company's Koo Koo Roo California Kitchen(TM) menu. Management currently intends
that all restaurants to be opened in the future will be selected in accordance
with the Company's site selection criteria and constructed in compliance with
one of the three prototypes discussed above. As of March 7, 1997, the Company
had 28 Koo Koo Roo restaurants open and 39 locations either identified or in
various stages of development. This includes nine sites with executed leases (3
of which are currently under construction), 7 sites in final lease negotiation
and 23 sites identified, some of which have letters of intent executed. While
management believes certain of the letters of intent to be binding, leases will
not be signed until permit and zoning approvals are in place. Consequently,
these sites, although presently planned for opening in 1997, are not listed
below. See "--Site Selection, Design and Construction." The status of the Color
Me Mine ceramics studios is separately described under the caption "--Color Me
Mine, Inc."
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RESTAURANTS IN OPERATION AS OF DECEMBER 31, 1996:
<TABLE>
<CAPTION>
Square
Location Footage Date Opened
- ----------------------- ------- ----------------
<S> <C> <C> <C>
LOS ANGELES COUNTY, CA: Los Angeles
(Beverly Blvd.) 1,425 March 1989
Marina Del Rey 2,500 June 1990
Encino 2,075 April 1991
West Los Angeles 2,675 May 1991
Brentwood 2,600 May 1994
Beverly Hills
(South Beverly) 2,975 August 1994
Santa Monica 3,525 January 1995
Downtown Los Angeles 2,325 April 1995
Manhattan Beach 2,675 April 1995
Pasadena 3,200 August 1995
Woodland Hills 3,800 December 1995
Studio City 5,600 January 1996
Larchmont Village 2,500 March 1996
Venice 4,100 April 1996
North Beverly Hills 4,650 May 1996
Redondo Beach 3,000 October 1996
ORANGE COUNTY, CA: Costa Mesa 2,850 July 1995
Yorba Linda 3,600 July 1996
Irvine 3,475 August 1996
Tustin Market 3,500 November 1996
SAN FRANCISCO BAY AREA: Menlo Park 5,067 October 1996
SAN DIEGO COUNTY, CA: Del Mar 2,425 November 1995
COLORADO: Denver 3,500 September 1996
FLORIDA: South Miami/1/ 3,200 November 1995
North Miami/1/ 3,550 July 1996
NEW YORK: Bayside 3,700 October 1996
NEW JERSEY: Taj Mahal Hotel & Casino 4,875 December 1991/2/
</TABLE>
RESTAURANT LOCATIONS WITH EXECUTED LEASES AT DECEMBER 31, 1996:
<TABLE>
<CAPTION>
Square Estimated Date
Location Footage of Opening/3/
- ----------------------- ------- --------------
<S> <C> <C> <C>
LOS ANGELES COUNTY, CA: West Hollywood 3,600 January 1997
(Opened)
Burbank /4/ 4,125 March 1997
(Opened)
Torrance (Del Amo) 3,800 July 1997
Torrance (Rolling Hills) 2,000 September 1997
Claremont 2,500 September 1997
ORANGE COUNTY, CA Laguna Hills 3,500 July 1997
Aliso Viejo /4/ 4,260 May 1997
WESTFIELD, NJ Westfield 3,600 May 1997
LEESBURG PIKE, VA Baileys 3,600 May 1997
LAS VEGAS, NV Las Vegas 2,500 4th Quarter 1997
LONG ISLAND, NY New Hyde Park 2,800 3rd Quarter 1998
</TABLE>
- --------------------
/1/ Joint venture with area developer. See "--Recent Developments--
Florida/Southern Georgia Area Development Agreement."
/2/ This store was sold for $1.4 million in January 1997 to the Taj Mahal Hotel
& Casino for casino expansion purposes.
/3/ Estimated date subject to potential delays beyond the control of
management, including government permits and construction complications.
/4/ These locations were purchased by the Company in 1996. Subsequent to
December 31, 1996, the Company entered into sale/leaseback agreements on
these properties.
Page 8
<PAGE>
SITE SELECTION, DESIGN AND CONSTRUCTION
The Company considers the location of a restaurant to be critical to its
long-term success. The site selection process involves an evaluation of a
variety of factors, including demographics (such as target population density
and household income levels); specific site characteristics (such as visibility,
accessibility, parking availability and traffic volume); proximity to activity
centers (such as prime urban office or retail shopping districts, suburban
shopping areas, health clubs, medical centers and hotel and office complexes);
and potential competition in the area. Based on the Company's impression of the
similarity between the customers of the Color Me Mine studios and Koo Koo Roo
California Kitchen(TM) restaurants, the Company plans in certain instances to
locate the two complementary concepts in adjacent facilities to take advantage
of real estate locations which have attractive demographics but which are too
large to be economically efficient for a Koo Koo Roo California Kitchen(TM)
alone. The Company leases all of its restaurant sites (except for two sites
which are to be financed with sale/leaseback transactions). Senior executives
inspect and approve the site for each Company-owned restaurant prior to the
execution of a lease. The opening of new restaurants is subject to certain
business risks including, among other things, locating satisfactory sites,
negotiating favorable leases, completing construction and securing appropriate
government permits and approvals. Once space has been leased and made available
to the Company, 120 days or more are required to complete construction, obtain
necessary licenses and approvals and open the new restaurant. Uncontrollable
factors such as obtaining licenses can result in additional months of delay from
lease signing to opening. See "--Business Risks."
While the Company's restaurant design is flexible and may be adapted to
local architectural styles and existing buildings with varying floor plans and
configurations, the Company has developed its own proprietary cooking system
which includes specialized equipment and a distinctive and proprietary equipment
layout in standardized modules which speed the design process. Currently, most
open restaurants range in size from approximately 2,000 to 3,800 square feet.
Currently, the standard restaurant consists of a kitchen/preparation area and
order/display counter, comprising approximately 50% of the total space of the
restaurant, with seating capacity for approximately 75 to 125 persons in the
remaining half of the restaurant.
RESTAURANT OPERATIONS AND MANAGEMENT
The Company generally employs full service restaurant managers. The
training program is up to 16 weeks for general managers, depending on experience
level, and includes training materials, including a certified "Train the
Trainer" program and task training materials for managers to use in training
their employees as well as Hazard Analysis of Critical Control Points (HACCP)
for professional implementation of food and facility safety and sanitation. The
average restaurant employs 30 to 40 staff members including an experienced full-
service general manager, a skilled production chef, and a personnel manager
along with shift leaders, cooks, turkey carvers, salad makers, and other service
personnel.
PURCHASING
The Company currently negotiates directly with manufacturers, producers and
suppliers for food ingredients and beverage products in order to ensure uniform
quality and adequate supply and to gain access to the most competitive prices.
The restaurants obtain food and beverage items from local suppliers, shipped
directly to the restaurants, but at the prices and on the terms established
relative to the Company's national contracts, which management believes results
in significant benefits to the Company.
FRANCHISE OPERATIONS
Due to its success with its new restaurant concept, the Company's franchise
activities have been eliminated with respect to Koo Koo Roo. However, the
Company may pursue franchise opportunities at some future time when and if the
Company determines that it is in the Company's best interest to do so. The
Company is currently developing joint ventures with its area developer in the
State of Florida and certain counties located in Southern Georgia and exploring
other joint venture opportunities. It is, however, presently expected that Color
Me Mine will pursue franchising and area development agreements as well as
company-owned stores. See "--Color Me Mine, Inc."
Page 9
<PAGE>
ADVERTISING AND PROMOTION
Historically, the Company has primarily pursued opportunistic, lower cost
advertising and promotion activities within the trading area of each restaurant.
Because its business is primarily driven by "word of mouth" messages and visit
frequency, these activities have been heavily weighted to community activities
that include sampling Koo Koo Roo food. A limited amount of local print and
selective radio advertising have also been tested in addition to a pilot
campaign combining billboards, transit posters and radio, and two two-week cable
television tests. Although the Company plans to continue marketing in its local
trading areas to its strength as reflected in consumer research studies
conducted by the Company--the taste, quality and healthiness of its food--
market-wide campaigns for a variety of media are also being developed. Longer
term, the Company plans to develop a sufficient number of restaurants in each
market to permit the cost-effective use of mass media.
COMPETITION
The Company believes that its ability to compete effectively will depend on
maintaining the quality of its food, service and ambiance at a reasonable price.
The Company believes that there exists an emerging market niche encompassing
quality, convenience, healthfulness, taste and affordability. The Company plans
to continue to introduce innovative product lines such as those associated with
the Turkey Bar and The Vegetable Stand, in addition to maintaining its own
individuality and standards of taste, freshness, visual vitality and cleanliness
at affordable pricing.
The restaurant industry is highly competitive and there are a number of
purveyors that compete directly and indirectly for the consumers' food dollars
many of which are larger and more widely known than the Company. Based on
research and customer comments, the Company believes that the quality and value
of its products, service, ambiance and prices distinguish it from its
competitors. There are several factors which could potentially affect the
competitive position of the Company or individual restaurants of the Company to
which management might have to respond. These factors include, but may not be
limited to: consumer taste and discretionary spending priorities; national,
regional or local economic conditions; demographic trends; traffic patterns;
employee availability; and the type, number and location of competing
restaurants. See "--Business Risks."
TRADEMARKS AND SERVICEMARKS
The trademark and servicemark "Koo Koo Roo(TM)" is registered in the United
States Patent and Trademark Office, and all right, title and interest in and to
the mark is held by the Company. Seventeen domestic and thirteen foreign
trademarks/patents are currently owned by the Company and more are being
developed for proprietary recipes, systems, software, customized equipment and
design/equipment layouts including the Company's patented Turkey Bar Carving
Station, its Original Skinless Flame Broiled Chicken(TM), The Vegetable Stand
and Arrosto Coffee. The Company believes that its trademarks and servicemarks
have significant value to the marketing of its restaurants and products.
GOVERNMENT REGULATION
The Company is subject to various federal, state and local laws affecting
its business. The Company's restaurants are subject to regulation by various
governmental agencies, including those responsible for compliance with state and
local licensing, zoning, land use, construction and environmental regulations
and various health, sanitation, safety and fire standards. The Company is also
subject to the Fair Labor Standards Act and various state laws governing such
matters as minimum wages, overtime and working conditions. Since many of the
Company's personnel are paid at rates based on the federal minimum wage,
increases in such minimum wage may result in an increase in the Company's labor
costs. The Company cannot predict the impact on its results of operations should
the federal minimum wage be changed.
If, in the future, the Company wishes to resume selling franchises or allow
additional joint venture partners to operate joint ventures in the U.S. (as is
presently planned to occur with Color Me Mine), it will be subject to federal
and state laws, rules and regulations that govern the offer and sale of
franchises. Although Color Me Mine has a current filing under the franchise laws
of California and all other states, there can be no assurance that the Company
or Color Me Mine will be able to update or maintain their respective disclosure
documents or become registered in certain states. Such state laws may require
the franchisor to deal with its franchisees in good faith, prohibit interference
with the right of free association among franchisees, and may regulate
discrimination among franchisees in charges, royalties or fees.
Page 10
<PAGE>
COLOR ME MINE, INC.
Based on the Company's impression of the similarity between the customers
of the Color Me Mine studios and Koo Koo Roo California Kitchen(TM) restaurants,
the Company initially bought its 90% interest primarily to locate the two
complementary concepts in adjacent facilities to take advantage of real estate
locations which have attractive demographics but which are too large to be
economically efficient for a Koo Koo Roo California Kitchen(TM) alone. Based on
activity in the industry, management's assessments of franchise growth potential
has led Color Me Mine to focus on its growth potential as a stand alone
business. A separate management team manages the concept and develops it through
franchises, area development agreements, joint ventures and company-owned
stores. Color Me Mine has a current Uniform Franchise Offering Circular filed in
the state of California and other states. Management presently plans to pursue
franchising simultaneously in multiple regions of the U.S., and internationally.
During 1996, Color Me Mine opened seven company-owned and two franchised and
four joint venture studios and signed three area developer agreements for San
Diego and Orange County, California, Nevada, Florida and New Jersey. The
founders of Color Me Mine have five-year employment contracts which expire in
March 2001. See "General Information" and "Recent Developments." Detailed
information regarding Color Me Mine is available in its Uniform Franchise
Offering Circular, available by writing to: Mr. Kevin Reilley, c/o Color Me
Mine, Inc., 14724 Ventura Blvd., Suite 1001, Sherman Oaks, CA 91403.
COLOR ME MINE CERAMICS STUDIOS IN OPERATION AS OF DECEMBER 31, 1996:
<TABLE>
<CAPTION>
Square
Location Footage Date of Opening
- -------- ------- ---------------
<S> <C> <C>
Company-Owned
- -------------
LOS ANGELES COUNTY, CA
Santa Monica 2,200 April 1994
Encino 1,650 March 1995
Beverly Hills 1,500 May 1996
Malibu 1,500 June 1996
Venice 1,392 July 1996
Studio City 1,670 September 1996
West Hollywood 1,700 December 1996
SAN FRANCISCO BAY AREA
Menlo Park 1,350 October 1996
San Francisco 1,000 December 1996
Franchised
- ----------
ORANGE COUNTY, CA
Belmont Shores 1,400 November 1995
LIVINGSTON, NJ
Livingston 1,940 December 1996
Summit 2,370 November 1996
Joint Ventures
- --------------
ORANGE COUNTY, CA
Costa Mesa 1,750 September 1996
Laguna Niguel 1,019 October 1996
SOUTHERN FLORIDA
Aventura 1,800 December 1996
Coconut Grove 1,550 December 1996
</TABLE>
Page 11
<PAGE>
EMPLOYEES
As of March 7, 1997, the Company employed approximately 1,672 full and
part-time individuals which includes 24 executives, 91 corporate and support
staff and five field managers. None of these employees is covered by a
collective bargaining agreement. The Company believes that it has good labor
relations.
BUSINESS RISKS
There can be no assurance that the Company will continue to enjoy the
existing store level success that it has enjoyed in the past, nor can there be
any assurance that new stores will open or enjoy success equal to the prototype
stores. Each potential investor should consider the following risks inherent in
the Company's business which include, but are not necessarily limited to: the
limited number of stores and the Company's history of losses; uncertainty of
proposed expansion due to availability of sites and the necessary capital;
uncertainty of consumer acceptance in new markets; competition which will
require continued innovation by management; potential reversal of consumer
trends in health and lifestyle which currently benefit Koo Koo Roo; dependence
upon key corporate and store management personnel; sanitation risks; and
government regulations including zoning/permitting delays, cost impact of labor
laws and franchise regulation of Color Me Mine franchises. While management is
aware of these factors and has strategies and plans which it believes will
manage these risks, some of these factors are beyond management's control and
could result in lower than expected performance.
ITEM 2. PROPERTIES
The Company's Burbank location (Opened in March 1997) and its Aliso Viejo
location (under construction), are properties that have been recently purchased
by the Company. All other Company-owned restaurant sites and ceramics studios
are leased from third parties. These leases expire on dates ranging up to May
2006, with the majority providing for renewal options. All leases provide for
specified periodic rental payments and certain leases call for additional
payments based on sales volume. Most leases require the Company to maintain the
property and pay the cost of insurance and taxes. Color Me Mine leases a 5,500
square foot warehouse and a 20,000 square foot bisque factory to support its
operations. For information relative to the Company's future minimum lease
payment obligations under its long-term operating leases, see Note 12 to the
Consolidated Financial Statements. For listing of the Company's locations and
related square foot information, see "--Restaurants Opened as of December 31,
1996" and "--Ceramics Studios Opened as of December 31, 1996."
Certain corporate offices of the Company are located in space leased by
Berg Enterprises, Inc., a company owned by the Company's Chairman, located in
Iselin, New Jersey. During the year ended December 31, 1996, the Company
compensated Berg Enterprises, Inc. in the amount of $16,600 for the use of such
space. See "Item 13."
In addition, the Company's principal executive office is located in
approximately 11,400 square feet of leased space in Los Angeles, California,
under a five year lease which expires May 31, 1999, with a base rent of
approximately, $16,000 per month. In March 1997, Color Me Mine operations were
relocated to an office facility located in Sherman Oaks, California where they
leased 7,600 square feet of space at a base rent of approximately $9,000 per
month expiring in May 2000.
ITEM 3. LEGAL PROCEEDINGS
The Company has become subject to various lawsuits, claims and other legal
matters in the ordinary course of conducting its business. As of the date of
this Report, management believes that there are no legal proceedings pending,
the resolution of which is expected to have a material financial impact on the
Company's consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
Page 12
<PAGE>
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
All directors hold office until the next annual meeting of the stockholders
and the election and qualification of their successors. Officers are elected
annually by the Board of Directors and serve at the discretion of the Board.
Directors who are officers of the Company receive no additional
compensation for serving on the Board of Directors, other than reimbursement of
reasonable expenses incurred in attending meetings. Non-employee directors
receive a maximum annual compensation of $3,000, a fee of $300 for each meeting
attended, $250 for each committee meeting attended and reimbursement of
reasonable expenses incurred in attending meetings. The currently authorized
number of directors is fifteen. The Board of Directors has a Compensation
Committee, Stock Awards Committee which administers the Company's Stock Awards
Plan, a Finance Committee and an Audit Committee.
The following sets forth certain information regarding the directors,
executive officers and other key employees of the Company. Additional
information available in the Company's annual proxy statement is incorporated by
reference. Set forth below is certain information with respect to each person
who is a director or executive officer of the Company as of March 7, 1997:
<TABLE>
<CAPTION>
NAME POSITION WITH COMPANY
- ---- ---------------------
<S> <C>
Kenneth Berg/4/ Chairman of the Board and Chief Executive
Officer. Born 1926.
Robert F. Kautz President, Chief Financial Officer and Director.
Born 1958.
Michael D. Mooslin President of Koo Koo Roo International and
Director. Born 1947.
John Kaufman President of Koo Koo Roo USA and Director.
Born 1962
Morton J. Wall/1/ Treasurer and Director. Born 1938.
Ronald D. Garber General Counsel and Corporate Secretary.
Born 1953
Kory L. Berg President of the Arrosto Division and Director.
Born 1960.
Lee A. Iacocca/2//3//4/ Director. Born 1924.
Mel Harris Director. Born 1940.
Jess M. Ravich/1/ Director. Born 1957.
Don Wohl/1//2//3//4/ Director. Born 1932.
</TABLE>
- --------------------
/1/ Member of the Audit Committee.
/2/ Member of the Compensation Committee.
/3/ Member of the Stock Awards Committee.
/4/ Member Finance Committee
KENNETH BERG, CHAIRMAN AND CHIEF EXECUTIVE OFFICER. Mr. Berg has been a
director since August 1990 and has been Chairman of the Board and Chief
Executive Officer since July 1992. He was Co-Chairman of the Board and Co-Chief
Executive Officer from March 1992 until July 1992. From August 1990 until March
1992, he served as Chairman of the Board of the Company. Since January 1990,
Mr. Berg has served as Chairman of the Board and President of Berg Enterprises,
Inc. ("Berg Enterprises"), a holding company of which Mr. Berg is the sole
stockholder. From 1969 to December 1989, Mr. Berg served as Chairman of the
Board and President of the original Berg Enterprises, Inc., a company chiefly
involved in the mortgage banking business (renamed Margco Holdings, Inc. in
1990), which was listed on the New York Stock Exchange until May 1985 and which
subsequently became a subsidiary of Primerica Corporation. Mr. Berg presently
works full-time for the Company. Kenneth Berg is the father of Kory L. Berg.
Page 13
<PAGE>
ROBERT F. KAUTZ, PRESIDENT, CHIEF FINANCIAL OFFICER AND DIRECTOR. Mr.
Kautz has been Chief Financial Officer of the Company since February 1995,
became Assistant Secretary and a Director in November 1995, President of
Corporate Development in September 1996, and President, Koo Koo Roo, Inc. in
March, 1997. Prior to joining the Company, Mr. Kautz managed due diligence and
business plan development projects at Archon Capital Partners, L.P. and
InterActive Partners, L.P. as a consultant and associate for one year. Prior to
Archon, for two years he was Vice President of Marketing and Business
Development for Integrated Voice Solutions, Inc. For five years prior to that,
and on an interim basis in early 1994, he led U.S. and international consulting
engagements as a Senior Manager, Manager and Senior Consultant for the Price
Waterhouse Strategic Consulting Group specializing in business strategy and cost
and quality improvement. He has an MBA degree from Harvard Business School.
JOHN KAUFMAN, PRESIDENT AND CHIEF OPERATING OFFICER, KOO KOO ROO USA, AND
DIRECTOR. Mr. Kaufman joined the Company in September, 1996, and is directly
responsible for domestic restaurant operations, marketing, human resources,
training, real estate and profitability. Prior to joining the Company, Mr.
Kaufman was Chief Executive Officer of Rosti, a small Italian restaurant chain
based in California. He joined Rosti in December 1994, responsible for
overseeing all operations. Mr. Kaufman was also with California Pizza Kitchen,
starting in June 1986 with its first restaurant and promoted to Vice President
Operations, overseeing the opening of an additional 64 restaurants over a nine-
year period. He had store profit responsibility including daily operations,
restaurant design, menu design, and management hiring and training.
MICHAEL D. MOOSLIN, PRESIDENT AND CHIEF OPERATING OFFICER, KOO KOO ROO
INTERNATIONAL, AND DIRECTOR. Mr. Mooslin was President and Chief Operating
Officer of the Company from March 1992 until September 1996 when he became
President and Chief Operating Officer of Koo Koo Roo International. He has also
been a director of the Company since September 1992. Mr. Mooslin has been
involved in various capacities in the food business since 1962. From 1986 until
March 1992, Mr. Mooslin owned and operated MDM Restaurant Group, a management
company which facilitated the growth of small, development stage fast-food
chains. From 1972 to 1986, he served as President of Naugles, inc., a fast-food
chain featuring freshly prepared Mexican food.
RONALD D. GARBER, GENERAL COUNSEL AND CORPORATE SECRETARY. Mr. Garber has
been General Counsel and Corporate Secretary since May of 1996. From 1993 until
April 1996, Mr. Garber was a partner at the law firm of Richman, Lawrence, Mann,
Greene & Chizever in Beverly Hills, where he represented the Company. Prior
thereto, he was Of Counsel for the law firm of Cooper, Epstein & Horowitz.
MORTON J. WALL, TREASURER AND DIRECTOR. Mr. Wall has been Treasurer of the
Company since August 1990 and a Director since June 30, 1994. He also served as
Secretary from August 1990 to May 1996. Since March 1990, Mr. Wall has served
as Vice President and Treasurer of Berg Enterprises.
KORY L. BERG, PRESIDENT, ARROSTO AND DIRECTOR. Mr. Berg has been a
director and employee of the Company since August 1990. He established the
first Koo Koo Roo in Florida and served as its general manager from November
1990 to November 1994.
LEE A. IACOCCA, DIRECTOR. Mr. Iacocca, the retired Chairman of Chrysler
Corporation, was named to the Board of Directors in August 1995. He is also a
director of MGM Grand, Inc. and New World Communications Group Inc. In
addition, Mr. Iacocca is Chairman of the Committee for Corporate Support of the
Joslin Diabetes Foundation and a member of the advisory board of Reading is
Fundamental.
MEL HARRIS, DIRECTOR. Since 1988 Mr. Harris has been Chairman and since
1993 Chief Executive Officer of Preferred Employers Holdings, Inc. (NASDAQ:
PEGI) and President of International Insurance Group, Inc. since 1984. Mr.
Harris is CEO of Restaurant Marketing Corporation (RMC) and Restaurant
Acquisition Corporation (RAC), entities with which the company has service
agreements. RAC is also the Company's joint venture partner in two stores in
Florida. Mr. Harris is CEO of Ceramics Acquisiton Corporation which is the joint
venture partner of Color Me Mine, Inc. in three stores in Florida. He also
serves on the board of directors of the National Parkinson Foundation, Hebrew
Home for the Aged in Riverdale, New York, and the Yeshiva University Sy Syms
School of Business. He is a founder of the United States Holocaust Memorial
Museum, Washington, D.C., and a 1994 recipient of the Ellis Island Medal of
Honor Award.
JESS M. RAVICH, DIRECTOR. Mr. Ravich has been the Chief Executive Officer
and the majority owner of Libra Investments, Inc., a registered broker dealer,
since its was founded Libra in 1991. From March 1990 to March 1991, Mr. Ravich
was Executive Vice President of high yield trading with Jefferies & Co, a
registered broker dealer. Mr. Ravich is a director of Cherokee, Inc., a clothing
manufacturer and ACTV, Inc. a developer of individualized television programming
technology.
DON WOHL, DIRECTOR. Mr. Wohl has been a director of the Company since
December 1993. He has been a private investor as well as a business and
individual consultant for more than the past five years. Mr. Wohl is also a
director of Vitafort International Corporation, a specialty food manufacturer.
Page 14
<PAGE>
The following sets forth, as of March 7, 1997, certain biographical
information with respect to additional members of the Company's management:
BETH ARNOLD, VICE PRESIDENT FINANCE. Ms. Arnold joined the Company in 1994
and brings over 15 years of management experience in accounting, finance, data
processing and administrative functions. Prior to joining the Company, she
served as Director of Accounting and Administration for a wholesale food
distributor owned by Flagstar Companies, Inc. Prior to that, she was a
controller and assistant controller to two start-up restaurant chains. Ms.
Arnold is a CPA.
THOMAS BECK, VICE PRESIDENT OF CONSTRUCTION & DESIGN. Mr. Beck is a
seasoned manager who has built restaurants across the United States and been
involved in construction since 1970. Prior to joining the Company, he was
Director of Construction for California Pizza Kitchen.
JOHN BIRDSALL, SENIOR VICE PRESIDENT AND EXECUTIVE CHEF. Mr. Birdsall
brings 16 years of restaurant experience. Before joining the Company, Mr.
Birdsall was executive chef for Monroe's Restaurant and Catering, Metro
Restaurant, California Institute of Foods, Ruby's Diner Corporation and Hilton
Hotel. He is responsible for menu development and kitchen training.
MARVIN COHEN, VICE PRESIDENT OF PURCHASING. Mr. Cohen has over 25 years
experience in food purchasing and distribution, most recently with The
Cheesecake Factory where he was Director of Purchasing. He has also held
numerous management positions with firms such as S.E. Rykoff and Sizzler
International, Inc.
ROBERT FORT, VICE PRESIDENT, INFORMATION SYSTEMS TECHNOLOGY. Mr. Fort has
spent more than 18 years developing information systems for various industries
including food service. Prior to joining the Company Mr. Fort worked for Nestle
USA where he developed and successfully implemented various financial systems.
PHILIP GAY, PRESIDENT AND CEO, COLOR ME MINE. Mr. Gay was named Chief
Executive Officer in December 1996. Prior to joining Color Me Mine, Mr. Gay was
the CFO of Wolfgang Puck Food Company, Inc. from 1994 to 1996 and served as
Acting President from July 1996 to September 1996. From 1987 to 1994 Mr. Gay
was employed by California Pizza Kitchen, Inc., Los Angeles, California where he
last served as Vice President Finance, CFO and Corporate Secretary.
JEANNE GILES, CONTROLLER. Ms. Giles joined the company in March 1997. She
brings over ten years of accounting and finance experience primarily in a
restaurant/retail environment. Prior to joining the Company, Ms. Giles, was the
Controller for La Salsa, a ninety unit restaurant chain, where she managed all
the accounting, finance and information system functions for the past five
years.
BRADLEY GOLD, DIRECTOR OF OPERATIONS, ARROSTO COFFEE COMPANY. Mr. Gold
brings over 20 years of multi-unit restaurant and real estate experience. Most
recently, Mr. Gold was Regional Operations Manager for California for Pasqua,
Inc. where he managed 31 coffee bar locations and a distribution facility.
Previously, he was with The Tiger Company, Thrifty Corporation and Associated
Hosts, a fifteen restaurant chain.
JAMES KONSTANTINIDES, VICE PRESIDENT, REAL ESTATE. Mr. Konstantinides has
been involved in the restaurant, real estate development and franchising fields
for over twenty years. He has identified and secured over 350 sites in his
career for major chains including Friday's, Swensen's, Red Robin and Denny's.
Previously, he was President and Chief Operating Officer for California
Restaurant Concepts, the franchisee of T.J. Applebee's in California.
JACK MCSHANE, EXECUTIVE VICE PRESIDENT, STORE OPENINGS. Mr. McShane has
been Executive Vice President of the Company since August 1993. Mr. McShane
brings over 15 years of restaurant experience to the Company. Prior to joining
the Company, Mr. McShane spent 10 years with Pioneer Boulangerie where he served
as General Manager and Chief Buyer for the multi-million dollar food complex
which encompassed catering, a national wholesale bakery facility, and fine
dining as well as quick service dining.
JOEL PETERSEN, REGIONAL VICE PRESIDENT OF OPERATIONS. Mr. Petersen brings
over 20 years of restaurant operations experience to the Company. Mr. Petersen
has worked for Mr. Steak Restaurants, Brown Derby, Pizza Time Theatres and
Denny's and has directly supervised up to 200 stores.
Page 15
<PAGE>
MARTIN G. PARAVATO, SENIOR VICE PRESIDENT FINANCE. Mr. Paravato joined the
Company in August 1996. Prior to joining the Company, Mr. Paravato was a
partner with the international accounting firm of BDO Seidman LLP, specializing
in SEC reporting companies. He is a CPA and a graduate of California State
University at Northridge.
MAX SCHNEEBERGER, REGIONAL VICE PRESIDENT OF OPERATIONS. Mr. Schneeberger
possesses both corporate and franchise operations experience as a result of his
20 year career with Sizzler Restaurants International. Mr. Schneeberger
supervised operations for up to 85 stores with annual sales of $100 million.
JEANNE SCOTT, VICE PRESIDENT OF HUMAN RESOURCES. Ms. Scott has been Vice
President of Human Resources of the Company since December 1995 and is also
responsible for the Training Department. From August 1993 to November 1995, she
served as Vice President of Human Resources for Perkins Family Restaurants, a
450-unit, full service restaurant chain with approximately 9,000 employees.
From April 1980 to July 1992, Ms. Scott held various human resource and training
positions with the Taco Bell Corporation, a unit of PepsiCo.
ROBERT ZANOLLI, REGIONAL VICE PRESIDENT OF OPERATIONS. Mr. Zanolli brings
to the Company over 15 years of restaurant experience having worked for Acapulco
Restaurants, Red Onion, El Torito and Sheraton. Most recently, he supervised
operations with annual revenues exceeding $42 million.
Page 16
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since the Company's initial public offering in October 1991, the Company's
Common Stock has traded in the over-the-counter market and has been listed for
quotation through the National Association of Securities Dealers Automated
Quotation System ("Nasdaq"). Prior to such date, there was no public market for
the Common Stock. On August 14, 1995, the Company was accepted for quotation
through the Nasdaq National Market.
The following table sets forth for the periods identified the high and low
sales price of the Common Stock for the periods indicated, as reported by
Nasdaq.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
YEAR ENDED DECEMBER 31, 1995
<S> <C> <C>
First Quarter $ 7.000 $4.000
Second Quarter 7.000 4.750
Third Quarter 9.781 6.250
Fourth Quarter 9.563 6.250
YEAR ENDED DECEMBER 31, 1996
First Quarter $ 9.125 $6.125
Second Quarter 10.000 7.750
Third Quarter 9.250 6.250
Fourth Quarter 8.812 6.000
</TABLE>
On March 7, 1997, there were 588 holders of record of the Company's Common
Stock. The Company estimates that there are approximately 9,473 beneficial
owners of such stock.
The Company has not paid cash dividends on its Common Stock since its
incorporation and does not intend to declare any such dividends in the
foreseeable future. The Company is obligated to pay dividends at the rate of 5%
per annum (which generally may be in cash or Common Stock) on its Series A
Convertible Preferred Stock issued in March 1996. The Company is also obligated
to pay dividends at the rate of 6% per annum (which generally may be in cash or
Series B Preferred Convertible Stock) on its Series B Convertible Preferred
Stock issued in February 1997.
During the year ended December 31, 1996, the Company issued 450,000 of
Common Stock to accredited investors at a cash purchase price of $7.245 per
share. The Company also issued 1,200,000 shares of its Series A Convertible
Preferred Stock to accredited investors at a cash purchase price of $25.00 per
share. Such shares of Series A Convertible Preferred Stock are convertible into
shares of Common Stock at a conversion, less a discount initially equal to 13%
and increasing over time to 29% thirteen months from the date of original
issuance. The Company also issued 861,721 shares of Common Stock upon conversion
of, or in lieu of cash dividends on, such shares of Series A Convertible
Preferred Stock. In connection with the foregoing original issuances, the
Company also issued to accredited investors, warrants exercisable into 40,500
shares of Common Stock, and 108,000 shares of Series A Convertible Preferred
Stock. All of such shares and warrants were issued upon reliance of the
exemption from registration provided by Regulation D under the Securities Act.
Additional information with respect to the issuance of the Common Stock,
the Series A Convertible Preferred Stock and the terms of its conversion into
shares of Common Stock, and the warrants is contained under Item 5 in the
Company's Current Report on Form 8-K dated March 18, 1996 which is hereby
incorporated herein by reference.
During the year ended December 31, 1996, the Company also issued an
aggregate of 46,168 shares of Common Stock to accredited investors for aggregate
consideration of $247,000, and 377,000 shares of Common Stock to accredited
investors in connection with the acquisition of Color Me Mine. During the year
ended December 31, 1996, the Company also issued to accredited investors options
to purchase an aggregate of 1,824,000 shares of Common Stock. Such shares and
options were issued upon reliance of the exemption from registration provided in
Section 4(2) of the Securities Act.
Page 17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(In thousands, except per share amounts and number of restaurants)
YEARS ENDED DECEMBER 31, 1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue $ 4,167 $ 5,082 $ 8,983 $20,896 $39,802
Net Loss (3,617) (2,219) (4,782) (6,911) (9,285)
Net loss per common share (1.08) (0.48) (0.63) (0.57) (0.83)
Total assets 2,754 5,732 8,356 26,555 49,772
Stockholders' equity 1,756 4,512 3,748 21,543 42,549
Stockholders' equity per common share 0.42 0.63 0.44 1.51 1.06
Average annual sales per unit/1/ 645 796 1,163 1,533 1,907
Number of restaurants open at period end 9 7 8 16 27
Average annual same store sales growth/2/ - 23.6% 56.7% 21.5% 10.6%
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
The discussion below and elsewhere in this Report includes forward looking
statements about the future business results and activities of the Company
which, by their very nature, involve a number of risks and uncertainties. For an
explanation of certain of these risks and uncertainties, see the matters
discussed in the last paragraph of this Introduction section and the materials
referred to therein.
Calendar years 1995 and 1996 marked periods of continued expansion for the
Company as the Company opened nine and twelve new restaurants during 1995 and
1996 and added Arrosto Coffee Company locations in five of these restaurants.
At December 31, 1996, the Company operated 27 restaurants, ten of which included
Arrosto locations. Subsequent to year end the Company opened one location in
January 1997, which included an Arrosto location and another location in March
1997. On January 31, 1997, the Company sold the lease for its Atlantic City, New
Jersey location at the Taj Mahal Hotel and Casino to the hotel owner for
expansion purposes. This location included a Koo Koo Roo restaurant and a
Swenson's ice cream parlor which ceased operations on January 31, 1997.
In March 1996, the Company acquired 90% of the stock of Color Me Mine, a
small chain of paint-your-own ceramics studios then located in Southern
California. The total consideration consisted solely of 377,000 restricted
shares of unregistered Koo Koo Roo Common Stock and of this total, shares
aggregating $900,000 in value are subject to registration rights and 100,000
shares are subject to a lock-up to be released at the end of three years. The
founders of the acquired company have five year management contracts expiring in
March 2001 with annual compensation of $50,000 each plus profit sharing and
certain change in control provisions. The acquisition was accounted for using
the pooling of interest method of accounting. Accordingly, the financial
statements have been restated to include the effects of the acquisition of Color
Me Mine.
- --------------------
/1/ Average annual sales per unit is computed by averaging sales for stores
open 24 months or more.
/2/ Average annual same store sales growth is computed by subtracting the
current year average annual sales from the prior year and dividing the
difference by the prior year average annual sales.
Page 18
<PAGE>
On March 21, 1997, the Company entered into a purchase agreement to acquire
14 Hamburger Hamlet restaurants for a total consideration consisting of $9.7
million in cash, 150,000 shares of restricted common stock and assumption of
$250,000 in debt as well as assumption of the related real property leases. The
purchase agreement is subject to the approval of the bankruptcy court. Ten
restaurants are located in California and four in the Washington, DC Beltway
area. If consummated, certain of the acquired locations would be converted to or
co-located with Koo Koo Roo California Kitchen(TM) restaurants. In certain of
the acquired locations, the Company also intends to test market a menu insert
profiling Koo Koo Roo California Kitchen(TM) and offering selected Koo Koo Roo
California Kitchen(TM) menu items in the full service Hamburger Hamlet
restaurant environment. The Company presently intends to finance the acquisition
with cash on hand or with borrowings under a debt package which is presently
being negotiated. There can be no assurance that this acquisition will be
completed. See "--Liquidity and Capital Resources."
Many of the statements made in this Management Discussion and Analysis of
Financial Condition and Results of Operations are forward looking and, among
other things, comment on the prospects for the Company to grow rapidly and
attain profitable operations. The Company has incurred net losses which have
been increasing. Management presently anticipates that net losses will continue
to be incurred for some time, but that the net loss should decrease during the
next calendar year both in the aggregate and as a percentage of sales.
Management presently cannot predict precisely when the Company may achieve
profitable operations. The Company's current level of overhead contemplates more
restaurants and ceramics studios than are currently opened, and control over the
timing of the opening of the additional stores necessary to achieve a volume
level which would permit overall Company profitability is subject to factors
outside the control of management, including, among other things, site landlords
which are in negotiations with the Company, government permitting agencies, and
other outside parties and agencies including, but not necessarily limited to,
contractors, vendors, and government inspectors. See "Item 1.--Business Risks."
RESULTS OF OPERATIONS
The Company incurred operating losses during the years ended December 31,
1994, 1995 and 1996 in large part due to the costs of the management team and
other infrastructure which the Company believes necessary to pursue the
Company's corporate strategy of growing through the construction, acquisition
and operation of Company-owned stores. In addition to corporate overhead costs,
the Company's losses also reflect costs related to the development of new
products, store development expenses and the abandonment of certain sites and
assets, all of which continued to more than offset improvements in restaurant
operations. The net loss was also impacted by the cost of expansion of Color Me
Mine's operations as described below.
The net loss for the year ended December 31, 1996 was $9,285,000 compared
to a net loss of $6,911,000 for the year ended December 31, 1995. The Company's
operations consist of the Koo Koo Roo chain of restaurants (which includes the
Arrosto operations) and the Color Me Mine "paint-your-own" ceramics studios. The
discussion of the results of operations discusses the results of each line
separately to provide the reader a better understanding of the Company's
operations. Following are the results of operations for each line:
<TABLE>
<CAPTION>
RESTAURANTS CERAMICS STUDIOS
------------------------------ -----------------
1994 1995 1996 1995 1996
-------- -------- -------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Sales $ 8,772 $19,221 $36,608 $1,078 $1,655
Franchise fees and royalties - - - 13 363
Interest income and other 211 584 1,176 - -
------- ------- ------- ------ ------
Total 8,983 19,805 37,784 1,091 2,018
------- ------- ------- ------ ------
Costs and Expenses:
Cost of sales 6,457 13,981 26,160 541 1,328
Occupancy expense 1,237 1,737 3,240 122 281
Other operating expenses 5,728 10,611 17,301 368 1,199
Other 343 442 (368) 5 (54)
------- ------- ------- ------ ------
Total 13,765 26,771 46,333 1,036 2,754
------- ------- ------- ------ ------
Net income (loss) $(4,782) $(6,966) $(8,549) $ 55 $ (736)
======= ======= ======= ====== ======
</TABLE>
Page 19
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO 1995
CERAMICS STUDIO OPERATIONS
The ceramics studio operations incurred a loss for the year ended December
31, 1996 amounting to $736,000 compared to net income of $55,000 for the year
ended December 31, 1995. The loss for the current year results primarily from
the costs associated with opening new locations and the cost of relocation and
expansion of the ceramics production facility. Sales increased by 54% from
$1,078,000 to $1,655,000 during the current year as compared to the prior year,
primarily as the result of 13 new studio openings during the year, nine of which
opened in the forth quarter. Additional revenues were received during the year
ended December 31, 1996 amounting to $363,000 from the sales of franchise areas
and royalties.
RESTAURANT OPERATIONS
Revenues for the year ended December 31, 1996 amounted to $37,784,000
compared to $19,805,000 for the year ended December 31, 1995, an increase of
91%. Revenues for the current year included $1,145,000 of interest income earned
primarily from the Company's investment in marketable securities.
Sales of $35,342,000, excluding Arrosto, for the current year were produced
by sixteen restaurants which operated during both the current and prior calendar
years and twelve new restaurants open for part of the current year. Comparable
sales for the restaurants open throughout both 1996 and 1995 increased by 10.6%.
Ten Arrosto locations generated $1,266,000 in revenues during the current
year compared to $770,000 generated in the prior year by six Arrosto locations.
All of the Arrosto Coffee Company outlets are located in Koo Koo Roo California
Kitchen(TM) stores.
Gross profit on sales for calendar year 1996 increased by 99% to
$10,448,000 from $5,240,000 for the prior year. As a percentage of sales, gross
profit increased to 28.5% in the current year compared to 27.3% in the prior
year. Gross profit generally increases in mature stores (those open more than
three months) and are lower in newly opened stores. All but four Company stores
were open for more than three months during the 1996 calendar year. Cost of
sales improvements included efficiency improvements, waste reduction and
increased volumes, which resulted in improvements in overall food and paper
costs. Labor costs as a percentage of sales decreased by approximately 1.8%
during the current year as compared to the prior year.
Occupancy costs increased to $3,240,000 for the year ended December 31,
1996 compared to $1,737,000 during the prior period. Occupancy costs as a
percentage of sales were approximately the same in both years. Other operating
expenses which include other store and corporate expenses amounted to
$17,301,000 for the current year compared to $10,611,000 for 1995. This increase
was primarily due to the Company's expansion. As a percentage of sales, other
operating expenses decreased to 47% from 55% during the prior year, primarily as
a result of increased sales and higher per store volumes which resulted in
decreases in other fixed expenses. Included in other operating expenses during
1996 were marketing and advertising costs of approximately $400,000 and employee
severance costs approximating $125,000. Personnel and other corporate expenses
increased as the Company continued to implement the infrastructure necessary for
its planned growth. Management expects overall operating expenses to continue to
decline as a percentage of revenues in the future.
Minority interest represents the limited partners' interest in two
partnerships and the minority stockholders' interest in one subsidiary, which
are controlled by the Company. Pursuant to the partnership agreements, profits
and losses and cash distributions are allocated based on ownership percentage.
The financial results of the partnerships and subsidiary have been consolidated
with those of the Company. The ceramics studio subsidiary is 90% owned by the
Company.
The Company's present expansion plans contemplate a number of new store
openings during the balance of 1997 and into 1998. In connection with new store
openings, pre-opening costs (such as training of new employees and various site
costs) are capitalized until the store is opened at which time they are
amortized on a straight-line basis over the first twelve months' operations.
Pre-opening amortization and equipment and leasehold depreciation is expected to
increase as a result of an increase in store openings. See Item 1. "Business --
Restaurants in Operation and Expansion Plans."
Page 20
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO 1994.
CERAMICS STUDIO OPERATIONS
Prior to 1995, the ceramics studio operations were nominal with only one
store opened at the beginning of the year and another added during the year.
Sales for 1994 amounted to $382,000 compared to $1,091,000 during 1995.
RESTAURANT OPERATIONS
The Company incurred operating losses during the year ended December 31,
1995 in large part due to the required costs 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. In
addition to corporate overhead costs, the Company's losses also reflect costs
related to the development of new products, store development expenses and the
abandonment of certain sites and assets, all of which continued to more than
offset improvements in store operations.
The net loss for the year ended December 31, 1995 was $6,966,000 compared
to a net loss of $4,782,000 for the year ended December 31, 1994. Included in
the net loss for the year ended December 31, 1995 were costs related to the
closing of restaurants amounting to $587,000 and other costs including asset
abandonment costs, costs related to canceling Area Development Agreements and
certain other non-operating costs totaling $1,145,000. Included in the net loss
for the year ended December 31, 1994 were store closing costs of $425,000 and
certain other non-operating costs, chiefly expenses associated with a terminated
financing discussions totaling $331,000.
Revenues for the year ended December 31, 1995 amounted to $19,805,000
compared to $8,983,000 for the year ended December 31, 1994, an increase of
120%. Revenues for the current year included $427,000 of interest income earned
chiefly from the Company's investment in marketable securities. Franchise
revenues were minor in both years and have been largely eliminated with the
reacquisition of all but one of the Area Development Agreements as the Company
changed its strategy to emphasize company-owned or operated restaurants.
Sales of $18,450,000, excluding Arrosto, for 1995 were produced by eight
restaurants which operated during both the current and prior calendar years and
nine additional restaurants open for part of 1995. Comparable sales for the
restaurants open throughout both 1995 and 1994 increased by 21.5%. Six Arrosto
locations generated $770,000 in sales during 1995 compared to four Arrosto
locations and $291,000 in the prior year. All of the Arrosto Coffee Company
outlets are located in Koo Koo Roo California Kitchen(TM) stores.
Gross profit, net of other income, for calendar year 1995 increased by 126%
to $5,239,000 from $2,315,000 for the prior year. As a percentage of sales,
gross profit increased to 27.3% in the current year compared to 26.4% in the
prior year. Gross profit generally increases in mature stores (those open more
than three months) and are lower in newly opened stores. All but three Company
stores were open for more then three months during the current calendar year.
Cost of sales improvements included efficiency improvements, waste reduction and
increased volumes, which resulted in improvements in overall food and paper
costs. Labor costs as a percentage of sales remained approximately level.
Occupancy expenses increased to $1,737,000 during the year ended December
31, 1995 as compared to $1,237,000 during 1994. The increase was primarily due
to expansion and the maturing of locations opened during 1994 and 1995. As a
percentage of sales, occupancy expenses deceased to 8.9% from 14.1% during the
prior year. Other operating expenses amounted to $10,611,000 for 1995 compared
to $5,728,000 for 1994. The increase was also due to the Company's expansion. As
a percentage of sales, other operating expenses decreased to 58% of sales
compared to 65% of sales in the prior year. Occupancy, as well as other
operating expenses are expected to continue to decline as a percentage of sales
in the future. Personnel and other corporate expenses increased as the Company
implemented the infrastructure necessary for its planned growth and continued to
incur product development expenses for such products as The Vegetable Stand.
During calendar year 1995, the Company closed one location in Miami Beach,
Florida and also closed one Arrosto location incurring an aggregate cost of
$437,000. In addition, $150,000 was reserved for a store closing which occurred
in 1994. Management currently anticipates that store closing costs will remain
low. These expenses include the abandonment of signed leases and sites deemed
inappropriate given the Company's concept criteria developed during 1995, as
well as the unamortized costs of certain assets abandoned and written off during
the remodeling of the New Jersey store. Other operating expenses for the current
year also include $284,000 of costs related to reacquiring Area Development
Agreements. Other operating expenses for 1994 include a charge of $331,000 for
expenses associated with terminated financing discussions.
Page 21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
Total cash, cash equivalents and marketable securities at December 31, 1996
amounted to $9,811,000. The Company's cash position increased to $4,591,000 from
$3,502,000 at December 31, 1995. As of March 1, 1997, the Company's cash, cash
equivalents and marketable securities amounted to approximately $32 million
which includes the net proceeds of the February 1997 private placement of the
Series B Convertible Preferred Stock.
The Company has been expending cash resources to build new and remodeled
Koo Koo Roo California Kitchen(TM) stores. The Company completed the
construction of twelve Koo Koo Roo restaurants, including five with Arrosto
Coffee Company locations, as well as eight Company-owned Color Me Mine "paint
your own" ceramics studios during the year ended December 31, 1996. In addition,
as of December 31, 1996, five Koo Koo Roo restaurants and five Color Me Mine
ceramics studios were in various stages of construction.
Net cash used in operating activities amounted to $2,599,000, $2,175,000
and $4,368,000 during the years ended December 31, 1994, 1995 and 1996. The
increases were primarily caused by net losses each year and were partially
offset by increases in payables and accrued liabilities of $565,000, $2,345,000
and $1,252,000 during the years ended December 31, 1994, 1995 and 1996.
Net cash used in investing activities, including purchases of property and
equipment together with costs for acquiring certain locations, amounted to
$4,086,000, $10,373,000 and $20,732,000 during the years ended December 31,
1994, 1995 and 1996 as well as $1,287,000 and $1,588,000 for pre-opening costs
during the years ended December 31, 1995 and 1996.
Net cash provided by financing activities amounted to $5,790,000,
$20,456,000 and $29,862,000 during the years ended December 31, 1994, 1995 and
1996. The Company received $3,441,000, $19,876,000 and $31,561,000 from sales of
Common Stock and Preferred Stock during the years ended December 31, 1994, 1995
and 1996. During calendar years 1994 and 1995, the Company received capital
contributions of $2,234,000 and $616,000 from minority partners of three
partnerships which owned restaurants in Los Angeles and which were consolidated
with the Company. On September 26, 1995, the Company agreed to purchase the
limited partner's minority interest in three Los Angeles restaurants. As
consideration for this purchase, the Company issued 275,848 shares of its common
stock. In November 1996, the Company utilized $1,645,000 to repurchase a portion
of the outstanding stock purchase warrants issued in connection with private
placements originating during 1995.
At December 31 1996, management has provided a 100% valuation allowance
amounting to approximately $9.8 million against the net deferred asset
represented by its net operating loss carry forwards due to the indeterminate
nature of the Company's ability to realize this deferred asset.
CAPITAL RESOURCES
During the year ended December 31, 1996, the Company completed two private
placement offerings and, in addition, received the proceeds from the exercise of
certain Common Stock options and warrants. The Company received a total of $30.4
million, net of related expenses from the private placement offerings and
$1,146,000 from the exercise of options and warrants.
In February 1997, the Company completed a private placement of the Series B
Convertible Preferred Stock and received a total of $26.9 million (net of
related costs and estimated expenses of $2.1 million). The Series B Convertible
Preferred Stock can be converted at the rate of 15% of each holders' shares per
month starting in the fourth month, into the Company's Common Stock at the
market price, less a discount of 3% on the 91st day after issuance, increasing
to 25% at the end of 13 months. The conversion ratio will be based on the market
price of the Company's Common Stock at the time of the conversion. The Company
also agreed to issue to the placement agent a warrant to purchase 29,000 shares
of Series B Convertible Preferred Stock at $100 per share. The Company has
noticed a special meeting of its stockholders to be held on April 17, 1997 to
approve and reserve for issuance shares of Common Stock issuable upon the
conversion of shares of the Company's Series B Convertible Preferred Stock, as
dividends thereon and in respect of related placement agent warrants. If
Stockholder approval is not obtained, the Company would be prohibited from
issuing more than approximately 3,150,000 shares of Common Stock in connection
with the private placement of the Series B Convertible Preferred Stock. In such
event, the Company would have to satisfy further obligations with cash. One such
obligation would be to return within 15 days of such event an estimated $10.1
million to the holders of the Series B Convertible Preferred Stock (including a
premium of 3%, or approximately $303,000), and completion of the redemption by
June 30, 1997. Although the Company has established a reserve of cash and
marketable securities to satisfy future obligations, there can be no assurance
that the Company will have the cash resources to satisfy future obligations
which might arise depending on the future market price of the Common Stock, or
that such payments would not have a material adverse effect on the Company's
financial position or ability to execute its growth plan.
Page 22
<PAGE>
In March 1996, the Company completed two related private placement
offerings and received net proceeds aggregating approximately $30.4 million
(after deducting cash fees to the placement agents and transaction expenses). In
these offerings, the Company issued (i) 1,200,000 shares of 5% Convertible
Preferred Stock, liquidation preference $25 per share (the "Series A Convertible
Preferred Stock") and (ii) 450,000 shares of Common Stock, subject to
adjustment. The Series A Convertible Preferred Stock is convertible into shares
of the Company's Common Stock at a conversion price generally equal to the
market price of the of the Common Stock at the time of conversion, less a
discount initially equal to 13% and increasing over time to 29% thirteen months
from the date of original issuance. Dividends may be paid in cash or by issuing
shares of Common Stock (valued at market value). As of March 11, 1997, the
Company issued during 1997 a total of 285,417 shares in respect of the Common
Stock placement in accordance with a market price adjustment mechanism. The
Company also issued to the placement agent five year warrants to acquire 108,000
shares of Series A Convertible Preferred Stock for $25 per share and 40,500
shares of Common Stock for $7.75 per share.
With the exception of $1,695,000, the Company has no long-term debt or
store level debt financing as of December 31, 1996. Management estimates that an
investment of approximately $22 million will be required for capital
expenditures relating to new locations during 1997, (excluding the Hamburger
Hamlet transaction) which management plans to fund through the use of cash and
marketable securities. In addition, the Company intends to investigate store-
level, asset-based financing of fixtures, equipment and leasehold improvements
as its expansion continues. The Company has also entered into sale-leaseback
agreements for the Burbank and Aliso Viejo properties which are expected to
generate approximately $2.8 million in cash for the Company in 1997.
To date, the development and expansion of Color Me Mine has been financed
by advances from Koo Koo Roo, Inc., which advances totaled approximately $3.7
million at December 31, 1996. The Company is considering various alternative
strategies to finance the further growth of Color Me Mine, which may include
future debt or equity financing by Color Me Mine as well as financing that may
be provided by future joint venture partners and franchisees.
On March 21, 1997, the Company entered into a purchase agreement to acquire
14 Hamburger Hamlet restaurants for a total consideration consisting of $9.7
million in cash, 150,000 shares of restricted common stock and assumption of
$250,000 in debt as well as assumption of the related real property leases. The
purchase agreement is subject to the approval of the bankruptcy court. Ten
restaurants are located in California and four in the Washington, DC Beltway
area. If consummated, certain of the acquired locations would be converted to or
co-located with Koo Koo Roo California Kitchen(TM) restaurants. In certain of
the acquired locations, the Company also intends to test market a menu insert
profiling Koo Koo Roo California Kitchen(TM) and offering selected Koo Koo Roo
California Kitchen(TM) menu items in the full service Hamburger Hamlet
restaurant environment. The Company presently intends to finance the acquisition
with cash on hand or with borrowings under a debt package which is presently
being negotiated. There can be no assurance that this acquisition will be
completed.
The timing of future capital requirements will be affected by, among other
things, the number of stores opened, operational results, real estate
development, and potential other corporate opportunities, which may include
joint ventures in the United States and internationally and the acquisition of
complimentary businesses. In the ordinary course of its business, the Company
regularly investigates and enters into negotiations related to joint venture and
acquisition opportunities. During March of 1996, the Company raised net proceeds
of approximately $30.4 million from private placement offerings. During February
1997 the Company raised approximately $26.9 million from a private placement
offering to be used principally for the construction of new stores, joint
venture investments and possible acquisitions. See "Item 1. Business-Recent
Developments" and Consolidated Financial Statements, Note 14 -"Subsequent
Events."
Management believes that the Company's existing capital resources will be
sufficient to fund its planned growth into I998. In addition, the Company is
seeking acquisitions suitable for conversion or co-locating with Koo Koo Roo
California Kitchen(TM) restaurants which would accelerate the Company's growth
and might require additional capital. The Company may seek additional funds from
public or private offerings of debt or equity, or may seek bank financing
facilities.
SEASONALITY
Company revenues in certain areas appear to be subject to seasonal
fluctuations. These seasonal fluctuations have not to date been apparent in
overall results due to more significant trends including, but not limited to,
same store sales growth and unit growth.
Page 23
<PAGE>
INFLATION
The Company does not believe that inflation has to date had a material
impact on its operations. Significant increases in labor, food, or other
operating costs could have a material adverse affect on the Company's results if
the Company were for some reason unable to pass along cost increases due to
general inflation by increasing its prices.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index included at "Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
Information required for Items 10 through 13 of this Report will be provided in
the Company's definitive proxy statement to be filed within 120 days of the end
of the fiscal period covered by this report and such information is incorporated
herein by this reference.
PART IV
<TABLE>
<CAPTION>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<S> <C>
(a)(1) FINANCIAL STATEMENTS
Index to Consolidated Financial Statements F-1
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets as of
December 31, 1995 and 1996 F-3
Consolidated Statements of Operations for the
years ended December 31, 1994, 1995 and 1996 F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1994, 1995 and 1996 F-5
Consolidated Statements of Cash Flows for the
years ended December 31, 1994, 1995 and 1996 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
(a)(2) FINANCIAL STATEMENT SCHEDULES
All schedules are omitted since the required information is not
present in amounts sufficient to require submission of the schedule,
or because the information required is included in the financial
statements or notes thereto.
Page 24
<PAGE>
(a)(3) EXHIBITS
<TABLE>
<C> <S>
3.1 Restated Certificate of Incorporation of Registrant/1/
3.2 Amended and Restated Bylaws of Registrant, as amended March 1992/2/
3.3 Bylaw Amendment Changing year-end/3/
3.4 Certificate of Amendment to the Restated Certificate of Incorporation of
Koo Koo Roo, Inc./10/
3.5 Certificate of Designations of 5% Convertible Preferred Stock/9/
4.1 Form of Certificate for Common Stock of Registrant/1/
4.2 Form of Certificate for 5% Convertible Preferred Stock of Registrant/9/
4.3 Form of Amendment to the Restated Certificate of Incorporation of Registrant/9/
4.4 Certificate of Designations of 5% Convertible Preferred Stock of Registrant/9/
4.5 Form of Warrant Agreement used in connection with the Company's February 1995
private placement of Company Common Stock and Warrants/8/
4.6 Form of Warrant Agreement used in connection with the Company's June 1995 private
placement of Company Common Stock and Warrants/8/
4.7 Form of Stock Purchase Agreement dated March 12, 1996 by and among the Registrant
and the purchasers named therein/9/
4.8 Form of Preferred Stock Investment Agreement dated March 20, 1996 by and among the
Registrant and the purchasers named therein/9/
4.9 Certificate of Designations of Series B 6% Convertible Preferred Stock/13/
4.10 Form of Certificate for Series B 6% Convertible Preferred Stock/13/
4.11 Form of Series B Preferred Stock Investment Agreement dated February 27, 1997 by and
among the Registrant and the purchasers named therein/13/
4.12 Form of 5% Convertible Preferred Stock Warrant Agreement dated March 20, 1996/14/
4.13 Form of Common Stock Warrant Agreement dated March 12, 1996/14/
10.49 Agreement of Limited Partnership of KKRO Partners L.P. dated March 23, 1994/4/
10.50 Area Development Agreement dated August 19, 1993 between the Registrant and Mel Harris/5/
</TABLE>
Page 25
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
10.55 Amended and Restated Employment Agreement of Kenneth Berg dated as of
January 9, 1995 and related letter agreement/8/
10.56 Amended and Restated Employment Agreement of Michael Mooslin dated
as of March 17, 1995/8/
10.58 Employment Agreement of Robert Kautz dated as of February 8, 1995/8/
10.59 Stock Awards Plan/6/
10.60 Form of Non-Qualified Stock Option Agreement Under the Stock Awards Plan/8/
10.61 Directors' Stock Option Plan, as amended/7/
10.62 First Amendment to the Harris Development Agreement dated as of August 25, 1995/8/
10.63 KKRO Partners, L.P. Purchase Agreement dated as of September 26, 1995 by and
between the Company and KKRO Partners, L.P./8/
10.64 KKRO Partners, L.P. Liquidation Agreement dated as of September 28, 1995 by and
between the Company and KKRO Partners, L.P./8/
10.65 Form of Warrant Agreement used in connection with the Company's February 1995
private placement of Company Common Stock and Warrants/8/
10.66 Form of Warrant Agreement used in connection with the Company's June 1995
private placement of Company Common Stock and Warrants/8/
10.67 Form of Stock Purchase Agreement dated March 12, 1996 by and among the
Registrant and the purchasers named therein/9/
10.68 Form of Preferred Stock Investment Agreement dated March 20, 1996 by and
among the Registrant and the purchasers named therein/9/
10.69 Agreement for Acquisition of Color Me Mine, Inc./10/
10.70 Canadian Letter of Intent/10/
10.71 Business Development Services Agreement, dated as of May 8, 1996, by and
between the Registrant and Restaurant Marketing Corporation./11/
</TABLE>
Page 26
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
10.72 Non-Qualified Stock Option Agreement for Restaurant Marketing
Corporation, dated as of May 8, 1996, by and between the Registrant
and Restaurant Marketing Corporation./11/
10.73 Non-Qualified Stock Option Agreement for Restaurant Marketing
Corporation, dated as of May 8, 1996, by and between the Registrant
and Restaurant Marketing Corporation./11/
10.74 Second Amendment to Area Development Agreement, dated as of May 8,
1996, by and between the Registrant, Koo Koo Roo Licensing Systems,
Inc. and Restaurant Acquisition Corporation./11/
10.75 Employment Agreement and Non-Qualified Stock Option Agreement, dated as
of May 8, 1996, by and between the Registrant and Mel Harris./11/
10.76 Color Me Mine, Inc. Area Development Agreement/12/
10.77 Asset Purchase Agreement By and Between Hamburger Hamlet, Inc.and the
Registrant dated as of March 21, 1997.
21.1 Subsidiaries of Registrant/8/
23.1 Consent of Independent Certified Public Accountants
27 Financial Data Schedule
99.1 "Item 5. Other Events" included the Company's Current Report dated March 18, 1996./10/
</TABLE>
footnotes
- ---------
1 Incorporated by reference to identical exhibit number in the Company's
Registration Statement on Form S-18 (No. 33-42487-NY) declared effective on
October 15, 1991.
2 Incorporated by reference to identical exhibit number in the Company's
Transition Report on Form 10-K for the six months ended June 30, 1992.
3 Incorporated by reference to identical exhibit number in the Company's
Current Report on Form 8-K dated December 14, 1995 (filed with the
Commission on December 15, 1995).
4 Incorporated by reference to identical exhibit number in the Company's
Annual Report on Form 10-K/A for the fiscal year ended June 30, 1993 (filed
with the Commission on April 25, 1994).
5 Incorporated by reference to identical exhibit number in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1994.
6 Incorporated by reference to identical exhibit number in the Company's
Proxy Statement dated December 15, 1994.
7 Incorporated by reference to identical exhibit number in the Company's
Proxy Statement dated November 15, 1993.
8 Incorporated by reference to identical exhibit number in the Company's
Amendment No. 2 to its Annual Report on Form 10-K/A for the fiscal year
ended June 30, 1995.
9 Incorporated by reference to identical exhibit number in the Company's
Current Report on Form 8-K dated March 18, 1996.
10 Incorporated by reference to the exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.
11 Incorporated by reference to identical exhibit number in the Company's
Registration Statement on Form S-1 (No. 333-3360) declared effective on
June 11, 1996.
12 Incorporated by reference to the exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996
13 Incorporated by reference from the Company's Current Report on Form 8-K
dated February 27, 1997.
14 Incorporated by reference from the Company's Registration Statement on Form
S-3 (No. 333-23263) as filed on March 13, 1997.
b) REPORTS ON 8-K
Not Applicable
Page 27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized the 25th day of March
1997.
KOO KOO ROO, INC.
By: /S/ KENNETH BERG
--------------------------
Kenneth Berg, Chairman of
the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/S/ KENNETH BERG Chairman of the Board March 25, 1997
- ------------------------ Chief Executive Officer
Kenneth Berg and Director
(Principal Executive Officer)
/S/ ROBERT F. KAUTZ President, Chief Financial March 25, 1997
- ------------------------ Officer and Director
Robert F. Kautz (Principal Financial Officer)
/S/ MICHAEL D. MOOSLIN President of Koo Koo Roo March 25, 1997
- ------------------------ International and Director
Michael D. Mooslin
/S/ JOHN KAUFMAN President of Koo Koo Roo March 25, 1997
- ------------------------ USA and Director
John Kaufman
/S/ MARY E. ARNOLD Vice President-Finance March 25, 1997
- ------------------------ (Principal Accounting Officer)
Mary E. Arnold
/S/ MORTON J. WALL Treasurer and Director March 25, 1997
- ------------------------
Morton J. Wall
/S/ KORY BERG Director March 25, 1997
- ------------------------
Kory L. Berg
Director March , 1997
- ------------------------
Mel Harris
Director March , 1997
- ------------------------
Lee A. Iacocca
/S/ DONALD WOHL Director March 25, 1997
- ------------------------
Donald Wohl
/S/ JESS M. RAVICH Director March 25, 1997
- ------------------------
Jess M. Ravich
Page 28
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets as of
December 31, 1995 and 1996 F-3
Consolidated Statements of Operations for the
years ended December 31, 1994, 1995 and 1996 F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1994, 1995 and 1996 F-5
Consolidated Statements of Cash Flows for the
years ended December 31, 1994, 1995 and 1996 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Koo Koo Roo, Inc.
Los Angeles, California
We have audited the accompanying consolidated balance sheets of Koo Koo Roo,
Inc. and subsidiaries as of December 31, 1995 and 1996 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Koo Koo
Roo, Inc. and subsidiaries as of December 31, 1995 and 1996 and the results of
their operations and cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ BDO SEIDMAN, LLP
----------------------
BDO SEIDMAN, LLP
Los Angeles, California
March 5, 1997
F-2
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
--------------------
1995 1996
-------- --------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents $ 3,502 $ 4,591
Marketable securities (Note 3) 3,663 5,220
Receivables 489 1,803
Inventories 187 815
Prepaid expense and other 191 196
-------- --------
Total current assets 8,032 12,625
Investments in and advances to joint ventures - 462
Property and equipment, net (Note 4) 14,271 31,307
Intangibles and other assets (Note 5) 4,252 5,378
-------- --------
$ 26,555 $ 49,772
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 1,661 $ 3,265
Accrued payroll 491 634
Accrued store closing costs (Note 11) 547 -
Other accrued liabilities 1,402 1,399
Current portion of long-term debt 14 220
-------- --------
Total current liabilities 4,115 5,518
-------- --------
Long-term debt (Note 7) 179 1,475
-------- --------
Minority interest (Note 6) 718 230
-------- --------
Commitments and contingencies (Notes 11, 12 and 14)
Stockholders' Equity (Notes 8, 11, 12 and 14)
Preferred stock, $.01 par value, 5,000,000 shares
authorized; 1,200,000 shares of Series A 5%
convertible preferred stock issued; 0 and 1,027,193
shares issued and outstanding (liquidation
preference $25,680,000) - 10
Common stock, $.01 par value, 25,000,000
shares authorized; 14,329,851 and
15,933,822 shares issued and outstanding 143 159
Additional paid-in capital 40,468 73,623
Accumulated deficit (18,275) (30,608)
Treasury stock, 84,352 and 72,512 shares, at cost (2) (2)
Common stock issued for unearned compensation (791) (633)
-------- --------
Total stockholders' equity 21,543 42,549
-------- --------
$ 26,555 $ 49,772
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
1994 1995 1996
----------- ------------ -----------
<S> <C> <C> <C>
Revenues:
Restaurant sales $ 8,772 $ 19,221 $ 36,608
Ceramics studio sales - 1,078 1,655
Franchise fees and royalties - 13 363
Interest income and other 211 584 1,176
--------- ---------- ----------
Total 8,983 20,896 39,802
--------- ---------- ----------
Cost of sales:
Food and paper 3,367 7,155 13,811
Ceramics products - 541 1,328
Labor costs 3,090 6,826 12,349
--------- ---------- ----------
Total 6,457 14,522 27,488
--------- ---------- ----------
Gross profit 2,526 6,374 12,314
--------- ---------- ----------
Operating expenses:
Loss on store closings (Note 11) 425 587 -
Occupancy expense (Note 12) 1,237 1,859 3,521
Other operating expenses 5,727 10,979 18,500
--------- ---------- ----------
Total 7,389 13,425 22,021
--------- ---------- ----------
Loss before minority interest (4,863) (7,051) (9,707)
Minority interest in loss (Note 6) 81 140 422
--------- ---------- ----------
Net loss (Note 1) $ (4,782) $ (6,911) $ (9,285)
========= ========== ==========
Net loss per common share (Note 1) $ (0.63) $ (0.57) $ (0.83)
========= ========== ==========
Weighted average number of common
and common equivalent shares 7,626,800 12,093,500 14,878,400
========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Additional
Common Stock Preferred Stock Paid-in Treasury Unearned
Shares Amount Shares Amount Capital Deficit Stock Compensation
------- ------- ---------- ------- ----------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 7,167 $ 71 - $ - $11,012 $ (6,571) $ - $ -
Stock Issuances:
Exercise of stock options 489 5 - - 765 - - -
Exercise of warrants 1,111 11 - - 2,659 - - -
Payment of expenses 12 - - - 60 - - -
Proposed financing
transaction (Note 11) 60 1 - - - - (1) -
Acquisition of assets 85 1 - - 499 - - -
Cancellation of escrowed
shares (Note 8) (400) (4) - - 4 - - -
Net loss for the year - - - - - (4,782) - -
------ ---- --------- ------ ------- -------- -------- ------------
Balance, December 31, 1994 8,524 85 - - 14,999 (11,353) (1) -
Acquisition (Note 2) 377 4 - - - 14 - -
------ ---- --------- ------ ------- -------- -------- ------------
Balance, December 31, 1994
as restated 8,901 89 - - 14,999 (11,339) (1) -
Stock Issuances:
Private Placements 3,986 40 - - 17,622 - - -
Exercise of stock options 62 1 - - 221 - - -
Exercise of warrants 480 4 - - 1,987 - - -
Acquisition of minority
interest 300 3 - - 1,909 - -
Payment of expenses 160 2 - - 862 - - -
Acquisition of assets 241 2 - - 1,925 - - -
Employment contract (Note
12) 200 2 - - 943 - - (945)
Distributions to
stockholders - - - - - (25) - -
Acquisition of treasury
stock - - - - - - (1) -
Amortization of unearned
compensation - - - - - - - 154
Net loss for the year - - - - - (6,911) - -
------ ---- --------- ------ ------- -------- -------- ------------
Balance, December 31, 1995 14,330 143 - - 40,468 (18,275) (2) (791)
Stock Issuances:
Private Placements 453 5 1,200 12 30,398 - - -
Exercise of stock options 246 3 - - 1,143 - - -
Payment of expenses 17 - - - 92 - - -
Acquisition of assets 26 - - - 175 - - -
Repurchase of stock warrants - - - - (1,645) - - -
Preferred Stock dividends 136 1 - - 2,997 (3,048) - -
Conversion of Preferred Stock
to Common Stock 726 7 (173) (2) (5) - - -
Amortization of unearned
compensation - - - - - - - 158
Net loss for the year - - - - - (9,285) - -
------ ---- --------- ------ ------- -------- -------- ------------
Balance, December 31, 1996 15,934 $159 1,027 $10 $73,623 $(30,608) $(2) $(633)
====== ==== ========= ====== ======= ======== ======== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
"Increase (Decrease) in Cash and Cash Equivalents"
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1994 1995 1996
-------- --------- ---------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $(4,782) $ (6,911) $ (9,285)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 640 2,153 4,434
Deferred franchise revenue 490 (80) -
Other 35 191 91
Minority interest in net loss (82) (140) (422)
Assets written off or abandoned 165 695 -
Changes in operating assets and liabilities:
Inventories (32) (80) (628)
Prepaid expenses and other 402 (348) 190
Accounts payable 203 1,125 1,659
Accrued expenses and other liabilities 362 1,220 (407)
------- -------- --------
Net cash used in operating activities (2,599) (2,175) (4,368)
------- -------- --------
Cash Flows From Investing Activities:
Acquisition of marketable securities - (3,663) (1,557)
Acquisition of property and equipment (3,757) (10,155) (19,459)
Investments in joint ventures - - (528)
Lease acquisition and other costs (280) (127) (775)
Pre-opening costs - (1,287) (1,588)
Lease security deposits (49) (91) (498)
------- -------- --------
Net cash used in investing activities (4,086) (15,323) (24,405)
------- -------- --------
Cash Flows From Financing Activities:
Proceeds from loans payable 115 104 1,600
Payments on loans payable - (115) (97)
Minority capital contributions 2,234 616 -
Proceeds of private placements 2,400 17,662 30,415
Repurchase of stock warrants - - (1,645)
Exercise of stock options and warrants 1,041 2,214 1,146
Other - (25) (1,557)
------- -------- --------
Net cash provided by financing activities 5,790 20,456 29,862
------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents (895) 2,958 1,089
Cash and Cash Equivalents, beginning of period 1,439 544 3,502
------- -------- --------
Cash and Cash Equivalents, end of year $ 544 $ 3,502 $ 4,591
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Koo Koo Roo, Inc. (the "Company") operates under the name Koo Koo Roo
California Kitchen casual dining restaurants featuring flame-broiled skinless
chicken, rotisserie chicken, hand-carved turkey, salads, sandwiches and fresh-
baked goods. To complement its principal business, the Company has expanded to
provide, under the name Arrosto Coffee Company, a variety of fresh-roasted
coffees, pastries and other coffee-related products and merchandise. The
Company, through its 90% owned subsidiary Color Me Mine, Inc.("Color Me Mine"),
owns and operates and also franchises "paint-your-own" ceramics studios.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company,
its subsidiaries and limited partnerships in which the Company holds a
controlling interest. All significant intercompany transactions and balances are
eliminated. The Company's principal subsidiaries include Arrosto Coffee Company
and Color Me Mine (Note 2).
ACCOUNTING 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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with initial
maturities of three months or less to be cash equivalents.
MARKETABLE SECURITIES
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities," the
Company classifies its investments in debt and equity securities into three
categories: held-to-maturity, available-for-sale, or trading. Held-to-maturity
investments are valued at amortized cost. Available-for-sale investments are
valued at fair value with the net unrealized gains or losses shown as a separate
component of stockholders' equity until realized. Trading investments are also
valued at fair value but net unrealized gains or losses are included in
earnings.
CONCENTRATION OF CREDIT RISKS
The Company maintains cash balances at various financial institutions.
Deposits not to exceed $100,000 for each institution are insured by the Federal
Deposit Insurance Corporation. At December 31, 1996, the Company has uninsured
cash and cash equivalents in the amount of $4,463,000.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined on
the first-in, first-out method. Inventories are comprised of food and supplies
for its restaurants and ceramics products.
PROPERTY AND EQUIPMENT AND DEPRECIATION
Property and equipment is recorded at cost and is depreciated over estimated
useful lives of 5 to 7 years using the straight-line method. Leasehold
improvements are recorded at cost and are amortized over the lesser of the
estimated useful lives of the property or the lease term using the straight line
method.
F-7
<PAGE>
NOTE 1 - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STORE LOCATIONS
The following is an analysis of restaurants and ceramics studios in
operation during the periods
<TABLE>
<CAPTION>
Restaurant Locations (a) Ceramics Studio Locations
----------------------------------- ----------------------------
1994 1995 1996 1994 1995 1996
---------- --------- ---------- ------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Numbers of locations:
At beginning of period: 7(b) 8 16 1 2 4
Opened during period: 2 9(c) 12 1 2(d) 13(e)
Closed during period: (1)(b) (1) (1)(c) - - (1)
---- ---- ---- ---- ---- ----
At end of period: 8 16 27 2 4 16
---- ---- ---- ---- ---- ----
</TABLE>
(a) Excluding Arrosto Coffee Company locations (six and ten locations open
as of December 31, 1995 and 1996, each of which is located in a
Koo Koo Roo restaurant identified in the table).
(b) Includes one franchised restaurant which was closed during 1994.
(c) Includes one franchised restaurant acquired as a Company-owned
restaurant in August 1995, which was subsequently closed in
March 1996.
(d) Includes one franchised studio.
(e) Includes two franchised and 4 joint venture studios.
PRE-OPENING COSTS
Pre-Opening costs consisting primarily of occupancy costs, salaries and
related expenses are incurred by the Company prior to the opening of new
restaurants and ceramics studios. These expenses are capitalized and are
amortized over a 12 month period beginning the month the restaurant or ceramics
studio opens.
LEASE ACQUISITION COSTS
Lease acquisition costs are being amortized over the term of each respective
lease beginning the month the restaurant or ceramics studio opens.
REVENUE RECOGNITION
In connection with its business activity of selling individual and area
franchises, principally with respect to Color Me Mine, the Company has no
significant commitments or obligations resulting from the franchise agreements.
The Company recognizes income from area franchise sales in accordance with
Statement of Financial Accounting Standards No. 45. Franchise agreements with
franchisees provide for initial franchise fees and continuing royalty payments
to the Company based upon a percent of sales. The Company generally charges an
initial franchise fee for each new franchised store that is added and in some
cases, an area development fee, which grants exclusive rights to develop a
specific number of Color Me Mine studios in a designated geographic area.
These fees are recognized ratably when substantially all the services required
of the Company are complete and the stores covered by such agreements commence
operations or upon cancellation or expiration of an area development agreement.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires a Company to use the asset
and liability method, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. Under
SFAS No. 109, the effect on deferred income taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
F-8
<PAGE>
NOTE 1 - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK -BASED COMPENSATION
In 1996, the Company adopted for footnote disclosure purposes, Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123) which requires that companies measure the cost of
stock-based employee compensation at the grant date based on the value of the
award and recognize this cost over the service period. The value of the stock
based award is determined using a pricing model whereby compensation cost is the
excess of the fair value of the stock as determined by the model at grant date
or other measurement date over the amount an employee must pay to acquire the
stock.
NET LOSS PER COMMON SHARE
Net loss per common share has been computed based on the weighted average
number of common and common equivalent shares outstanding. Common equivalent
shares representing the common shares that would be issued on conversion of
convertible securities and exercise of outstanding stock options and warrants
reduced by the number of shares which could be purchased from the related
exercise proceeds are not included since their effect would be anti-dilutive.
The net loss attributable to common stockholders has been adjusted for
dividends paid on preferred stock and deemed dividends. The deemed dividend
relates to the discount feature associated with the Company's 5% Convertible
Preferred Stock, computed in accordance with the SEC's recent position on
accounting for preferred stock which is convertible at a discount to the
market. Accordingly, during the fourth quarter of 1996, the Company recorded
the cumulative effect of the deemed dividend for 1996. The amount of deemed
dividends for the prior quarters of 1996 amounted to $1,155,000 for the second
quarter and $650,000 for the third quarter.
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
1994 1995 1996
-------- -------- ---------
(In thousands)
<S> <C> <C> <C>
Net loss $(4,782) $(6,911) $ (9,285)
Deemed dividends on preferred stock - - (1,945)
Dividends paid on preferred stock - - (1,103)
------- ------- --------
Net loss attributable to common stockholders $(4,782) $(6,911) $(12,333)
======= ======== ========
Per common share:
Net loss $ (0.63) $ (0.57) $ (0.62)
Dividends paid or deemed paid on preferred stock - - (0.21)
------- ------- --------
Net loss attributable to common stockholders $ (0.63) $ (0.57) $ (0.83)
======= ======= ========
</TABLE>
NOTE 2 - ACQUISITION OF COLOR ME MINE
In March 1996, the Company acquired 90% of the stock of Color Me Mine, a
small chain of paint-your-own ceramics studios located in Southern California.
The consideration consisted solely of 377,000 shares of restricted, unregistered
shares of the Company's Common Stock. Of this total, shares aggregating
$900,000 in value are subject to registration at the end of one year. Two
founders of the acquired company have five year management contracts with annual
compensation of $50,000 each plus profit sharing and certain change in control
provisions. The acquisition was accounted for using the pooling of interest
method of accounting. Accordingly, the financial statements have been restated
to include the effects of the acquisition. For the period prior to the
acquisition during 1996, Color Me Mine recorded net sales of $271,000 and net
income, after minority interest, of $27,600.
F-9
<PAGE>
NOTE 3 - MARKETABLE SECURITIES
At December 31, 1996, marketable securities consist of $5,220,000 face value
(which approximates market value) of U.S. Treasury Notes maturing at various
dates from January 31, 1997 to January 31, 2000. Interest rates on these notes
range from 6.125% to 7.75%. These securities are classified as "Available-for-
sale" and are included in current assets since management may convert these
investments to cash during the fiscal year ending December 31, 1997.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1995 1996
------- -------
(In thousands)
<S> <C> <C>
Leasehold improvements $ 7,997 $17,969
Land and building - 1,560
Machinery and equipment 5,144 9,947
Furniture and fixtures 2,022 4,223
Construction-in-progress 1,248 2,116
------- -------
16,411 35,815
Accumulated depreciation and amortization (2,140) (4,508)
------- -------
Net Property and equipment $14,271 $31,307
======= =======
As of December 31, 1996, the estimated cost to complete construction-in-
progress is approximately $9.2 million.
NOTE 5 - INTANGIBLES AND OTHER ASSETS
Intangibles and other assets consists of the following:
December 31,
------------------------
1995 1996
------- -------
(In thousands)
Lease security deposits $ 275 $ 774
Lease acquisition costs, net of accumulated
amortization of $81,500 and $203,000 1,512 2,070
Pre-opening costs, net of accumulated
amortization of $454,500 and $1,827,000 841 1,056
Other intangibles, net of accumulated
amortization of $394,200 and $809,300 1,624 1,478
------ ------
Net Intangible and other assets $4,252 $5,378
====== ======
</TABLE>
NOTE 6 - MINORITY INTEREST IN SUBSIDIARIES
Minority interest represents the limited partners' interest in two
partnerships and the minority stockholders' interest in one subsidiary, which
are controlled by the Company. Pursuant to the partnership agreements, profits
and losses and cash distributions are allocated based on ownership percentage.
The financial results of the partnerships and subsidiary have been consolidated
with those of the Company. The ceramics studio subsidiary is 90% owned by the
Company. Minority equity is shown as minority interest on the accompanying
consolidated balance sheet.
On September 26, 1995, the Company agreed to purchase the limited partner's
minority interest in three Los Angeles restaurants. As consideration for this
purchase, the Company issued 275,848 shares of its unregistered common stock.
Such shares were subsequently registered for resale under the Securities Act of
1933.
F-10
<PAGE>
NOTE 7 - LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
December 31,
---------------
1995 1996
----- ------
(In thousands)
<S> <C> <C>
Notes payable to the Small Business Administration
with interest at the rate of 11% payable in monthly
installments of $1,713 and maturing in 2002. $ 98 $ 101
Prime + 1% (9.25% at December 31, 1996) notes payable
to a bank with equal monthly installments over a seven
year period and collateralized by the assets and leasehold
interest of two of the Company's restaurants. - 1,544
Other 95 50
----- ------
Total notes payable 193 1,695
Current portion (14) (220)
----- ------
Long-term debt, net of current portion $ 179 $1,475
===== ======
</TABLE>
Long-term debt maturities during the next five years is as follows; $220,000
in 1997, $207,000 in 1998, $225,000 in 1999, $245,000 in 2000 and $267,000 in
2001 and $531,000 thereafter.
NOTE 8 - STOCKHOLDERS' EQUITY
PRIVATE PLACEMENT OFFERINGS
In February 1995, the Company completed a private placement offering and
received a total of $4,243,500. In connection with this offering the Company
issued 942,999 shares of its common stock. The offering also included warrants
to purchase 471,499 shares of common stock at an exercise price of $5.00 per
share and expiring on January 31, 1998. The Company has the right, under
certain conditions, to request the mandatory exercise of these warrants after
January 1, 1996.
In June 1995, the Company completed a private placement offering and
received a total of $13,418,100, net of related costs and expenses of $854,300.
In connection with this offering, the Company issued 3,042,812 shares of common
stock. The offering also included warrants to purchase 1,197,863 shares of
common stock at exercise prices of $5.70 or $5.75 per share, exercisable after
August 15, 1996 and expiring May 31, 1998. The Company has the right, under
certain conditions, to request the mandatory exercise of these warrants after
August 15, 1996. A portion of these warrants were repurchased by the Company
during 1996.
In March 1996, the Company completed a private placement offering of 450,000
shares of the Company's common stock and received a total of $2,981,000 (net of
related costs and expenses of $280,000). The Company is required to issue
additional shares if during the first twelve months after issuance, the Company
sells newly issued common stock at a price below that of the private placement.
Subsequent to December 31, 1996, the Company issued 285,417 additional shares in
accordance with the private placement agreement. The placement agent in the
transaction received a warrant to purchase 40,500 shares of the Company's common
stock at $7.75 per share.
In March 1996, the Company completed a private placement of 5% Series A
Convertible Preferred Stock (the "Series A Convertible Stock") and received a
total of $27,530,000 (net of related costs and expenses of $2,470,000). The
Series A Convertible Preferred Stock can be converted at the rate of 10% per
month starting in the fourth month, into the Company's common stock at the
market price, less a discount of 13% on the 91st day after issuance increasing
to 29% at the end of 13 months. The placement agents in the transaction
received a warrant to purchase 108,000 shares of the Company's Convertible
Preferred at $25.00 per share. See Note 14 - Subsequent Events.
F-11
<PAGE>
NOTE 8 - STOCKHOLDERS' EQUITY (CONTINUED)
STOCK WARRANTS
The Company issued a total of 1,669,362 stock purchase warrants in
connection with two private placements during 1995. In November 1996, the
Company repurchased and canceled 813,589 stock warrants at a price of $2.00 per
warrant ($1,645,000 in the aggregate, including costs). At December 31, 1996,
the remaining stock warrants were exercisable to purchase 855,773 shares of the
Company's common stock.
STOCK AWARDS PLAN
The Company has established a Stock Awards Plan (the "Awards Plan") that has
been adopted by the Board of Directors and approved by the stockholders on
behalf of selected eligible employees and consultants. The Awards Plan covers an
aggregate of 4,250,000 shares of common stock as amended on January 18, 1995,
and is administered by a committee appointed by the Board of Directors (the
"Stock Awards Committee"). The Awards Plan provides for the issuance of stock
options, stock appreciation rights ("SARs"), restricted stock and other awards
(collectively, "Awards").
Two types of stock options may be granted under the Awards Plan: incentive
stock options ("ISOs") which are intended to qualify under Section 422 of the
Internal Revenue Code ("IRC"), and non-qualified stock options ("NQSOs"). The
option price of each NQSO granted under the Awards Plan may not be less than the
par value of a share of common stock. The option price of each ISO granted under
the Awards Plan must be at least equal to the stock's fair market value on the
date the ISO is granted. The Stock Awards Committee determines the option
exercise period of each option. The period may not exceed ten years from the
date of grant. The aggregate fair market value of the shares covered by ISOs
granted under all stock option plans of the Company that become exercisable by a
grantee for the first time in any calendar year is subject to a $100,000 limit.
The NQSOs granted under the Awards Plan have been granted at an exercise price
which is no less than the fair market value at the date of grant.
The following table summarizes the activity in the Awards Plan:
<TABLE>
<CAPTION>
Number Weighted Average
of shares Exercise Price
--------- ----------------
(In thousands)
<S> <C> <C>
Shares under option - January 1, 1994 1,515 $3.19
Granted 1,854 5.53
Exercised (45) 2.02
Canceled (861) 5.64
-----
Shares under option - December 31, 1994 2,463 4.12
Granted 1,108 6.08
Exercised (4) 1.75
Canceled (473) 4.95
-----
Shares under option - December 31, 1995 3,094 4.70
Granted 1,545 7.98
Exercised (29) 5.45
Canceled (516) 6.54
-----
Shares under option - December 31, 1996 4,094 5.69
=====
</TABLE>
The number of shares of common stock available for granting future options
was 233,800 1,098,300 and 70,365 at December 31, 1994, 1995 and 1996. At
December 31, 1996, options were exercisable to purchase 1,681,000 shares at a
weighted average price per share of $4.00.
F-12
<PAGE>
NOTE 8 - STOCKHOLDERS' EQUITY (CONTINUED)
NON-PLAN OPTIONS
The Company has from time to time awarded stock options to certain non-
employees. These options have terms varying from one to 10 years, are
exercisable over periods up to 5 years, and have prices that approximated the
fair value on the date granted.
The following table summarizes the activity of non-plan options:
<TABLE>
<CAPTION>
Number Weighted Average
of shares Exercise Price
--------- ----------------
(In thousands)
<S> <C> <C>
Shares under option - January 1, 1994 1,055 $3.21
Granted 1,485 3.41
Exercised (964) 1.09
Canceled (185) 4.78
-----
Shares under option - December 31, 1994 1,391 4.69
Granted 1,700 5.39
Exercised (537) 4.10
-----
Shares under option - December 31, 1995 2,554 5.67
Granted 1,824 7.67
Exercised (208) 4.43
Canceled (40) 6.70
-----
Shares under option - December 31, 1996 4,130 6.53
=====
Shares exercisable - December 31, 1996 2,650 6.00
=====
</TABLE>
DIRECTORS' STOCK OPTION PLAN
The Company has established a Directors' Stock Option Plan (the "Directors'
Plan") that has been adopted by the Board of Directors and approved by the
stockholders on behalf of each non-employee director. The Directors' Plan covers
an aggregate of 60,000 shares of common stock and will expire in 2001. The
Directors' Plan provides that each non-employee director would receive an option
to purchase 10,000 shares (amended to 20,000 shares) at the fair market value,
subject to the overall limit of the number of shares issuable under the
Directors' Plan.
The maximum term of each option is ten years from the date the option is
granted and automatically terminates upon leaving office. The term of each
option commences on the date of grant and terminates no later than ten years
from such date. Twenty-five percent of each optionee's shares will become
exercisable each year commencing on the first anniversary of the date of grant.
As of December 31, 1996, 50,000 options were outstanding of which 20,000 were
exercisable; 10,000 shares at $5.00 per share, 5,000 shares at $6.56 per share
and 5,000 shares at $6.625 per share.
ESCROW SHARES
Upon the consummation of its initial public offering in 1991, the Company's
stockholders prior to the offering placed on a pro-rata basis an aggregate of
800,000 shares of common stock in escrow (the "Escrow Shares"), pursuant to an
agreement by and among such stockholders, the Company, the escrow agent and the
underwriter. The Escrow Agreement permitted the release of the Escrow Shares
only upon attaining certain net income requirements. The Company did not meet
the net income requirements and, consequently, the 800,000 shares were canceled
and returned to authorized but unissued status (400,000 shares in 1993 and
400,000 shares in 1994).
F-13
<PAGE>
NOTE 8 - STOCKHOLDERS' EQUITY (CONTINUED)
STOCK BASED COMPENSATION
All stock options issued to employees have an exercise price not less than
the fair market value of the Company's common stock on the date of grant, and in
accordance with accounting for such options utilizing the intrinsic value method
there is no related compensation expense recorded in the Company's financial
statements. Had compensation cost for stock-based compensation been determined
based on the fair value at the grant dates consistent with the method of SFAS
123, the Company's net income and earnings per share for the years ended
December 31, would have been reduced to the pro forma amounts presented below
(in thousands, except per share data):
<TABLE>
<CAPTION>
1995 1996
-------- --------
(in thousands)
<S> <C> <C>
Net loss
As reported $(6,911) $( 9,285)
Pro forma $(7,480) $(10,619)
Primary loss per common share
As reported $ (0.57) $ (0.83)
Pro forma $ (0.62) $ (0.92)
</TABLE>
Additional information relating to stock options outstanding and exercisable
at December 31, 1996 summarized by exercise price are as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
----------------------------------------- ---------------------------
Exercise Weighted Average Weighted
Price ----------------------------- Average
Per Share Shares Life (Years) Exercise Price Shares Exercise Price
--------- --------- ------------ -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
$0.62 to $4.50 1,443,065 5.72 $ 3.05 1,056,300 $3.60
4.63 to 5.00 1,494,499 7.50 5.00 752,665 5.00
5.12 to 5.87 1,229,774 7.57 5.74 834,575 5.79
5.91 to 6.56 969,300 4.91 6.23 489,733 6.34
6.62 to 7.62 1,008,945 6.27 7.14 582,600 7.18
7.63 to 7.94 449,190 7.59 7.74 94,700 7.71
8.00 to 8.00 1,642,500 8.28 8.00 1,380,500 8.00
8.12 to 9.25 780,500 6.95 8.52 15,700 8.73
9.50 to 9.50 12,000 8.37 9.50 - -
10.00 to 10.00 100,000 1.59 10.00 - -
--------- ---------
0.62 to 10.00 9,129,773 6.85 6.19 5,206,773 6.07
========= =========
</TABLE>
The fair value of option grants is estimated on the date of grant utilizing
the Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 1996; expected life option of 5 years, expected
volatility of 36%, risk free interest rate of 6.0% and a 0% dividend yield. The
weighted average fair value at date of grants range from $6.38 to $9.50 per
option.
Due to the fact that the Company's stock option programs vest over many
years and additional awards are made each year, the above proforma numbers are
not indicative of the financial impact had the disclosure provisions of SFAS 123
been applicable to all years of previous option grants. The above numbers do not
include the effect of options granted prior to 1995 that vest in 1995 and 1996.
NOTE 9 - RELATED PARTY TRANSACTIONS
During the years ended December 31, 1994, 1995 and 1996, a corporation in
which the Company's principal stockholder has a controlling interest provided
various services to the Company. These services included accounting,
bookkeeping, occupancy and various other office services. The Company paid
$84,100, $77,600 and $82,000 for such services during the years ended December
31, 1994, 1995 and 1996.
During the years ended December 31, 1994, 1995 and 1996, a corporation in
which a former officer and director of the Company has controlling interest,
provided the Company with training manuals, recruiting and marketing services.
The Company made payments of $60,000, $327,600 and $329,200 during the years
ended December 31, 1994, 1995 and 1996.
F-14
<PAGE>
NOTE 9 - RELATED PARTY TRANSACTIONS (CONTINUED)
On March 21, 1995, the Company issued 200,000 shares of its common stock,
subject to certain restrictions, to its principal stockholder in connection with
the amendment and extension of his employment agreement (see Note 12). The
value assigned to these shares is being amortized over the term of the
employment agreement, the unamortized portion is shown as a reduction to
stockholders' equity.
During May 1996, the Company entered into a business development agreement
with an entity associated with its Florida joint venture partner to provide
business development services. In consideration for the agreement, the Company
issued options to purchase 1.0 million shares of its common stock with an
exercise price of $8.00 per share. The options will become exercisable ratably
over a three-year period beginning on the first anniversary of the date of
issuance, so long as the business agreement remains in place. The president of
this entity subsequently became a member of the Company's Board of Directors in
November 1996. See Note 12.
NOTE 10 - INCOME TAXES
Deferred tax assets consist of the following and the Company has provided
valuation allowances to offset the benefit of any net operating loss
carryforwards or deductible temporary differences as a result of adopting SFAS
109:
<TABLE>
<CAPTION>
December 31,
------------------
1995 1996
------- -------
(In thousands)
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforwards $ 7,060 $10,204
Other - -
------- -------
Total Deferred Tax Assets 7,060 10,204
------- -------
Deferred Tax Liabilities:
Capitalized preopening costs (336) (422)
Excess depreciation (48) (73)
------- -------
Total Deferred Tax Liabilities (384) (495)
------- -------
6,676 9,709
Valuation Allowance (6,676) (9,709)
------- -------
Net Deferred Tax Assets $ - $ -
======= =======
</TABLE>
Since inception the Company has reported losses for income tax and financial
reporting purposes. Accordingly, no provisions for Federal or state income taxes
were provided. A 100% valuation allowance was provided at December 31, 1995 and
1996 since management could not determine that it was more likely than not that
the net deferred tax asset would be realized.
At December 31, 1996, the Company has available net operating loss
carryforwards of approximately $28.3 million for income tax purposes, subject to
certain limitations, which expire in varying amounts through 2011. Section 382
of the Internal Revenue Code, as amended, impose limitations on the use of net
operating losses following certain changes in ownership. Such a change occurred
during 1995. The limitation imposed by Section 382 reduced the amount that such
benefits would be available to offset future taxable income each year commencing
in 1995 in the amount of approximately $3.4 million per year.
F-15
<PAGE>
NOTE 11 - OTHER ITEMS
STORE CLOSINGS
On December 15, 1993, the Company sold a location in Long Beach, California
to be operated as a Koo Koo Roo franchise. As part of the sale the Company
received a promissory note for $275,000 secured by all furniture, fixtures and
equipment. As a result of the sale, the Company recognized a loss of $97,000
for the year ended December 31, 1993. Beginning March 1994, the franchisee
defaulted on current obligations that led to the closing of the location. As a
result of the store closing, the Company recognized a loss during the year ended
December 31, 1994 of $380,000 which includes the unpaid amount of the promissory
note, the net amount of fixed assets abandoned, estimated damages due to the
landlord and other associated costs. During June 1995 the estimated damages due
to the landlord were increased and, accordingly, the Company recognized an
additional loss of $150,000 in the year ending December 31, 1995. In December
1996, the Company reached a settlement with the landlord and paid him $75,000.
On December 26, 1995, the Company allowed an option to renew its lease to
expire and closed its location in Miami Beach, Florida which had been opened in
June 1991. The loss on store closing amounted to $367,000 and included the net
book value of fixed assets abandoned, estimated closing costs and additional
payments due in accordance with the store lease.
ABORTED FINANCING
In September 1994, the Company issued 60,000 shares of its unregistered
common stock in connection with a private placement for the par value of $.01
per share. The Company immediately repurchased these shares and pledged them as
security for up to $300,000 of potential financing. The Company ultimately
determined that it was not in its stockholders' best interest to further pursue
the financing. The Company incurred approximately $331,000 of costs relating to
the financing, which were expensed and included in the caption "other operating
expenses" in the accompanying statement of operations for the year ended
December 31, 1994.
AREA FRANCHISE / DEVELOPMENT RIGHTS
On August 18, 1995, the Company purchased the franchise rights for San Diego
and Northern California (including certain counties in and around San
Francisco), the assets of one existing franchise location including the
assignment of the lease for this location and the assumption of certain related
liabilities and certain other assets (including the assignment of the lease for
an additional location and the assumption of liabilities for a third location).
In connection with this purchase, the Company issued 200,000 shares of its
unregistered common stock. The aggregate purchase price of $1,215,000 has been
allocated as follows: $150,000 to property and equipment, $240,000 in
satisfaction of deferred franchise revenue and $825,000 to the acquisition of
franchise rights. The franchise rights are being amortized over a period of ten
years.
In August 1995, the Company acquired certain development and joint venture
rights for possible future locations in the State of Florida and certain
portions of Georgia. As consideration for this agreement, the Company granted a
non-plan stock option to purchase 300,000 shares of common stock at $4.50 per
share, a price lower than the quoted market price at the time the option was
granted. The rights were recorded at the excess of the market value over the
exercise price which amounted to $414,000 and is being amortized over a period
of ten years. In May 1996, the agreement was modified whereby all future
locations will be developed as joint ventures through newly-formed partnerships
of which the Company will own a 50% interest. In consideration for this
amendment, the Company granted the area developer options to purchase 350,000
shares of the Company's common stock at $8.00 per share. See Note 9.
F-16
<PAGE>
NOTE 12 - COMMITMENTS AND CONTINGENCIES
The Company leases restaurants, an office facility, a ceramics production
facility and ceramics studios under long-term operating leases. Future minimum
lease payments under these noncancellable operating leases are as follows:
<TABLE>
<CAPTION>
Year Amount
- ---------- --------------
(In thousands)
<S> <C>
1997 $ 4,165
1998 4,587
1999 4,524
2000 4,328
2001 4,020
Thereafter 15,509
</TABLE>
In addition to the above amounts, the leases generally contain inflation
escalation clauses and requirements for the payment of property taxes, insurance
and maintenance expenses, and security deposits. Certain leases call for
additional payments based on unit sales volume.
The Company has become subject to various lawsuits, claims and other legal
matters in the course of conducting its business. The Company believes that the
outcome of such lawsuits, claims and other legal matters will not have a
material impact on the Company's consolidated financial position.
The Company entered into a five year employment agreement with its Chairman
effective October 15, 1991. On January 9, 1995 this agreement was amended and
restated, whereby the term was extended for an additional six years and 200,000
shares of common stock were issued to the Chairman. The agreement provides
aggregate minimum annual compensation of $150,000.
On March 16, 1992, the Company entered into a three year employment
agreement with an individual to be President and Chief Operating Officer. On
March 17, 1995, the agreement was amended and restated and the term was extended
for an additional 2 years. The agreement provides for minimum annual
compensation of $150,000.
NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures of cash flow information: Interest expense
amounted to $64,700, $9,400 and $91,900 during the years ended December 31,
1994, 1995 and 1996. Supplemental noncash investing and financing activities:
The Company issued common stock in payment for various expenses and the
acquisition of certain assets. These issuances were recorded at their fair value
of the shares at the dates of issuance as follows:
<TABLE>
<CAPTION>
Shares Amount
------ ------
(In thousands)
<S> <C> <C>
During 1994
- -----------
Acquisition of assets 85 $ 500
Payment of expenses 11 60
During 1995
- -----------
Extension of employment agreement 200 945
Acquisition of assets 241 1,927
Acquisition of minority interest 276 1,912
Payment of expenses 160 864
During 1996
- -----------
Acquisition of assets 26 175
Payment of expenses 17 92
</TABLE>
F-17
<PAGE>
NOTE 14 - SUBSEQUENT EVENTS
In January 1997, the Company completed the sale of a Koo Koo Roo restaurant
and a yogurt and ice cream parlor located in the Taj Mahal Hotel and Casino in
Atlantic City, New Jersey. The restaurant and ice cream parlor were closed in
anticipation of expansion plans by the hotel and casino. The Company received
total consideration of $1,400,000 payable $100,000 cash and the balance to be
paid in three equal installments plus interest on September 1, 1997, January 1,
1998 and the final payment on January 1, 1999. The Company will recognize a
gain on the sale in the amount of approximately $216,000 during the first
quarter of 1997.
In February 1997, the Company completed a private placement of 6% Series B
Convertible Preferred Stock (the "Series B Convertible Preferred") and received
a total of $26.9 million (net of related costs and estimated expenses of $2.1
million). The Series B Convertible Preferred Stock can be converted at the rate
of 15% of each holders' shares per month, starting in the fourth month, into the
Company's common stock at the market price, less a discount of 3% on the 91st
day after issuance increasing to 25% at the end of 13 months. The conversion
ratio will be based on the market price of the Company's stock at the time of
the conversion. The placement agent in the transaction received a warrant to
purchase 29,000 shares of Series B Convertible Preferred at $100 per share.
On March 5, 1997, the Company signed a letter of intent to acquire 14
Hamburger Hamlet restaurants for a total consideration consisting of $9.7
million in cash, 150,000 shares of restricted common stock and assumption of
$250,000 in debt as well as assumption of the real property leases. The
acquisition is subject to court approval and due diligence procedures to be
carried out by the Company.
F-18
<PAGE>
INDEX OF EXHIBITS
The following exhibits are filed in the order hereinafter listed:
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE NO.
- ------- ----------
<C> <S> <C>
3.1 Restated Certificate of Incorporation of Registrant/1/
3.2 Amended and Restated Bylaws of Registrant, as amended March 1992/2/
3.3 Bylaw Amendment Changing year-end/3/
3.4 Certificate of Amendment to the Restated Certificate of Incorporation of
Koo Koo Roo, Inc./10/
3.5 Certificate of Designations of 5% Convertible Preferred Stock/9/
4.1 Form of Certificate for Common Stock of Registrant/1/
4.2 Form of Certificate for 5% Convertible Preferred Stock of Registrant/9/
4.3 Form of Amendment to the Restated Certificate of Incorporation of Registrant/9/
4.4 Certificate of Designations of 5% Convertible Preferred Stock of Registrant/9/
4.5 Form of Warrant Agreement used in connection with the Company's February 1995
private placement of Company Common Stock and Warrants/8/
4.6 Form of Warrant Agreement used in connection with the Company's June 1995 private
placement of Company Common Stock and Warrants/8/
4.7 Form of Stock Purchase Agreement dated March 12, 1996 by and among the Registrant
and the purchasers named therein/9/
4.8 Form of Preferred Stock Investment Agreement dated March 20, 1996 by and among the
Registrant and the purchasers named therein/9/
4.9 Certificate of Designations of Series B 6% Convertible Preferred Stock/13/
4.10 Form of Certificate for Series B 6% Convertible Preferred Stock/13/
4.11 Form of Series B Preferred Stock Investment Agreement dated February 27, 1997 by and
among the Registrant and the purchasers named therein/13/
4.12 Form of 5% Convertible Preferred Stock Warrant Agreement dated March 20, 1996/14/
4.13 Form of Common Stock Warrant Agreement dated March 12, 1996/14/
10.49 Agreement of Limited Partnership of KKRO Partners L.P. dated March 23, 1994/4/
10.50 Area Development Agreement dated August 19, 1993 between the Registrant and Mel Harris/5/
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE NO.
- ------- ----------
<C> <S> <C>
10.55 Amended and Restated Employment Agreement of Kenneth Berg dated as of
January 9, 1995 and related letter agreement/8/
10.56 Amended and Restated Employment Agreement of Michael Mooslin dated
as of March 17, 1995/8/
10.58 Employment Agreement of Robert Kautz dated as of February 8, 1995/8/
10.59 Stock Awards Plan/6/
10.60 Form of Non-Qualified Stock Option Agreement Under the Stock Awards Plan/8/
10.61 Directors' Stock Option Plan, as amended/7/
10.62 First Amendment to the Harris Development Agreement dated as of August 25, 1995/8/
10.63 KKRO Partners, L.P. Purchase Agreement dated as of September 26, 1995 by and
between the Company and KKRO Partners, L.P./8/
10.64 KKRO Partners, L.P. Liquidation Agreement dated as of September 28, 1995 by and
between the Company and KKRO Partners, L.P./8/
10.65 Form of Warrant Agreement used in connection with the Company's February 1995
private placement of Company Common Stock and Warrants/8/
10.66 Form of Warrant Agreement used in connection with the Company's June 1995
private placement of Company Common Stock and Warrants/8/
10.67 Form of Stock Purchase Agreement dated March 12, 1996 by and among the
Registrant and the purchasers named therein/9/
10.68 Form of Preferred Stock Investment Agreement dated March 20, 1996 by and
among the Registrant and the purchasers named therein/9/
10.69 Agreement for Acquisition of Color Me Mine, Inc./10/
10.70 Canadian Letter of Intent/10/
10.71 Business Development Services Agreement, dated as of May 8, 1996, by and
between the Registrant and Restaurant Marketing Corporation./11/
</TABLE>
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EXHIBIT PAGE NO.
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10.72 Non-Qualified Stock Option Agreement for Restaurant Marketing
Corporation, dated as of May 8, 1996, by and between the Registrant
and Restaurant Marketing Corporation./11/
10.73 Non-Qualified Stock Option Agreement for Restaurant Marketing
Corporation, dated as of May 8, 1996, by and between the Registrant
and Restaurant Marketing Corporation./11/
10.74 Second Amendment to Area Development Agreement, dated as of May 8,
1996, by and between the Registrant, Koo Koo Roo Licensing Systems,
Inc. and Restaurant Acquisition Corporation./11/
10.75 Employment Agreement and Non-Qualified Stock Option Agreement, dated as
of May 8, 1996, by and between the Registrant and Mel Harris./11/
10.76 Color Me Mine, Inc. Area Development Agreement/12/
10.77 Asset Purchase Agreement By and Between Hamburger Hamlet, Inc.and the
Registrant dated as of March 21, 1997.
21.1 Subsidiaries of Registrant/8/
23.1 Consent of Independent Certified Public Accountants
27 Financial Data Schedule
99.1 "Item 5. Other Events" included the Company's Current Report dated March 18, 1996./10/
</TABLE>
footnotes
- ---------
1 Incorporated by reference to identical exhibit number in the Company's
Registration Statement on Form S-18 (No. 33-42487-NY) declared effective on
October 15, 1991.
2 Incorporated by reference to identical exhibit number in the Company's
Transition Report on Form 10-K for the six months ended June 30, 1992.
3 Incorporated by reference to identical exhibit number in the Company's
Current Report on Form 8-K dated December 14, 1995 (filed with the
Commission on December 15, 1995).
4 Incorporated by reference to identical exhibit number in the Company's
Annual Report on Form 10-K/A for the fiscal year ended June 30, 1993 (filed
with the Commission on April 25, 1994).
5 Incorporated by reference to identical exhibit number in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1994.
6 Incorporated by reference to identical exhibit number in the Company's
Proxy Statement dated December 15, 1994.
7 Incorporated by reference to identical exhibit number in the Company's
Proxy Statement dated November 15, 1993.
8 Incorporated by reference to identical exhibit number in the Company's
Amendment No. 2 to its Annual Report on Form 10-K/A for the fiscal year
ended June 30, 1995.
9 Incorporated by reference to identical exhibit number in the Company's
Current Report on Form 8-K dated March 18, 1996.
10 Incorporated by reference to the exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.
11 Incorporated by reference to identical exhibit number in the Company's
Registration Statement on Form S-1 (No. 333-3360) declared effective on
June 11, 1996.
12 Incorporated by reference to the exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996
13 Incorporated by reference from the Company's Current Report on Form 8-K
dated February 27, 1997.
14 Incorporated by reference from the Company's Registration Statement on Form
S-3 (No. 333-23263) as filed on March 13, 1997.
<PAGE>
ASSET PURCHASE AGREEMENT
BY AND BETWEEN
HAMBURGER HAMLET RESTAURANTS INC.
HAMBURGER HAMLETS INC.
HAMBURGER HAMLET OF SUNSET, INC.
DAVILEW CORPORATION
VALLEY HAMLET CORPORATION
HAMBURGER HAMLET OF BRENTWOOD, INC.
HAMBURGER HAMLET OF PASADENA, INC.
HAMBURGER HAMLET OF HOLLYWOOD, INC.
HAMBURGER HAMLET OF SEPULVEDA, INC.
HAMBURGER HAMLET OF PALM SPRINGS, INC.
HAMBURGER HAMLET OF GEORGETOWN SQUARE, INC.
109 SOUTH SAINT ASAPH STREET, INC.
HAMBURGER HAMLET OF AGOURA HILLS, INC.
HAMBURGER HAMLET OF GAITHERSBURG, INC.
HAMBURGER HAMLET OF CRYSTAL CITY, INC.
HAMBURGER HAMLET OF VALENCIA, INC.
AND
KOO KOO ROO, INC.
MARCH 21, 1997
<PAGE>
TABLE OF CONTENTS
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ARTICLE 1 DEFINITIONS.............................................. 1
1.1 "Accountants"............................................ 1
1.2 "Accountants' Final Closing Statement"................... 2
1.3 "Administrative Material and Equipment".................. 2
1.4 "Assets"................................................. 2
1.5 "Assumed Liabilities".................................... 2
1.6 "Assumption Agreement"................................... 2
1.7 "Bankruptcy Code"........................................ 2
1.8 "Bankruptcy Court"....................................... 2
1.9 "Bankruptcy Proceeding" and "Bankruptcy Proceedings"..... 2
1.10 "Best Knowledge of Seller"............................... 2
1.11 "Bill of Sale"........................................... 2
1.12 "Casualty"............................................... 2
1.13 "Close of Escrow"........................................ 3
1.14 "Closing"................................................ 3
1.15 "Closing Date"........................................... 3
1.16 "Code"................................................... 3
1.17 "Committee".............................................. 3
1.18 "Committee Counsel"...................................... 3
1.19 "Cut-off Time"........................................... 3
1.20 "Encumbrances"........................................... 3
1.21 "Equipment".............................................. 3
1.22 "Escrow"................................................. 3
1.23 "Escrow Agent"........................................... 3
1.24 "Escrow Deposit"......................................... 3
1.25 "Escrow Instructions".................................... 3
1.26 "Excluded Assets"........................................ 4
1.27 "Excluded Restaurants"................................... 4
1.28 "Fair Market Value"...................................... 4
1.29 "Final Closing Statement"................................ 5
1.30 "Final Settlement Date".................................. 5
1.31 "General Assignment"..................................... 5
1.32 "Goodwill"............................................... 5
1.33 "Grant Deed"............................................. 5
1.34 "Holdback Amount"........................................ 5
1.35 "Inventory".............................................. 5
1.36 "Intellectual Property Rights"........................... 5
1.37 "Lease Deposits"......................................... 5
1.38 "Leased Real Property"................................... 5
1.39 "Liquor Licenses"........................................ 6
1.40 "Liquor License Holdback"................................ 6
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1.41 "Non-Foreign Status Certificate"........................ 6
1.42 "Operating Assets"...................................... 6
1.43 "Other Licenses"........................................ 6
1.44 "Outside Registration Date"............................. 6
1.45 "Overbid" and "Overbidder".............................. 6
1.46 "Overbid Motion"........................................ 6
1.47 "Pacific Time".......................................... 6
1.48 "Permitted Assignee".................................... 6
1.49 "Permitted Exceptions".................................. 6
1.50 "Person"................................................ 7
1.51 "Petty Cash"............................................ 7
1.52 "Plan of Reorganization"................................ 7
1.53 "Preliminary Closing Statement"......................... 7
1.54 "Purchase Deposit"...................................... 7
1.55 "Purchase Price"........................................ 7
1.56 "Real Property"......................................... 7
1.57 "Representative"........................................ 7
1.58 "Restaurant Records and Documents"...................... 7
1.59 "Restaurants"........................................... 7
1.60 "Sale Motion"........................................... 7
1.61 "Sale Order"............................................ 7
1.62 "Shares"................................................ 7
1.63 "Tangible Personal Property"............................ 7
1.64 "Tax Clearance Certificates"............................ 8
1.65 "Third-Party Contracts"................................. 8
1.66 "Title Policy".......................................... 8
1.67 "Title Report".......................................... 8
1.68 "Valuation Date"........................................ 8
ARTICLE 2 PURCHASE AND SALE OF ASSETS............................. 8
2.1 Transfer of Assets...................................... 8
2.2 Purchase Price.......................................... 8
2.3 Escrow Deposit and Payment of Purchase Price............ 8
2.4 Investment of Escrow Deposit............................ 9
2.5 Purchase Price Allocation............................... 9
2.6 Assumed Liabilities..................................... 10
2.7 Remaining Liabilities of Seller......................... 10
2.8 Taxes................................................... 11
ARTICLE 3 ESCROW.................................................. 11
3.1 Opening Escrow.......................................... 11
3.2 Escrow Instructions..................................... 11
3.3 Close of Escrow......................................... 11
3.4 Costs of Escrow......................................... 12
3.5 Other Costs............................................. 13
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3.6 Preparation of Preliminary and Final Closing Statements. 13
3.7 Prorations.............................................. 13
ARTICLE 4 OTHER AGREEMENTS........................................ 14
4.1 Expedited Process....................................... 14
4.2 Overbid Motion.......................................... 14
4.3 Sale Motion............................................. 15
4.4 Third-Party Contracts Not Accepted by Purchaser......... 16
4.5 Administrative Claims................................... 16
4.6 Price Protection........................................ 16
4.7 Registration Rights..................................... 17
4.8 Intellectual Property Rights............................ 18
4.9 Employees............................................... 19
4.10 Listing Application..................................... 19
4.11 Notice of Bankruptcy Motions............................ 19
4.12 Management Agreement.................................... 19
4.13 Covenant Not to Sue Individuals......................... 20
4.14 No Action to Delay Hearings............................. 20
ARTICLE 5 TITLE TO THE REAL PROPERTY; PERMITTED EXCEPTIONS........ 21
5.1 Title Report............................................ 21
5.2 Title Policy............................................ 21
ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF SELLER................ 22
6.1 Status.................................................. 22
6.2 Corporate Power and Authority; Due Authorization........ 22
6.3 Enforceable............................................. 22
6.4 Title................................................... 22
6.5 No Changes.............................................. 22
6.6 Availability and Condition of Assets.................... 23
6.7 Equipment............................................... 23
6.8 Inventory............................................... 24
6.9 Intellectual Property Rights............................ 24
6.10 Lease Deposits.......................................... 24
6.11 Liquor Licenses and Other Licenses...................... 24
6.12 Restaurant Records and Documents........................ 24
6.13 Petty Cash.............................................. 24
6.14 Third-Party Contracts................................... 24
6.15 Taxes................................................... 25
6.16 Compliance With Law..................................... 25
6.17 Employees............................................... 26
6.18 Employment Contracts.................................... 26
6.19 Securities Representations.............................. 26
6.20 No Brokers.............................................. 28
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6.21 Disclosure.............................................. 28
ARTICLE 7 REPRESENTATIONS AND WARRANTIES OF PURCHASER............. 28
7.1 Status.................................................. 28
7.2 Authorization........................................... 28
7.3 Enforceable............................................. 28
7.4 No Conflicts............................................ 29
7.5 Consents................................................ 29
7.6 Litigation.............................................. 29
7.7 No Brokers.............................................. 29
7.8 Access.................................................. 29
7.9 Shares.................................................. 29
7.10 Financial Resources..................................... 29
7.11 Disclosure.............................................. 29
7.12 Hart-Scott-Rodino....................................... 30
7.13 Disclosure.............................................. 30
ARTICLE 8 COVENANTS............................................... 30
8.1 Maintenance of Assets Prior to Closing.................. 30
8.2 Investigation by Purchaser.............................. 30
8.3 Reasonable Efforts...................................... 30
8.4 No Encumbrance or Transfer.............................. 31
8.5 Notification of Certain Matters......................... 31
8.6 Business in the Ordinary Course......................... 31
8.7 Supplier Relations...................................... 31
8.8 Preparation of Audited Statements....................... 31
ARTICLE 9 CONDITIONS TO SELLERS' OBLIGATIONS...................... 32
9.1 Representations, Warranties and Covenants............... 32
9.2 Consents................................................ 32
9.3 Closing Certificate..................................... 32
9.4 Funds................................................... 32
9.5 Purchaser's Deliveries.................................. 32
9.6 Sale Order.............................................. 32
ARTICLE 10 CONDITIONS TO PURCHASER'S OBLIGATIONS................... 32
10.1 Representations, Warranties and Covenants............... 32
10.2 Overbid Motion.......................................... 33
10.3 Other Bankruptcy Court Orders........................... 33
10.4 Tax Clearance Certificates.............................. 33
10.5 Other Consents.......................................... 33
10.6 Material Changes........................................ 33
10.7 Closing Certificates.................................... 33
10.8 Sellers' Deliveries..................................... 33
10.9 Title Policy............................................ 33
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ARTICLE 11 CLOSING................................................. 34
11.1 Closing................................................. 34
11.2 Closing Documents to be Deposited by Sellers into
Escrow................................................. 34
11.3 Deposit of Closing Documents and Funds into Escrow
by Purchaser........................................... 34
11.4 Liquor License Holdback................................. 35
11.5 Failure of Condition.................................... 35
11.6 Extended Closing Date................................... 36
11.7 Possession of Assets.................................... 36
ARTICLE 12 DEFAULTS AND REMEDIES................................... 36
12.1 Sellers' Defaults....................................... 36
12.2 Purchaser's Remedies.................................... 36
12.3 Purchaser's Defaults.................................... 37
12.4 Sellers' Remedy......................................... 37
12.5 Liquidated Damages to Purchaser......................... 38
ARTICLE 13 RISK OF LOSS............................................ 38
13.1 Tangible Personal Property.............................. 38
13.2 Casualties to Real Property............................. 39
ARTICLE 14 ACTIONS BY SELLERS AND PURCHASER AFTER THE CLOSING...... 40
14.1 Books and Records....................................... 40
14.2 Indemnifications........................................ 40
14.3 Further Assurances...................................... 42
ARTICLE 15 MISCELLANEOUS........................................... 43
15.1 Notices................................................. 43
15.2 Applicable Law.......................................... 44
15.3 Forum................................................... 44
15.4 Expenses................................................ 45
15.5 Interpretation.......................................... 45
15.6 Severability............................................ 45
15.7 Waiver.................................................. 45
15.8 Binding................................................. 45
15.9 Entire Agreement........................................ 46
15.10 Modification............................................ 46
15.11 Counterparts............................................ 46
</TABLE>
v
<PAGE>
ASSET PURCHASE AGREEMENT
------------------------
This Asset Purchase Agreement (this "Agreement") is entered into as of
March 21, 1997, by and between Hamburger Hamlet Restaurants Inc. ("HHR"), a
Delaware corporation; Hamburger Hamlets Inc., a California corporation;
Hamburger Hamlet of Sunset, Inc., a California corporation; Davilew Corporation,
a California corporation; Valley Hamlet Corporation, a California corporation;
Hamburger Hamlet of Brentwood, Inc., a California corporation; Hamburger Hamlet
of Pasadena, Inc., a California corporation; Hamburger Hamlet of Hollywood,
Inc., a California corporation; Hamburger Hamlet of Sepulveda, Inc., a
California corporation; Hamburger Hamlet of Palm Springs, Inc., a California
corporation; Hamburger Hamlet of Georgetown Square, Inc., a Maryland
corporation; 109 South Saint Asaph Street, Inc., a Virginia corporation;
Hamburger Hamlet of Agoura Hills, Inc., a California corporation; Hamburger
Hamlet of Gaithersburg, Inc., a Maryland corporation; Hamburger Hamlet of
Crystal City, Inc., a Virginia corporation; Hamburger Hamlet of Valencia, Inc.,
a California corporation (collectively referred to as "Sellers" and individually
referred to as a "Seller"); and Koo Koo Roo, Inc., a Delaware corporation
("Purchaser"), with reference to the following facts:
A. HHR filed a bankruptcy petition in the United States Bankruptcy Court,
Central District of California (the "Bankruptcy Court"), Case No. SV95-19653GM
(the "Bankruptcy Proceeding") and the remaining Sellers also filed bankruptcy
petitions in the Bankruptcy Court (all such proceedings and the Bankruptcy
Proceeding are collectively referred to as the "Bankruptcy Proceedings").
B. Sellers operate sixteen (16) restaurants under the trade name
"Hamburger Hamlet" or "Portner's" in the United States.
C. Purchaser desires to purchase and assume and Sellers desire to sell
and assign the assets and specified liabilities relating to the operation of
fourteen (14) of the restaurants.
NOW, THEREFORE, in consideration of the mutual agreements set forth in this
Agreement, and for other valuable consideration, the receipt and adequacy of
which are hereby acknowledged, Sellers and Purchaser agree as follows:
ARTICLE 1
DEFINITIONS
-----------
As used in this Agreement, the capitalized terms below shall have the
following meanings:
1.1 "Accountants" shall mean BDO Seidman, LLP.
-----------
<PAGE>
1.2 "Accountants' Final Closing Statement" shall have the meaning given
------------------------------------
such term in Section 3.6.
1.3 "Administrative Material and Equipment" shall mean those assets of
-------------------------------------
Sellers described on Schedule 1.3.
1.4 "Assets" shall mean the Administrative Material and Equipment,
------
Equipment, Goodwill, Inventory, Intellectual Property Rights, Lease Deposits,
Liquor Licenses (to the extent the same are transferable), Other Licenses (to
the extent the same are transferable), Operating Assets, Petty Cash, Real
Property, Restaurant Records and Documents, and Third-Party Contracts used in
connection with, and as to Tangible Personal Property other than the
Administrative Material and Equipment located at, the Restaurants, but excluding
the Excluded Assets.
1.5 "Assumed Liabilities" shall mean, subject to Sections 2.7 and 4.4, the
-------------------
obligations of Sellers under the Third-Party Contracts which are being assigned
to Purchaser and which solely arise from and after the Closing Date. In
addition, Assumed Liabilities shall include liabilities of Sellers to General
Electric Capital Corporation, Textron Financial Corporation, Advanta Business
Services Corporation (Advanta Leasing Corporation), and the Small Business
Administration to the extent such liabilities do not exceed $250,000.
1.6 "Assumption Agreement" shall mean an assumption agreement, in form and
--------------------
substance reasonably satisfactory to Purchaser and HHR, evidencing Purchaser's
assumption of the Assumed Liabilities.
1.7 "Bankruptcy Code" shall mean the United States Bankruptcy Code and any
---------------
successor statute thereto, and the rules and regulations issued thereunder and
the local bankruptcy rules for the Central District of California, as in effect
from time to time.
1.8 "Bankruptcy Court" shall have the meaning given such term in the
----------------
recitals hereto.
1.9 "Bankruptcy Proceeding" and "Bankruptcy Proceedings" shall have the
--------------------- ----------------------
meanings given such terms in the recitals hereto.
1.10 "Best Knowledge of Seller" shall mean the best knowledge of the senior
------------------------
officers of Sellers after diligent inquiry by such officers (including a review
of Sellers' files) with respect to the matter in question.
1.11 "Bill of Sale" shall mean a bill of sale duly executed by Sellers
------------
conveying to Purchaser all of Sellers' right, title, and interest in and to the
Tangible Personal Property as of the Cut-off Time, in form and substance
reasonably satisfactory to Purchaser and HHR.
1.12 "Casualty" shall mean any material damage to the Real Property or any
--------
Leased Real Property caused by fire, rain, snow, wind, flood, earthquake, civil
unrest, act
2
<PAGE>
of God or other cause not under the reasonable control of HHR or any
condemnation or other taking of any portion of the Real Property or Leased Real
Property.
1.13 "Close of Escrow" shall have the meaning given such term in Section
---------------
3.3.
1.14 "Closing" shall mean, with respect to the purchase and sale of the
-------
Assets (other than as provided in Section 11.4), consummation thereof as
contemplated by this Agreement.
1.15 "Closing Date" shall mean the date upon which the Closing occurs,
------------
which shall be, subject to Article 10, May 20, 1997 or any other date as HHR and
Purchaser shall mutually agree; provided, however, that if Bankruptcy Court
approval to the Sale Order has not been obtained by May 9, 1997, the Closing
Date shall automatically be extended to eleven (11) days after the Sale Order
has been entered by the Bankruptcy Court.
1.16 "Code" shall mean the Internal Revenue Code of 1986, as amended from
----
time to time.
1.17 "Committee" shall mean the Official Committee of Unsecured Creditors
---------
in the Bankruptcy Proceeding.
1.18 "Committee Counsel" shall mean Pachulski, Stang, Ziehl & Young.
-----------------
1.19 "Cut-off Time" shall mean 11:59 p.m. (Pacific Time) on the day before
------------
the Closing Date.
1.20 "Encumbrances" shall mean any claim, lien, pledge, option, security
------------
interest, or encumbrance of any Person.
1.21 "Equipment" shall mean all furniture, fixtures, furnishings,
---------
equipment, signs, appliances, computers, cash registers and point of sale
systems, telephone systems, ovens, stoves, refrigerators, bars, bar fixtures and
equipment, lamps, mirrors and heating and lighting fixtures and equipment owned
by Sellers and used in connection with, and located at, the operation of the
Restaurants, subject to such depletions, and replacements as shall occur and be
made in the normal course of business.
1.22 "Escrow" shall mean the Escrow to be opened with the Escrow Agent and
------
established for the sale to Purchaser of all of the Assets in accordance with
the terms of this Agreement.
1.23 "Escrow Agent" shall mean First American Title Insurance Company.
------------
1.24 "Escrow Deposit" shall have the meaning given such term in Section
--------------
2.3, and shall also include all interest earned thereon.
1.25 "Escrow Instructions" shall have the meaning given such term in
-------------------
Section 3.2.
3
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1.26 "Excluded Assets" shall mean the following assets of Sellers: (a)
---------------
Sellers' interest under real property leases for the Excluded Restaurants and
Sellers' corporate offices; (b) all furniture, fixtures and equipment associated
with the Excluded Restaurants and Sellers' corporate offices other than such
equipment which is included in the Administrative Material and Equipment; (c)
all vehicles and vehicle leases; (d) all cash, cash equivalents, credit card and
other receivables other than the Petty Cash; (e) all deposits and prepaid
expenses other than the Lease Deposits or those being assigned to Purchaser in
connection with the Restaurants; (f) all notes receivables; (g) all liquor
licenses and other licenses and permits used in connection with the Excluded
Restaurants; (h) all refunds, volume discounts or advertising allowances arising
from activities or transactions which occurred prior to the Closing Date; (i)
all corporate and employee records other than such records which are included in
the Restaurant Records and Documents (to the extent that Sellers' corporate or
employer records are included in the Restaurant Records and Documents, Sellers
may retain a copy of such records); and (j) subject to Article 13, all causes of
action and rights to receive proceeds from insurance policies owned by Sellers.
1.27 "Excluded Restaurants" shall mean those certain restaurants operated
--------------------
by affiliates of Sellers under the name "Hamburger Hamlet" in Costa Mesa and
Palm Desert, California and any other restaurants previously operated by Sellers
and their affiliates (other than the Restaurants).
1.28 "Fair Market Value" means the value of a Share determined as follows:
-----------------
(a) If the Shares are listed on any established stock exchange or a
national market system, including without limitation, the National Market System
of the National Association of Securities Dealers, Inc. Automated Quotation
("NASDAQ") System, the Fair Market Value of a Share shall be the average of the
closing sales price for such stock (or the closing bid, if no sales are
reported) as quoted on such system or exchange (or the exchange with the
greatest volume of trading in the Shares) on the five (5) trading days
immediately preceding (and, which will include the Valuation Date if the
Valuation Date is a trading day) and on the five (5) trading days immediately
following the Valuation Date, as reported in The Wall Street Journal;
(b) If the Shares are quoted on the NASDAQ System (but not on the
National Market System thereof) or are regularly quoted by recognized securities
dealers but selling prices are not reported, the Fair Market Value of a Share
shall be the average of the mean between the high bid and low asked prices for a
Share on the five (5) trading days immediately preceding (and, which will
include the Valuation Date if the Valuation Date is a trading day) and on the
five (5) trading days immediately following the Valuation Date, as reported in
The Wall Street Journal; and
(c) In the absence of any established market for the Shares, the Fair
Market Value shall be determined by mutual agreement of HHR and Purchaser;
provided, however, if HHR and Purchaser cannot agree, they shall mutually select
an independent appraiser to determine the Fair Market Value as of the Valuation
Date, the determination
4
<PAGE>
of which shall be binding on all parties, and the fees and expenses of such
independent appraiser shall be shared equally by HHR and Purchaser.
1.29 "Final Closing Statement" shall have the meaning given such term in
-----------------------
Section 3.6.
1.30 "Final Settlement Date" shall mean the date which is ten (10) days
---------------------
after the delivery of the Final Closing Statement unless Sellers object to the
Final Closing Statement in the time and manner described in Section 3.6, in
which event the Final Settlement Date shall mean the date that all such
objections have been resolved.
1.31 "General Assignment" shall mean an assignment, duly executed by
------------------
Sellers and Purchaser, assigning to Purchaser all of Sellers' right, title and
interest in and to the Goodwill, Intellectual Property Rights, Lease Deposits,
Liquor Licenses (to the extent assignable), Operating Assets, Other Licenses (to
the extent assignable) and, except as provided in Section 4.4, the Third-Party
Contracts, as of the Cut-off Time, in form and substance reasonably satisfactory
to Purchaser and HHR.
1.32 "Goodwill" shall mean the business of each of the acquired Restaurants
--------
as a going concern, the goodwill associated therewith and all prepaid expenses
and deposits with respect to the Restaurants as of the Closing Date.
1.33 "Grant Deed" shall mean grant deeds with respect to the Real Property,
----------
duly executed and acknowledged by the Sellers who hold legal or equitable title
to such Real Property, in form and substance reasonably satisfactory to
Purchaser and HHR.
1.34 "Holdback Amount" shall mean the sum of $100,000.
---------------
1.35 "Inventory" shall mean all merchantable (in the ordinary course of
---------
business) inventory of food, beverages (alcoholic and non-alcoholic), paper
products, plastic products, uniforms, chinaware, glassware, silverware, pots,
pans, kitchen utensils, linens, menus, other consumables and supplies associated
with the operation of the Restaurants, subject to such depletions, and
replacements as shall occur and be made in the normal course of business.
1.36 "Intellectual Property Rights" shall mean: (i) the names "Hamburger
----------------------------
Hamlet" and "Portner's," any trademark registration relating to such names and
any goodwill in such names; (ii) all other trademarks and trade names relating
to the foregoing owned by or licensed to Sellers and used in connection with the
operation of the Restaurants; and (iii) trade secrets and all other proprietary
information of Sellers relating to the operation of the Restaurants.
1.37 "Lease Deposits" shall mean all lease and other deposits held by
--------------
lessors or others relating to the Third-Party Contracts which are assumed by
Purchaser.
1.38 "Leased Real Property" shall mean any land, buildings, structures or
--------------------
improvements subject to a real property lease for a Restaurant.
5
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1.39 "Liquor Licenses" shall mean all liquor licenses used in connection
---------------
with the Restaurants.
1.40 "Liquor License Holdback" shall mean 686 Shares for each Liquor
-----------------------
License for which approval from the California Department of Alcoholic Beverage
Control, or other California governmental authority, for the assignment to
Purchaser of such Liquor License is required, but has not been obtained as of
the Closing Date.
1.41 "Non-Foreign Status Certificate" shall mean a certificate as to the
------------------------------
non-foreign status of the Sellers who hold legal or equitable title to the Real
Property, in form and substance reasonably satisfactory to Purchaser and HHR, to
be executed by such Sellers.
1.42 "Operating Assets" shall mean all personal property owned by Sellers
----------------
located on and used in connection with the Restaurants other than the Excluded
Assets, Petty Cash, Equipment, Inventory, Liquor Licenses, Other Licenses,
Intellectual Property Rights, Goodwill, Restaurant Records and Documents, and
Third-Party Contracts.
1.43 "Other Licenses" shall mean all of Sellers' right, title, interests,
--------------
privileges, benefits and remedies in, to and under all licenses, permits,
variances, approvals, plans and specifications and land use entitlement, or
other government authorizations held by Sellers and/or relating to the
construction, reconstruction, occupancy, operation or use of any part of the
Restaurants (including, without limitation, all building permits, certificates
of occupancy, and business licenses), but excluding the Liquor Licenses.
1.44 "Outside Registration Date" means, the earlier of (i) the date which
-------------------------
is two (2) years following the Closing Date, and (ii) the date upon which HHR
(or its Permitted Assignees) are permitted to sell the Shares received hereunder
without any restrictions pursuant to the provisions of Rule 144 under the
Securities Act of 1933, as amended.
1.45 "Overbid" and "Overbidder" shall have the meanings given such terms in
------- ----------
Section 4.2.
1.46 "Overbid Motion" shall mean that certain motion to be prepared and
--------------
filed by Sellers in the Bankruptcy Court with respect to the Bankruptcy
Proceedings which is further described in Section 4.2.
1.47 "Pacific Time" shall mean either Pacific Standard Time or Pacific
------------
Daylight Savings Time, whichever is then in effect in Los Angeles, California on
the date in question.
1.48 "Permitted Assignee" shall mean (i) any Person who receives the Shares
------------------
from: (a) HHR, a disbursing agent or a Chapter 11 trustee in bankruptcy pursuant
to the Plan of Reorganization consistent with Section 1145 of the Bankruptcy
Code, or (b) a Chapter 7 trustee in bankruptcy pursuant to applicable law,
specifically including Securities laws and regulations, or (ii) a Chapter 7
trustee in bankruptcy.
1.49 "Permitted Exceptions" shall have the meaning given such term in
--------------------
Section 5.2.
6
<PAGE>
1.50 "Person" shall mean any corporation, governmental authority,
------
individual, limited liability company, partnership, trust or other entity.
1.51 "Petty Cash" shall mean all petty cash on hand at the Restaurants as
----------
of the Cut-off Time, which shall be in the amounts set forth in Schedule 6.13.
1.52 "Plan of Reorganization" means the plan of reorganization with respect
----------------------
to Sellers as confirmed in connection with the Bankruptcy Proceedings.
1.53 "Preliminary Closing Statement" shall have the meaning given such term
-----------------------------
in Section 3.6.
1.54 "Purchase Deposit" shall mean the sum of $1,000,000 which was
----------------
deposited by Purchaser with its bankruptcy counsel, Wynne Spiegel Itkin, A Law
Corporation.
1.55 "Purchase Price" shall have the meaning given such term in Section
--------------
2.2.
1.56 "Real Property" shall mean all real property owned by Sellers which is
-------------
used in connection with the operation of the Restaurants, including without
limitation, the parking lots associated with the Beverly Drive and Sherman Oaks
Restaurants and the improvements thereon.
1.57 "Representative" shall mean any officer, director, principal,
--------------
attorney, agent, accountant, employee or other representative.
1.58 "Restaurant Records and Documents" shall mean all books and records,
--------------------------------
files, computerized records, software, training materials, marketing materials
and other materials related to the other Assets, used or useful in the operation
of the Restaurants, and located at and used in connection with the Restaurants.
1.59 "Restaurants" shall mean those fourteen (14) restaurants owned or
-----------
operated by Seller which are described on Schedule 1.59.
1.60 "Sale Motion" shall mean that certain motion to be prepared and filed
-----------
by Sellers in the Bankruptcy Court with respect to the Bankruptcy Proceedings
which is further described in Section 4.3.
1.61 "Sale Order" shall have the meaning given such term in Section 10.3.
----------
1.62 "Shares" shall mean shares of common stock of Purchaser.
------
1.63 "Tangible Personal Property" shall mean the Administrative Material
--------------------------
and Equipment, Equipment, Inventory, Operating Assets, Petty Cash and Restaurant
Records and Documents.
7
<PAGE>
1.64 "Tax Clearance Certificates" shall mean, in the case of Restaurants
--------------------------
located in California, tax clearance certificates issued by the California State
Board of Equalization, Franchise Tax Board and Employment Development
Department, and in the case of Restaurants located in Maryland and Virginia,
similar certificates issued by similar governmental agencies, in each case
certifying that all sales, use, franchise and employment taxes relating to the
operation of the Restaurants have been properly withheld and paid over to such
governmental agencies in accordance with applicable law.
1.65 "Third-Party Contracts" shall mean all real property leases (including
---------------------
without limitation, for the Leased Real Property), personal property leases and
other executory contracts of Sellers with respect to the operation of the
Restaurants.
1.66 "Title Policy" shall have the meaning given such term in Section 5.2.
------------
1.67 "Title Report" shall have the meaning given such term in Section 5.1.
------------
1.68 "Valuation Date" shall mean the date occurring eighteen (18) calendar
--------------
months from the Closing Date.
ARTICLE 2
PURCHASE AND SALE OF ASSETS
---------------------------
2.1 Transfer of Assets. Subject to the terms and conditions contained in
------------------
this Agreement, on the Closing Date Sellers shall sell, convey, transfer, assign
and deliver to Purchaser, and Purchaser shall acquire from Sellers, the Assets,
free and clear of all Encumbrances, effective as of the opening of business on
the Closing Date.
2.2 Purchase Price. The total purchase price ("Purchase Price") shall be
--------------
$11,450,000 and the cash portion of the Purchase Price shall be $9,700,000,
subject, however, to adjustments and prorations as provided in Sections 3.6 and
11.4 and Article 13. The non-cash portion of the Purchase Price shall be
satisfied through the issuance of 150,000 Shares to HHR, subject to Section 11.4
and to Purchaser's obligations under Section 4.6.
2.3 Escrow Deposit and Payment of Purchase Price. The Purchase Price shall
--------------------------------------------
be payable by Purchaser to HHR, on behalf of the Sellers, as follows:
(a) Provided that Sellers have prepared and filed by March 21, 1997,
and served by March 20, 1997, an emergency motion to have the Overbid Motion
heard prior to March 28, 1997, in form and content reasonably satisfactory to
Purchaser and its counsel, Purchaser shall cause $1,000,000 to be transferred
from its bankruptcy counsel's client trust account and deposited into Escrow
(the "Escrow Deposit") within one (1) business day of the execution of this
Agreement. At the Close of Escrow, the amount of the Escrow Deposit, together
with interest earned thereon, shall be credited against the cash portion of the
Purchase Price. If this Agreement is terminated prior to the Close of Escrow,
the
8
<PAGE>
Escrow Deposit, together with interest earned thereon, shall be disbursed by
Escrow Agent in accordance with the applicable provisions of this Agreement.
(b) Not later than 1:00 p.m., Pacific Time, on the day immediately
preceding the Closing Date, Purchaser shall deposit into the Escrow (i) in cash
or other immediately available federal funds, the sum of (A) an amount equal to
the balance of the cash portion of the Purchase Price less the Holdback Amount,
plus (B) an amount adequate to pay any of the estimated prorations and costs
- ----
described in the Preliminary Closing Statement to be paid by Purchaser through
the Escrow in connection with this transaction and (ii) a stock certificate or
certificates in the name of HHR evidencing the issuance of 150,000 Shares. On
the Closing Date, Purchaser shall pay the Holdback Amount to the Committee
Counsel trust account, which Holdback Amount shall be held in trust by Committee
Counsel and disbursed in accordance with the applicable provisions of this
Agreement.
(c) If the Bankruptcy Court does not approve either the Overbid
Motion or Purchaser's bid at the hearing on the Sale Motion, the Escrow Deposit
shall be fully refunded to Purchaser by Escrow Agent within 48 hours of the
earlier of either such occurrence and Purchaser shall have no claim to, interest
in or lien against Seller, the Assets or otherwise.
2.4 Investment of Escrow Deposit. Escrow Agent shall hold the Escrow
----------------------------
Deposit and the sums deposited pursuant to Section 2.3(b) above in the Escrow
and shall invest and reinvest the same, only in bonds, notes, treasury bills or
other securities constituting direct obligations of, or fully guaranteed by, the
United States of America (and provided, further, that such direct obligations or
guarantees, as the case may be, are entitled to the full faith and credit of the
United States of America) maturing on or before the Closing Date or in an
interest bearing account at such financial institution as may be approved by
Purchaser. Purchaser shall pay any income taxes on all interest earned on the
Escrow Deposit and paid or credited to Purchaser.
2.5 Purchase Price Allocation. As described in Section 2.2, Purchaser
-------------------------
shall pay to HHR, on behalf of Sellers, for the sale, transfer, assignment,
conveyance and delivery of the Assets an amount equal to the Purchase Price. The
Purchase Price shall be reasonably allocated in accordance with an allocation
schedule to be determined by HHR in its reasonable discretion, a copy of which
shall be given to Purchaser at least seven (7) days prior to the Closing Date
and then attached to this Agreement as Schedule 2.5. Unless otherwise agreed in
writing by Purchaser and HHR, Purchaser and Seller shall (a) reflect the Assets
in Purchaser's books and for tax reporting purposes in accordance with such
allocation, (b) file all forms required under Section 1060 of the Code and all
other tax returns and reports in accordance with and based upon such allocation
and (c) unless required to do so in accordance with a "determination" as defined
in Section 1313(a)(1) of the Code, take no position in any tax return, tax
proceeding, tax audit or otherwise which is inconsistent with such allocation.
9
<PAGE>
2.6 Assumed Liabilities. In addition to the payments to be made by
-------------------
Purchaser pursuant to Section 2.3, but subject to the terms and conditions
contained in this Agreement, Purchaser shall assume the Assumed Liabilities on
the Closing Date pursuant to the Assumption Agreement. If Purchaser reasonably
determines that the aggregate amount required to be paid by Purchaser with
respect to the Assumed Liabilities owed by Sellers to General Electric Capital
Corporation, Textron Financial Corporation, Advanta Business Services
Corporation (Advanta Leasing Corporation), and the Small Business Administration
is less than $250,000, then Purchaser shall pay to HHR, on behalf of Sellers,
one-half of the amount by which $250,000 exceeds the amount required to be paid
by Purchaser, which payment shall be made upon the later to occur of the Closing
Date or seven (7) days after such determination. Purchaser shall use reasonable
efforts to make the foregoing determination as soon as practicable.
2.7 Remaining Liabilities of Seller. Notwithstanding anything to the
-------------------------------
contrary in this Agreement, Purchaser is not assuming, and shall not be
responsible for, any indebtedness, liabilities or obligations of Sellers,
whether fixed, contingent or otherwise, or whether arising before or after the
filing of the Bankruptcy Proceedings, except for the Assumed Liabilities. All
indebtedness, liabilities and obligations of Sellers, other than the Assumed
Liabilities, shall remain the indebtedness, liabilities and obligations of
Sellers and Sellers shall satisfy such indebtedness, liabilities and obligations
in accordance with the Plan of Reorganization, as otherwise required by law, an
order of the Bankruptcy Court or as otherwise provided in this Agreement. The
liabilities not assumed by Purchaser hereunder and for which Seller shall be
responsible include, without limitation, the following: (a) any liability
arising under or in connection with any lease, contract, commitment or agreement
not included in Assumed Liabilities or not specifically listed as a Third-Party
Contract on Schedule 6.14 hereto or, if listed thereon (or entered into after
the date hereof with the consent of Purchaser), which arise due to breach or
nonperformance by Sellers of their obligations thereunder or which arise or
accrue prior to the Closing Date; (b) any post-Closing Date liability in excess
of $250,000 in the aggregate with respect to the obligations of Sellers to
General Electric Capital Corporation, Textron Financial Corporation, Advanta
Business Services Corporation (Advanta Leasing Corporation), and the Small
Business Administration; (c) all contingent liabilities for acts or omissions of
Sellers, their officers, directors, agents and employees, including any
liability or obligation arising out of any alleged breach of any lease contract,
permit or agreement to the extent the same is not an Assumed Liability; (d)
payment and performance of all trade payables, notes, accounts payable, debts,
demands, agreements, arrangements, understandings, claims, litigation,
obligations, or liabilities to the extent the same is not an Assumed Liability;
(e) severance payments and any other liability of Sellers to their employees,
contractors or agents pursuant to the Worker Adjustment Retraining and
Notification Act or other applicable law or regulation, or for salaries,
compensation, vacation, sick pay, severance, bonus, profit sharing, pension or
other employee benefits or compensation relating to or based on service to
Sellers; (f) all taxes accruing from Sellers' business or the operation of the
Restaurants prior to the Closing Date, including, without limitation, federal,
state and local taxes based upon or measured by Sellers' income, any sales, use
or other taxes imposed on or collectable by Sellers based upon the sale of goods
and services or other transactions and any real or personal property taxes; (g)
any claim asserted against Sellers from an act or
10
<PAGE>
omission occurring prior to the Closing Date, whether such claim is in contract,
tort, violation of law or otherwise, to the extent the same is not part of the
Assumed Liabilities; and (h) any other liability or obligation of Sellers which
is not part of the Assumed Liabilities.
2.8 Taxes. Sellers shall be responsible for the payment of any transfer,
-----
sales, use or other taxes imposed by reason of the transfer of the Assets
pursuant to the Agreement (and any interest or penalty payable with respect to
such taxes). Sellers shall cause all such amounts to be paid as and when due
under applicable law and shall provide Purchaser with evidence satisfactory to
it that all such amounts have been paid.
ARTICLE 3
ESCROW
------
3.1 Opening Escrow. Immediately upon the execution hereof by Purchaser and
--------------
by Sellers, the parties shall deposit an original counterpart of this Agreement
with the Escrow Agent.
3.2 Escrow Instructions. The parties hereto agree that this Agreement,
-------------------
together with the General Provisions of Escrow Agent attached hereto as Exhibit
A, shall constitute the escrow instructions for the transfer of the Assets (the
"Escrow Instructions"). In the event of a conflict between the General
Provisions of Escrow Agent attached hereto as Exhibit A and the terms of this
Agreement (exclusive of Exhibit A) then the terms of this Agreement (exclusive
of Exhibit A) shall control. If any requirements relating to the duties or
obligations of the Escrow Agent hereunder are not acceptable to the Escrow
Agent, or if the Escrow Agent requires additional instructions, the parties
agree to make such deletions, substitutions and additions to the Escrow
Instructions as counsel for Purchaser and HHR shall mutually approve and which
do not substantially alter this Agreement or its intent.
3.3 Close of Escrow.
---------------
(a) The Escrow shall close on the Closing Date. As used in this
Agreement, "Close of Escrow" shall mean the time the Grant Deeds are recorded in
the Official Records of Los Angeles County, California.
(b) Provided that Escrow Agent has not received from either party
hereto written notice of the failure of any condition precedent specified in
Article 9 or 10 to the obligations of such party, then, when Purchaser and
Sellers have each deposited into the Escrow the documents, instruments and funds
required thereof by this Agreement and Escrow Agent can and will issue the Title
Policy concurrently with the Close of Escrow, Escrow Agent shall:
(i) prepare Escrow closing statements for Purchaser and for
Sellers based on the Preliminary Closing Statement;
11
<PAGE>
(ii) insert the Closing Date as the date of any document to be
delivered through Escrow but not theretofore dated;
(iii) deliver the Grant Deeds to Purchaser by causing them to be
recorded in the Official Records of Los Angeles County, California;
(iv) deliver to Purchaser: the Bill of Sale, General Assignment,
Non-Foreign Status Certificate, any other document required to be deposited
into the Escrow for delivery to Purchaser at the Close of Escrow, and any
funds deposited by Purchaser in excess of the amount required under Section
2.3(b) to be paid by Purchaser at the Close of Escrow;
(v) deliver to HHR: (A) all sums to be received by Sellers from
Purchaser through Escrow at the Close of Escrow less the sum of (I) all
amounts to be paid by Sellers, if any, pursuant to Section 3.4 for Escrow
Agent's fees and expenses, and (II) the amount to be withheld as described
in Section 13.1, if any; and (B) the stock certificate evidencing the
issuance of 150,000 Shares to HHR (less certificates evidencing the Liquor
License Holdback, if any), the General Assignment, the Assumption Agreement
and any other document required to be deposited into the Escrow for
delivery to HHR at the Close of Escrow; and
(vi) cause the Title Policy to be issued.
3.4 Costs of Escrow. Costs of the Escrow shall be allocated as follows:
---------------
(a) Purchaser shall pay the Escrow fees.
(b) Sellers shall pay the fees for recording the Grant Deeds, all
documentary transfer taxes, if any, imposed upon the conveyance of the Real
Property to Purchaser and the cost of the Title Policy (except, if applicable,
for any portion of the premium which is in excess of the premium for a CLTA
Standard Coverage owner's policy of title insurance).
(c) Purchaser shall pay, if applicable, the portion of the premium
for the Title Policy which is in excess of the premium for a CLTA Standard
Coverage owner's policy of title insurance.
(d) Except as otherwise expressly provided herein, any other costs
incurred through the Escrow shall be apportioned in the manner customary in
escrows of Escrow Agent in Los Angeles County, California.
(e) Notwithstanding anything to the contrary, if the Escrow fails to
close on the Closing Date for any reason whatsoever, including, without
limitation, a failure of a condition precedent set forth in Article 9 or 10, the
Escrow costs (including, without limitation, Escrow cancellation fees) shall be
borne by the party (if any) in material breach of this Agreement, or, if neither
or both Purchaser and Sellers are in material breach, said
12
<PAGE>
costs shall be divided equally between Purchaser on the one hand and Sellers on
the other hand.
3.5 Other Costs. Except as otherwise expressly provided to the contrary
-----------
herein, each party shall pay all of its own legal, accounting and consulting
fees and all other costs and expenses incurred in connection with the
transaction contemplated by this Agreement.
3.6 Preparation of Preliminary and Final Closing Statements. The parties
-------------------------------------------------------
hereto authorize the Accountants to examine and audit the books and records of
the Restaurants and the Assets, to such extent as the Accountants may deem
necessary in order to make the prorations required under Section 3.7. Based upon
such preliminary examination and audit, the Accountants will prepare and, three
(3) days prior to the Closing Date, deliver to each of the parties a
"Preliminary Closing Statement" (herein so called), which will show the net
amount due as a result of such prorations either to Sellers or to Purchaser, and
such net amount will be added to, or subtracted from the payment of the cash
balance of the Purchase Price to be paid to HHR on behalf of Sellers pursuant to
Section 2.3. Within forty-five (45) days following the Closing Date, the
Accountants shall deliver an "Accountants' Closing Statement" (herein so called)
to each of the parties setting forth its final determination of all prorations
to be made pursuant to the Agreement. If Purchaser or HHR object to the
Accountants' Final Statement, the objecting party shall notify the other party
of such objection within fifteen (15) days following the receipt of the
Accountants' Final Statement. Such objections shall be resolved by mutual
agreement or by the Bankruptcy Court. (If no objections to the Accountants'
Final Statement are brought within the time period set forth above, the
Accountants' Final Statement shall constitute the "Final Closing Statement." If
objections are brought in a timely manner, the "Final Closing Statement" shall
refer to the statement as corrected to reflect the resolution of all
objections.)
Within ten (10) days following the Final Settlement Date, the net amount
due Purchaser by reason of adjustments in the Preliminary Closing Statement as
shown in the Final Closing Statement shall be paid in cash to Purchaser by
Committee Counsel from the Holdback Amount, and the balance of the Holdback
Amount shall be paid to HHR on behalf of Sellers. If the net amount due to
Sellers by reason of adjustment in the Preliminary Closing Statement as shown in
the Final Closing Statement exceeds the Holdback Amount, then, within ten (10)
days following the Final Settlement Date, Committee Counsel shall pay the
Holdback Amount to HHR on behalf of Sellers and Purchaser shall pay such net
amount in excess of the Holdback Amount to HHR on behalf of Sellers. The
Holdback Amount shall not be applied to any claims of Purchaser other than as
described in the Final Closing Statement.
3.7 Prorations. The following matters and items shall be apportioned on an
----------
accrual basis as of the Cut-off Time between Purchaser and Sellers:
(a) Taxes and Assessments. All ad valorem taxes, special or general
---------------------
assessments, and real and personal property taxes. If the amount of any such
item is unascertainable on the Closing Date, the credit therefor shall be based
on the most recent
13
<PAGE>
available bill. If the actual amount of any such item, when later determined,
and prorated for the applicable period, differs from the credit given therefor
on the Preliminary Closing Statement, the parties shall promptly make the
appropriate adjustment pursuant to the Final Closing Statement, and the party
owning sums by reason of such adjustment shall promptly remit such sums to the
other party.
(b) Utility Contracts. Telephone contracts and contracts for the
-----------------
supply of heat, steam, electric power, gas, lighting and any other utility
service. At Purchaser's option, cut-off readings will be secured for all
utilities as of the Cut-off Time.
(c) Third-Party Contracts. Any amounts prepaid or payable under any
---------------------
Third-Party Contracts.
ARTICLE 4
OTHER AGREEMENTS
----------------
4.1 Expedited Process. As a material inducement for Purchaser to enter
-----------------
into this Agreement, Sellers acknowledge that Purchaser has expressed its need
to consummate the transaction contemplated herein as expeditiously as possible.
Purchaser has been advised that Sellers, Banque Paribas and the Committee have
agreed to utilize their reasonable efforts to expedite the sale process so that
the Sale Motion is heard no later than April 18, 1997. Based upon the foregoing,
Sellers and Purchaser have agreed to an expedited process for a hearing before
the Bankruptcy Court on the Overbid Motion, so that the hearing on the Sale
Motion can take place by April 18, 1997. Sellers shall file, by March 21, 1997,
and serve by March 20, 1997, an emergency motion to have the Overbid Motion
heard prior to March 28, 1997, and to have the hearing on the Sale Motion take
place no later than April 18, 1997, and timely notice thereof filed and served
by March 28, 1997. If the Bankruptcy Court does not approve such emergency
motion, then the hearing dates for the Overbid Motion and the Sale Motion, and
the filing and serving dates required with respect thereto, described in
Sections 4.2 and 4.3, respectively, shall apply and remain in full force and
effect. Nothing set forth herein shall affect the agreement of Sellers and
Purchaser herein that if the Bankruptcy Court does not approve the overbid
procedures and break-up fee set forth in the Overbid Motion, whether at an
expedited or other hearing, Purchaser has no obligation whatsoever to proceed
with the transaction contemplated herein, shall receive its $1,000,000 retained
in its counsel's trust account, and neither the Sellers nor the Purchaser shall
have any continuing obligations or liability to the other.
4.2 Overbid Motion. On or before March 25, 1997 (or such earlier date
--------------
described in Section 4.1), Sellers shall file with the Bankruptcy Court a motion
(the "Overbid Motion"), in form and content satisfactory to Purchaser's
bankruptcy counsel, seeking approval of the following with respect to the sale
of the Assets at a hearing to be held on or before April 18, 1997 (or such
earlier date described in Section 4.1):
(a) Minimum Overbid Protection. Sellers shall not accept, nor be
--------------------------
required to accept, any bid or combination of bids ("Overbid"), except for a
qualifying overbid, by any
14
<PAGE>
overbidder ("Overbidder") for the sale of less than all of the Assets. For
purposes of this Agreement, a qualifying Overbid(s) must meet the following
terms and conditions:
(i) Five (5) days prior to any hearing on the sale, all
potential Overbidders, in order to qualify, must deposit with HHR a
$1,000,000 cash deposit. Such deposit will be non-refundable and credited
toward the purchase price if such Overbidder is the successful bidder, or
will serve as liquidated damages if such Overbidder is the successful
bidder but defaults in the purchase of the Assets.
(ii) The initial Overbid must exceed the Purchase Price by at
least $600,000, must contain at least a $9,700,000 cash component and must
include the assumption of all of the Assumed Liabilities (other than up to
any three (3) Third-Party Contracts with respect to Leased Real Property
and all Third-Party Contracts relating to the ownership or operation of the
Restaurants associated therewith other than the Third-Party Contracts with
General Electric Capital Corporation, Textron Financial Corporation,
Advanta Business Services Corporation (Advanta Leasing Corporation) and the
Small Business Administration).
(iii) After the initial Overbid, all Overbids must be in the
minimum incremental amount of $100,000 in cash or cash equivalent.
(iv) The Overbid must seek to acquire all of the Assets, on
terms and conditions not less favorable to Sellers than the terms and
conditions set forth herein.
(v) All Overbidders must demonstrate, on or before five (5)
days prior to the hearing on the Sale Motion, their financial
qualifications to HHR's sole satisfaction.
(b) Break-up Fee. Sellers shall pay a "break-up fee" to Purchaser if
------------
Purchaser is ultimately not the successful purchaser of the Assets by reason of
the Bankruptcy Court's approval of a qualifying Overbid. The amount of the
break-up fee shall be $350,000 plus ten percent (10%) of the amount of the
successful Overbid in excess of the initial Overbid, payable out of the
successful Overbidder's deposit upon entry of the Bankruptcy Court's order
approving the sale to such Overbidder. The Bankruptcy Court's order approving
the Overbid Motion shall specifically authorize the payment of the "break-up"
fee to Purchaser referred to in the preceding sentence.
4.3 Sale Motion. On or before March 28, 1997 (or such earlier date
-----------
described in Section 4.1), Sellers shall file with the Bankruptcy Court a motion
(the "Sale Motion") under Sections 363 and 365 of the Bankruptcy Code and Rules
6004 and 6006 of the Federal Rules of Bankruptcy Procedure, seeking approval of
this Agreement and the transaction described herein at a hearing to be held on
or before May 5, 1997 (or such earlier date described in Section 4.1), and
authorizing the sale of the Assets to Purchaser free and clear of all
Encumbrances (other than the Assumed Liabilities) and the payment of all of
Sellers' obligations hereunder without further court order. The form and
substance
15
<PAGE>
of the Sale Motion and the proposed order with respect thereto shall be subject
to the reasonable approval of Purchaser and Purchaser's bankruptcy counsel prior
to filing with the Bankruptcy Court. Sellers and Purchaser shall use their
reasonable best efforts to cooperate and make such filings and take such other
actions as are reasonably necessary to cause the Bankruptcy Court to enter such
proposed order.
4.4 Third-Party Contracts Not Accepted by Purchasers. Notwithstanding
------------------------------------------------
anything to the contrary contained in this Agreement, Purchaser may elect, at or
before the hearing on the Overbid Motion, not to accept an assignment of up to
any three (3) Third-Party Contracts with respect to Leased Real Property and all
Third-Party Contracts relating to the ownership or operation of the Restaurants
associated therewith (other than the Third-Party Contracts with General Electric
Capital Corporation, Textron Financial Corporation, Advanta Business Services
Corporation (Advanta Leasing Corporation) and the Small Business
Administration), in which event the Seller who is a party to such Third-Party
Contract shall reject said Third-Party Contracts or assume and assign the same
to another Person at such Seller's option. Thereafter, Purchaser may only
decline to accept Third-Party Contracts with the consent of the Seller who is a
party to such Third-Party Contract and the Committee, in which event such Seller
shall reject said Third-Party Contract or assume and assign the same to another
Person, at such Seller's option. There will be no adjustment in the Purchase
Price if Purchaser declines to accept any Third-Party Contract and any Seller
thereafter rejects or assumes and assigns any of such Third-Party Contracts to a
Person other than Purchaser.
4.5 Administrative Claims. Sellers represent, acknowledge and agree that
---------------------
all amounts which they are obligated to pay to, or for the benefit of, Purchaser
under this Agreement are administrative claims under Bankruptcy Code Section
503(b) which are provided priority treatment under Bankruptcy Code Section
507(a)(1); provided, however, that this Section shall have no effect on the
classification or priority afforded to obligations of the Sellers (other than as
described in Section 2.8 or Section 3.4) to third parties.
4.6 Price Protection. As soon as reasonably practical after the Valuation
----------------
Date (but not later than forty-five (45) days after the Valuation Date), if the
Fair Market Value of a Share is less than $11.67, Purchaser shall, at its
election either, pay cash to HHR, issue additional Shares to HHR, or any
combination thereof, such that the sum of (a) the 150,000 Shares multiplied by
the Fair Market Value of a Share, (b) the additional Shares, if any, to be
issued under this Section 4.6 multiplied by the Fair Market Value of a Share,
and (c) the cash, if any, to be paid under this Section 4.6, shall equal
$1,750,000 in the aggregate; provided, however, that (i) if HHR has sold,
assigned or otherwise transferred any of the 150,000 Shares prior to the
Valuation Date (other than a transfer by HHR, a disbursing agent or a Chapter 11
trustee in bankruptcy pursuant to the Plan of Reorganization consistent with
Section 1145 of the Bankruptcy Code or to or from a Chapter 7 trustee in
bankruptcy pursuant to applicable law, specifically including securities laws
and regulations, which transfers are expressly not subject to this clause (i)),
no payment of cash or issuance of Shares shall be required under this Section
4.6 with respect to the Shares so transferred and the payment of cash or
issuance of Shares shall be proportionately reduced, and (ii) if Purchaser
increases or decreases the number of its issued and outstanding Shares, or
16
<PAGE>
changes in any way the rights and privileges of such Shares, by means of (A) the
payment of a stock dividend or the making of any other distribution on such
Shares payable in Shares, (B) a forward or reverse stock split or other
subdivision of Shares, (C) a consolidation or combination involving the Shares,
or (D) a reclassification or recapitalization involving the Shares, then the
valuation price of $11.67 and the number of Shares referred to in this Section
4.6 shall be proportionately adjusted. As an example of the occurrence described
in clause (i) above, if HHR had so transferred 37,500 Shares prior to the
Valuation Date, Purchaser's obligations under this Section 4.6 would be reduced
to paying cash or issuing additional Shares such that the sum of (a) 112,500
Shares multiplied by the Fair Market Value of a Share, (b) the additional
Shares, if any, to be issued under this Section 4.6 multiplied by the Fair
Market Value of a Share, and (c) the cash, if any, to be paid under this Section
4.6, shall equal $1,312,500 in the aggregate. As an example of the occurrence
described in clause (ii) above, if Purchaser were to declare a two-for-one
forward stock split or a 100% stock dividend, then the number of Shares subject
to this Section 4.6 (or 150,000 Shares) would be doubled (to 300,000) and the
valuation price of $11.67 would be reduced by 50% (to $5.835).
4.7 Registration Rights.
-------------------
(a) If at any time prior to the Outside Registration Date, Purchaser
proposes to register any shares of common stock under the Securities Act of 1933
as amended, in an underwritten public offering, for its own account or for the
account of any other selling shareholders, on any form ("Registration
Statement") other than S-8, S-4 or successor forms, Purchaser will give prompt
written notice to HHR and all Permitted Assignees holding Shares. HHR or any
such Permitted Assignee may notify Purchaser, in writing within fourteen (14)
days of receipt of such notice of the number of Shares, if any, that it desires
to include in such registration, and Purchaser shall use its best efforts to
cause such Shares to be included in such registration (subject to customary
reductions which shall apply to all parties (including Purchaser) participating
in the offering on a pro rata basis, if the managing underwriter notifies
Purchaser in writing that all Shares proposed to be sold cannot in fact be
sold). Notwithstanding the foregoing, Purchaser's obligations under this Section
4.7 are conditioned upon Purchaser's timely receipt from HHR or any Permitted
Assignee in writing of such information as Purchaser or its underwriters may
require for inclusion in the Registration Statement together with such sale
agreements as the managing underwriter may require for such Shares. Purchaser
shall bear all registration and filing fees, state blue sky fees, printing
expenses, and fees and disbursements of counsel and accountants for Purchaser in
connection with registering the Shares issued to HHR in connection with this
Agreement as well as up to $2,500 in fees and expenses of one counsel for HHR
and the Permitted Assignees registering Shares under this provision. HHR and
Permitted Assignees who register Shares under this provision shall bear the
portion of underwriting commissions, transfer taxes and the underwriter's
accountable and nonaccountable expense allowances attributable to the Shares
sold by them and all costs and expenses of their counsel in excess of $2,500.
Purchaser will, at all times following the Closing Date through the Outside
Registration Date, make such filings with the Securities and Exchange Commission
as are required to satisfy the requirements of Rule 144(c) or any successor
provision under the Rules promulgated pursuant to the Securities Act of 1933.
17
<PAGE>
(b) In connection with any such Registration Statement, Purchaser
shall indemnify Seller, Permitted Assignee and their respective affiliates,
officers, directors, shareholders, employees, agents, attorneys, registered
representatives, and control persons against any claims, losses, damages,
expenses or liabilities which Seller, Permitted Assignee or any of their
respective affiliates, officers, directors, shareholders, employees, attorneys,
accountants, agents, registered representatives, and control persons may incur
from any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, any prospectus contained therein, or
any amendment or supplement thereto, or which arise out of or are based upon the
omission or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading. Purchaser
will reimburse HHR, Permitted Assignee and their respective affiliates,
officers, directors, shareholders, employees, agents, attorneys, registered
representatives, and control persons for any legal or other expenses incurred by
each such person in connection with investigating or defending any such claim;
provided that Purchaser shall not be obligated to indemnify HHR, Permitted
Assignee or their respective affiliates, officers, directors, shareholders,
employees, attorneys, accountants, agents, registered representatives, and
control persons to the extent such claims arise out of or are based upon an
untrue statement or alleged untrue statement or omission or alleged omission so
made in conformity with information furnished in writing by HHR or Permitted
Assignee to Purchaser specifically for use in the Registration Statement.
(c) If HHR or any Permitted Assignee registers Shares in connection
with any such Registration Statement, HHR and each Permitted Assignee (as
applicable) shall indemnify Purchaser and its affiliates, officers, directors,
shareholders, employees, attorneys, accountants, agents, registered
representatives, and control persons against any claims which Purchaser or any
of its affiliates, officers, directors, shareholders, employees, attorneys,
accountants, agents, registered representatives, and control persons may incur
from any untrue statement or alleged untrue statement of material fact contained
in the Registration Statement, any prospectus contained therein, or any
amendment or supplement thereto, or which arise out of or are based upon the
omission or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, but only to
the extent that such claims arise out of or are based upon an untrue statement
or alleged untrue statement or omission or alleged omission so made in
conformity with information furnished in writing by HHR or any such Permitted
Assignee to Purchaser specifically for use in the Registration Statement.
4.8 Intellectual Property Rights. From and after the Closing Date, Sellers
----------------------------
shall cease using, or permitting any Person to use, any of the Intellectual
Property Rights in connection with the operations or the ownership of the
Excluded Assets or Excluded Restaurants; provided, however, that Sellers shall
be permitted to use their current corporate names as may be agreed to in writing
by Purchaser or in connection with pleadings or communications related to the
Bankruptcy Proceedings, and shall not be obligated hereunder to merge, dissolve
or otherwise cause a change in their corporate names by filing all necessary
documents with the applicable Secretary of State to amend their Certificates of
Incorporation or Articles of Incorporation, as the case may be, until the
earlier of (a) the date that the Plan of Reorganization has been confirmed by
the
18
<PAGE>
Bankruptcy Court or (b) September 30, 1997. Without limiting the foregoing,
(c) Sellers shall, as of the Closing Date, remove the trademarks being assigned
to Purchaser from all equipment, menus, uniforms, supplies, paper products,
chinaware, marketing materials, training materials, linens and stationery which
are not included in the Assets, or if such trademarks cannot be removed, either
destroy all such assets or, if agreed to by Purchaser, transfer such assets to
Purchaser at no cost to Purchaser and (d) following the Closing Date, all press
releases and public announcements made by Sellers (other than Bankruptcy Court
filings) shall reference Sellers as the former owners and operators of the
Restaurants.
4.9 Employees. All employees of Seller (other than the chairman and chief
---------
financial officer of HHR or its affiliates and the employees whose principal
site of employment is one of the Excluded Restaurants) shall be terminated by
Sellers as of the Cut-off Time and all of the employees whose principal site of
employment is one of the Restaurants, and substantially all of such other
employees, shall immediately be rehired as at-will employees by Purchaser at the
same level of compensation and with comparable benefits. In terminating such
employees, Sellers shall provide such notices and pay such amounts to such
employees as and when may be required under law or regulation or any employment
agreement, profit sharing or pension plan or other compensation arrangement to
which Seller is a party. Seller shall have no liability for any obligation of
Purchaser to the employees hired by Purchaser pursuant to the preceding sentence
solely relating to or based on services rendered by such employees to Purchaser
from and after the Closing Date, including any liability for salaries,
compensation, vacation, sick pay, severance, bonus, profit sharing, pension or
other employee benefits or compensation from and after the Closing Date. At
Purchaser's election, Purchaser shall either establish a comparable "401(k)"
plan for such employees or assume Sellers' existing "401(k)" plan.
4.10 Listing Application. Prior to Closing, Purchaser shall file an
-------------------
additional listing application with NASDAQ with respect to the Shares and shall
take such other action as may be necessary to cause the Shares to be listed on
NASDAQ as of the Closing Date.
4.11 Notice of Bankruptcy Motions. Sellers covenant that they will duly
----------------------------
serve notice of the Overbid Motion by March 28, 1997 (unless the Bankruptcy
Court grants the application to shorten time or the emergency motion described
in Section 4.1) on, at a minimum, Banque Paribas and the Committee through their
counsel, parties requesting special notice and the Office of the United States
trustee and duly serve notice of the Sale Motion by April 4, 1997 (or such
earlier date described in Section 4.1), on all of their claimants, creditors,
lien holders, interest holders, parties to Third-Party Contracts, parties
requesting special notice and the Office of the United States trustee and such
other Persons as may be required by applicable law. Sellers also shall provide
Purchaser, within one (1) business day of filing with the Bankruptcy Court, with
a copy of all pleadings or motions filed in the Bankruptcy Proceedings from the
date of the Agreement through the Closing Date which relate to this Agreement,
the operation of the Restaurants, the Assets or the Assumed Liabilities.
4.12 Management Agreement. Upon the request of Purchaser, Purchaser and the
--------------------
Sellers who hold the Liquor Licenses for the Restaurants located in Maryland and
Virginia
19
<PAGE>
shall, on or before the Closing Date, enter into a management agreement,
reasonably satisfactory to Purchaser and HHR, providing, among other things,
that (a) pending the issuance to Purchaser of liquor licenses for such
Restaurants, such Sellers and Purchaser will agree, to the maximum extent
permitted by Maryland or Virginia law, as the case may be, to an arrangement
permitting the sale of alcoholic beverages under Sellers' Liquor Licenses, (b)
Sellers shall not be required thereunder to make payments or provide any
services for which it does not receive reimbursement for its reasonable out-of-
pocket costs, (c) except to the minimum extent expressly required by Maryland or
Virginia law, as the case may be, no additional compensation shall be paid or
payable by Purchaser under such agreement, and (d) Purchaser shall indemnify
such Sellers against any damages or liability that they may incur by reason of
Purchaser operating under Sellers' Liquor Licenses (other than legal fees or
costs relating to the preparation and negotiation of such agreement).
4.13 Covenant Not to Sue Individuals. Except for a legal action relating to
-------------------------------
fraud, gross negligence, willful misconduct or violation of law, Purchaser
covenants that, following the Closing Date, it shall not bring any legal action
against Sellers' Chief Executive Officer (or Matthews & Associates, Inc.) or
Chief Financial Officer in their personal capacities with respect to this
Agreement. The parties agree that the preceding sentence shall not be deemed to
create any implication as to whether Purchaser has any claim or cause of action
with respect to such individuals except as expressly provided in this Agreement
or by law.
4.14 No Action to Delay Hearings. Sellers acknowledge that Purchaser is
---------------------------
entering into this Agreement with the express understanding that Sellers, Banque
Paribas and the Committee shall take all action reasonably necessary to request
the Bankruptcy Court to approve the emergency motion described in Section 4.1,
and to request the Bankruptcy Court to hear the Overbid Motion and the Sale
Motion no later than the respective dates described in this Agreement. Sellers
jointly and severally represent and warrant to, and covenant with, Purchaser
that no Seller shall take any action, or omit to take any action, which,
directly or indirectly, may result in the emergency motion described in Section
4.1 or the Overbid Motion not being approved or in any such hearings being taken
off calendar, postponed or otherwise delayed beyond the respective dates
described in this Agreement. For purposes of this Agreement, and without
limiting the foregoing, Sellers acknowledge and agree that any of the following
events shall also constitute a default of Sellers' obligation under this Section
4.14: (a) any Seller seeks to withdraw the emergency motion described in Section
4.1, the Overbid Motion or the Sale Motion, (b) any Seller encourages or
solicits any Person to take, or omit to take, any action except for overbids in
accordance with the procedures described in the Overbid Motion, which, directly
or indirectly, may result in any such hearing being so delayed, (c) the
Committee or Banque Paribas objects to the emergency motion described in Section
4.1, the Overbid Motion or the Sale Motion, or (d) the Committee or Banque
Paribas takes, or omits to take, any action (or encourages or solicits any
Person to take, or omit to take, any action) except for overbids in accordance
with the procedures described in the Overbid Motion, which, directly or
indirectly, may result in any such hearing being so delayed.
20
<PAGE>
ARTICLE 5
TITLE TO THE REAL PROPERTY; PERMITTED EXCEPTIONS
------------------------------------------------
5.1 Title Report. Purchaser acknowledges and agrees that it has received
------------
and approved the CLTA standard coverage preliminary title reports dated March 7,
1997 (the "Title Reports") attached as Exhibit B hereto and all exceptions
contained therein.
5.2 Title Policy.
------------
(a) Permitted Exceptions. Purchaser's title to the Real Property
--------------------
shall be insured by CLTA Standard Coverage owner policies of title insurance
(collectively, the "Title Policy") issued by the Escrow Agent, with liability in
the amount allocated to the Real Property on Schedule 2.5, showing fee simple
title to the Real Property vested in Purchaser, subject only to the following
items (which items are collectively referred to herein as "Permitted
Exceptions"):
(i) nondelinquent city, county and special district taxes and
special assessments, if any;
(ii) the printed exceptions and exclusions to be set forth in
the Title Policy;
(iii) the exceptions described on Schedule 5.2; and
(iv) such other matters as Purchaser shall have approved in
writing.
The Title Policy shall contain such endorsements as Purchaser shall elect,
which endorsements shall be at the sole cost and expense of Purchaser.
(b) ALTA Policy. Purchaser may request issuance by the Escrow Agent
-----------
of a Title Policy in the form of an ALTA Extended Coverage owner's policy of
title insurance with liability in the amount allocated to the Real Property on
Schedule 2.5; provided, however, that, in such event: (i) Purchaser shall be
solely responsible for paying any difference in premium or charge between the
title policy described in Subsection 5.2(a) above and the ALTA policy, if any,
issued, and for any survey and other costs associated with such ALTA policy; and
(ii) the issuance of the Title Policy as an ALTA Extended Coverage Policy shall
not be a condition precedent to Close of Escrow or to Purchaser's obligations
under this Agreement.
(c) Delivery of Title Policy. The Title Policy shall be effective at
------------------------
Close of Escrow and shall be delivered to Purchaser promptly thereafter.
21
<PAGE>
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF SELLER
----------------------------------------
Sellers hereby jointly and severally represent and warrant to Purchaser as
follows:
6.1 Status. Sellers are corporations duly incorporated, validly existing
------
and in good standing under the laws of the States of Delaware, California,
Maryland or Virginia and are qualified to do business and in good standing under
the laws of the States in which they are incorporated. Sellers have all
necessary corporate power and authority to own its properties and conduct its
business as it is presently being conducted pursuant to Sections 1107 and 1108
of the Bankruptcy Code.
6.2 Corporate Power and Authority; Due Authorization. Subject to
------------------------------------------------
Bankruptcy Court approval, each Seller has all necessary corporate power and
authority, and has taken all corporate action necessary to enter into this
Agreement and each of the documents referenced herein to which such Seller is or
will be a party and to consummate the transactions contemplated thereby. Each
Seller has duly authorized HHR to act on its behalf in connection with the
transactions contemplated hereunder and to receive, on its behalf, all notices,
deliveries and payments, to which such Seller may be entitled.
6.3 Enforceable. Upon entry of the Sale Order, this Agreement will have
-----------
been, and all documents referenced herein which are to be delivered by Sellers
at Closing will have been, duly executed and delivered by Sellers and constitute
legal, valid and binding obligations of Sellers enforceable against them in
accordance with their respective terms.
6.4 Title. Upon entry of the Sale Order, Sellers will have good and
-----
marketable title to and own the entire right, title and interest in and to the
right to use all of the Assets free and clear of all Encumbrances (other than
the Assumed Liabilities). On the Closing Date, Sellers shall transfer to
Purchaser such title to the Assets (other than Liquor Licenses and Other
Licenses which are not transferable) free and clear of all Encumbrances (other
than the Assumed Liabilities).
6.5 No Changes. (a) From December 31, 1996 through the date of this
----------
Agreement, there has not been, other than in the ordinary course of business or
approved by the Bankruptcy Court, any:
(i) transaction with respect to the Restaurants;
(ii) capital expenditures with respect to the Restaurants;
(iii) revaluation by Sellers of any assets relating to the
Restaurants.
(iv) increase in the salary or other compensation payable or to
become payable by Sellers to any of their officers, directors, or employees
with respect to the Restaurants, or the declaration, payment, or commitment
or obligation
22
<PAGE>
of any kind for the payment, by Sellers, of a bonus or other additional
salary or compensation to any such person; or
(v) sale or transfer of any Asset.
(b) Since December 31, 1996 there has not been any:
(i) material adverse change in the Assets or the financial
condition, liabilities, business, or prospects of the Restaurants;
(ii) destruction, damage to, or loss of any Asset (whether or
not covered by insurance) that materially and adversely affects the
financial condition, business, or prospects of the Restaurants;
(iii) commencement or notice or threat of commencement of any
civil litigation or any governmental proceeding against or investigation of
the Restaurants which would have a material adverse impact on the
Restaurants; or
(iv) labor trouble or claim of wrongful discharge or other
unlawful labor practice or action which would have a material adverse
impact on the Restaurants.
6.6 Availability and Condition of Assets. Except for Excluded Assets, the
------------------------------------
Assets, together with the Liquor Licenses and Other Licenses which are not
transferable, constitute all of the operating assets of the Restaurants and all
of the goodwill of the Restaurants including, without limitation, all of the
contractual rights, intangible rights, information, personal property, and other
items, information and things used or intended for use in the business and
operation of the Restaurants. The Assets constitute all assets which are
reasonably necessary to permit Purchaser to operate the Restaurants in the same
manner and to the same extent as now conducted by Sellers except for Liquor
Licenses and Other Licenses which may not be transferable. To the Best Knowledge
of Seller, the Assets are in usable condition (except for normal wear and tear)
and are suitable for their intended uses.
6.7 Equipment. Sellers have made available to Purchaser for its review and
---------
inspection all Equipment used or useful in the operation of the Restaurants
(whether or not located at a Restaurant) and all Administrative Material and
Equipment. The Administrative Material and Equipment described on Schedule 1.3
includes, among other things, all computer equipment, software, computer
records, related manuals, diskettes and other office equipment (exclusive of
furniture or fixtures) used by employees of Sellers (other than Sellers' Chief
Executive Officer or Chief Financial Officer) at Sellers' corporate offices.
Except for Assets leased pursuant to Third-Party Contracts described on Schedule
6.14, no personal property used by Sellers in connection with the Restaurants
and no Administrative Material and Equipment is held under any lease, security
agreement, conditional sales contract or other titled retention or security
arrangement, or is located other than in the possession of Sellers at the
Restaurants.
23
<PAGE>
6.8 Inventory. Sellers have made available to Purchaser for its review and
---------
inspection all Inventory. As of the Closing Date the Inventory will consist only
of items which are of a quality usable in the ordinary course of business. On
the Closing Date, Inventory at each Restaurant will be sufficient to operate the
Restaurant normally for three (3) days, except for perishable items which must
be purchased on a daily basis, which will be sufficient for one (1) day of
normal operations at each Restaurant.
6.9 Intellectual Property Rights. A true and complete list of all
----------------------------
Intellectual Property Rights is set forth in Schedule 6.9. To the Best Knowledge
of Seller, no infringement of any trademark, trade name, service mark, or
copyright or registration thereof or any proprietary right of any kind has
occurred or results in any way in from the ownership or use of the Intellectual
Property Rights or the operation of the Restaurants. To the Best Knowledge of
Seller, (i) no claim or threat of any such infringement has been made with
respect with any of the Intellectual Property Rights, (ii) no claim of
invalidity of Sellers' ownership of or right to use any of the Intellectual
Property Rights has been made and (iii) no proceedings are pending or
threatened, which challenge the validity or ownership of any of the Intellectual
Property Rights or Sellers' use thereof and Sellers know of no infringing use of
any of the Intellectual Property Rights by others.
6.10 Lease Deposits. Schedule 6.10 sets forth a true and correct list of
--------------
all Lease Deposits.
6.11 Liquor Licenses and Other Licenses. Schedule 6.11 sets forth a true
----------------------------------
and correct list of all Liquor Licenses used in connection with the Restaurants,
and, to the Best Knowledge of Seller, of all Other Licenses.
6.12 Restaurant Records and Documents. Sellers have made available to
--------------------------------
Purchaser, and shall continue to make available to Purchaser prior to the
Closing, true and correct copies of all Restaurant Records and Documents and
financial statements and insurance policies relating to the operation of the
Restaurants.
6.13 Petty Cash. The Petty Cash on hand at the Restaurants as of the Cut-
----------
off Time, and which shall be transferred to Purchaser on the Closing Date, shall
consist of at least the amounts set forth on Schedule 6.13.
6.14 Third-Party Contracts. Except as described on Schedule 6.14, (a) all
---------------------
Third-Party Contracts are listed in Schedule 6.14 as well as all monetary
defaults thereunder, both pre-Bankruptcy Proceedings and arising on or after the
commencement of the Bankruptcy Proceedings; (b) each of the Third-Party
Contracts described in Schedule 6.14 constitutes the valid and binding
obligation of the Seller thereto and the other parties thereto, is in full force
and effect and may, subject to Bankruptcy Court approval, be assumed by such
Seller and assigned to Purchaser pursuant to this Agreement and will continue in
full force and effect thereafter, in each case without breach of the terms
thereof or resulting in the forfeiture or impairment of any rights thereunder
and without the consent, approval or act of, or the making of any filing with
any other party other than the approval of the other party to said Third Party
Contract or an order of the Bankruptcy Court approving the
24
<PAGE>
assignment and assumption of said Third-Party Contract to Purchaser; and (c)
other than by reason of defaults on the commencement of the Bankruptcy
Proceeding, Sellers are not, nor alleged to be in, material breach or default
under, nor is there alleged to be any basis for termination of, any of the
Third-Party Contracts and, to the Best Knowledge of Seller, no other party to
any of the Third-Party Contracts has breached or defaulted thereunder, and no
event has occurred which, with the passage of time, or the giving of notice or
both, would constitute a material default or breach by Sellers or, to the Best
Knowledge of Seller, by any other party. True and complete copies of each of the
Third-Party Contracts (including all amendments or modifications thereto) have
been made available to Purchaser by Sellers.
6.15 Taxes. Seller will file all required federal, state, county and local
-----
income, excise, withholding, property, sales, use, franchise, and other tax
returns which are required to be filed with respect to taxes for all periods
through the Closing Date and pay all amounts required to be paid thereunder as
and when due pursuant to the Plan of Reorganization or as otherwise required by
law or order of the Bankruptcy Court.
6.16 Compliance With Law. (a) Sellers have not received notice that the
-------------------
Assets are not in compliance with all applicable laws, ordinances, regulations,
rules or orders. With respect to the operation of the Restaurants, to the Best
Knowledge of Seller, Sellers have complied in all material respects with all
applicable laws, ordinances, regulations, rules or orders relating to the
operation of the Restaurants as presently conducted.
(b) Without limiting the foregoing, to the Best Knowledge of Seller,
Sellers have complied in all material respects with all federal, state, and
local environmental protection laws and regulations with respect to the
Restaurants and has not been cited for any violation of any such law or
regulation which would have a material adverse effect on the Restaurants. With
respect to the Real Property, the Restaurants and the Assets, to the Best
Knowledge of Seller, there is no pending audit by any federal, state, or local
governmental authority with respect to groundwater, soil, or air monitoring; the
storage, burial, release, transportation, or disposal of hazardous substances;
or the use of underground storage tanks by or relating to the Real Property.
Sellers do not have any agreement with any third party or federal, state, or
local governmental authority relating to any such environmental matter or any
environmental cleanup.
(c) With respect to the Real Property, the Restaurants and the
Assets, to the Best Knowledge of Seller, Sellers have complied with all
requirements of the Occupational Safety and Health Act and its state or local
equivalents and regulations promulgated under any such legislation, the
consequences of a violation of which could have a material adverse effect on the
operation of the Restaurants, and with all orders, judgments, and decrees of any
tribunal under such legislation that apply to the Restaurants.
(d) To the Best Knowledge of Seller, neither the Real Property nor
the land subject to any Leased Real Property, nor any buildings, structures or
improvements thereon are in violation of any zoning, use, parking, building,
fire, environmental or other regulatory laws, ordinances or regulations which
would have a material adverse effect on
25
<PAGE>
the Restaurants and Sellers have received no written notice of any violation or
alleged violation thereof. To the Best Knowledge of Seller, no governmental
authority has issued or threatened to issue any notice or order with respect to
the Real Property or Leased Real Property as presently utilized which would have
a material adverse effect on the Restaurants. To the Best Knowledge of Seller,
there are no condemnation or eminent domain proceedings pending, threatened or
contemplated against the written notice of the desire of any public authority or
government entity to take or use the Leased Real Property, the Real Property or
any part thereof.
6.17 Employees. Sellers have made available to Purchaser a true and correct
---------
list of the names, addresses, telephone numbers, social security numbers,
compensation and job title or description of all employees who render services
at, or for, the Restaurants or will otherwise be hired by Purchaser in
accordance with Section 4.9.
6.18 Employment Contracts. With respect to the Restaurants, Sellers have
--------------------
entered into no employment contracts which shall survive the Closing Date or
collective bargaining agreements. Sellers have made available to Purchaser true
and correct copies of all pension, bonus, profit-sharing, stock option, or other
agreements or arrangements providing for employee remuneration or benefits to
which Sellers are a party or by which Sellers are bound with respect to the
Restaurants or its other employees who will be hired by Purchaser in accordance
with Section 4.9. All these contracts and arrangements are in full force and
effect, and neither Sellers nor, to the Best Knowledge of Seller, any other
party is in material default under them, either pre-Bankruptcy Proceedings or
arising from or after the commencement of the Bankruptcy Proceedings. There have
been no claims of defaults and, to the Best Knowledge of Seller there are no
facts or conditions that if continued, or on notice, will result in a default
under these contracts or arrangements. There is no pending or, to the Best
Knowledge of Seller, threatened labor dispute, strike, or work stoppage
affecting the Restaurants. Sellers have complied with all applicable laws, which
would have a material adverse effect on the Restaurants, for each of its
Restaurant's employee benefit plans, including the provisions of the Employee
Retirement Income Security Act if and to the extent applicable. There are no
pending, or, to the Best Knowledge of Seller, threatened claims by or on behalf
of any such benefit plan, by or on behalf of any employee covered under any such
plan, or otherwise involving any such benefit plan, that allege a breach of
fiduciary duties or violation of other applicable state or federal law, nor is
there, to the Best Knowledge of Seller, any basis for such a claim.
6.19 Securities Representations. With respect to the issuance of the Shares
--------------------------
by Purchaser to HHR, HHR hereby represents and warrants as follows:
(a) Sophisticated Investor; Investment Intent. HHR is an "accredited
-----------------------------------------
investor" as defined in Regulation D of the Securities Act of 1933, as amended
(the "Act"). HHR, by reason of its business and financial experience or together
with its advisors, have sufficient knowledge and experience in financial and
business matters to enable them to evaluate the merits and risks of this
Agreement and the transactions contemplated hereby. HHR is acquiring the Shares
for its own account for an investment intent and not with a view to engage in,
or for sale in connection with, any distribution thereof and otherwise
26
<PAGE>
without a present intent of transferring or otherwise disposing of such Shares,
except in compliance with the Act or the Plan of Reorganization.
(b) No Advertising. HHR has not seen, received, been presented with,
--------------
or been solicited by any leaflet, public promotional meeting, newspaper or
magazine article or advertisement, radio or television advertisement, or any
other form of advertising or general solicitation with respect to the sale of
the Shares.
(c) No Registration of Shares. HHR acknowledges that the Shares have
-------------------------
not been registered under the Act, or qualified under the California Corporate
Securities Law of 1968, as amended, or any other applicable blue sky laws in
reliance, in part, on its representations, warranties, and agreements herein.
(d) Shares are Restricted Security. HHR understands that the Shares
------------------------------
are a "restricted security" under the Act in that the Shares will be acquired
from Purchaser in a transaction not involving a public offering, and that the
Shares may be resold without registration under the Act only in certain limited
circumstances and that otherwise the Shares must be held indefinitely. In this
connection, HHR understands the resale limitations imposed by the Act and are
familiar with Securities and Exchange Commission ("SEC") Rule 144 ("Rule 144"),
as presently in effect, and the conditions which must be met in order for Rule
144 to be available for resale of "restricted securities," including the
requirement as of Closing that the securities must be held for at least one (1)
year after purchase thereof from Purchaser prior to resale and the condition
that there be available to the public current information about Purchaser under
certain circumstances.
(e) No Disposition in Violation of Law. Without limiting the
----------------------------------
representations set forth above, neither HHR nor any Permitted Assignee will
make any disposition of all or any part of the Shares which will result in the
violation by any of them or by Purchaser of the Act, the California Corporate
Securities Law of 1968, or any other applicable securities laws. Without
limiting the foregoing, HHR and any Permitted Assignee agree not to make any
disposition of all or any part of the Shares unless and until:
(i) There is then in effect a registration statement under the
Act covering such proposed disposition and such disposition is made in
accordance with such registration statement and any applicable requirements
of state securities laws; or
(ii) In the case of any disposition of all or any part of the
Shares pursuant to Rule 144, HHR or a Permitted Assignee, as the case may
be, shall promptly forward to Purchaser a copy of any Form 144 filed with
the SEC with respect to such disposition and a letter from the executing
broker reasonably satisfactory to Purchaser evidencing compliance with Rule
144. If Rule 144 is amended or if the SEC's interpretations thereof in
effect at the time of any such disposition have changed from its present
interpretations thereof, HHR or a Permitted Assignee, as the case may be,
shall provide Purchaser with such additional documents as Purchaser may
reasonably require.
27
<PAGE>
(f) Legends. HHR understands that the certificate evidencing the
-------
Shares may bear one or more legends regarding restrictions on the transfer of
such certificate.
(g) Information Reviewed. HHR has received and reviewed a copy of
--------------------
Purchaser's Form 10-K for its fiscal year ended December 31, 1995, Form 10-Q for
its fiscal quarter ended September 30, 1996, other documents, and all other
information it considers necessary or appropriate for deciding whether to accept
the Shares. HHR has had an opportunity to ask questions and receive answers from
Purchaser and its officers and employees regarding the terms and conditions of
purchase of the Shares and regarding the business, financial affairs, and other
aspects of Purchaser and has further had the opportunity to obtain all
information (to the extent Purchaser possesses or can acquire such information
without unreasonable effort or expense) which HHR deems necessary to evaluate
the investment and to verify the accuracy of information otherwise provided to
them.
6.20 No Brokers. No Seller is a party to any agreement with any person
----------
(other than Arthur Andersen) which would or may result in an obligation to pay
any finder's fee, brokerage commission or similar payment in connection with the
transaction contemplated by this Agreement.
6.21 Disclosure. No covenant, representation or warranty by any Seller and
----------
no written certificate furnished or to be furnished by any Seller pursuant to
the terms and conditions of this Agreement contains or will contain any material
misstatement of fact, or omits or will omit to state any material fact required
to be stated to make the statements contained therein not misleading.
ARTICLE 7
REPRESENTATIONS AND WARRANTIES OF PURCHASER
-------------------------------------------
Purchaser hereby represents and warrants to Sellers as follows:
7.1 Status. Purchaser is a corporation duly incorporated, validly existing
------
and in good standing under the laws of the State of Delaware. Purchaser is
qualified to do business and in good standing in all jurisdictions in which a
failure to be so qualified would have a material adverse effect on Purchaser.
7.2 Authorization. Purchaser has all necessary corporate power and
-------------
authority, and has taken all corporate action necessary, to enter into this
Agreement and each of the documents referenced herein to which Purchaser is or
will be a party and to consummate the transactions contemplated thereby.
7.3 Enforceable. This Agreement has been, and all documents referenced
-----------
herein which are to be delivered by Purchaser at Closing will be, duly executed
and delivered by Purchaser and constitute legal, valid and binding obligations
of Purchaser, enforceable against Purchaser in accordance with their respective
terms, except that the validity, binding
28
<PAGE>
effect or enforceability of this Agreement may be limited or otherwise affected
by (a) any bankruptcy, insolvency or other similar law affecting the enforcement
of creditors' rights and remedies generally or (b) principles of equity.
7.4 No Conflicts. The execution and delivery hereof and the performance by
------------
Purchaser of its obligations hereunder will not conflict with or violate its
Certificate of Incorporation, bylaws or any material terms or material
provisions of any agreement, document, instrument, judgment, order or decree to
which Purchaser is a party or by which Purchaser is bound.
7.5 Consents. No consent, approval or authorization of, or declaration,
--------
filing or registration with, any governmental authority or any other Person is
required to be made or obtained by Purchaser in connection with the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated by this Agreement.
7.6 Litigation. There is no action, claim, suit or other legal proceeding
----------
pending or, to the Best Knowledge of Purchaser, threatened against Purchaser
relating to or affecting the transactions contemplated by this Agreement.
7.7 No Brokers. Purchaser is not a party to any agreement with any Person
----------
(other than Libra Investments, Inc.) which would or may result in an obligation
to pay any finder's fee, brokerage commission or similar payment in connection
with the transact on contemplated by this Agreement.
7.8 Access. Although Purchaser has been provided access to the Assets and
------
information relating to the business, financial and other affairs of the
Restaurants (including, but not limited to, financial statements, accounting
records, customer lists, maintenance records and employee records), Purchaser,
in entering into this Agreement, is relying upon such information being true and
correct in all material respects.
7.9 Shares. The Shares to be delivered to HHR pursuant to this Agreement
------
have been duly authorized and, once issued and delivered in accordance with the
terms of this Agreement, will be validly issued, fully paid and non-assessable
and free and clear of any lien or other encumbrance upon issuance.
7.10 Financial Resources. Purchaser has adequate financial resources to
-------------------
make timely payment of all sums due from Purchaser hereunder and to perform all
of its obligations hereunder and pursuant to the Assumed Liabilities.
7.11 Disclosure of Sellers. To the actual knowledge of Purchaser's
---------------------
executive officers, Purchaser is not aware of any covenant, representation or
warranty by any Seller or any written certificate furnished or to be furnished
by any Seller pursuant to the terms and conditions of this Agreement which
contains any material misstatement of fact, or omits to state any material fact
required to be stated to make the statements contained therein not misleading.
29
<PAGE>
7.12 Hart-Scott-Rodino. No filing is required under the Hart-Scott-Rodino
-----------------
Act with respect to the purchase and sale of the Assets.
7.13 Disclosure. The covenants, representations and warranties by
----------
Purchaser, any written certificate furnished or to be furnished by Purchaser
pursuant to the terms and conditions of this Agreement, and the public filings
by Purchaser with the SEC do not contain or will contain any material
misstatement of fact, or omits or will omit to state any material fact required
to be stated to make the statements contained therein not misleading.
ARTICLE 8
COVENANTS
---------
Sellers, on the one hand, and Purchaser, on the other hand, each covenant
with the other as follows:
8.1 Maintenance of Assets Prior to Closing. Sellers shall prior to the
--------------------------------------
Closing Date (a) maintain the Assets in usable state of repair and (b) maintain
insurance covering the Assets similar to that in effect on December 31, 1996.
8.2 Investigation by Purchaser. Purchaser and each Representative of
--------------------------
Purchaser have conducted a due diligence review with respect to the Assets and
the operation of the Restaurants and have completed such review to their
satisfaction. In connection with making additional information available to
Purchaser, Sellers and each Representative of Seller shall, upon reasonable
prior notice, (a) cooperate with Purchaser and each Representative of Purchaser,
(b) make available all information, and all documents and other tangible items
containing or relating to such information, reasonably requested by Purchaser or
any Representative of Purchaser, and (c) permit Purchaser, and each
Representative of Purchaser, reasonable access to inspect, review, make copies
or abstracts of, or communicate with, as the case may be, all of Sellers' books
and records, employees and Restaurants during normal business hours; provided,
that access to and communications with employees at the Restaurants shall be
coordinated with, and conducted in the presence of, Sellers' designated
Representatives.
8.3 Reasonable Efforts. As soon as practicable, Purchaser and Sellers, as
------------------
applicable, shall commence all reasonable actions to obtain the Tax Clearance
Certificates, approvals for the transfer of the Liquor Licenses and Other
Licenses to the extent the same are transferable, and all other consents,
approvals, permits and agreements of, and to give all notices and make all
filings with, any Person as may be necessary to authorize, approve or permit on
or before the Closing Date the closing of the transaction contemplated by this
Agreement. Upon the request of Purchaser, Sellers also shall complete, execute
and file such documents as may be required for Purchaser to obtain temporary
liquor licenses as of the Closing for the Restaurants; provided, however, that
Sellers shall not be required to expend any funds solely in connection with such
documents.
30
<PAGE>
8.4 No Encumbrance or Transfer. During the period beginning on the date of
--------------------------
this Agreement and ending on the Closing Date, Sellers shall not, without
obtaining the prior written consent of Purchaser, Encumber (other than with
respect to cash collateral stipulation or motions in the Bankruptcy Proceedings)
or, other than in the ordinary course of business, sell, license, transfer or
otherwise dispose of any of the Assets. Without limiting the foregoing,
transfers of the Assets from the Restaurants to the Excluded Restaurants shall
not be considered transfers in the ordinary course of business.
8.5 Notification of Certain Matters. HHR shall give prompt notice to
-------------------------------
Purchaser, and Purchaser shall give prompt notice to HHR, of (a) the occurrence,
or failure to occur, of any event which would be likely to cause any
representation or warranty contained in this Agreement to be untrue or
inaccurate in any material respect any time from the date of this Agreement to
the Closing Date and (b) any material failure of a Seller or Purchaser, as the
case may be, to comply with or satisfy any covenant, condition or agreement to
be complied with or satisfied by it under this Agreement. Each party hereto
shall use all reasonable efforts to remedy any material failure on its part to
comply with or satisfy any covenant, condition or agreement to be complied with
or satisfied by it under this Agreement.
8.6 Business in the Ordinary Course. Prior to Closing, Sellers shall use
-------------------------------
their best efforts to maintain their respective relationships with suppliers,
customers and others having business relations with them and carry on the
Restaurants in the ordinary course, to the extent applicable, consistent with
recent experience. Sellers will not, without obtaining the prior written consent
of Purchaser, make any commitment, enter into any agreement or take any act,
other than in the ordinary course of business, which may materially increase
Purchaser's obligations hereunder or materially diminish the value of the
Assets.
8.7 Supplier Relations. Upon the reasonable request of Purchaser, Sellers
------------------
shall, prior to Closing, assist Purchaser in the establishment and maintenance
of a business relationship between Purchaser and the suppliers of the
Restaurants.
8.8 Preparation of Audited Statements. Sellers acknowledge that Purchaser
---------------------------------
has engaged the Accountants to prepare audited financial statements with respect
to the operations of the Restaurants. Sellers shall cause its management or
employees to meet with, discuss or answer questions from the Accountants, and
deliver statements or certificates as the Accountants may reasonably request in
connection with the preparation of such audited financial statements, which
statements or certificates shall be in substantially the form of Exhibit C.
8.9 Affiliates. Sellers shall cause their affiliates to execute and
----------
deliver to Purchaser at Closing such assignment, transfer or other documents,
instruments or agreements conveying such affiliates' interests, if any, in the
Assets to Purchaser, in such form and substance as Purchaser may reasonably
request.
31
<PAGE>
ARTICLE 9
CONDITIONS TO SELLERS' OBLIGATIONS
----------------------------------
The obligation of Sellers to consummate the transaction contemplated by
this Agreement is subject, in the discretion of HHR, to the satisfaction, on or
prior to the Closing Date, of each of the following conditions (any of which
may, in the absolute and sole discretion of HHR, be waived in whole or in part):
9.1 Representations, Warranties and Covenants. All representations and
-----------------------------------------
warranties of Purchaser contained in this Agreement shall be true and correct in
all material respects at and as of the Closing Date, except as and to the extent
that the facts and conditions upon which such representations and warranties are
based are expressly required or permitted to be changed by the terms of this
Agreement, and Purchaser shall have performed all covenants required by this
Agreement to be performed by it prior to or at the Closing Date.
9.2 Consents. All consents, approvals and waivers necessary to permit a
--------
Seller to transfer the Assets (other than the Liquor Licenses or Other Licenses)
to Purchaser as contemplated by this Agreement shall have been obtained, unless
the failure to obtain any such consent, approval or waiver would not have a
material adverse effect upon such Seller.
9.3 Closing Certificate. Purchaser shall have furnished HHR with a
-------------------
certificate of an officer of Purchaser, in form and substance reasonably
satisfactory to HHR, to evidence compliance with the conditions set forth in
this Article 9.
9.4 Funds. Purchaser shall have delivered to Escrow Agent or Committee
-----
Counsel, on or before the Closing Date, all cash or other immediately available
funds due from Purchaser in accordance with Section 2.3.
9.5 Purchaser's Deliveries. Purchaser shall have delivered to Escrow Agent
----------------------
the items described in Section 11.3.
9.6 Sale Order. The Sale Order shall have been obtained.
----------
ARTICLE 10
CONDITIONS TO PURCHASER'S OBLIGATIONS
-------------------------------------
The obligation of Purchaser to consummate the transaction contemplated by
this Agreement is subject, in the discretion of Purchaser, to the satisfaction,
on or prior to the Closing Date, of each of the following conditions (any of
which may, in Purchaser's absolute and sole discretion, be waived in whole or in
part):
10.1 Representations, Warranties and Covenants. All representations and
-----------------------------------------
warranties of Sellers contained in this Agreement shall be true and correct in
all material respects at and as of the Closing Date, except as and to the extent
that the facts and
32
<PAGE>
conditions upon which such representations and warranties are based are
expressly required or permitted to be changed by the terms of this Agreement,
and Sellers shall have performed all covenants required by this Agreement to be
performed by it or to or at the Closing Date.
10.2 Overbid Motion. On or before April 23, 1997 (or such earlier date
--------------
described in Section 4.1), an order shall have been entered by the Bankruptcy
Court, reasonably acceptable in form and substance to Purchaser, approving the
Overbid Motion.
10.3 Other Bankruptcy Court Orders. At least eleven (11) days prior to the
-----------------------------
Closing, an order or orders shall have been entered by the Bankruptcy Court,
reasonably acceptable in form and substance to Purchaser (collectively, the
"Sale Order"), providing (a) for the granting of the Sale Motion, (b) that
pursuant to Bankruptcy Code Section 363(f), the Assets shall be sold to
Purchaser free and clear of all Encumbrances and that the Assets shall be free
of any executory contract or lease other than the Assumed Liabilities; (c) that
Purchaser is a good faith purchaser for fair value entitled upon the Closing to
the protections afforded by Bankruptcy Code Section 363(m); and (d) for the
assumption and assignment of the specified Third-Party Contracts desired by
Purchaser to be assigned and that (i) Sellers shall make all cure payments
required thereunder and (ii) Purchaser shall be responsible for the performance
of such assumed and assigned contracts, leases and obligations after the
Closing.
10.4 Tax Clearance Certificates. The Tax Clearance Certificates, in form
--------------------------
reasonably satisfactory to Purchaser, shall have been obtained.
10.5 Other Consents. All consents, approvals and waivers necessary to
--------------
permit Sellers to transfer the Assets (other than the Liquor Licenses and Other
Licenses) to Purchaser as contemplated by this Agreement, other than those
described in Section 10.2 and 10.3, shall have been obtained, unless the failure
to obtain any such consent, approval or waiver would not have a material adverse
effect upon Purchaser.
10.6 Material Changes. There shall not have been during the period
----------------
beginning on December 31, 1996 ending on the Closing Date any material adverse
change in the condition of the Assets or the financial condition or, business of
the Restaurants or in the business relationship between Sellers and suppliers of
the Restaurants.
10.7 Closing Certificates. Sellers shall have furnished Purchaser with
--------------------
certificates of officers of Sellers, in form and substance reasonably
satisfactory to Purchaser, to evidence compliance with the conditions set forth
in this Article 10.
10.8 Sellers' Deliveries. Sellers shall have delivered the items described
-------------------
in Section 11.2.
10.9 Title Policy. Escrow Agent shall be unconditionally prepared to issue
------------
to Purchaser the Title Policy in the amount described in Section 5.2, insuring
that fee simple
33
<PAGE>
title to the Real Property is vested in Purchaser. Such Title Policy shall not
contain any exceptions other than the Permitted Exceptions.
ARTICLE 11
CLOSING
-------
11.1 Closing. The closing of the transaction contemplated in this Agreement
-------
shall be held at 10:00 a.m. local time on the Closing Date at the offices of
Richman, Lawrence, Mann, Greene, Chizever, Friedman & Phillips, 9601 Wilshire
Boulevard, Penthouse, Beverly Hills, California 90210 or any other place as HHR
and Purchaser shall mutually agree.
11.2 Closing Documents to be Deposited by Sellers into Escrow.
--------------------------------------------------------
(a) Sellers shall deposit or cause to be deposited into the Escrow
with Escrow Agent prior to the Closing Date the following original documents,
each of which shall be executed, and where appropriate, acknowledged by Sellers
but shall be undated:
(i) The Grant Deeds;
(ii) Three (3) counterparts of the General Assignment;
(iii) Three (3) counterparts of the Bill of Sale;
(iv) Non-Foreign Status Certificate; and
(v) Any other documents, including without limitation,
trademark assignments, reasonably required by Purchaser or the Escrow Agent
to consummate the purchase and sale of the Assets.
(b) Subject to Section 11.4, Escrow Agent is authorized to use the
foregoing instruments and documents to effect Closing, as provided in Section
3.3, when: (i) Escrow Agent holds for Sellers a counterpart of the General
Assignment and the Assumption Agreement, each duly executed by Purchaser,
together with all sums and Shares to be paid by Purchaser to HHR through Escrow
at the Closing; and (ii) the Escrow Agent can and will issue the Title Policy
concurrently with the Closing.
11.3 Deposit of Closing Documents and Funds into Escrow by Purchaser.
---------------------------------------------------------------
(a) Purchaser shall deliver to Escrow Agent prior to the Closing Date
the following funds and original documents (each of which shall be executed,
and, where appropriate, acknowledged by Purchaser but shall be undated):
(i) The cash portion of the Purchase Price less the Holdback
Amount plus the other amounts described in Section 2.3(b);
34
<PAGE>
(ii) Three (3) counterparts of the General Assignment;
(iii) The Assumption Agreement;
(iv) The stock certificate or certificates evidencing the
issuance to HHR of 150,000 Shares; and
(v) Any other documents reasonably required by HHR or the
Escrow Agent to consummate the purchase and sale of the Assets.
(b) Subject to Section 11.4, Escrow Agent is authorized to use the
foregoing instruments, documents and funds to effect Closing, as provided in
Section 3.3, when: (i) Escrow Agent holds for the account of Purchaser the
documents and instruments described in Section 11.2(a); and (ii) the Escrow
Agent can and will issue the Title Policy concurrently with the Closing.
11.4 Liquor License Holdback. If approval by the California Department of
-----------------------
Alcoholic Beverage Control or other governmental authority to the assignment of
a California Liquor License by any Seller to Purchaser has not been obtained on
or before the Closing Date, the following events shall occur: (a) the Closing
shall occur on the Closing Date with respect to all Assets other than such
Liquor License; (b) Escrow Agent shall retain, and shall not release, stock
certificates evidencing the Liquor License Holdback with respect to such Liquor
License to HHR on the Closing Date; (c) a closing of the transfer and assignment
to Purchaser of any such Liquor License shall occur within three (3) business
days of Purchaser's receipt of the appropriate governmental approval, at which
time the Liquor License Holdback applicable to such Liquor License shall be
released by Escrow Agent to HHR on behalf of such Seller; and (d) if approvals
are not obtained within six (6) months of the Closing Date, either Purchaser or
such Seller may elect, by written notice to Escrow Agent and the other party, to
terminate this Agreement with respect to such Liquor License, in which event the
stock certificates evidencing the remaining Liquor License Holdback shall be
delivered by Escrow Agent to Purchaser for cancellation and Seller shall be
under no obligation to deliver such Liquor License to Purchaser.
11.5 Failure of Condition. Except as otherwise provided in this Agreement,
--------------------
if the Escrow fails to close on or before the Closing Date for any reason
whatsoever (other than a reason for which Purchaser has the express right to
postpone Closing), including, without limitation, a failure of a condition
precedent set forth in Article 9 or 10 or this Article 11, and either Purchaser
or HHR elects to terminate the Escrow and this Agreement in accordance with this
Agreement, then:
(a) the costs of the Escrow through the Closing Date shall be
governed by Section 3.4;
(b) except as otherwise provided in Section 12.4, all monies paid
into the Escrow plus interest thereon, all documents deposited in the Escrow and
the Holdback Amount shall be returned to the party paying or depositing the
same;
35
<PAGE>
(c) each party shall pay its own costs and expenses; and
(d) each party shall be released from all obligations under this
Agreement except for the obligations set forth in Section 3.4, Section 11.5,
Article 12, and Article 15 and any other provisions which expressly survive
termination of this Agreement.
11.6 Extended Closing Date. Notwithstanding anything to the contrary
---------------------
contained in Section 11.5, if the Closing Date has not occurred by August 31,
1997:
(a) Purchaser, if it is not in default hereunder, may elect at any
time thereafter to terminate Escrow and this Agreement, in which event the
Escrow Deposit, Holdback Amount and all other amounts or documents deposited by
Purchaser shall be returned to Purchaser upon Purchaser giving notice of its
election to terminate; and
(b) Sellers may elect at any time thereafter to terminate Escrow and
this Agreement provided that all of the following conditions are satisfied: (i)
no such election may be made by Sellers unless the Committee and Banque Paribas
jointly deliver notice to Purchaser of such election at least fourteen (14) days
prior to the effective date of termination, (ii) no Seller shall be in default
hereunder as of the date of such election, including without limitation, any
provision contained in Article 4, 6, 8, 11, 13 or 14, and (iii) at the time such
notice is to be effective, Sellers shall pay to Purchaser the sum of $175,000 as
liquidated damages and the Escrow Deposit, Holdback Amount and all other amounts
or documents deposited by Purchaser shall be returned to Purchaser.
11.7 Possession of Assets. Simultaneously with the Close of Escrow,
--------------------
Sellers, through their officers, agents and employees, will put Purchaser into
full possession and enjoyment of all Assets (other than those Liquor Licenses
and Other Licenses which cannot be transferred at the Close of Escrow).
ARTICLE 12
DEFAULTS AND REMEDIES
---------------------
12.1 Sellers' Defaults. Sellers shall be considered to be in default
-----------------
hereunder prior to Closing if any Seller fails to meet, comply with, or perform
any material covenant, agreement, or obligation on its part and such failure was
not preceded by Purchaser's default.
12.2 Purchaser's Remedies. If any Seller is in default hereunder as
--------------------
described in Section 12.1 (which default has not been cured to the satisfaction
of Purchaser), Purchaser may, except as approved in Section 12.5, exercise any
or all of the following remedies:
(a) Terminate this Agreement by written notice delivered to HHR and
Escrow Agent on or before the Closing Date in which event Escrow Agent shall
promptly return to Purchaser the Escrow Deposit, any other amounts deposited by
Purchaser in
36
<PAGE>
Escrow or with Committee Counsel and any of Purchaser's documents deposited with
Escrow Agent, to Purchaser;
(b) Enforce specific performance of this Agreement against Sellers,
in which event Purchaser shall be deemed to have accepted Sellers' title to the
Assets and waived any breach by Sellers of any of its representations and
warranties made hereunder; or
(c) Seek actual and incidental damages or any other equitable
remedies which it may otherwise have for Sellers' default, but not to exceed
$1,000,000; provided, however, that, notwithstanding anything to the contrary
contained in this Agreement, (i) a default under Section 4.14 shall be deemed a
bad faith breach and willful misconduct hereunder for which Purchaser may,
except as provided herein, seek damages, not to exceed $1,000,000, regardless of
whether the Sale Order has been entered, and (ii) in the event of a default
under clause (c) or (d) of Section 4.14, Purchaser shall not seek damages
against any Seller.
Notwithstanding the foregoing, if Purchaser has not exercised either
remedy described in clause (a) or (b) above by December 31, 1997, this Agreement
shall terminate except for Purchaser's right to exercise its remedies under
clause (c) above.
12.3 Purchaser's Defaults. Purchaser shall be considered to be in default
--------------------
hereunder prior to Closing only if the emergency motion described in Section 4.1
is timely filed and served in accordance with Section 4.1 and Purchaser
thereafter fails to meet, comply with or perform any material covenant,
agreement or obligation on its part and such failure was not preceded by a
Seller's default.
12.4 Sellers' Remedy. Sellers shall have no right or remedy against
---------------
Purchaser with respect to this Agreement for any failure of Purchaser to meet,
comply with or perform any covenant, agreement or obligation on its part under
this Agreement prior to the timely filing of the emergency motion described in
Section 4.1. If Purchaser is in default hereunder solely as described in Section
12.3 (which default has not been cured to the satisfaction of HHR), then:
(a) AS SELLERS' SOLE REMEDY FOR SUCH DEFAULT AND UPON WRITTEN NOTICE
OF TERMINATION FROM SELLER TO PURCHASER AND ESCROW AGENT, THE ESCROW AND THIS
AGREEMENT SHALL TERMINATE (EXCEPT FOR THIS SECTION 12.4) AND ANY OTHER
PROVISIONS WHICH EXPRESSLY SURVIVES TERMINATION OF THIS AGREEMENT). THE PARTIES
ACKNOWLEDGE AND AGREE BY INITIALING THIS SECTION 12.4 THAT UPON PURCHASER'S
DEFAULT AS DESCRIBED IN SECTION 12.3, SELLERS WILL INCUR CERTAIN COSTS AND OTHER
DAMAGES IN AN AMOUNT THAT WOULD BE EXTREMELY DIFFICULT OR IMPRACTICAL TO
ASCERTAIN;
37
<PAGE>
(b) PURCHASER ACKNOWLEDGES AND AGREES THAT THE $1,000,000 PLACED IN
THE ESCROW DEPOSIT ON BEHALF OF PURCHASER BEARS A REASONABLE RELATIONSHIP TO THE
DAMAGES WHICH THE PARTIES ESTIMATE MAY BE SUFFERED BY SELLERS BY REASON OF
FAILURE OF THE CLOSE OF ESCROW SO TO OCCUR, AND $1,000,000 IS NOT AN AMOUNT
UNREASONABLE UNDER THE CIRCUMSTANCES EXISTING AT THE TIME THIS AGREEMENT WAS
MADE; AND
(c) UPON FIVE (5) DAYS PRIOR WRITTEN NOTICE TO ESCROW AGENT AND
PURCHASER BY HHR OF A NOTICE OF TERMINATION, ESCROW AGENT SHALL (i) RELEASE
$1,000,000 FROM THE ESCROW DEPOSIT TO HHR, ON BEHALF OF SELLERS, AS LIQUIDATED
DAMAGES, WHICH DAMAGES SHALL BE SELLERS' SOLE MONETARY REMEDY HEREUNDER IN THE
EVENT OF SUCH A BREACH BY PURCHASER, (ii) RELEASE THE REMAINING AMOUNT IN THE
ESCROW DEPOSIT TO PURCHASER TOGETHER WITH ANY OTHER AMOUNTS RECEIVED FROM
PURCHASER, AND (iii) RETURN TO SELLERS AND PURCHASER ALL DOCUMENTS AND
INSTRUMENTS PREVIOUSLY DEPOSITED INTO THE ESCROW BY OR ON BEHALF OF SUCH PARTY.
INITIALS: _______________________ ___________________________
SELLERS PURCHASER
12.5 Liquidated Damages to Purchaser. If any Seller exercises its right to
-------------------------------
terminate this Agreement in accordance with Section 11.6 or 13.1, then:
(a) THE PARTIES ACKNOWLEDGE AND AGREE BY INITIALING THIS SECTION 12.5
THAT UPON EITHER SUCH OCCURRENCE, PURCHASER WILL INCUR CERTAIN COSTS AND OTHER
DAMAGES IN AN AMOUNT THAT WOULD BE EXTREMELY DIFFICULT OR IMPRACTICAL TO
ASCERTAIN AND THAT PURCHASER'S SOLE REMEDY SHALL BE AS PROVIDED IN SECTION 11.6
OR 13.1, AS THE CASE MAY BE; AND
(b) SELLERS ACKNOWLEDGE AND AGREE THAT THE PAYMENT OF $175,000 TO
PURCHASER IS A NEGOTIATED AMOUNT OF DAMAGES WHICH MAY BE SUFFERED BY PURCHASER
BY REASON OF SUCH OCCURRENCE, AND $175,000 IS NOT AN AMOUNT UNREASONABLE UNDER
THE CIRCUMSTANCES EXISTING AT THE TIME THIS AGREEMENT WAS MADE.
INITIALS: _______________________ ___________________________
SELLERS PURCHASER
ARTICLE 13
RISK OF LOSS
------------
38
<PAGE>
13.1 Tangible Personal Property. The risk of loss, damage or destruction to
--------------------------
any of the Tangible Personal Property from fire or other casualty or cause shall
be borne by Sellers at all times prior to the Closing Date. In the event of any
such loss, damage, or destruction, the proceeds of any claim for any loss,
payable under any insurance policy with respect thereto, shall be assigned to
Purchaser at the Closing Date. In the event of any loss or damage to any of the
Tangible Personal Property to be transferred hereunder from fire, casualty or
other causes between the date of this Agreement and the Closing Date, Seller
shall notify Purchaser of same in writing immediately. Such notice shall specify
with particularity the loss or damage incurred, the cause thereof (if known or
reasonably ascertainable), and the insurance coverage, if any. Except as
provided herein, Purchaser shall consummate the transaction contemplated herein
and accept the Tangible Personal Property in its then condition and Sellers
shall assign to Purchaser all proceeds of insurance theretofore received and to
be received, if any, covering the Tangible Personal Property involved and, to
the extent that Purchaser reasonably determines that such proceeds are
insufficient to completely compensate Purchaser for the diminution in value to
Purchaser of such Tangible Personal Property to its reasonable satisfaction,
Purchaser and Sellers shall attempt to agree to an appropriate holdback from the
cash portion of the Purchase Price equal to such deficiency resulting from such
proceeds. If the parties are unable to agree as to an appropriate holdback
amount as a result of such event, the amount of such diminution shall be
resolved by the Bankruptcy Court. Notwithstanding the foregoing, (a) if the
difference between such diminution in value and such insurance proceeds exceed
$500,000, Sellers may elect to terminate the Escrow and this Agreement provided
that all of the following conditions are satisfied: (i) such election may only
be made during the fourteen (14) day period following the determination that
such difference exceeds $500,000, (ii) no Seller shall be in default hereunder
as of the date of such election, including without limitation, any provision
contained in Article 4, 6, 8, 11, 13 or 14, (iii) notice of such election must
be delivered to Purchaser during such election period, (iv) at the time such
notice is delivered, Sellers shall pay to Purchaser the sum of $175,000 as
liquidated damages and the Escrow Deposit, Holdback Amount and all other amounts
or documents deposited by Purchaser shall be returned to Purchaser, and (b) in
the event of the loss or destruction with respect to substantially all of the
Tangible Personal Property associated with three (3) Restaurants prior to the
Closing Date, through no fault of Purchaser, Purchaser shall have the right in
its sole discretion to terminate this Agreement upon giving notice in writing of
its desire to do so to Sellers, at which time the Escrow Deposit, the Holdback
Amount and all other amounts or documents deposited by Purchaser shall be
returned to Purchaser.
13.2 Casualties to Real Property. If during the period beginning on the
---------------------------
date of this Agreement and ending on the Closing Date there is any Casualty,
then Sellers shall promptly give notice to Purchaser of such Casualty and the
amount of insurance, if any, payable to Sellers with respect to such Casualty.
Purchaser shall then have the option, which shall be exercised by written notice
to Sellers within fourteen (14) days after receipt of Sellers' notice or, if
there is not fourteen (14) days prior to the Closing Date, as soon as possible
prior to the Closing Date, of (a) accepting the Real Property or Leased Real
Property subject to Sellers' obligation to reassign to Purchaser the insurance
proceeds attributable to such Casualty, or (b) in the event any such Casualty
materially adversely affects the ability of Purchaser to use the Real Property
or the Leased Real Property,
39
<PAGE>
terminate this Agreement with respect to such Real Property or Leased Real
Property, in which event the Purchase Price and the Assets shall be
appropriately adjusted as negotiated in good faith by Purchaser and HHR.
Notwithstanding the foregoing, if Casualties to Real Property or Leased Real
Property have a material adverse effect on the ability of Purchaser to use three
(3) or more Restaurants, Purchaser shall have the right in its sole discretion
to terminate this Agreement upon the giving of notice in writing of its desire
to do so to HHR, at which time the Escrow Deposit, the Holdback Amount and all
other amounts or documents deposited by Purchaser shall be returned to
Purchaser.
ARTICLE 14
ACTIONS BY SELLERS AND PURCHASER
--------------------------------
AFTER THE CLOSING
-----------------
14.1 Books and Records. Each party agrees that it will cooperate with and
-----------------
make available to the other party, upon reasonable prior notice and during
normal business hours, all books and records, information and employees (without
substantial disruption of employment) retained and remaining in existence after
the Closing Date which are necessary or useful in connection with any tax
inquiry, audit, investigation, dispute, or return, any litigation or
investigation or any other matter requiring any such books and records,
information or employees for any reasonable business purpose. The party
requesting any such books and records, information or employees shall bear all
of the out-of-pocket costs and expenses (including, but not limited to, copying
costs and attorneys' fees and expenses, but excluding reimbursement for salaries
and employee benefits) reasonably incurred in connection with providing such
books and records, information or employees.
14.2 Indemnifications.
----------------
(a) Survival of Representations and Warranties. Except for
------------------------------------------
representations and warranties with respect to the Shares set forth in Sections
6.19 and 7.9, all representations and warranties made by any Seller or Purchaser
to this Agreement shall not survive the closing of the transactions contemplated
by this Agreement. The representations and warranties with respect to the Shares
set forth in Sections 6.19 and 7.9 shall survive the closing of the transactions
contemplated by this Agreement. Following the Closing Date, no legal action may
be brought by any party with respect to any representation or warranty which
does not survive the closing or any covenant to be performed prior to the
Closing Date.
(b) Indemnification by Each Seller. Each Seller jointly and severally
------------------------------
indemnifies and agrees to hold Purchaser harmless following the Closing Date
from, against and with respect to the following:
(i) as described in Section 2.7, any and all indebtedness,
liabilities or obligations of any Seller, whether arising before or after
the Closing Date, except for the Assumed Liabilities;
40
<PAGE>
(ii) any and all loss, liability, deficiency or damage suffered
or incurred by Purchaser by reason of any nonfulfillment of any covenant or
agreement by any Seller contained in this Agreement or in any agreement,
instrument or other writing delivered to Purchaser pursuant to or in
connection with this Agreement (which shall not include, in any event,
consequential or punitive damages;
(iii) any claim for a finder's fee or brokerage or other
commission by any Person for services alleged to have been rendered at the
instance of a Seller with respect to this Agreement or the transaction
contemplated by this Agreement; and
(iv) any and all actions, suits, proceedings, claims, demands,
assessments, judgments, costs and expenses, (including, but not limited to,
legal fees and expenses) incident to any of the foregoing or incurred in
enforcing this Agreement.
(c) Indemnification by Purchaser. Purchaser hereby agrees to
----------------------------
indemnify and hold Sellers harmless following the Closing Date from, against,
and in respect of:
(i) any and all indebtedness, liabilities or obligations of
Purchaser, whether arising before or after the Closing Date;
(ii) any and all loss, liability, deficiency or damage suffered
or incurred by Seller resulting from nonfulfillment of any covenant or
agreement by Purchaser contained in this Agreement or in any agreement,
instrument or other writing delivered to Seller pursuant to or in
connection with this Agreement (which shall not include, in any event,
consequential or punitive damages);
(iii) any claim for a finder's fee or brokerage or other
commission by any Person for services alleged which shall be paid by
Sellers out of the Purchase Price to have been rendered at the instance of
Purchaser with respect to this Agreement or any of the transactions
contemplated by this Agreement; and
(iv) any and all actions, suits, proceedings, claims, demands,
assessments, judgments, costs, and expenses, (including, but not limited
to, legal fees and expenses) incident to any of the foregoing or incurred
in enforcing this Agreement.
(d) Third-Party Claims.
(i) Except as otherwise specifically provided in this
Agreement, in order for Purchaser or Sellers, as the case may be, to be
entitled to any indemnification provided hereunder, in respect of, arising
out of or involving a claim made by any Person other than Purchaser or
Sellers against the indemnified parry, the indemnified party must notify
the indemnifying party in writing of such claim promptly (but no more than
twenty (20) days) after receipt by the indemnified party
41
<PAGE>
of written notice of such claim. Thereafter, the indemnified party shall
deliver to the indemnifying party, within twenty (20) days after receipt by
the indemnified party, copies of all notices relating to such claim.
(ii) If a third-party claim as set forth in paragraph (i) of
this Subsection is made against an indemnified party, the indemnifying
party will be entitled to participate in the defense of such claim at its
own expense and, if it so chooses, to assume the defense of such claim at
its own expense with counsel selected by the indemnifying party, provided
such counsel is not reasonably objected to by the indemnified party. If the
indemnifying party elects to assume the defense of such claim, the
indemnified party will cooperate fully with the indemnifying party in
connection with such defense.
(iii) If the indemnifying party assumes the defense of a third-
party claim as set forth in paragraph (ii) of this Subsection, then in no
event will the indemnified party admit any liability with respect to, or
settle, compromise or discharge, any such claim without the indemnifying
party's prior written consent which consent shall not be withheld
unreasonably, and the indemnified party will agree to any settlement,
compromise or discharge of such claim that the indemnifying party may
recommend that releases the indemnified party completely in connection with
such claim. If the indemnifying party assumes the defense of the third-
party claim as set forth in (ii) of this Subsection, the indemnifying party
shall have no liability to the indemnified party with respect to any
counsel fees or expenses related to such claim incurred after the date on
which the defense is so assumed.
(iv) In the event the indemnifying party shall assume the
defense of any third-party claim as set forth in paragraph (ii) of this
Subsection, the indemnified party shall be entitled to participate in, but
not control, the defense of such claim with its own counsel at its own
expense. If the indemnifying party does not assume the defense of any such
claim, the indemnified party may defend such claim in a manner as it may
deem appropriate (including, but not limited to, settling such claim after
giving notice of it to the indemnifying party on such terms as the
indemnified party may deem appropriate) and the indemnifying party will
reimburse the indemnified party promptly to the extent it is liable in
accordance with the provisions of this Agreement.
14.3 Further Assurances. Both before and after the Closing Date, each party
------------------
will cooperate in good faith with the other and will take all appropriate action
and execute any agreement, instrument or other writing which may be reasonably
necessary or advisable to carry out the transaction contemplated by this
Agreement (including, but not limited to, obtaining consents or approvals from
any Person for the transfer of any of the Assets that are transferred subject to
consents or approvals being obtained). Notwithstanding the foregoing, after the
Closing Date, no party shall be obligated to incur expenses with respect to any
such action unless otherwise provided in this Agreement. The parties acknowledge
that, to the extent that Bankruptcy Court approval may be required in connection
with the
42
<PAGE>
taking of any action or execution of any instrument described herein, the
emergency motion described in Section 4.1, the Overbid Motion, the Sale Motion
and the Sale Order will provide for all such approvals.
ARTICLE 15
MISCELLANEOUS
-------------
15.1 Notices. Unless otherwise provided in this Agreement, any notice,
-------
request, instruction or other communication to be given hereunder by either
party to the other shall be in writing and (a) delivered personally, (b) mailed
by certified mail, postage prepaid, return receipt requested (such mailed notice
to be effective on the date such receipt is acknowledged or refused) or (c) sent
by telecopy, with a confirmation sent via one of the above methods, as follows:
If to Purchaser, addressed to:
Koo Koo Roo, Inc.
11075 Santa Monica Boulevard
Suite 225
Los Angeles, California 90025
Attn: Mr. Robert F. Kautz, President
Fax: (310) 479-4221
With a copy to:
Koo Koo Roo, Inc.
11075 Santa Monica Boulevard
Suite 225
Los Angeles, California 90025
Attn: Ronald D. Garber, Esq., General Counsel
Fax: (310) 479-4221
and
Richman, Lawrence, Mann, Greene, Chizever, Friedman & Phillips
9601 Wilshire Boulevard
Penthouse Suite
Beverly Hills, California 90210
Attn: Allan B. Duboff, Esq.
Fax: (310) 274-2831
If to HHR, any Seller or all Sellers, or Committee Counsel addressed to:
Hamburger Hamlet Restaurants, Inc.
14156 Magnolia Boulevard
43
<PAGE>
Sherman Oaks, California 91423
Attn: Mr. Richard Matthews
Fax: (818) 783-1525
With a copy to:
Irell & Manella LLP
333 S. Hope Street
Suite 3300
Los Angeles, California 90071
Attn: Richard C. Wirthlin, Esq.
Fax: (213) 229-0515
and
Stutman, Treister & Glatt
3699 Wilshire Boulevard
Suite 900
Los Angeles, California 90010
Attn: Richard M. Neiter
Fax: (213) 251-5288
and
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attn: James H.M. Sprayregen, Esq.
Fax: (312) 861-2200
and
Pachulski, Stang, Ziehl & Young
10100 Santa Monica Boulevard
Suite 1100
Los Angeles, California 90067
Attn: Marc A. Beilinson, Esq.
Fax: (310) 201-0760
Any Person designated in this Section 15.1 to receive notice may designate in a
writing to the other Persons any other address or telecopy number to which, and
any other Person to whom or which a copy of, any such notice, request,
instruction or other communication should be sent.
15.2 Applicable Law. This Agreement shall be construed, interpreted and the
--------------
rights of the parties determined in accordance with the laws of the State of
California.
44
<PAGE>
15.3 Forum. The Bankruptcy Court shall be the sole forum for resolution of
-----
any claim, action or proceeding arising out of this Agreement. Sellers and
Purchaser consent to in personam jurisdiction with respect to such court, agree
-----------
that venue will be proper in such court and waive any objections based upon
forum non conveniens. The choice of forum set forth in this Section shall not be
- --------------------
deemed to preclude the enforcement of any judgment obtained in such forum or the
taking of any action under this Agreement to enforce same in any other
jurisdiction.
15.4 Expenses. Except as otherwise specified in this Agreement, (i) Sellers
--------
and Purchaser shall pay their own legal, accounting and other expenses incident
to this Agreement and to any action taken by such party in preparation for
carrying this Agreement into effect and (ii) Sellers shall pay all of Sellers'
costs of applying for and obtaining all approvals of the Bankruptcy Court and
consents of lessors, creditors and claimants of Sellers necessary for the
transfer of the Assets (except for expenses related to the Liquor Licenses or
Other Licenses).
15.5 Interpretation. The parties agree that each party and its counsel have
--------------
reviewed and revised this Agreement and that the normal rule of construction to
the effect that any ambiguities are to be resolved against the drafting party
shall not be employed in the interpretation of this Agreement or any amendments
or exhibits thereto. The headings of the articles, sections and subsections of
this Agreement are inserted for convenience of reference only and shall not
affect the meaning or interpretation of this Agreement. Numbered or lettered
articles, sections, subsections, exhibits or schedules contained herein refer to
articles, sections, subsections, exhibits or schedules of this Agreement unless
otherwise expressly stated hereto. All exhibits and schedules attached hereto
are incorporated and shall be treated as if set forth herein.
15.6 Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such a manner as to be enforceable under applicable law.
However, if any provision of this Agreement shall be deemed unenforceable under
applicable law by a court having jurisdiction, such provision shall be
unenforceable, without invalidating the remainder thereof or any of the
remaining provisions of this Agreement.
15.7 Waiver. No failure of Sellers or Purchaser to require, and no delay by
------
Sellers or Purchaser in requiring, the other to comply with any provision of
this Agreement shall constitute a waiver of the right to require such
compliance. No failure of Sellers or Purchaser to exercise, and no delay by
Sellers or Purchaser in exercising, any right or remedy under this Agreement
shall constitute a waiver of such right or remedy. No waiver by Sellers of
Purchaser of any right or remedy under this Agreement shall be effective unless
made in writing. Any waiver by Sellers or Purchaser of any right or remedy under
this Agreement shall be limited to the specific instance and shall not
constitute a waiver of such right or remedy in the future.
15.8 Binding. This Agreement shall be binding upon Sellers and Purchaser
-------
and upon each successor and assignee of Sellers and Purchaser and shall inure to
the benefit of, and be enforceable by, Sellers and Purchaser and each successor
and assignee of Sellers and
45
<PAGE>
Purchaser, including any subsequent Chapter 7 or Chapter 11 trustee appointed in
the Bankruptcy Proceedings or any subsequent bankruptcy proceeding involving a
Seller; provided, however, that, (a) Purchaser may assign its rights and
obligations hereunder to an affiliated Person and Sellers may assign their
rights [and obligations] hereunder to a disbursing agent, (b) other than an
assignment by Purchaser to an affiliated Person, neither a Seller nor Purchaser
may assign any right or obligation arising pursuant to this Agreement without
first obtaining the written consent of the other party and (c) the assumption by
an affiliated Person of obligations arising pursuant to this Agreement shall not
relieve the assigning party of liability for such obligations.
15.9 Entire Agreement. This Agreement and the parties' agreement regarding
----------------
confidentiality contains the entire agreement between Sellers and Purchaser with
respect to the subject of this Agreement, and supersedes each course of conduct
previously pursued, accepted or acquiesced in, and each oral or written
agreement and representation previously made, by any Seller or Purchaser with
respect thereto, whether or not relied or acted upon, including without
limitation, that certain Letter of Intent between HHR, on behalf of Sellers, and
Purchaser dated February 12, 1997.
15.10 Modification. No course of performance or other conduct hereafter
------------
pursued, accepted or acquiesced in, and no oral agreement or representation made
in the future, by Sellers or Purchaser, whether or not relied or acted upon, and
no usage of trade, whether or not relied or acted upon, shall (a) modify or
terminate this Agreement, (b) impair or otherwise affect any obligation of
Sellers or Purchaser pursuant to this Agreement or any right or remedy of
Purchaser or Sellers pursuant to this Agreement or otherwise or (c) operate as a
waiver of any such right or remedy. No modification of this Agreement or waiver
of any such right or remedy shall be effective unless made in writing duly
executed by Sellers and Purchaser.
15.11 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original and all of which taken
together shall constitute one and the same instrument. Any party may execute
this Agreement by facsimile signature and the other party shall be entitled to
rely on such facsimile signature as evidence that this Agreement has been duly
executed by such party. Any party executing this Agreement by facsimile
signature shall immediately forward to the other party an original signature
page by overnight mail.
46
<PAGE>
IN WITNESS WHEREOF, Sellers and Purchaser have caused this Agreement to be
duly executed by their respective officers as of the day and year indicated at
the beginning of this Agreement.
HAMBURGER HAMLET HAMBURGER HAMLETS INC.
RESTAURANTS INC.
By /s/ Richard E. Mathews By /s/ Richard E. Mathews
--------------------------- ---------------------------
Its Chief Executive Officer Its Chief Executive Officer
----------------------- -----------------------
HAMBURGER HAMLET OF DAVILEW CORPORATION
SUNSET, INC.
By /s/ Richard E. Mathews By /s/ Richard E. Mathews
--------------------------- ---------------------------
Its Chief Executive Officer Its Chief Executive Officer
----------------------- -----------------------
VALLEY HAMLET CORPORATION HAMBURGER HAMLET OF BRENTWOOD INC.
By /s/ Richard E. Mathews By /s/ Richard E. Mathews
--------------------------- ---------------------------
Its Chief Executive Officer Its Chief Executive Officer
----------------------- -----------------------
HAMBURGER HAMLET OF PASADENA, INC. HAMBURGER HAMLET OF HOLLYWOOD, INC.
By /s/ Richard E. Mathews By /s/ Richard E. Mathews
--------------------------- ---------------------------
Its Chief Executive Officer Its Chief Executive Officer
----------------------- -----------------------
HAMBURGER HAMLET OF SEPULVEDA, INC. HAMBURGER HAMLET OF PALM SPRINGS, INC.
By /s/ Richard E. Mathews By /s/ Richard E. Mathews
--------------------------- ---------------------------
Its Chief Executive Officer Its Chief Executive Officer
----------------------- -----------------------
47
<PAGE>
HAMBURGER HAMLET OF 109 SOUTH SAINT ASAPH STREET, INC.
GEORGETOWN SQUARE, INC.
By /s/ Richard E. Mathews By /s/ Richard E. Mathews
--------------------------- ---------------------------
Its Chief Executive Officer Its Chief Executive Officer
----------------------- -----------------------
HAMBURGER HAMLET OF AGOURA HAMBURGER HAMLET OF GAITHERSBURG, INC.
HILLS, INC.
By /s/ Richard E. Mathews By /s/ Richard E. Mathews
--------------------------- ---------------------------
Its Chief Executive Officer Its Chief Executive Officer
----------------------- -----------------------
HAMBURGER HAMLET OF CRYSTAL HAMBURGER HAMLET OF VALENCIA, INC.
CITY, INC.
By /s/ Richard E. Mathews By /s/ Richard E. Mathews
--------------------------- ---------------------------
Its Chief Executive Officer Its Chief Executive Officer
----------------------- -----------------------
KOO KOO ROO, INC.
By /s/ Robert F. Kautz
---------------------------
Its President
-----------------------
48
<PAGE>
Schedules
---------
Section Reference Description
----------------- -----------
1.3 Administrative Material and Equipment
1.59 Restaurants
2.5 Purchase Price Allocation
5.2 Title Exceptions
6.9 Intellectual Property Rights
6.10 Lease Deposits
6.11 Liquor Licenses; Other Licenses
6.13 Petty Cash
6.14 Third-Party Contracts
Exhibits
--------
A General Provisions
B Preliminary Title Report
C Management Letters
49
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Koo Koo Roo, Inc.
Los Angeles, California
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (333-3360), in the Registration Statement on Form S-3
(333-23-263) and in the Registration Statement on Form S-8 ( ) of our
report dated March 5, 1997 relating to the consolidated financial statements of
Koo Koo Roo, Inc., appearing in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
/s/ BDO SEIDMAN, LLP
--------------------
BDO SEIDMAN, LLP
Los Angeles, California
March 5, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 JAN-31-1996
<CASH> 3,502,000 4,591,000
<SECURITIES> 3,663,000 5,220,000
<RECEIVABLES> 489,000 1,803,000
<ALLOWANCES> 0 0
<INVENTORY> 187,000 815,000
<CURRENT-ASSETS> 8,032,000 12,625,000
<PP&E> 14,271,000 31,307,000
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 26,555,000 49,772,000
<CURRENT-LIABILITIES> 4,115,000 5,518,000
<BONDS> 0 0
0 0
0 10,000
<COMMON> 143,000 159,000
<OTHER-SE> 21,400,000 42,380,000
<TOTAL-LIABILITY-AND-EQUITY> 26,555,000 49,772,000
<SALES> 20,299,000 38,263,000
<TOTAL-REVENUES> 20,896,000 39,802,000
<CGS> 14,522,000 27,488,000
<TOTAL-COSTS> 27,807,000 49,087,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 0 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,911,000) (9,285,000)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
