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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
AMENDMENT NO. 1 TO FORM 10-K
ON
FORM 10-K/A
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER: 0-19548
---------------
[LOGO OF KOO KOO ROO(R) CALIFORNIA KITCHEN]
KOO KOO ROO, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 22-3132583
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION #)
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11075 SANTA MONICA BOULEVARD, SUITE 225, LOS ANGELES, CA 90025
(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
(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 [_]
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 19, 1998, 47,359,043 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 19, 1998 was approximately
$69.4 million based on the closing price of $1.53 per share on that date on
the Nasdaq National Market. All directors, officers and more than 10%
stockholders of Registrant are deemed "affiliates" of Registrant for the
purpose of calculating such aggregate market value. The 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
None.
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KOO KOO ROO, INC.
INDEX TO FORM 10-K
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PAGE
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PART I
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Item 1. Business........................................................... 1
Item 2. Description of Property............................................ 14
Item 3. Legal Proceedings ................................................. 14
Item 4. Submission of Matters to a Vote of Security Holders................ 14
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters............................................................ 15
Item 6. Selected Financial Data............................................ 16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 16
Item 8. Financial Statements and Supplementary Data........................ 22
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................... 22
PART III
Item 10. Directors and Executive Officers.................................. 23
Item 11. Executive Compensation............................................ 26
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 30
Item 13. Certain Relationships and Related Transactions ................... 31
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 32
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EXPLANATORY NOTE
This Amendment No. 1 to Form 10-K on Form 10-K/A amends and restates the
Company's Form 10-K filed with the Securities and Exchange Commission on March
31, 1998, principally to include the information contained under the captions
"Item 10. Directors and Executive Officers," "Item 11. Executive
Compensation," "Item 12. Security Ownership of Certain Beneficial Owners and
Management" and "Item 13. Certain Relationships and Related Transactions."
PART I
ITEM 1. BUSINESS
GENERAL INFORMATION
The Company was organized in February 1987 and opened its first restaurant
in August 1988. 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 fresh 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 19,
1998, the Company operated 38 Koo Koo Roo Kitchen(TM) restaurants: 33 company
owned and operated restaurants located in California, one in Las Vegas, Nevada
and one at National Airport in Washington, D.C. as well as three joint venture
restaurants in Florida which are operated by the Company, plus three joint
venture restaurants in Toronto, Canada which are operated by the joint venture
partner in Canada. The Company also owns and operates 14 Hamburger Hamlet
restaurants which were acquired in May 1997. Four of the Hamburger Hamlet
restaurants are located in the Washington D.C. beltway and ten are located in
Southern California.
The Company's Koo Koo Roo California 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
sites and smells of fresh food preparation, such as a freshly cooked 28 pound
hand carved turkey 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 average approximately 2,800 square feet.
The Company's Hamburger Hamlet units are full service restaurants offering a
wide variety menu.
The Company opened its first Koo Koo Roo 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. The Company completed an initial public offering in
October 1991 with the intent of rolling out the fast food format concept in
several states. Subsequently, the Company repositioned its Koo Koo Roo concept
from a standard fast food format to a broad menu restaurant with full service
cooking standards while continuing to offer counter service. The Company later
developed the layout, menu and appearance of the Koo Koo Roo California
Kitchen(TM).
In 1994 the Company initiated, on a limited basis, an area development and
franchising program, which proved to be only moderately successful. However,
these efforts 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 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
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Directors. In March 1996, $33.0 million in equity was raised in convertible
preferred and common stock. 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 February 1997, $29.0 million in
equity was raised in convertible preferred stock. In August 1997, the Company
raised $12.0 million through the issuance of Senior Notes to an institutional
investor in a private placement. In March of 1998, Mr. A. William Allen joined
the Company as Chief Executive Officer and as a member of the Board of
Directors and Mr. William M. McKay joined the Company as Chief Financial
Officer. The Company's former chairman, Mr. Kenneth Berg, resigned as the
Chairman of the Board effective March 27, 1998. Upon Mr. Berg's resignation,
Mr. Iacocca became Acting Chairman of the Board. See "--Recent Developments."
RECENT DEVELOPMENTS
Discontinued Operations
As noted above, the Company appointed a new Chief Executive Officer and a
new Chief Financial Officer in March 1998. The new management completed a
comprehensive review of the Company's present operations and made a series of
recommendations which were approved by the Board of Directors to exit certain
businesses which are not closely related to the operation and development of
the Koo Koo Roo California Kitchen(TM) concept or the Hamburger Hamlet
restaurants. As more fully described below, the Company has determined to exit
from the paint-your-own ceramics business and, accordingly, to categorize this
business segment as discontinued operations in its financial statements.
Color Me Mine. In 1996, the Company acquired 90% of the common stock of
Color Me Mine, Inc., a chain of paint-your-own ceramics studios ("Color Me
Mine"). The Company acquired Color Me Mine with a view towards opening Company
owned and operated units adjacent to Koo Koo Roo stores in order to expand the
real estate options available to the Company. Color Me Mine stores have been
built adjacent to 15 Koo Koo Roo locations. Subsequently, Color Me Mine
developed its own management team and adopted a strategy of growth independent
of Koo Koo Roo through franchise operations. Management has determined that
Color Me Mine is not adequately related to the Company's core restaurant
operation to justify any further investment by the Company. In November 1997,
the Company adopted a plan to dispose of Color Me Mine. The Company intends to
seek a sale or other business combination involving its interest in Color Me
Mine.
Arrosto. As of March 19, 1998, eleven of the Company's Koo Koo Roo
restaurants featured the specialty products of the Arrosto Coffee Company
("Arrosto"), a wholly-owned subsidiary of the Company. Arrosto presently
operates a roasting facility to support its operations (which, except for a
prototype Coffee Shop located at 217 N. Larchmont Avenue in Los Angeles and
limited retail sales, are located in Koo Koo Roo restaurants.) Consistent with
its strategy to exit non core businesses, the Company has decided to exit the
coffee production operations of Arrosto and instead will source coffee
products for sale in the Koo Koo Roo stores from third party vendors.
Restructuring and Other Charges
During the third quarter of 1997, the Company began to reassess its business
strategy which resulted in a plan to streamline its operations and reduce
restaurant operating costs. In connection with these decisions, the Company
recorded certain charges of $4.6 million as of September 30, 1997. Charges of
$2.7 million relate to the closure of four Koo Koo Roo stores located in
Colorado, New York, New Jersey and one non-California Kitchen design
restaurant in California. Charges of $1.9 million relate to reductions in
corporate staff and the write-off of various capitalized and other costs. Such
charges are included in other operating expenses in the accompanying statement
of operations. Charges of $460,000 relate to the Company's 90% owned
subsidiary, Color Me Mine, which is included in discontinued operations at
December 31, 1997.
The Company continued with its revised business strategy in the fourth
quarter resulting in additional charges of $4.4 million comprised of lease
termination costs of $1.5 million, the write-off of certain intangible
2
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assets totaling $2.4 million and recording of allowances for possible losses
of $450,000 on accounts and notes receivables. In addition, the Company
recorded a loss of $9.8 million for the discontinued operations of Color Me
Mine, including a $7.0 million charge representing the estimated loss on
disposal of Color Me Mine.
The Company hired new senior management during the first quarter of 1998 who
continued the Company's efforts to reduce operating costs, focus on controlled
growth to take advantage of growth expansion opportunities in the Company's
core restaurant markets in California and Nevada. In this regard, the Company
will recognize restructuring and other charges of $10.0 to $12.0 million
during the first quarter ending March 31, 1998. Such charges relate to
management's decision to exit the Washington, D.C. beltway market with respect
to its Koo Koo Roo California Kitchen(TM) concept, further reduce corporate
staffing levels, close its Arrosto Coffee plant and various other charges. See
Item 7., "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Private Placements
In February 1997, the Company completed a private placement of 6% Series B
Adjustable Convertible Preferred Stock, liquidation preference $100 per share
(the "Series B Convertible Preferred Stock"), and received net proceeds of
approximately $26.6 million (after deducting cash fees to the placement agent
and 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 issued 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% Series A
Adjustable 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 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.
As of March 19, 1998, 30,096,161 shares of Common Stock had been issued upon
conversion of the Series A and Series B Convertible Preferred Stock. As of
March 19, 1998, there were 2,800 shares of Series A and 50,490 shares of
Series B Convertible Preferred Stock outstanding. The number of shares of
Common Stock issuable upon conversion of the remaining unconverted shares of
preferred stock and unexercised warrants will depend 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."
In August 1997, the Company issued $12,000,000 aggregate principal amount of
Senior Notes due August 2000 (the "Senior Notes") to an institutional investor
in a private placement. The Senior Notes carry an interest rate of 13% per
annum payable quarterly. The Senior Notes also included five-year purchase
warrants to purchase 330,000 shares of the Company's Common Stock at a price
of $5.375 per share. The Senior Notes provide that the Company redeem $2.5
million on February 28, 1999. Mandatory redemptions of the balance, prior to
the due date of the Senior Notes, are only required if there is a change of
control, sale of securities resulting in proceeds in excess of $20 million or
certain dispositions of assets as outlined in the Senior Notes.
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Acquisition of Hamburger Hamlet
On May 19, 1997, the Company completed the acquisition of 14 Hamburger
Hamlet restaurants for a purchase price of $11.7 million, consisting of $9.7
million in cash from the Company's existing working capital and 150,000 shares
of the Company's Common Stock, plus fees and expenses of approximately
$700,000. The Company also assumed $250,000 in debt and real property leases
related to the Hamburger Hamlet restaurants. The acquisition was accounted for
using the purchase method of accounting with the assets acquired and
liabilities assumed recorded at fair values. The results of the Hamburger
Hamlet restaurants are included in the Company's consolidated financial
statements from the date of acquisition. The excess of cost over net assets
acquired of $2.6 million is being amortized using the straight-line method
over 25 years.
Pursuant to the terms of the definitive purchase agreement between the
Company and the sellers (the "Purchase Agreement"), the purchase price remains
subject to adjustment with respect to that portion of the purchase price paid
in shares of the Company's Common Stock. The Purchase Agreement provides for
an adjustment to the purchase price if the market value of the Common Stock is
less than $11.67 per share at a date 18 months after the consummation of the
acquisition (as adjusted for customary anti-dilutive adjustments, if any,
during such period). The Company will either pay cash or issue additional
shares of Common Stock to the sellers, at the Company's option, to the extent
that the aggregate value of such cash or additional shares of Common Stock,
together with 150,000 shares of Common Stock originally issued in connection
with the acquisition, shall equal $1,750,000, subject to certain limitations
in the event the Sellers transfer any of the initial 150,000 shares of Common
Stock during such 18 month period. The Company currently anticipates that it
will satisfy such adjustments, if any, through the issuance of common stock.
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 Roo Canada"). The Company
currently has a 28.0% ownership interest in Koo Koo Roo Canada. The Company
plans to enter into discussion with its joint venture partner to convert this
joint venture arrangement into a license agreement in 1998. Koo Koo Roo Canada
has entered into three lease agreements and is negotiating for a fourth site,
all in the greater Toronto area. Koo Koo Roo Canada opened three restaurants
during 1997 and is expected to open up to three additional units by December
31, 1998.
International
The Company is pursuing other international opportunities and recently
signed a license agreement covering England. The Company received 50%, or
$250,000 of its initial licensing fee for the first ten units upon signing the
agreement. Pursuant to the term of the licensing agreement, the Company is
responsible for performing training functions, all paid by the licensee. The
license agreement provides for fixed license fees of $50,000 per unit and
royalty fees equal to 3% of gross sales. The license group is comprised of
local successful business leaders and restaurant operators. The Company is
focusing on international license agreements in order to further grow the Koo
Koo Roo California Kitchen(TM) concept, while avoiding the need for
significant capital commitments.
Business Development Agreement
On May 8, 1996, the Company retained Restaurant Marketing Corp. ("RMC") to
provide business development services. 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, to 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.
4
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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 are 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
to 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 Mr. Mel
Harris, a director of the Company. The Company plans to enter into discussions
with its joint venture partner to convert this joint venture arrangement into
a licensing agreement during 1998.
BUSINESS STRATEGY
The Company believes Koo Koo Roo California Kitchen(TM) is a leader in a new
dining niche within the home meal replacement segment--fresh quick--which is
characterized by high quality, freshly prepared predominately good for you
food offered to the customer through a quick service model. By serving fresh
and healthy food quickly, Koo Koo Roo is addressing and driving several key
and emerging trends in food service: the increasing demand for freshly
prepared food that tastes good; 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, as
well as 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," and the comfort of
home cooking. The Company believes that the Koo Koo Roo California Kitchen(TM)
concept addresses each of these trends in a unique, direct way.
The Company's goal is to become the leader in the convenient, fresh-quick
market niche. Therefore, its strategic objective is to grow and attain
dominant levels of brand awareness and economies of scale to maximize
efficiencies and store profitability. 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 growth environment; and finance the investment necessary to
achieve economies of scale. The Company believes that in its core market of
Southern California, it has established a strong brand which represents
freshness, quality, great taste, cleanliness and great service. The Company
plans to replicate its Koo Koo Roo California Kitchen(TM) concept's success,
with an initial focus on building clusters of stores in a limited number of
major metropolitan areas which are demographically similar to its core Los
Angeles market. The Company plans on focusing its efforts on the California
and Nevada markets in the near term. The Company intends to grow in the long-
term through the replication of Company-owned stores and/or licensing and
strategic arrangements in national and international markets. As of the date
of this report, other than the licensing agreements regarding England, the
Company has no agreements regarding any such venture, alliance or acquisition
beyond those discussed herein and there can be no assurance that any such
opportunity will be identified or realized. "See--Recent Developments."
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." 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
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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 and consistently fast and friendly
service 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 focused 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 oven-
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.
GROWTH PHILOSOPHY AND EXPANSION PLANS
Growth in Sales of Existing Restaurants. Koo Koo Roo California Kitchens are
currently averaging 5% same store sales annual growth. The Company intends to
continue focusing on sales growth in 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 utilizing direct mail.
Growth Through Replicating Company Stores. The Company's present emphasis in
the United States will focus principally on the California and Nevada markets,
where it intends to develop additional Koo Koo Roo California Kitchen(TM)
stores. The Company will continue to consider and evaluate other expansion
opportunities in other geographical areas as appropriate. See "--Restaurants
in Operation and Expansion Plans."
Focused Restaurant Real Estate Strategy. The Company tries to locate most of
the Company's Koo Koo Roo 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 and will build stores
in alternative real estate venues, such as shopping malls and street level
sites in urban, high rise buildings, and will continue to take advantage of
these alternative sites as appropriate. The Company may also pursue sites by
acquiring existing restaurants with the intent to secure locations.
Versatile Prototypes. 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 three
prototypical floor plans, 700 kiosk, 2,500 and 3,500. The 3,500 square foot
restaurant is used for greater density locations, mostly free-standing and
primarily allows for additional dining room space with the objective of
maximizing sales in such high density locations. The 2,500 square foot
restaurant is used for smaller, lower density, tenant improvement locations.
The Company designs and develops larger locations where efficient and where
expected risk adjusted returns on investment are favorable.
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To date, all Koo Koo Roo restaurants 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 developed. As of
March 19, 1998, the Company had 38 Koo Koo Roo restaurants and 14 Hamburger
Hamlets open and seven locations either identified or in various stages of
development. See "--Site Selection, Design and Construction."
Future Potential Growth. In the future, the Company expects to act
opportunistically to establish license agreements, strategic transactions
and/or pursue alliances as appropriate with experienced, major operators.
A priority for the Company in 1998 is to seek transactions which will permit
the Company to continue to pursue its growth objectives while limiting the
capital requirements imposed on the Company. There can be no assurance that
any such transaction will be successfully completed. Further, while the
Company pursues and enters into negotiations regarding such transactions on a
regular basis, as of the date of this Report, it has no agreement regarding
any of the transactions described in this paragraph beyond those otherwise
discussed elsewhere herein.
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KOO KOO ROO CALIFORNIA KITCHEN(TM) CONCEPT
Closed Restaurants
The Company's short-term business strategy is to focus its efforts on
further developing Koo Koo Roo restaurants in California and Nevada. In
connection with its current business strategy, the Company closed the
following restaurants in 1997 and 1998: Beverly Boulevard, Los Angeles, CA,
Cherry Creek, CO., Bayside, NY, Westfield, NJ, Bethesda, MD, Falls Church, VA,
and intends to close the National Airport location in early 1998.
Koo Koo Roo Restaurants in Operation as of March 19, 1998:
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SQUARE
LOCATION FOOTAGE DATE OPENED
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Los Angeles County, CA: Beverly Hills (North Beverly) 4,650 May 1996
Beverly Hills (South Beverly) 2,975 August 1994
Brentwood 2,600 May 1994
Burbank 2,700 March 1997
Claremont 2,500 December 1997
Downtown Los Angeles 2,325 April 1995
Encino 2,075 April 1991
Larchmont Village 2,500 March 1996
Manhattan Beach 2,675 April 1995
Marina Del Rey 2,500 June 1990
Miracle Mile 4,200 December 1997
Pasadena 3,200 August 1995
Redondo Beach 3,000 October 1996
Santa Barbara 2,500 January 1998
Santa Monica 3,525 January 1995
Studio City 5,600 January 1996
Torrance (Rolling Hills) 2,000 October 1997
Torrance (Del Amo) 2,300 November 1997
Venice 4,100 April 1996
West Hollywood 3,600 January 1997
West Los Angeles 2,675 May 1991
Woodland Hills 3,800 December 1995
Orange County, CA: Aliso Viejo 3,000 May 1997
Costa Mesa 2,850 July 1995
Irvine 3,475 August 1996
Laguna Hills 3,000 June 1997
Tustin 3,500 November 1996
Yorba Linda 3,600 July 1996
San Francisco Bay Area: Los Altos 2,400 November 1997
Menlo Park 5,067 October 1996
San Jose 2,925 March 1998
San Diego County, CA: Costa Verde 3,491 January 1998
Del Mar 2,425 November 1995
Florida:(1) Boca Raton 1,900 January 1998
North Miami 3,550 July 1996
South Miami 3,200 November 1995
Las Vegas, NV Lake Mead 2,500 December 1997
Washington D.C. beltway(2) National Airport 705 July 1997
</TABLE>
- --------
(1) Joint venture with area developer. See "--See Recent Developments--
Florida/Southern Georgia Area Development Agreement."
(2) The Company intends to close this store once the site is re-leased to
another operator.
8
<PAGE>
Koo Koo Roo Restaurant Locations With Executed Leases at March 19, 1998:
<TABLE>
<CAPTION>
SQUARE
LOCATION FOOTAGE ESTIMATED DATE OF OPENING
-------- ------- -------------------------
<S> <C> <C> <C>
Los Angeles County,
CA: Monrovia 2,218 September 1998
North Hollywood 2,500 September 1998
Sherman Oaks 2,500 December 1998
San Diego County, CA Mission Valley 2,700 August 1998
Las Vegas, NV Las Vegas, Sahara Blvd. 2,700 September 1998
Florida (joint ven-
tures) Plantation 2,400 August 1998
Miami (Kendall) 3,001 July 1998
</TABLE>
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. Senior executives inspect
and approve the site for each Company-owned restaurant prior to the execution
of a lease. The Company also has developed an analytical site model that looks
at approximately 1,500 variables specific to Koo Koo Roo. 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, 90-120 days or more
are required to complete construction, obtain necessary licenses and approvals
and open the new restaurant. Uncontrollable factors such as obtaining licenses
and permits can result in additional months of delay from lease signing to
opening. See "--Business Risks."
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 for
professional implementation of food and facility safety and sanitation. The
average Koo Koo Roo 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.
Highly Motivated Field Management
The Company's philosophy with regard to Koo Koo Roo store operations
provides for an 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-quick food market niche.
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.
9
<PAGE>
Test Kitchen
The Company currently operates a test kitchen adjacent to its Koo Koo Roo
store in West Los Angeles, California. The test kitchen is used for developing
and testing new menu items and testing of new equipment for its store
locations. The test kitchen was opened in June 1996. Prior to June 1996, the
Company conducted such testing in existing restaurant locations. The Company
expended approximately $150,000, $240,000 and $300,000 during the years ended
December 31, 1995, 1996 and 1997 to conduct these activities. These costs
include the compensation paid to the Company's executive chef and the costs of
operating the test kitchen itself.
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. 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 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."
License Operations
The Company may pursue license 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 plans to enter into discussions with its joint venture partners to
convert its joint venture arrangements in Canada and Florida into license
agreements, in 1998. See "--Recent Developments."
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. Numerous 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) and the Vegetable Stand. 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
10
<PAGE>
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 chooses to resume selling franchises or allow
additional joint venture partners to operate joint ventures in the U.S., 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.
COLOR ME MINE
In 1996, the Company acquired 90% of the common stock of Color Me Mine,
Inc., a chain of paint-your-own ceramics studios. The Company acquired Color
Me Mine with a view towards opening Company owned and operated units adjacent
to Koo Koo Roo stores in order to expand the real estate options available to
the Company. Color Me Mine stores have been built adjacent to 15 Koo Koo Roo
locations. Subsequently, Color Me Mine developed its own management team and
adopted a strategy of growth independent of Koo Koo Roo through franchise
operations. Management has determined that Color Me Mine is not adequately
related to the Company's core restaurant operation to justify any further
investment by the Company. In November 1997, the Company adopted a plan to
dispose of Color Me Mine. The Company intends to seek a sale or other business
combination involving its interest in Color Me Mine.
Through March 19, 1998, there were 35 Color Me Mine studios opened. The open
studios included: 11 company-owned; 21 franchised studios; and three studios
that are joint ventures. The studios are located in the following states: 17
in California; five in Florida, four in New Jersey, three in Pennsylvania, two
in New York and one each in Colorado and Nevada. In addition, there are two
studios open in Toronto, Ontario Canada.
EMPLOYEES
As of March 19, 1998, the Company employed approximately 3,100 full and
part-time individuals including 11 executives, 60 corporate and support staff
and 92 employees at Color Me Mine's factory. None of these employees are
covered by a collective bargaining agreement. The Company believes that it has
good labor relations.
BUSINESS RISKS
Limited Operating History; History of Losses. The Company was organized in
February 1987 and opened its first restaurant in August 1988 (which has since
been closed). In addition, 15 of the Company's owned and operated Koo Koo Roo
restaurants were opened since January 1, 1997. As a result, the Company has a
limited operating history upon which an evaluation of the Company's
performance can be made. The Company's prospects must be considered in light
of the risks, expenses and difficulties frequently encountered in the
establishment of a new business and concept in the highly competitive
restaurant industry, which is characterized by a high failure rate. Since
inception the Company has incurred operating losses. There can be no assurance
that the Company will generate significant revenue or achieve profitable
operations.
Limited Number of Restaurants in Operation; Geographic Concentration of
Restaurants; Dependence on Discretionary Spending. As of March 19, 1998, the
Company operated 38 Koo Koo Roo restaurants. Of these, 15 restaurants had been
in operation for more than two years and 14 restaurants had been in operation
for less than one year, 31 restaurants are in Southern California, including
10 restaurants opened in Southern California since January 1, 1997. The
Company's revenues are dependent on discretionary spending by consumers,
particularly by consumers living in the communities in which the restaurants
are located. A significant weakening
11
<PAGE>
in any of the local economies in which the Company operates may cause the
residents of such communities to curtail discretionary spending which, in
turn, could have a material adverse effect on the results of operations and
financial position of the entire Company. Consequently, the results achieved
to date by the Company's restaurants may not be indicative of the prospects or
market acceptance of a larger number of restaurants, particularly in wider and
more geographically dispersed areas with varied demographic characteristics.
Uncertainty of Market Acceptance. The Company has limited marketing
experience and to date has engaged in limited marketing activities. Achieving
consumer awareness and market acceptance, particularly as the Company seeks to
penetrate its new markets in Northern California and Nevada, will require
substantial efforts and expenditures by the Company. The Company has closed
all of its Koo Koo Roo restaurants except those located in California, Florida
and Nevada. There can be no assurance that the Company's restaurants will
achieve significant market acceptance.
Proposed Expansion; Need for Additional Financing. Although the Company
intends to pursue a strategy of moderate growth, the Company must depend on a
limited number of key experienced personnel in affecting this expansion. The
Company's proposed expansion (including, without limitation, accomplishment of
its new restaurant opening plans) will be dependent on, among other things,
market acceptance of the Company's business concepts, the availability of
suitable sites, timely development and construction of stores, the hiring of
skilled management and other personnel, the general ability to successfully
manage growth including monitoring stores, controlling costs and maintaining
effective quality controls, and the availability of adequate financing. The
Company may also grow through the acquisition of existing businesses to the
extent that such businesses can be acquired on advantageous terms and meet the
Company's investment and market criteria. There can be no assurance that the
Company will be successful in its proposed expansion. Until the Company
increases the size of its base of restaurants, the lack of success of a small
number of stores may have a disproportionate impact on the Company's
performance. To implement its expansion, the Company expects to issue
additional equity securities in the future and, if market conditions permit,
may incur additional indebtedness. The Company regularly investigates and
pursues transactions to raise such capital. There can be no assurance that
such additional capital, if and when required, will be available on terms
acceptable to the Company, or at all. In addition, future issuances of Common
Stock, if any, would dilute the present ownership of all stockholders in the
Company.
Management of Growth. The Company's business has grown rapidly in recent
periods and management's current plan calls for moderate and focused growth
while disposing of discontinuing non-core operations, which may place strains
on the Company's managerial, operational, financial and information systems.
This growth, has in the past and may in the future, involve the acquisition of
restaurants or complementary businesses. Acquisitions may involve a number of
special risks, including diversion of management's attention, the inability to
integrate successfully any acquired business, the incurrence of legal
liabilities and unanticipated events or circumstances, some or all of which
could have a material adverse effect on the Company's results of operations,
financial condition, business and prospects. The Company's success also
depends, to a significant extent, on the ability of its executive officers and
other members of senior management to respond to these challenges effectively.
The Company's expansion has also resulted in substantial growth in the number
of its employees, resulting in increased responsibility for both existing and
new management personnel. In addition, the Company is in the ongoing process
of evaluating and enhancing its operating and financial procedures and systems
in an effort to increase efficiencies in managing its expanding business.
There can be no assurance that the Company's management will be able to manage
future expansions and identified dispositions and closures successfully, or
that its management, personnel or system will be adequate to support the
Company's operations or will be implemented in a cost-effective or timely
manner. Any such inabilities or inadequacies would have a material adverse
effect on the Company's business, operating results and financial condition.
Competition. The restaurant industry, and particularly the quick-service
segment, is highly competitive with respect to price, service and location,
and numerous well-established competitors possess substantially greater
financial, marketing, personnel and other resources than the Company. In
addition, the quick-service industry is characterized by the frequent
introduction of new products, accompanied by substantial promotional
12
<PAGE>
campaigns. The Company is required to respond to various factors affecting the
restaurant industry, including changes in consumer preferences, tastes and
eating habits, demographic trends and traffic patterns, increases in food and
labor costs, competitive pricing and national, regional and local economic
conditions. In recent years numerous companies in the quick-service industry
have introduced products, including chicken, which were developed to
capitalize on growing consumer preference for food products which are, or are
perceived to be, healthful, nutritious, low in calories and low in fat
content. It can be expected that the Company will be subject to increasing
competition from companies whose products or marketing strategies, address
these consumer preferences. There can be no assurance that consumers will
regard the Company's products as sufficiently distinguishable from competitive
products (such as, for example, those offered by El Pollo Loco and Boston
Market), that substantially equivalent products will not be introduced by the
Company's competitors or that the Company will be able to compete
successfully.
Dependence Upon Key Personnel. The success of the Company is largely
dependent on the efforts of certain key management personnel. Although the
Company has entered into employment agreements with certain of its executive
officers, none of such agreements obligate these employees to continue to work
for the Company. The loss of their services could have a material adverse
effect on the Company. Additionally, in order to successfully implement its
proposed expansion and manage anticipated growth, the Company will be
dependent upon its ability to retain existing and hire additional qualified
personnel. There can be no assurance that the Company will be able to retain
or hire necessary personnel.
Government Regulations. The Company is subject to various federal, state and
local laws and regulations affecting its business. The Company's stores 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. Any difficulties or failure in obtaining required
licenses or approvals could delay or prevent the opening of a new store. In
addition, suspension of certain licenses or approvals, due to failure to
comply with applicable regulations or otherwise, could interrupt the
operations of the affected store or otherwise adversely affect the store or
the Company. The Company is also subject to federal and state laws
establishing minimum wages and regulating overtime and working conditions.
Since many of the Company's restaurant personnel are paid at rates which may
be affected by the federal minimum wage, increases in such minimum wage (which
recently have been enacted by Congress and the State of California and which
are the subject of current Congressional proposals) may result in an increase
in the Company's labor costs. The Company cannot predict the impact on its
results of operations should applicable federal or State minimum wage laws be
changed.
Expansion into Foreign Markets. The Company presently is seeking to expand
its business into certain foreign markets, principally through the use of
licensing agreements, and similar arrangements with existing local businesses
and members of each respective local business community. The Company's ability
to successfully expand its business into foreign markets depends, in part, on
cultural barriers to entry, the identity of the local businesses and members
of the local business community with whom the Company enters into any such
agreements, the consumer preferences of local consumers and acceptance in each
foreign market, prevailing local economic conditions, currency fluctuations,
changes in regulatory requirements, compliance with foreign laws and
regulations, local economy inflation and local economy interest rates. No
assurance can be given that the Company will be able to establish profitable
operations in any of the foreign markets which it is pursuing.
Insurance and Potential Liability. The Company maintains insurance,
including insurance relating to personal injury, in amounts which the Company
currently considers adequate. Nevertheless, a partially or completely
uninsured claim against the Company, if successful and of sufficient
magnitude, could have a material adverse effect on the Company.
13
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The Company's Burbank location (opened in March 1997) and its Aliso Viejo
location (opened in May 1997), are properties that were sold and leased back
to the Company during 1997. All other Company 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 ceramic bisque
factory, located in Van Nuys, California, to support its operations. The
ceramic bisque factory has production capacity to provide ceramic products for
approximately 75 to 80 stores. At December 31, 1997, the factory was operating
at approximately 40% of capacity. For information relative to the Company's
future minimum lease payment obligations under its long-term operating leases,
see Note 14 to the Consolidated Financial Statements. For listing of the
Company's restaurant locations and related square foot information, see
"Business--Koo Koo Roo California Kitchen(TM) Concept."
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 relocated to an office facility
located in Sherman Oaks, California where it leased 7,600 square feet of space
at a base rent of approximately $9,000 per month expiring in May 2000. In
August, 1997, Color Me Mine moved its corporate offices to the Color Me Mine
factory and has subleased the former office space. See "Business--Recent
Developments."
In addition, certain corporate offices of the Company were located in space
leased by Berg Enterprises, Inc., a company owned by the Company's former
Chairman, located in Iselin, New Jersey. This agreement was terminated,
effective December 31, 1997. During the year ended December 31, 1997, the
Company compensated Berg Enterprises, Inc. in the amount of $16,600 for the
use of such space.
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 adverse resolution of which is expected to have a material adverse
financial impact on the Company's consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
14
<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 on the Nasdaq National Market.
The following table sets forth for the periods identified the high and low
closing price of the Common Stock for the periods indicated, as reported by
Nasdaq.
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
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
YEAR ENDED DECEMBER 31, 1997
First Quarter............................................ 7.690 6.000
Second Quarter........................................... 7.250 3.625
Third Quarter............................................ 7.000 4.563
Fourth Quarter........................................... 4.969 2.156
YEAR ENDING DECEMBER 31, 1998
First Quarter ........................................... 3.438 1.250
Second Quarter (through April 28, 1998).................. 3.281 2.281
</TABLE>
On March 19, 1998, there were 684 holders of record of the Company's Common
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. See "Business--Recent Developments."
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995 1996 1997
------ ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND NUMBER OF RESTAURANTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue........................... $5,807 $ 8,772 $19,221 $36,608 $ 68,338
Loss from continuing operations... -- -- (6,966) (8,550) (19,636)
Income (loss) from discontinued
operations....................... -- -- 55 (735) (9,786)
Net Loss.......................... (2,219) (4,782) (6,911) (9,285) (29,422)
Per Common Share:
Loss from continuing operations. (0.48) (0.63) (0.57) (0.78) (1.09)
Loss from discontinued
operations..................... -- -- -- (0.05) (0.46)
Net loss........................ (0.48) (0.63) (0.57) (0.83) (1.55)
BALANCE SHEET DATA:
Total assets...................... $5,732 $ 8,356 $26,555 $49,772 $ 75,463
Long-term debt, including current
portion.......................... -- -- 193 1,695 13,793
Stockholders' equity.............. 4,512 3,748 21,543 42,549 42,749
Stockholders' equity per common
share............................ 0.63 0.44 1.51 1.06 0.66
OTHER DATA:
Average annual sales per unit(1).. $ 796 $ 1,163 $ 1,533 $ 1,907 $ 1,753
Number of restaurants open at
period end(2).................... 7 8 16 27 50
Average annual same store sales
growth(3)........................ 23.6% 56.7% 21.5% 10.6% 2.6%
</TABLE>
- --------
(1) Average annual sales per unit is computed by averaging sales for Koo Koo
Roo stores open 24 months or more.
(2) Includes the 14 Hamburger Hamlet restaurants acquired in May 1997.
(3) Average annual same store sales growth for Koo Koo Roo stores 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The discussion below and elsewhere in this Report on Form 10-K 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 1996 and 1997 marked periods of continued expansion for the
Company as the Company opened 12 (10 of which are still open) and 14 (11 of
which are still open) new restaurants during 1996 and 1997, plus the
acquisition of 14 Hamburger Hamlet restaurants in May 1997. At December 31,
1997, the Company operated 50 restaurants. Subsequent to December 31, 1997 the
Company opened three Koo Koo Roo restaurants in January 1998 and closed three
Koo Koo Roo restaurants located in the Washington D.C. beltway area and
determined to focus its development efforts primarily on the California and
Nevada markets.
In March 1996, the Company acquired 90% of the common 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
shares of Koo Koo Roo Common Stock. The acquisition was accounted for using
the pooling of interest
16
<PAGE>
method of accounting. During November 1997, Company management adopted a plan
to dispose of this subsidiary during 1998. Accordingly, the operations of
Color Me Mine are presented as discontinued operations in the statement of
operations and prior years financial statements were restated to conform to
the presentation of discontinued operations.
On May 19, 1997, the Company consummated the acquisition of 14 Hamburger
Hamlet restaurants for a purchase price of $11.7 million, consisting of $9.7
million in cash from the Company's existing working capital and 150,000 shares
of the Company's Common Stock, plus fees and expenses of approximately
$700,000. The Company also assumed $250,000 in debt and real property leases
related to the Hamburger Hamlet restaurants. The acquisition was accounted for
using the purchase method of accounting, accordingly, the assets acquired and
liabilities assumed were recorded at fair values. The operating results of the
Hamburger Hamlet restaurants are included in the Company's consolidated
financial statements from the date of acquisition. The purchase price is
subject to adjustment with respect to that portion of the purchase price paid
in shares of the Company's Common Stock.
During the third and fourth quarters of 1997, the Company recorded
significant adjustments amounting to approximately $4.4 million relating to,
among other things, closing certain restaurant locations that were operating
at a loss with little hope of achieving profitability in the foreseeable
future. Also during the fourth quarter, as mentioned above, the Company
accrued a $7.0 million charge relating to the estimated cost of disposal of
the Color Me Mine segment, which is expected to be completed during 1998.
During the first quarter of 1998, the Company adopted a plan to restructure
the Company and concentrate its efforts on its core business of operating
restaurants. In connection with this plan, the Company closed the three
remaining Koo Koo Roo California Kitchen(TM) stores located in the
Northeastern part of the United States. The Company intends to focus it
efforts on operating restaurants in California and Nevada. The Company also
has a 28% ownership interest in three restaurants operated in Toronto,
Ontario, Canada. The Company will continue to operate the 14 Hamburger Hamlet
restaurants acquired during 1997. As part of the restructuring efforts, the
Company will recognize restructuring and other charges of $10.0 to $12.0
million during the first quarter ending March 31, 1998. Such charges relate to
management's decision to exit the Washington, D.C. beltway market with respect
to its Koo Koo Roo California Kitchen(TM) concept, further reduce corporate
staffing levels, close its Arrosto Coffee plant and various other charges. The
Company believes that these steps along with improving operating efficiencies
at the stores will help improve operating results during 1998 and in future
periods.
Many of the statements made herein are forward looking and, among other
things, relate to the prospects for the Company to expand and attain
profitable operations. The Company has historically incurred net losses and
the Company presently anticipates that it will continue to incur operating
losses during 1998. However, the Company believes that the net operating
losses should begin to 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 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 "Business--Business Risks."
17
<PAGE>
RESULTS OF OPERATIONS
The Company's operations consist of the Koo Koo Roo and Hamburger Hamlet
chain of restaurants and the Color Me Mine "paint-your-own" ceramics studios.
Management's discussion of the results of operations addresses the results of
each segment separately to provide the reader with a better understanding of
the Company's operations. Following are the results of operations for each
segment:
<TABLE>
<CAPTION>
DISCONTINUED CERAMIC
RESTAURANTS STUDIO OPERATIONS
--------------------------- ----------------------
1995 1996 1997 1995 1996 1997
------- -------- -------- ------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $19,221 $ 36,608 $ 68,338 $1,091 $2,018 $ 4,031
------- -------- -------- ------ ------ -------
Costs and Expenses:
Cost of sales......... 13,981 26,160 47,437 541 1,328 2,467
Occupancy expense..... 1,737 4,153 5,957 122 281 943
Other operating
expenses............. 8,501 12,237 21,871 331 1,017 2,628
Depreciation and
amortization......... 2,111 4,152 8,071 42 127 624
Loss on store
closings............. 587 -- 4,274 -- -- 155
------- -------- -------- ------ ------ -------
Total............... 26,917 46,702 87,610 1,036 2,753 6,817
------- -------- -------- ------ ------ -------
Operating income (loss). $(7,696) $(10,094) $(19,272) $ 55 $ (735) $(2,786)
======= ======== ======== ====== ====== =======
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO 1996
Restaurant Operations
Restaurant sales for the year ended December 31, 1997 amounted to
$68,388,000 compared to $36,608,000 for the year ended December 31, 1996, an
increase of 87%. The increase in revenues was produced by thirteen restaurants
which operated during both the current and prior calendar years and fourteen
new restaurants open for part of the current year, plus fourteen Hamburger
Hamlet restaurants acquired in May 1997. Comparable same store sales for the
Koo Koo Roo restaurants open throughout both 1997 and 1996 increased by 2.6%.
Gross profit on sales for calendar year 1997 increased to $20,901,000 from
$10,448,000 for the prior year. As a percentage of sales, gross profit
increased to 30.5% in 1997 compared to 28.5% for 1996. Gross profit generally
increases in mature stores (those open more than three months) and are lower
in newly opened stores. All but six Company stores were open for more than
three months during the 1997 calendar year. The Hamburger Hamlet restaurants,
included for seven months, contributed to the overall improvement in the gross
profit percentage. The Company closed four Koo Koo Roo California Kitchen(TM)
stores during 1997. Cost of sales improvements included efficiency
improvements, waste reduction and increased volumes, which resulted in lower
food, beverage and paper costs (3.1%) but were partially offset by increased
labor costs of 2.1% of sales during the current year as compared to the prior
year.
Occupancy costs increased to $5,957,000 for the year ended December 31, 1997
compared to $4,153,000 during the prior year. Occupancy costs as a percentage
of sales improved slightly during 1997 as compared to 1996. Depreciation and
amortization expenses increased to $8,071,000 from $4,152,000 for the prior
year. The increase resulted from additional Koo Koo Roo store openings during
1997 and the acquisition of the Hamburger Hamlet restaurants.
Other operating expenses, which include other store operating and corporate
overhead expenses, amounted to $21,871,000 for the year ended December 31,
1997 compared to $12,237,000 for 1996. The increase was due to several
factors, including approximately $4,691,000 relating to new Koo Koo Roo stores
openings and the acquisition of the 14 Hamburger Hamlet restaurants. As a
percentage of sales, store operating expenses increased by 1% of sales during
1997. Corporate overhead expenses increased by approximately $4,324,000,
however, improved as a percentage of sales from 23% to 19%. This percentage
improvement resulted from higher volume including the addition of the
Hamburger Hamlet operations.
18
<PAGE>
Depreciation and amortization increased by $3,919,000 to $8,071,000 during
1997. The increase related to several factors including: the acquisition of
Hamburger Hamlet, the new stores opened during 1997 plus a full year's
depreciation for the stores opened in 1996. In addition, certain intangible
assets were written down during the fourth quarter amounting to $2,573,000.
Minority interest represents the limited partners' interest in two
partnerships 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 have been
consolidated with those of the Company.
The Company's present expansion plans contemplate a number of new store
openings during the balance of 1998 and into 1999. 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. See "Business--Restaurants in Operation and Expansion Plans."
Discontinued Operations
In November 1997, the Company decided to dispose of its 90% owned
subsidiary, Color Me Mine. Accordingly, the Company has reclassified the
operations of Color Me Mine as discontinued operations at December 31, 1997.
The Company's discontinued operations resulted in a loss of $9,786,000 in
1997, compared to a loss of $735,000 for 1996. The loss for 1997 include
operating losses of $2,786,000 and a charge of $7,000,000 representing the
estimated loss on disposal of Color Me Mine, including estimated operating
losses of $1,200,000 to be incurred during the phase-out period.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO 1995
Restaurant Operations
Sales of $36,608,000 for 1996 were produced by 16 restaurants which operated
during both the current and prior calendar years and 12 new restaurants open
for part of the current year. Sales for the restaurants amounted to
$19,221,000 for the prior year. Comparable sales for the restaurants open
throughout both 1996 and 1995 increased by 10.6%.
Gross profit on sales for 1996 increased 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 $4,153,000 for the year ended December 31, 1996
compared to $1,737,000 during the prior period. Store occupancy costs as a
percentage of sales were approximately the same in both years. Depreciation
and amortization expenses increased to $4,152,000 from $2,111,000 for the
prior year. The increase resulted from the new store openings during 1996 plus
a full year's depreciation and amortization for stores opened during the prior
year.
Other operating expenses which include other store operating and corporate
overheard expenses amounted to $12,237,000 for the current year compared to
$8,501,000 for 1995. This increase was primarily due to the Company's
expansion. As a percentage of sales, other operating expenses decreased to 36%
from 44% 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
19
<PAGE>
corporate expenses increased during 1996 as the Company continued to build the
infrastructure necessary for its planned growth.
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.
Discontinued Operations
The ceramics studio operations incurred a loss for the year ended December
31, 1996 amounting to $735,000 compared to net income of $55,000 for the year
ended December 31, 1995. The loss for 1996 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 $1,091,000 to
$2,018,000 during 1996 as compared to the prior year, primarily as the result
of 13 new studio openings during the year, nine of which opened in the fourth
quarter. Additional revenues were received during the year ended December 31,
1996 amounting to $363,000 from the sales of franchise areas and royalties.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Total cash, cash equivalents and marketable securities at December 31, 1997
amounted to $12,652,000. During the past two years the Company expended cash
resources principally to build new and remodeled Koo Koo Roo California
KitchenTM stores, acquire Hamburger Hamlet, expand the operations of Color Me
Mine and finance operating losses. During 1997, the Company completed the
construction of 14 Koo Koo Roo restaurants, two of which were sold and leased
back. In addition, as of December 31, 1997, four Koo Koo Roo restaurants were
in various stages of construction, plus seven other locations with signed
leases.
Net cash used in operating activities amounted to $2,271,000, $4,784,000 and
$8,671,000 during the years ended December 31, 1995, 1996 and 1997. The
increases were primarily caused by net losses each year and were partially
offset by increases in payables and accrued liabilities of $2,345,000,
$1,252,000 and $12,046,000 and depreciation and amortization of $2,153,000,
$4,434,000 and $8,071,000 during the years ended December 31, 1995, 1996 and
1997.
Net cash used in investing activities, including purchases of property and
equipment together with costs for acquiring certain locations, amounted to
$15,599,000, $25,325,000 and $28,047,000 during the years ended December 31,
1995, 1996 and 1997. Also included in investing activities were purchases and
sales of marketable securities which resulted in net funds used of $3,663,000,
$1,557,000 and $492,000 during the years ended December 31, 1995, 1996 and
1997.
Net cash provided by financing activities amounted to $20,828,000,
$31,198,000 and 39,067,000 during the years ended December 31, 1995, 1996 and
1997. The Company received $19,876,000, $31,561,000 and $27,476,000 from sales
of Common Stock and Preferred Stock during the years ended December 31, 1995,
1996 and 1997. In August 1997 the Company issued $12,000,000 aggregate
principal amount of 13% in Senior Notes due August 2000. During 1997 the
Company's Color Me Mine subsidiary borrowed $500,000 under a line of credit
agreement with a bank. The line of credit is secured by a certificate of
deposit of the same amount. During calendar years 1995 and 1997, the Company
received capital contributions of $616,000 and $121,000 from minority partners
of partnerships and joint ventures which owned restaurants. 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.
20
<PAGE>
At December 31 1997, management has provided a 100% valuation allowance
amounting to approximately $21.2 million against the net deferred tax asset
represented primarily by its net operating loss carry forwards due to the
Company not being able to determine that it was more likely than not the net
deferred tax asset would be realized.
Capital Resources
In February 1997, the Company completed a private placement of the Series B
Convertible Preferred Stock and received a total of $26.6 million (net of
related costs and transaction expenses of $2.4 million). The Series B
Convertible Preferred Stock is convertible 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 is based on
the market price of the Company's Common Stock at the time of the conversion.
The Company also issued to the placement agent a warrant to purchase 29,000
shares of Series B Convertible Preferred Stock at $100 per share. The holders
of the Series B Convertible Preferred Stock had converted all but 50,490
shares of such preferred stock to Common Stock as of March 19, 1998.
In August 1997, the Company issued $12,000,000 aggregate principal amount of
Senior Notes due August 2000 (the "Senior Notes") to an institutional investor
in a private placement. The Senior Notes carry an interest rate of 13% per
annum payable quarterly. The Senior Notes also included five-year purchase
warrants to purchase 330,000 shares of the Company's Common Stock at a price
of $5.375 per share. The Senior Notes provide that the Company redeem $2.5
million on February 28, 1999. Mandatory redemptions of the balance, prior to
the due date of the Senior Notes, are only required if there is a change of
control, sale of securities resulting in proceeds in excess of $20 million or
certain dispositions of assets as outlined in the Senior Notes.
Management believes that the Company's existing capital resources will be
sufficient to fund its planned operations and growth for the next 12 months.
The Company' long-term debt as of December 31, 1997 amounts to $13,793,000.
Management estimates that an investment of approximately $8.0 to $9.0 million
may be required for capital expenditures relating to stores under construction
plus new locations planned for 1998. The Company intends to investigate store-
level, asset-based financing of fixtures, equipment and leasehold improvements
as its expansion continues. The Company also consummated sale-leaseback
agreements for the Burbank and Aliso Viejo properties which generated
approximately $2.2 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 totaled approximately $9.1 million at
December 31, 1997. As indicated above, the Company has adopted a plan to
dispose of this subsidiary during 1998.
The timing of future capital requirements will be affected by, among other
things, the number of stores opened, operational results, real estate
development, and other potential 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 business
opportunities. The Company may seek additional funds from public or private
offerings of debt or equity, or may seek bank financing facilities.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income," issued by the FASB is effective for financial statements with fiscal
years beginning after December 15, 1997. SFAS establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. The Company does not expect adoption
of SFAS 130 to have any effect on its financial position or results of
operations. Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information," issued by the SFASB
is effective for financial statements with fiscal years beginning after
December 15, 1997. SFAS 131 requires that public companies report certain
21
<PAGE>
information about operating segments, products, services and geographical
areas in which they operate and their major customers. The Company does not
expect adoption of SFAS 131 to have any effect on its financial position or
results of operations; however, disclosures with respect to the aforementioned
items may be expanded.
SEASONALITY
Company revenues in certain geographic 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.
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
relating to general inflation by increasing its prices.
YEAR 2000
The Company is in the process of determining what, if any, steps have to be
taken to cure any potential computer software problems associated with the
year 2000. Based on preliminary discussions with the Company's software
vendors, the Company has determined that it will not incur any material
liability to upgrade computer programs to accommodate the year 2000.
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
22
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Directors are elected at each Annual Meeting of Stockholders and hold office
until their resignation or removal and until their respective successors are
duly elected and qualified. The Company's Bylaws provide that the Board of
Directors (the "Board") shall consist of no fewer than four or more than ten
directors, with the exact number to be fixed by the Board of Directors. The
authorized number of directors is presently ten. Officers are elected annually
by the Board and serve at its discretion until their successors are elected
and duly qualified.
The following set forth certain information regarding the persons serving as
directors and Named Executive Officers (as defined below) of the Company as of
April 28, 1998.
<TABLE>
<CAPTION>
POSITIONS CURRENTLY
NAME OF OFFICER/DIRECTOR AGE HELD WITH THE COMPANY
------------------------ --- ---------------------
<S> <C> <C>
A. William Allen, III............... 38 Chief Executive Officer and Director
John S. Kaufman..................... 36 President and Chief Operating Officer
Michael D. Mooslin.................. 50 Chief Executive Officer, Color Me Mine
Ronald D. Garber.................... 44 General Counsel and Corporate Secretary
Lee A. Iacocca...................... 73 Acting Chairman of the Board
Ann Graham Erhinger, Ph.D. ......... 59 Director
Mel Harris.......................... 58 Director
Robert F. Kautz..................... 39 Director
Don Wohl............................ 66 Director
</TABLE>
Executive Officers
A. WILLIAM ALLEN, III has served as Chief Executive Officer and director of
the Company since March 1998. Mr. Allen has over 22 years experience in the
restaurant business. Prior to joining the Company, Mr. Allen spent seven years
as CEO/President of La Madeleine, a chain of upscale quick service
restaurants, growing the concept from five locations to its present level of
60 locations. He was responsible for the day to day operations and the support
functions of food production and development, finance and accounting, real
estate, design and construction, human resources and marketing. Mr. Allen
began his career with Marriott Corporation in 1979 as an entry level manager
and progressed through the ranks as restaurant General Manager, Area Director,
Vice President of Operations and Senior Area Vice President, overseeing all
West Coast operations.
JOHN S. KAUFMAN joined the Company in September 1996 as Chief Operating
Officer. Mr. Kaufman has 20 years experience in the restaurant business. Mr.
Kaufman is directly responsible for domestic restaurant operations, marketing,
human resources, training and real estate. From December 1994 to September
1996, Mr. Kaufman was Chief Executive Officer of Rosti, an Italian restaurant
chain based in California. From June 1986 to December 1994, Mr. Kaufman served
as Vice President of Operations for California Pizza Kitchen, during which
time they grew from one to 68 restaurants.
MICHAEL D. MOOSLIN has been Chief Executive Officer of Color Me Mine, Inc.,
a 90% owned subsidiary of the Company, since December 1997. Mr. Mooslin served
as President and Chief Operating Officer of Koo Koo Roo International from
September 1996 through December 1997, and 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 was
also a director of the Company from September 1992 until January 1998. He is a
director of Humphrey Yogurt, Arden Wood Nursing Facility and F&M Food Service,
all of which are private companies. 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.
23
<PAGE>
RONALD D. 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 & Hurowitz. Mr. Garber also serves as a Judge Pro Tem for the
Los Angeles Superior and Municipal Courts in Santa Monica, Beverly Hills, and
Culver City, California. Mr. Garber attended the University of California at
Berkeley and received his B.A. from Northwestern University in Evanston,
Illinois and received his J.D. from the University of Toledo College of Law.
Mr. Garber is admitted to practice in both California and Ohio and is a member
of the Beverly Hills Bar Association, ICSC and recently served as a consultant
for the California Continuing Education of the Bar recent edition on Real
Estate Leases. Mr. Garber is the Sponsorship Chairperson for the Bay Cities
Jewish Community Center in Santa Monica, California.
Directors
LEE A. IACOCCA, Acting Chairman of the Board, retired Chairman of Chrysler
Corporation, was named to the Board of Directors in August 1995. On March 27,
1998, Mr. Iacocca became Acting Chairman of the Board and in connection
therewith was granted options to purchase 500,000 shares of Common Stock at an
exercise price of $1.56 per share, of which one-half were fully vested on the
date of grant, and one-half vest one year from the date of grant. He is also a
director of Consolidated Cigar Holdings, 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. He
has been a private investor as well as a business and individual consultant
for the past five years.
ANN GRAHAM EHRINGER, PHD, has served as a director of the Company since
April 1998. Since 1992, Ms. Ehringer has served as Chairman and Chief
Executive Officer of S.P. Land, Inc. and S.P. Lodge, Inc. (dba Saddle Peak
Lodge), a real estate holding entity and a fine-dining entity, respectively.
In addition, since 1996, Ms Ehringer has been Director of the Family &
Closely-Held Businesses Program as well as Associate Professor of
Entrepreneurship at the Marshall School of Business of the University of
Southern California. For six years prior to accepting these positions, she
coached dozens of owners and key executives of small and mid-sized companies.
Dr. Ehringer's areas of expertise include decision-making, strategic thinking
and entrepreneurial leadership. Dr. Ehringer's education includes degrees from
the University of California, Harvard Business School, Stanford University and
the University of Hawaii. She is a member of the Executive Advisory Panel for
the "Executive," a publication of the Academy of Management, and of the
National Association of Corporate Directors. She currently serves on the
boards of UStel, Inc., and several privately-held companies.
MEL HARRIS has been a director of the Company since November 1996. Since
1988 Mr. Harris has been Chairman and since 1993 Chief Executive Officer of
Preferred Employers Holdings, Inc., a public company, and President of
International Insurance Group, Inc. since 1984. Both of these entities are
insurance agencies. Mr. Harris is CEO and director 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 three stores in Florida. Mr. Harris is a director of
Marketing Corporation International, a private company. Mr. Harris is CEO of
Ceramics Acquisition 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, DC,
and a 1994 recipient of the Ellis Island Medal of Honor Award.
ROBERT F. KAUTZ has been a Director of the Company since November 1995.
Mr. Kautz has been the Chief Financial Officer and President of WPFC
International since January 1998. Prior to joining Wolfgang Puck Food Company,
Inc., Mr. Kautz was an officer of the Company, starting as its Chief Financial
Officer in February 1995, becoming Assistant Secretary and a Director in
November 1995, President of Corporate Development in September 1996, and
serving as its President from March 1997 through December 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., a software developer of automated scheduling
systems. For five years prior to that, and on an interim basis in early 1994,
24
<PAGE>
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.
DON 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
the past five years. Mr. Wohl is also a director of Vitafort International
Corporation, a public, specialty food manufacturer.
BOARD OF DIRECTORS AND COMMITTEES
The Audit Committee of the Board of Directors is presently composed of
Messrs. Harris and Wohl. Mr. Harris chairs the Committee. The functions of the
Audit Committee are to review and approve the selection of, and all services
performed by, the Company's independent accountants, to meet and consult with,
and to receive reports from, the Company's independent accountants and its
financial and accounting staff and to review and act with respect to the scope
of audit procedures, accounting practices and internal accounting and
financial controls of the Company. The Audit Committee held one formal meeting
independent of full Board meetings during the twelve months ended December 31,
1997.
The Stock Awards Committee of the Board of Directors is presently composed
of Messrs. Iacocca and Wohl. Mr. Wohl chairs the Committee. The function of
the Stock Awards Committee is to administer the Company's Stock Awards Plan.
Although the Stock Awards Committee had no formal meetings independent of full
Board meetings during the twelve months ended December 31, 1997, the members
consulted by phone and executed unanimous written consents with respect to
action taken during the year.
The Compensation Committee for the Board of Directors was formed in November
1995 and is presently composed of Messrs. Iacocca and Wohl. Mr. Wohl chairs
the Committee. The Compensation Committee reviews and approves executive
salaries and performs other related functions upon the request of the Board of
Directors. See "Executive Compensation--Employment Arrangements." Although the
Compensation Committee had no formal meetings independent of full Board
meetings during the twelve months ended December 31, 1997 the members
consulted by phone and executed unanimous written consents with respect to
action taken during the year.
The Finance Committee of the Board of Directors is presently composed of
Messrs. Allen, Iacocca and Wohl. The function of the Finance Committee is to
approve the Company's budget, financing plans and capital structure. The
Finance Committee had one formal meeting independent of full Board meetings
during the twelve months ended December 31, 1997.
The compensation of directors is described under "Executive Compensation--
Directors' Compensation."
COMPLIANCE WITH SECTION 16(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than ten percent of a registered
class of the Company's equity securities ("Insiders"), to file with the
Commission initial reports of ownership and reports of changes in ownership of
Common Stock. Insiders are required by the Commission's regulations to furnish
the Company with copies of all Section 16(a) reports filed by such persons.
To the Company's knowledge, based solely on its review of the copies of such
reports furnished to the Company, during the year ended December 31, 1997 all
Section 16(a) filing requirements applicable to Insiders were complied with.
25
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table provides certain summary
information concerning compensation paid to or accrued by the Company for its
Chief Executive Officer and each of the most highly compensated executive
officers of the Company who earned more than $100,000 (salary and bonus) (the
"Named Executive Officers") for all services rendered in all capacities to the
Company during the three years ended December 31, 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
----------------------------------- ---------------------
NAME AND PRINCIPAL OTHER ANNUAL RESTRICTED OPTIONS/
POSITION YEAR SALARY BONUS COMPENSATION(1) STOCK AWARDS SARS(#)
- ------------------ ---- -------- ----- --------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
John S. Kaufman(2)...... 1997 $201,431 $-- $ -- -- --
(President and Chief
Operating Officer) 1996 59,231 -- 16,578 -- 250,000
Michael D. Mooslin(3)... 1997 174,618 -- 18,000 -- --
(Chief Executive 1996 161,500 -- 41,900 -- --
Officer of 1995 143,700 -- 30,121 -- --
Color Me Mine, Inc.)
Ronald D. Garber(4)..... 1997 170,623 -- -- -- 50,000
(Secretary and General 1996 95,308 -- -- -- 100,000
Counsel)
Kenneth Berg(5)......... 1997 200,000 -- -- -- 250,000
(Former Chief Executive 1996 207,700 -- -- -- 500,000
Officer and Chairman 1995 172,500 -- -- 1,050,000 900,000
of the Board)
Robert F. Kautz(6)...... 1997 216,372 -- -- -- 150,000
(Former President and 1996 176,300 -- 27,400 -- --
Chief Financial 1995 116,109 -- -- -- 250,000
Officer)
</TABLE>
- --------
(1) With respect to each of the executive officers named in the table, if not
separately reported the aggregate amount of perquisites and other personal
benefits, securities or property received was less than the lesser of
$50,000 or 10% of the total annual salary and bonus reported for such
executive officer.
(2) Mr. Kaufman joined the Company during August 1996 and is currently
President and Chief Operating Officer. During 1996 the Company granted
Mr. Kaufman options to purchase 250,000 shares of Common Stock at an
exercise price of $7.69 per share. The Board reset the exercise price of
such options to $1.56 per share, effective March 24, 1998.
(3) Mr. Mooslin resigned, effective December 1997, as President of Koo Koo
Roo International and was appointed Chief Executive Officer of Color Me
Mine, Inc., the Company's 90% owned subsidiary.
(4) Mr. Garber joined the Company as General Counsel during May 1996. During
1997 and 1996, the Company granted to Mr. Garber options to purchase
150,000 shares of Common Stock under the Company's Non-Qualified Stock
Option Plan. Such options were originally issued at exercise prices per
share ranging from $3.72 to $7.76. On March 24, 1998, the Board reset the
exercise price for all such options to, and granted Mr. Garber options to
purchase an additional 100,000 shares of Common Stock at an exercise
price of $1.56 per share.
(5) Mr. Berg resigned as the Company's Chief Executive Officer, effective
March 1, 1998 and as Chairman of the Board, effective March 27, 1998. In
March 1998, the Company and Mr. Berg agreed to cancel options to
purchase 1,650,000 shares of Common Stock with exercise prices ranging
from $5.00 to $8.00 per share in exchange for options to purchase 100,000
shares of Common Stock of an exercise price of $1.56 per share. The newly
issued stock options are fully vested and provide for an exercise period
of 15 years.
26
<PAGE>
(6) Mr. Kautz resigned as President and Chief Financial Officer, effective
December 31, 1997. During 1997, Mr. Kautz was granted options to purchase
150,000 shares of Common Stock at an exercise price of $6.125 per share.
On December 17, 1997 the exercise price applicable to such options was
reset to $3.50 per share and options to purchase 250,000 of Common Stock
at exercise prices ranging from $5.72 per share to $7.25 per share were
cancelled. Mr. Kautz and the Company mutually agreed to cancel the
remaining options to purchase 150,000 shares of Common Stock, effective
March 24, 1998. See "--Employment Arrangements."
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding stock options
granted to the Named Executive Officers during the year ended December 31,
1997:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS/SARS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM
OPTIONS/SARS EMPLOYEES IN OR BASE EXPIRATION ---------------------
NAME GRANTED (#)(1) FISCAL YEAR PRICE ($/SH) DATE 5% ($) 10% ($)
---- -------------- ------------ ------------ ---------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Ronald D. Garber........ 50,000 1.9% $3.72 5/03/2007 $ 116,220 $ 295,199
Kenneth Berg............ 250,000 9.7 6.00 3/25/2007 943,342 2,390,614
Robert F. Kautz......... 150,000 5.6 3.50 2/27/2007 101,106 471,970
</TABLE>
- --------
(1) Unless otherwise indicated, such options vest ratably over a three-five
year period beginning on the first anniversary of the date of grant.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table sets forth certain information regarding exercises of
stock options by the Named Executive Officers during the year ended December
31, 1997 and the value of unexercised options at December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS
OPTIONS/SARS AT AT
FISCAL YEAR-END FISCAL YEAR-END(1)
------------------------- -------------------------
SHARES
ACQUIRED ON VALUE ($) ($)
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John S. Kaufman......... -- -- 50,000 200,000 $ -0- $-0-
Michael D. Mooslin...... -- -- 316,000 -0- 128,296 -0-
Ronald D. Garber........ -- -- 20,000 130,000 -0- -0-
Kenneth Berg............ -- -- 1,510,000 440,000 459,300 -0-
Robert F. Kautz......... -- -- 150,000 -0- -0- -0-
</TABLE>
- --------
(1) To the extent the exercise price per share of options was greater than
the last quoted sales price on the Nasdaq Stock Market on December 31,
1997, the value of such options is determined to be $0.
In March 1998, the Company and Mr. Berg mutually agreed to cancel options to
purchase 1,650,000 shares of Common Stock with exercise prices ranging from
$5.00 to $8.00 per share in exchange for options to purchase 100,000 shares of
Common Stock with an exercise price of $1.56 per share. In addition, Mr. Kautz
and the Company mutually agreed to cancel all outstanding options to purchase
150,000 shares of Common Stock, effective March 24, 1998. See "--Employment
Arrangements."
DIRECTORS' COMPENSATION
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
27
<PAGE>
directors currently receive annual compensation of $1,000 for each meeting
attended and reimbursement of reasonable expenses incurred on Company
business.
DIRECTORS' STOCK OPTION PLAN
The Company's Directors' Stock Option Plan (the "Directors' Plan") was
adopted by the Board of Directors and approved by the stockholders to enable
the Company to attract and retain the services of non-employee members of the
Board. The Directors' Plan covers an aggregate of 60,000 shares of Common
Stock and will expire in 2001. The Directors' Plan, as amended, provides that
each non-employee person who becomes a director will receive an option to
purchase a minimum of 10,000 shares and up to a maximum of 20,000 shares of
Common Stock at an exercise price equal to the fair market value of the
Company's Common Stock on the date the option is granted. Such options vest
one year from the date of grant and are exercisable for a period of ten years.
During the year ended December 31, 1997, no options were granted under the
Director's Stock Option Plan.
EMPLOYMENT ARRANGEMENTS
A. William Allen. Mr. Allen has a one-year employment agreement which
provides for an annual base salary of $300,000 ($50,000 of which has been
deferred). In addition, Mr. Allen was granted options to purchase 500,000
shares of Common Stock at an exercise price of $1.56 per share. Such options
vest one year from the date of grant. The Company may terminate the agreement
for cause if Mr. Allen willfully breaches or habitually neglects his duties.
Mr. Allen is entitled to severance payments equal to one year's full
compensation plus benefits in the event of a termination without cause,
termination with good reason (including in the event that there is a material
reduction in the nature and scope of Mr. Allen's duties to the Company) or
change in control. The agreement may continue from year-to-year upon mutual
agreement of the parties. In addition, Mr. Allen was granted a $50,000 loan,
collateralized by Mr. Allen's stock options, upon his commencement of
employment.
William M. McKay. Mr. McKay joined the Company in March 1998 as Chief
Financial Officer. Mr. McKay has a one-year employment agreement which
provides for an annual base salary of $175,000. In addition, Mr. McKay was
granted options to purchase 250,000 shares of Common Stock at an exercise
price of $1.56 per share. The Company may terminate the agreement for cause if
Mr. McKay willfully breaches or habitually neglects his duties. Mr. McKay is
entitled to severance payments equal to one year's full compensation plus
benefits in the event of a termination without cause, termination with good
reason (including in the event that there is a material reduction in the
nature and scope of Mr. McKay's duties to the Company) or change in control.
The agreement provides that it shall continue from year-to-year unless
terminated by either the Company or by Mr. McKay upon notice to the other
provided not less than 90 days prior to the end of the term.
John S. Kaufman. Mr. Kaufman's employment agreement was amended effective
March 24, 1998. Under the terms of his agreement, Mr. Kaufman has a one-year
employment agreement which provides for an annual base salary of $207,200. In
addition, in connection with such amendment, Mr. Kaufman's previously granted
options to purchase 250,000 shares of Common Stock at an exercise price of
$7.69 were repriced to an exercise price of $1.56. Of such outstanding
options, options to purchase 100,000 shares of Common Stock are currently
exercisable and options to purchase 150,000 shares of Common Stock vest
ratably over a three-year period beginning on March 24, 1999. The Company may
terminate the agreement for cause if Mr. Kaufman willfully breaches or
habitually neglects his duties. Mr. Kaufman is entitled to severance payments
equal to one year's full compensation plus benefits in the event of a
termination without cause, termination with good reason (including in the
event that there is a material reduction in the nature and scope of Mr.
Kaufman's duties to the Company) or change in control. The agreement provides
that it shall continue from year-to-year unless terminated by either the
Company or by Mr. Kaufman upon notice to the other provided not less than 90
days prior to the end of the term.
Ronald D. Garber. Mr. Garber's employment agreement was amended effective
March 24, 1998. Under the terms of his agreement, Mr. Garber has a one-year
employment agreement which provides for an annual base salary of $182,200. In
addition, in connection with such amendment, Mr. Garber was granted options to
28
<PAGE>
purchase 100,000 shares of Common Stock at an exercise price of $1.56 per
share, vesting ratably over three years beginning March 24, 1999. In addition,
Mr. Garber's outstanding options to purchase 150,000 shares of Common Stock
were repriced to an exercise price of $1.56 per share and are fully vested.
The Company may terminate the agreement for cause if Mr. Garber willfully
breaches or habitually neglects his duties. Mr. Garber is entitled to
severance payments equal to one year's full compensation plus benefits in the
event of a termination without cause, termination with good reason (including
in the event that there is a material reduction in the nature and scope of Mr.
Garber's duties to the Company) or change in control. The agreement provides
that it shall continue from year-to-year unless terminated by either the
Company or by Mr. Garber upon notice to the other provided not less than 90
days prior to the end of the term.
Michael D. Mooslin. Pursuant to Mr. Mooslin's Amended and Restated
Employment Agreement with the Company, he receives a base salary at an annual
rate of $150,000 (or such higher rate as may be determined by the Board of
Directors of the Company). In 1993 and 1994, Mr. Mooslin accepted a temporary
reduction in current salary to $125,000 per annum in return for the
forgiveness of certain loans. As such loans were forgiven, the amount thereof
was reported as "Other Annual Compensation." Mr. Mooslin is entitled to
participate in fringe benefits and bonus, profit sharing and incentive plans
as determined by the Board of Directors. Mr. Mooslin is reimbursed for certain
Company-related travel expenses. The Company makes annual payments for an
automobile and reimbursement of up to $1,500 per month for rent and related
housing expenses. The Company and Mr. Mooslin have mutually agreed to
terminate the employment agreement effective March 1999. Prior to that date,
the Company may terminate the Agreement in the event that Mr. Mooslin is
disabled and unable to perform his full-time duties for a consecutive period
of 90 days or for a total of 120 days in any consecutive twelve-month period.
In addition, the Company may terminate the Agreement for cause if Mr. Mooslin
willfully breaches or habitually neglects his duties.
Kenneth Berg. On March 27, 1998, in connection with Mr. Berg's resignation
as Chairman of the Board of the Company, the Company and Mr. Berg entered into
a Termination Agreement (the "Agreement"). The Agreement effectively
supersedes the terms and conditions contained in Mr. Berg's Employment
Agreement. Pursuant to the Agreement, the Company will pay Mr. Berg his annual
base salary of $200,000 over the remaining term of the Employment Agreement,
or through March 27, 2004. In addition, Mr. Berg agreed to the cancellation of
options to purchase 1,650,000 shares of common stock at exercise prices
ranging from $5.00 to $8.00 per share in exchange for options to purchase
100,000 shares of common stock at an exercise price of $1.56 per share. Mr.
Berg's medical insurance premium payments will continue to be paid through the
term of the Agreement.
Robert F. Kautz. On December 17, 1997 Mr. Kautz and the Company entered into
a Termination Agreement in connection with Mr. Kautz's resignation as
President and Chief Financial Officer of the Company, effective December 31,
1997. Pursuant to the terms of the Termination Agreement, Mr. Kautz kept
options to purchase 150,000 shares of Common Stock at an exercise price of
$3.50 per share and surrendered options to purchase 250,000 shares of Common
Stock at exercise prices ranging from $5.72 per share to $7.25 per share.
Effective March 24, 1998, Mr. Kautz and the Company agreed to cancel the
remaining options to purchase 150,000 shares of Common Stock in exchange for
the forgiveness of loans with an aggregate principal amount of $116,250 and
the reimbursement of federal and state income taxes related to such loan
forgiveness.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is composed of Lee Iacocca and Don Wohl. The
Compensation Committee did not meet separate and apart from Board meetings
during 1997. The Compensation Committee carried out its duties by written
resolution and informal discussions by phone and at the time of full Board
meetings. None of the executive officers served as a director or member of the
compensation committee of another entity during the year ended December 31,
1997.
29
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS AND MANAGEMENT
The following table sets forth certain information as of April 20, 1998 with
respect to the beneficial ownership of the Company's Common Stock, which
constitutes the Company's only outstanding class of voting securities, by (i)
each person who, to the knowledge of the Company, beneficially owned more than
5% of the Common Stock, (ii) each director and nominee for director of the
Company, (iii) the Named Executive Officers and (iv) all Named Executive
Officers and directors of the Company as a group:
<TABLE>
<CAPTION>
AMOUNT OF PERCENT OF
NAME OF BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP CLASS(2)
--------------------------- -------------------- ----------
<S> <C> <C>
A. William Allen(3)...................... -0- -0-
Ronald D. Garber(4)...................... 151,000 *
John S. Kaufman(5)....................... 100,660 *
Michael D. Mooslin(6).................... 316,000 *
Ann Graham Erhinger, PhD.(7)............. -0- -0-
Mel Harris(8)............................ -0- -0-
Lee A. Iacocca(9)........................ 353,300 *
Don Wohl(10)............................. -0- -0-
Kenneth Berg(11)......................... 1,541,500 3.1%
Robert F. Kautz(12)...................... -0- -0-
All Directors and Named Executive
Officers
as a Group (10 persons)................. 2,462,460 4.9%
</TABLE>
- --------
* Represents less than 1% of the outstanding shares of Common Stock.
(1) The address of A. William Allen, Ronald D. Garber, John S. Kaufman and
Ann Graham Erhinger is in care of the Company, 11075 Santa Monica
Boulevard, Suite 225, Los Angeles, California 90025. The address of
Kenneth Berg is 10601 Wilshire Blvd., Los Angeles, California 90025. The
address of Lee A. Iacocca is 10900 Wilshire Boulevard, Suite 520, Los
Angeles, California 90024. The address of Don Wohl is 1800 Avenue of the
Stars, Suite 1114, Los Angeles, California 90067. The address of Mel
Harris is 10800 Biscayne Blvd., Penthouse Floor, North Miami, Florida
33161. The address for Robert F. Kautz is 1333 Second Street, First
Floor, Santa Monica, CA 90401.
(2) Unless otherwise noted, the Company believes that all persons named in
the table have sole voting and investment power with respect to all
shares of Common stock beneficially owned by them. A person is deemed to
be the beneficial owner of securities that can be acquired by such
person within 60 days of a specified date as provided in Rule 13d-3
under the Securities Exchange Act of 1934, as amended. Each beneficial
owner's percentage is determined by assuming that options or warrants
that are held by such person (but not those held by any other person)
and which are exercisable within 60 days of the date of the above table
have been exercised.
(3) Mr. Allen joined the Company as Chief Executive Officer and Director in
March 1998 and presently does not beneficially own any shares of Common
Stock.
(4) Includes 150,000 shares of Common Stock issuable upon exercise of
options exercisable presently and within 60 days of the date of the
table.
(5) Includes 100,000 shares of Common Stock issuable upon exercise of
options exercisable presently and within 60 days of the date of the
table.
(6) Includes 316,000 shares of Common Stock issuable upon exercise of options
exercisable presently and within 60 days of the date of the table.
(7) Ms. Erhinger became a director of the Company in April 1998 and presently
does not beneficially own any shares of Common Stock.
30
<PAGE>
(8) Through mutual agreement with Mr. Harris, the Company canceled options
to purchase 2,010,000 shares of Common Stock held by Mr. Harris and his
affiliates, effective March 24, 1998.
(9) Includes 250,000 shares of Common Stock issuable upon exercise of
options exercisable within 60 days of the date of the table.
(10) Through mutual agreement with Mr. Wohl, the Company cancelled options to
purchase 410,000 shares of Common Stock held by Mr. Wohl, effective
March 24, 1998.
(11) Kenneth Berg's holdings include: (a) 815,000 shares of Common Stock in
respect of which Mr. Berg has only the right to vote pursuant a proxy,
and over which he does not possess any control over disposition and
transfers (Mr. Berg disclaims beneficial ownership of such shares) and
(b) 400,000 shares of Common Stock issuable upon exercise of options
exercisable presently and within 60 days of the date of the table.
(12) Mr. Kautz resigned as President and Chief Financial Officer effective
December 31, 1997. Mr. Kautz presently does not beneficially own any
shares of Common Stock, or and securities exchangeable or convertible
into shares of Common Stock. See "--Employment Agreements."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company received various goods and services from a corporation in which
the Company's former chief executive officer, Mr. Berg, has a controlling
interest. These services include accounting, bookkeeping, occupancy and
various other office services. The Company paid $74,000 for such services
during the year ended December 31, 1997.
During May 1996, the Company entered into a business development agreement
with an entity associated with Restaurant Marketing Corporation, which is
owned by Mr. Mel Harris, 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.
Through mutual agreement with Mr. Harris, the Company cancelled such options,
effective March 24, 1998.
During 1997, the Company utilized the services of a general insurance agency
for placing a portion of its insurance requirements. Mr. Harris is the
Chairman of the Board and Chief Executive Officer of the insurance agency. The
Company believes that the insurance premiums paid for such policies were at
market rates. The use of such insurance services was approved by a majority of
the non-interested directors. During the year ended December 31, 1997, the
insurance agency received commissions of approximately $92,000 on insurance
policies placed with the agency.
Mr. Jess Ravich, a former Director of the Company, is the Chief Executive
Officer of Libra Investments, Inc. In connection with the acquisition of
Hamburger Hamlet restaurants, Libra Investments, Inc. received a fee of
$487,500 in cash and five-year warrants to purchase 100,000 shares of Common
Stock at an exercise price of $3.72 per share. In addition, in August 1997,
Libra Investments, Inc. was paid a fee of $300,000 in cash, and received
warrants to purchase 60,000 shares of Common Stock at an exercise price of
$5.38 per share, in connection with the private placement of $12,000,000
aggregate principal amount of the Company's 13% senior notes due August 15,
2000.
31
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
<TABLE>
<S> <C>
Index to Consolidated Financial Statements.............................. F-1
Report of Independent Certified Public Accountants...................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997............ F-3
Consolidated Statements of Operations for the years ended December 31,
1995, 1996 and 1997.................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995, 1996 and 1997....................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997.................................................... 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.
(a)(3) Exhibits
The following exhibits are filed in the order hereinafter listed:
<TABLE>
<CAPTION>
EXHIBIT
-------
<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)
Certificate of Amendment to the Restated Certificate of Incorporation
3.4 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)
Form of Certificate for 5% Convertible Preferred Stock of
4.2 Registrant(9)
Form of Amendment to the Restated Certificate of Incorporation of
4.3 Registrant(9)
Certificate of Designations of 5% Convertible Preferred Stock of
4.4 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)
Certificate of Designations of Series B 6% Convertible Preferred
4.9 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)
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
-------
<C> <S>
4.12 Form of Series A 5% Convertible Preferred Stock Warrant Agreement
dated March 20, 1996(14)
4.13 Form of Common Stock Warrant Agreement dated March 12, 1996(14)
4.14 Form of Series B 6% Convertible Preferred Stock Warrant Agreement
dated February 27, 1997(15)
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)
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)
10.59 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
Warrant(8)
10.66 Form of Warrant Agreement used in connection with the Company's June
1995 private placement of Company Common Stock and Warrant(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)
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.(16)
21.1 Subsidiaries of Registrant (Previously filed)
23.1 Consent of BDO Seidman, LLP (Previously filed)
27.1 Financial Data Schedule (Previously filed)
</TABLE>
33
<PAGE>
- --------
(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 to the exhibits filed with the Company's
Current Report on Form 8-K dated February 27, 1997.
(14) Incorporated by reference to the exhibits filed with the Company's
Registration Statement on Form S-3 (No. 333-23263) as filed on March 13,
1997
(15) Incorporated by reference to the exhibits filed with the Company's
Amendment No. 2 Registration Statement on Form S-3 (No. 333-23263) as
filed on June 5, 1997
(16) Incorporated by reference to identical exhibit number in the Company's
Amendment No. 1 to its Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1996
(17) Filed herewith.
(b) Reports on 8-K
Current report on Form 8-K, dated October 16, 1997, which includes the
Company's press release, dated October 16, 1997, announcing the Company's
third quarter 1997 charge of $4.8 million.
34
<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.
KOO KOO ROO, INC.
Date: April 29, 1998
/s/ A. William Allen
By: _________________________________
A. William Allen
Chief Executive Officer and Director
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ A. William Allen Chief Executive Officer and April 29, 1998
____________________________________ Director (Principal
A. William Allen Executive Officer)
/s/ Lee A. Iacocca Acting Chairman of the Board April 29, 1998
____________________________________
Lee A. Iacocca
/s/ William M. McKay Chief Financial Officer and April 29, 1998
____________________________________ Treasurer (Principal
William M. McKay Financial Officer)
/s/ Jeanne Giles Vice-President, Controller April 29, 1998
____________________________________ (Principal Accounting
Jeanne Giles Officer)
/s/ Mel Harris Director April 29, 1998
____________________________________
Mel Harris
Director April , 1998
____________________________________
Robert F. Kautz
/s/ Donald Wohl Director April 29, 1998
____________________________________
Donald Wohl
Director April , 1998
____________________________________
Ann Graham Erhinger
</TABLE>
35
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants...................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997............ F-3
Consolidated Statements of Operations for the years ended December 31,
1995, 1996 and 1997.................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995, 1996 and 1997....................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997.................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Koo Koo Roo, Inc.
We have audited the accompanying consolidated balance sheets of Koo Koo Roo,
Inc. and subsidiaries as of December 31, 1996 and 1997 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, 1997.
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, 1996 and 1997 and the
results of their operations and cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
Los Angeles, California
March 20, 1998
F-2
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
-------- --------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents................................ $ 4,591 $ 6,940
Marketable securities.................................... 5,220 5,712
Receivables.............................................. 707 1,330
Notes receivable......................................... 1,096 1,214
Inventories.............................................. 815 1,237
Prepaid expenses and other............................... 196 1,086
-------- --------
Total current assets................................... 12,625 17,519
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES.............. 462 1,382
PROPERTY AND EQUIPMENT, net................................ 31,307 45,227
INTANGIBLE AND OTHER ASSETS, net........................... 5,378 11,335
-------- --------
TOTAL ASSETS........................................... $ 49,772 $ 75,463
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable......................................... $ 3,265 $ 5,512
Other accrued liabilities................................ 1,399 3,816
Accrued payroll.......................................... 634 902
Accrued store closings and disposal costs................ 8,450
Current portion of long-term debt........................ 220 803
-------- --------
Total current liabilities.............................. 5,518 19,483
-------- --------
LONG-TERM DEBT............................................. 1,475 12,990
-------- --------
MINORITY INTERESTS IN SUBSIDIARIES......................... 230 241
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value, 50,000,000 shares
authorized; 15,933,822 and 26,770,170 shares issued and
outstanding............................................. 159 268
Preferred Stock, $.01 par value, 5,000,000 shares
authorized; 1,027,193 and 175,342 shares of Series A and
0 and 215,839 shares of Series B convertible preferred
stock issued and outstanding (aggregate liquidation
preference $25,173,850)................................. 10 4
Additional paid-in capital............................... 73,623 106,632
Accumulated deficit...................................... (30,608) (63,414)
Treasury stock, 72,512 and 147,012 shares, at cost....... (2) (238)
Common Stock issued for unearned compensation............ (633) (503)
-------- --------
Total stockholders' equity............................. 42,549 42,749
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $ 49,772 $ 75,463
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
RESTAURANT SALES.................................. $19,221 $ 36,608 $ 68,338
------- -------- --------
COSTS AND EXPENSES:
Food, labor and related costs................... 13,981 26,160 47,437
Occupancy expenses.............................. 1,737 4,153 5,957
Other operating expenses........................ 8,501 12,237 21,871
Depreciation and amortization................... 2,111 4,152 8,071
Loss on store closings.......................... 587 4,274
------- -------- --------
Total......................................... 26,917 46,702 87,610
------- -------- --------
LOSS FROM OPERATIONS.............................. (7,696) (10,094) (19,272)
OTHER INCOME (EXPENSE):
Interest expense................................ (9) (95) (807)
Interest and other income....................... 593 1,299 1,103
Equity in net loss of joint ventures............ (981)
Minority interest in net loss of joint venture.. 146 340 321
------- -------- --------
LOSS FROM CONTINUING OPERATIONS................... (6,966) (8,550) (19,636)
DISCONTINUED OPERATIONS:
Income (loss) from operations of Color Me Mine
subsidiary held for sale....................... 55 (735) (2,786)
Estimated loss on disposal of the net assets of
Color Me Mine, including $1,200 for operating
losses during phase-out period................. (7,000)
------- -------- --------
NET LOSS.......................................... (6,911) (9,285) (29,422)
Dividends on preferred stock...................... (3,048) (3,384)
------- -------- --------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS........ $(6,911) $(12,333) $(32,806)
======= ======== ========
PER COMMON SHARE:
Loss from continuing operations................. $ (0.57) $ (0.78) $ (1.09)
Loss from discontinued operations............... (0.05) (0.46)
------- -------- --------
Net loss........................................ $ (0.57) $ (0.83) $ (1.55)
======= ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES................................ 12,094 14,878 21,210
======= ======== ========
</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>
PREFERRED
COMMON STOCK STOCK ADDITIONAL
------------- -------------- PAID-IN TREASURY UNEARNED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK COMPENSATION
------ ------ ------ ------ ---------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1995................... 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
Purchase of minority
interest............ 300 3 1,909
Payment of expenses.. 160 2 862
Purchase of assets... 241 2 1,925
Employment contract.. 200 2 943 (945)
Distributions to
stockholders........ (25)
Purchase of treasury
stock................. (1)
Amortization of
unearned
compensation.......... 154
Net loss............... (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
Purchase of assets... 26 175
Conversions of
preferred stock..... 726 7 (173) (2) (5)
Repurchase of stock
warrants.............. (1,645)
Preferred stock
dividends............. 136 1 2,997 (3,048)
Amortization of
unearned
compensation.......... 158
Net loss............... (9,285)
------ ---- ----- --- -------- -------- ----- -----
Balance, December 31,
1996................... 15,934 159 1,027 10 73,623 (30,608) (2) (633)
Stock Issuances:
Private placements... 285 3 290 3 26,630
Exercise of stock
options............. 226 2 837
Purchase of assets... 177 2 1,879
Conversion of stock
warrant............. 227 2 (2)
Conversions of
preferred stock..... 9,907 99 (937) (9) (70)
Non-employee stock
options............... 634
Preferred stock
dividends............. 14 1 11 2,712 (3,384)
Purchase of treasury
stock................. (236)
Warrants issued with
debt.................. 389
Amortization of
unearned
compensation.......... 130
Net loss............... (29,422)
------ ---- ----- --- -------- -------- ----- -----
Balance, December 31,
1997................... 26,770 $268 391 $ 4 $106,632 $(63,414) $(238) $(503)
====== ==== ===== === ======== ======== ===== =====
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................... $ (6,911) $ (9,285) $(29,422)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 2,153 4,434 8,071
Deferred franchise revenue................... (80)
Minority interest in net loss................ (140) (422) (631)
Assets written off or abandoned.............. 695 3,840
Loss on disposal of discontinued operations.. 7,000
Changes in operating assets and liabilities,
net of acquisition:
Receivables................................ (96) (416) (494)
Inventories................................ (80) (628) (191)
Prepaid expenses and other................. (157) 281 (890)
Accounts payable........................... 1,125 1,659 661
Accrued expenses and other liabilities..... 1,220 (407) 3,385
-------- -------- --------
Net cash used in operating activities.... (2,271) (4,784) (8,671)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................... (10,155) (19,459) (17,460)
Acquisition of Hamburger Hamlet................ (10,527)
Sale of marketable securities.................. 15,160 17,426
Purchase of marketable securities.............. (3,663) (16,717) (17,918)
Notes and loans to employees and others........ (276) (920) (664)
Payments on notes and loans.................... 1,337
Sale and leaseback of store assets............. 1,978
Investments in and advances to related
entities...................................... (528) (790)
Payment of pre-opening......................... (1,287) (1,588) (1,338)
Lease acquisitions and other costs............. (218) (1,273) (91)
-------- -------- --------
Net cash used in investing activities.... (15,599) (25,325) (28,047)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from private placements........... 17,662 30,415 26,636
Proceeds from borrowings....................... 104 1,600 12,433
Payments on loans payable...................... (115) (97) (336)
Minority capital contributions................. 616 120
Dividends paid on preferred stock.............. (49) (390)
Repurchase of Common Stock and warrants........ (1,645) (236)
Proceeds from exercise of stock options and
warrants...................................... 2,214 1,146 840
Other.......................................... 347 (172)
-------- -------- --------
Net cash provided by financing
activities.............................. 20,828 31,198 39,067
-------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS........ 2,958 1,089 2,349
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR..... 544 3,502 4,591
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR........... $ 3,502 $ 4,591 $ 6,940
======== ======== ========
</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 which owns and operates casual dining restaurants featuring
flame-broiled skinless chicken, rotisserie chicken, hand-carved turkey,
salads, sandwiches and fresh-baked goods. The Company's wholly-owned
subsidiary, The Hamlet Group, Inc., doing business under the name Hamburger
Hamlet, operates full-service restaurants in a casual environment. The
Company's wholly-owned subsidiary Arrosto Coffee Company, provides 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 which was discontinued in 1997.
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 Hamburger Hamlet,
Arrosto Coffee Company and Color Me Mine.
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, however, 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, 1997, the Company has
uninsured cash and cash equivalents in the amount of $3,351,000.
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.
F-7
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Equity Method
Investments in joint ventures in which the Company holds a 20% to 50%
interest are carried at cost, adjusted for the Company's proportionate share
of their undistributed earnings or losses.
Property and Equipment and Depreciation
Property and equipment is recorded at historical 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.
Intangible Assets
Goodwill represents the excess of the cost of companies acquired over the
fair value of their net assets at dates of acquisition and is amortized on the
straight-line method over 25 years. Amortization expense charged to operations
for the year ended December 31, 1997 was $60,000.
Fair Value of Financial Instruments
Estimated fair values of cash and short-term investments approximates the
carrying value of such investments. The fair value of long-term debt based on
the current rates at which the Company could borrow funds with similar
remaining maturities, approximates its carrying value as of December 31, 1997.
Store Locations
The following is a summary of restaurant activity, excluding Arrosto Coffee
and Color Me Mine locations:
<TABLE>
<CAPTION>
NUMBER
OF LOCATIONS
----------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Beginning of year......................................... 8 16 27
Opened during year...................................... 9 12 14
Acquisition of Hamburger Hamlet......................... -- -- 14
Closed during year...................................... (1) (1) (5)
--- --- ---
End of year............................................... 16 27 50
=== === ===
</TABLE>
Pre-Opening Costs
Pre-Opening costs, consisting primarily of salaries and related expenses and
occupancy costs, 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.
F-8
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition
In connection with its business activity of selling individual and area
franchises, principally with respect to Color Me Mine, 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 Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
No. 109"). SFAS No. 109 requires the use of the asset and liability method,
whereby 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.
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
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
issued by the FASB is effective for financial statements with fiscal years and
interim periods ending after December 15, 1997. SFAS 128 provides for the
calculation of Basic and Diluted earnings per share. Basic earnings per share
includes no dilution and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding
during the periods presented. Dilutive earnings per share reflects the
potential dilution of securities that could share in the earnings, such as
stock options, warrants or convertible debentures. Stock options and warrants
outstanding during the periods presented were not included in diluted earnings
per share 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 Convertible Preferred Stocks, computed in
accordance with the Securities and Exchange Commission's recent position on
accounting for preferred stock which is convertible at a discount to the
market. The dividends on preferred stock include deemed dividends of
$1,945,000 and $1,419,000 for the years ended December 31, 1996 and 1997.
Reclassifications
The financial statements for 1995 and 1996 have been reclassified to conform
to the current year's presentation.
F-9
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Long-Lived Assets
The Company accounts for its long-lived assets in accordance with Statement
of Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" which establishes
guidelines regarding when impairment losses on long-lived assets, which
include property and equipment and certain identifiable intangible assets,
should be recognized and how impairment losses should be measured. The Company
periodically reviews such assets for possible impairment and expected losses,
if any, are recorded currently. During the year ended December 31, 1997, the
Company provided reserves of assets to be disposed of as described in Note 2
below.
New Accounting Pronouncements
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income," issued by the FASB is effective for financial statements with fiscal
years beginning after December 15, 1997. SFAS establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. The Company does not expect adoption
of SFAS 130 to have any effect on its financial position or results of
operations. Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information," issued by the SFASB
is effective for financial statements with fiscal years beginning after
December 15, 1997. SFAS 131 requires that public companies report certain
information about operating segments, products, services and geographical
areas in which they operate and their major customers. The Company does not
expect adoption of SFAS 131 to have any effect on its financial position or
results of operations; however, disclosures with respect to the aforementioned
items may be increased.
NOTE 2--DISCONTINUED OPERATIONS 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 the Company's Common
Stock. Two founders of the acquired company, received five year management
agreements 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.
In November 1997, the Company initiated a plan to dispose of its 90% owned
subsidiary, Color Me Mine. Accordingly, the Company has reclassified the
operations of Color Me Mine as discontinued operations in the accompanying
statements of operations. The Company recorded an estimated loss of $7.0
million on the disposal of assets relating to the Color Me Mine subsidiary,
including approximately $1.2 million relating to estimated losses during the
phase out period. The accompanying consolidated balance sheet as of December
31, 1997 includes current assets of $1,972,000, long-term assets of $4,720,000
and total liabilities of $1,392,000 as well as the $7,000,000 reserve for the
disposal of these assets.
NOTE 3--ACQUISITION OF HAMBURGER HAMLET RESTAURANTS
On May 19, 1997, the Company completed the acquisition of fourteen (14)
Hamburger Hamlet restaurants for a purchase price of $11.7 million, consisting
of $9.7 million in cash from the Company's existing working capital and
150,000 shares of the Company's Common Stock, plus fees and expenses of
approximately $700,000. The Company also assumed $250,000 in debt and assumed
real property leases related to the Hamburger Hamlet restaurants. The
acquisition was accounted for using the purchase method of accounting with the
assets acquired and liabilities assumed recorded at fair values, and the
results of the Hamburger Hamlet restaurants included in the Company's
consolidated financial statements from the date of acquisition. The excess of
cost over net assets acquired of $2,586,000 is being amortized using the
straight-line method over 25 years.
F-10
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pursuant to the terms of the definitive purchase agreement between the
Company and the sellers (the "Purchase Agreement"), the purchase price is
subject to adjustment with respect to that portion of the purchase price paid
in shares of the Company's Common Stock. The Purchase Agreement provides for
an adjustment to the purchase price if the market value of the Common Stock is
less than $11.67 per share at a date 18 months after the consummation of the
acquisition (as adjusted for customary anti-dilutive adjustments, if any,
during such period). The Company will either pay cash or issue additional
shares of Common Stock to the sellers, at the Company's option, to the extent
that the aggregate value of such cash or additional shares of Common Stock,
together with 150,000 shares of Common Stock originally issued in connection
with the acquisition, shall equal $1,750,000, subject to certain limitations
in the event the Sellers transfer any of the initial 150,000 shares of Common
Stock during such 18-month period. Purchase price adjustments, if any, will be
accounted for prospectively as an adjustment to the excess of cost over net
assets acquired and amortized accordingly.
The following unaudited pro-forma condensed consolidated financial data
assumes that the acquisition of the Hamburger Hamlet restaurants occurred on
January 1 of each year presented:
<TABLE>
<CAPTION>
1996 1997
------- --------
(IN THOUSANDS)
<S> <C> <C>
Restaurant sales........................................ $66,666 $ 80,021
Loss from continuing operations......................... (8,197) (18,998)
Net loss................................................ (8,932) (29,785)
Net loss per common share............................... (0.60) (1.40)
</TABLE>
NOTE 4--MARKETABLE SECURITIES
At December 31, 1997, marketable securities of $5,712,000 at face value
(which approximates market value) consisting of short term investments in
corporate bonds, and $1,315,000 of U.S. Treasury Notes maturing at various
dates from February 1998 to March 2002. Interest rates on theses investments
range from 5.53% to 7.75%. These securities are classified as "Available-for-
sale" and are included in current assets since the Company may convert these
investments to cash during the fiscal year ending December 31, 1998.
NOTE 5--INVESTMENTS IN JOINT VENTURES
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 Roo Canada"). The Company
holds a 28% ownership and profit/loss participation interest in Koo Koo Roo
Canada. Under the terms of the joint venture agreement, if requested, the
Company is required to provide it's proportionate share of capital
contributions.
F-11
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Leasehold improvements................................... $17,969 $27,572
Land and building........................................ 1,560 1,544
Machinery and equipment.................................. 9,947 13,669
Furniture and fixtures................................... 4,223 7,827
Construction-in-progress................................. 2,116 3,340
------- -------
35,815 53,952
Accumulated depreciation and amortization................ (4,508) (8,725)
------- -------
Net property and equipment............................... $31,307 $45,227
======= =======
</TABLE>
As of December 31, 1997, the estimated cost to complete construction-in-
progress is $1.9 million.
NOTE 7--INTANGIBLES AND OTHER ASSETS
Intangibles and other assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
------ -------
(IN THOUSANDS)
<S> <C> <C>
Lease acquisition costs, net of accumulated amortization of
$203,000 and $587,000..................................... $2,070 $ 5,411
Lease security deposits.................................... 774 665
Pre-opening costs, net of accumulated amortization of
$1,827,000 and $287,000................................... 1,056 1,093
Excess of cost over fair value of assets acquired, net of
accumulated amortization of $0 and $60,000................ -- 2,526
Other intangibles, net of accumulated amortization of
$809,300 and $741,000..................................... 1,478 1,640
------ -------
Net Intangible and other assets............................ $5,378 $11,335
====== =======
</TABLE>
NOTE 8--MINORITY INTERESTS IN SUBSIDIARIES
Minority interest represents the limited partners' interest in two
partnerships and the minority stockholders' interest in the Color Me Mine
subsidiary, both of which are controlled by the Company. Pursuant to the
partnership agreements, profits and losses and cash distributions are
allocated based on ownership percentages. 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.
F-12
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------ -------
(IN THOUSANDS)
<S> <C> <C>
Senior Notes, less unamortized discount of $346,000(a)....... $ -- $11,654
Line of credit payable to a bank with interest at the bank's
certificate of deposit
rate plus 1% (6.34% at December 31, 1997) payable on demand
and secured by a
$500,000 certificate of deposit............................. -- 446
Prime rate plus 1% (9.25% at December 31, 1997) notes payable
to a bank with equal monthly installments over a seven year
period, collateralized by assets and leasehold interest of
two of the Company's restaurants............................ 1,544 1,370
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........................................................ 101 75
Other........................................................ 50 248
------ -------
1,695 13,793
Less: current portion...................................... (220) (803)
------ -------
Long-term debt, net of current portion....................... $1,475 $12,990
====== =======
</TABLE>
- --------
(a) In August 1997, the Company issued $12 million in Senior Notes due August
15, 2000 (the "Senior Notes") to an institutional investor in a private
placement. The notes carry an interest rate of 13% payable quarterly and
include attached five-year warrants to purchase 330,000 shares of the
Company's Common Stock at a price of $5.375 per share. The warrants were
valued at $389,400 and recorded as an issue discount to the Senior Notes.
A principal payment of $2.5 million is due in February 1999. The holder of
the Senior Notes has the right to require the repurchase of the Senior
Notes if the Company completes equity or mezzanine financings of more than
$20 million, or upon a change in control of the Company. The Company is
required to file a shelf registration statement for the shares of Common
Stock issuable upon exercise of the warrants on or before May 25, 1998. In
connection with the issuance of the Senior Notes, the Company paid the
investors a $300,000 commitment fee and paid the placement agents a
$300,000 placement fee plus warrants to purchase 60,000 shares of the
Company's Common Stock at $5.375 per share.
Long-term debt maturities during the next five years is as follows; $803,000
in 1998, $2,721,000 in 1999, $9,380,000 in 2000, $211,000 in 2001 and $187,000
in 2002 and $491,000 thereafter.
NOTE 10--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 which expired on January 31, 1998.
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
F-13
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company has the right, under certain conditions, to request the mandatory
exercise of these warrants after August 15, 1996. In November 1996, the
Company repurchased and canceled 813,589 of the stock warrants at a price of
$2.00 per warrant ($1,645,000 in the aggregate, including costs).
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. During 1997, 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 1,200,000 shares
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.
In February 1997, the Company completed a private placement of 290,000
shares of 6% Series B Adjustable Convertible Preferred Stock, liquidation
preference $100 per share (the "Series B Convertible Preferred Stock"), and
received net proceeds of approximately $26.6 million (after deducting cash
fees to the placement agent and 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.
Stock Awards Plans
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"). In October 1997, the Board of Directors
approved the 1997 Stock Option Plan for Restaurant Employees and Management of
Koo Koo Roo, Inc. (the "1997 Option Plan"). The 1997 Option Plan covers an
aggregate of 750,000 shares of Common Stock.
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.
F-14
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On November 18, 1997, The Company's Compensation Committee agreed to reset
the exercise price of employee options, except those options issued to its
executive officers. The reset option price was $3.50 per option. The following
table summarizes the activity in the Awards Plan and the 1997 Option Plan:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Options outstanding--January 1, 1995............ 2,463 $4.12
Granted....................................... 1,108 6.08
Exercised..................................... (4) 1.75
Canceled...................................... (473) 4.95
-----
Options outstanding--December 31, 1995.......... 3,094 4.70
Granted....................................... 1,545 7.98
Exercised..................................... (29) 5.45
Canceled...................................... (516) 6.54
-----
Options outstanding--December 31, 1996.......... 4,094 5.69
Granted....................................... 1,201 2.35
Canceled...................................... (746) 7.02
-----
Options outstanding--December 31, 1997.......... 4,549 4.56
=====
</TABLE>
The number of shares of Common Stock available for granting future options
was 1,098,300, 70,365 and 451,000 at December 31, 1995, 1996 and 1997. At
December 31, 1997, options were exercisable to purchase 2,674,000 shares at a
weighted average price per share of $4.28.
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.
F-15
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes the activity of non-plan options:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
(IN
THOUSANDS)
<S> <C> <C>
Options outstanding--January 1, 1995........... 1,391 $4.69
Granted...................................... 1,700 5.39
Exercised.................................... (537) 4.10
-----
Options outstanding--December 31, 1995......... 2,554 5.67
Granted...................................... 1,674 7.67
Exercised.................................... (217) 4.43
Canceled..................................... (31) 6.70
-----
Options outstanding--December 31, 1996......... 3,980 6.53
Granted...................................... 1,437 5.28
Exercised.................................... (225) 3.72
Canceled..................................... (471) 6.74
-----
Options outstanding--December 31, 1997......... 4,721 6.39
=====
Options exercisable--December 31, 1997......... 3,691 6.06
=====
</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, 1997, 40,000 options were outstanding of which
27,500 were exercisable; 10,000 shares at $5.00 per share, 5,000 shares at
$6.56 per share, 10,000 at $6.625 per share and 2,500 shares at $7.125 per
share.
F-16
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(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 loss and loss per share for the years
ended December 31, would have been increased to the pro forma amounts
presented below:
<TABLE>
<CAPTION>
1996 1997
-------- --------
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Net loss
As reported......................................... $ (9,285) $(29,422)
Pro forma........................................... $(10,619) $(33,772)
Primary loss per common share
As reported......................................... $ (0.83) $ (1.55)
Pro forma........................................... $ (0.92) $ (1.75)
</TABLE>
Due to the fact that the Company's stock option programs vest over many
years and additional awards are made each year, the above pro forma
information is not necessarily indicative of the financial impact on the
Company's results had the disclosure provisions of SFAS 123 been applicable to
all years of previous option grants. The above information does not include
the effect of options granted prior to 1995 that vest in 1995 and 1996.
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 options granted during 1997; expected life of option of 5
years, expected volatility of 50%, risk free interest rate of 6.0% and a 0%
dividend yield. The weighted average fair value at the grant date for such
options range from $2.15 to $7.50 per option.
Additional information relating to stock options and warrants outstanding
and exercisable at December 31, 1997 summarized by exercise price are as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------------------- ---------------
WEIGHTED
WEIGHTED AVERAGE AVERAGE
----------------------- ---------------
EXERCISE
PRICE LIFE EXERCISE EXERCISE
PER SHARE SHARES (YEARS) PRICE SHARES PRICE
--------- ------ ------- -------- ------ --------
<S> <C> <C> <C> <C> <C>
$0.62 to $3.44.................... 839 5.34 $1.53 718 $1.34
3.50.......................... 1,473 7.65 3.50 336 3.50
3.53 to 4.94..................... 883 6.25 4.32 799 4.38
5.00.......................... 1,492 6.53 5.00 1,492 5.00
5.06 to 5.75..................... 1,098 5.89 5.58 976 5.56
5.88 to 6.06..................... 1,260 5.55 5.97 1,180 5.97
6.13 to 7.69..................... 1,151 6.38 6.99 886 6.83
7.75 to 7.88..................... 98 5.44 7.75 58 7.75
8.00.......................... 1,363 3.20 8.00 693 8.00
8.50 to 10.00.................... 610 6.94 8.75 110 8.52
------ -----
0.62 to 10.00.................... 10,267 5.94 5.49 7,248 5.32
====== =====
</TABLE>
F-17
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--RELATED PARTY TRANSACTIONS
The Company received various goods and services from a corporation in which
the Company's principal stockholder has a controlling interest. These services
include accounting, bookkeeping, occupancy and various other office services.
The Company paid $77,600, $82,000 and $74,000 for such services during the
years ended December 31, 1995, 1996 and 1997.
The Company receives various goods and services from a corporation in which
a former officer and director of the Company has controlling interest. These
goods and services include the preparation of training manuals, recruiting
activities and marketing services. The Company made payments of $327,600 and
$329,200 during the years ended December 31, 1995, 1996 for such goods and
services.
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. 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.
During 1997, the Company utilized the services of a general insurance agency
for placing a portion of its insurance requirements. A Director of the Company
is the Chairman of the Board and Chief Executive Officer of the insurance
agency. During the year ended December 31, 1997, the insurance agency received
commissions of approximately $92,000 on insurance policies placed with the
agency.
NOTE 12--INCOME TAXES
Net 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:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforwards...................... $10,204 $ 18,484
Estimate loss on disposal of assets................... -- 2,800
------- --------
Total Deferred Tax Assets........................... 10,204 21,284
------- --------
Deferred Tax Liabilities:
Capitalized pre-opening costs......................... (422) (437)
Excess depreciation................................... (73) (33)
------- --------
Total Deferred Tax Liabilities...................... (495) (470)
------- --------
9,709 20,814
Valuation Allowance..................................... (9,709) (20,814)
------- --------
Net Deferred Tax Assets................................. $ -- $ --
======= ========
</TABLE>
F-18
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Since inception, the Company has reported net 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, 1996 and 1997, respectively, since the Company can not determine
at this time, with reasonable certainty, that the net deferred tax assets will
be realized.
At December 31, 1997, the Company has available net operating loss
carryforwards of approximately $51 million for income tax purposes which
expire in varying amounts through 2012. Section 382 of the 1986 Internal
Revenue Code imposes limitations on the use of net operating losses following
certain changes in ownership. Such a change occurred during 1995. The annual
limitation imposed by Section 382 is approximately $3.4 million. The net
operating losses affected by Section 382 is approximately $17 of the $51
million available net operating losses. The remaining $34 million of net
operating loss carryforwards are not affected by this limitation.
NOTE 13--OTHER ITEMS
Store Closings
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 with the balance
payable in three equal installments plus interest on September 1, 1997,
January 1, 1998 and the final payment on January 1, 1999. The Company
recognized a gain on the sale in the amount of $201,000 during 1997.
During September 1997, the Company decided to exit three markets: Colorado,
New York and New Jersey. In connection with this decision the Company closed
its only restaurant in Colorado in July 1997 and its only restaurants located
in New York and New Jersey in early October 1997. The Company also closed a
restaurant in Los Angeles which did not conform to the California Kitchen
restaurant design. The charge related to these closings amounted to
approximately $2.8 million.
Fourth Quarter Adjustments
During the fourth quarter of 1997, the Company recorded additional reserves
relating to closed store locations and abandoned leases in the amount of $1.5
million, wrote-off the remaining unamortized balance of $947,000 relating to
area franchise/development rights described below, and wrote off other
capitalized costs amounting to $1.4 million. In addition, the Company provided
a $7.0 million reserve on the disposal of discontinued operations described in
Note 2.
Area Franchise/Development Rights
On August 18, 1995, the Company purchased the franchise rights for San Diego
and Northern California, the assets of one existing franchise, and certain
other assets. 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.
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
F-19
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
NOTE 14--COMMITMENTS AND CONTINGENCIES
The Company leases restaurant sites, 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>
1998...................................................... $ 7,135
1999...................................................... 7,074
2000...................................................... 6,786
2001...................................................... 6,547
2002...................................................... 5,746
Thereafter................................................ 28,155
-------
Total................................................... $61,443
=======
</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 ordinary course of 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.
During 1997, the Company approved a Section 401(k) Plan which permits
eligible employees of the Company to defer up to 15% of their annual
compensation, subject to certain limitations imposed by the Internal Revenue
Code of 1996, as amended (the "Code"). The employees's elective deferrals are
immediately vested and non-forfeitable upon contribution to the Section 401(k)
Plan. Employee deferrals may be invested, at each employee's option, in one or
all of certain publicly traded mutual funds, guaranteed interest rate
contracts or shares of the Company's Common Stock.
F-20
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15--SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures of cash flow information: Interest paid amounted to
$9,100, $91,900 and $807,000 during the years ended December 31, 1995, 1996
and 1997.
Supplemental non-cash 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 the fair value of the shares at the
dates of issuance as follows:
<TABLE>
<CAPTION>
SHARES AMOUNT
------ ------
(IN
THOUSANDS)
<S> <C> <C>
Year Ended December 31, 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
Year Ended December 31, 1996:
Acquisition of assets...................................... 26 175
Payment of expenses........................................ 17 92
Year Ended December 31, 1997:
Acquisition of assets...................................... 177 1,881
</TABLE>
During 1997, the Company issued 14,432 common shares and 10,837 Series B
preferred shares in payment of dividends on the Series B preferred in the
amount of $1.3 million.
NOTE 16--SUBSEQUENT EVENTS
During March 1998, the Company developed and approved a plan to restructure
the Company. The restructuring plan provides for, among other things, a
reduction in the number of store openings planned for 1998 and a reduction in
the number of employees at the corporate office. In addition, the Company
decided to exit the Washington D. C. market and closed three restaurants and
abandoned a lease for a fourth location. The Company will also close its
Arrosto coffee factory which grinds and packages coffee for use in its
restaurants. In connection with this restructuring, the Company will recognize
charges in the first quarter of 1998 ranging from $10 to $12 million. The
Company is in the process of finalizing its restructuring plan and expects to
provide further details in connection with the release of its first quarter
results.
As of December 31, 1997, the Company had 26,770,170 shares of Common Stock
outstanding. However due to the on-going conversions of the Company's Series A
and Series B convertible preferred stock, the number of common shares
outstanding at March 19, 1998 increased to 47,339,569 common shares. The
Company is currently authorized to issue a total of 50 million shares of
Common Stock. Therefore, the Company is in the process of seeking stockholder
approval to increase the number of authorized shares of common stock to
75 million.
F-21
