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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(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)]
KOO KOO ROO, INC,
(Exact name of Registrant as specified in its charter)
Delaware 22-3132583
- --------------------------------- ------------------
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification #)
11075 Santa Monica Boulevard, Suite 225, Los Angeles, CA 90025
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (310) 479-2080
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------
(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
Portions of the Company's Proxy Statement with respect to its 1998 Annual
Meeting of Stockholders to be filed not later than 120 days after the end of the
fiscal year are incorporated by reference in Part III of this Form 10-K.
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KOO KOO ROO, INC.
INDEX TO FORM 10-K
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PART I
Item 1. Business.............................................................................. 1
Item 2. Properties............................................................................ 15
Item 3. Legal Proceeding...................................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders.................................. 15
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters............. 16
Item 6. Selected Financial Data............................................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.. 18
Item 8. Financial Statements and Supplementary Data........................................... 24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.. 24
PART III
Item 10. Directors and Executive Officers...................................................... 25
Item 11. Executive Compensation................................................................ 25
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 25
Item 13. Certain Relationships and Related Transactions........................................ 25
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................... 26
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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. See "--
Restaurants in Operation and Expansion Plans."
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 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."
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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 out-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 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.
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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 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 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 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 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.
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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 will be developed as joint ventures.
As consideration for the May 1996 amendment, the Developer was issued options to
purchase 350,000 shares of Common Stock at $8.00 per share. The developer is an
affiliate of 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 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 that
discussed herein under the caption "--Recent Developments" and there can be no
assurance that any such opportunity will be identified or realized.
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 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
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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 focus on giving courteous, friendly service with a
heightened sense of urgency. Quality monitoring and training for food
preparation and other key service standards is supported by a self-managed,
multi-lingual, card and audio tape training system to assist management in
maintaining consistency as the Company grows.
PROPRIETARY, SIGNATURE PRODUCTS AND DISPLAYS. The Company's signature
product, Original Skinless Flame-Broiled Chicken(TM), has never been duplicated
to the Company's knowledge and requires marinating and basting in a proprietary
sauce. The Company has developed other proprietary dishes and received a patent
for its Turkey Bar, which features hand-carved, fresh 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 averaging 5% same store sales growth for January and February 1998. 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.
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, California, Cherry
Creek, Colo., Bayside, N.Y., Westfield, N.J., Bethesda, Md., Falls Church, Va.,
and intends to close the National Airport location in early 1998.
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KOO KOO ROO RESTAURANTS IN OPERATION AS OF MARCH 19, 1998:
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Location Sq. Footage Date Opened
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LOS ANGELES COUNTY, CA: North Beverly Hills 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.
Page 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 VENTURES) 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.
Page 9
<PAGE>
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.
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 partner to
convert its joint venture arrangements in Canada and Florida into license
agreements, in 1998. See "--Recent Developments."
Page 10
<PAGE>
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 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 open studios 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.
Page 11
<PAGE>
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 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.
Page 12
<PAGE>
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 dispensing or discounting 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 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.
Page 13
<PAGE>
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.
Page 14
<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 "--
Restaurants Opened as of March 19, 1998."
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
Page 15
<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
sales 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 (through March 19, 1998) 2.340 1.250
</TABLE>
On March 19, 1998, there were 684 holders of record of the Company's Common
Stock. The Company estimates that there are approximately 10,000 beneficial
owners of such stock.
The Company has not paid cash dividends on its Common Stock since its
incorporation and does not intend to declare any such dividends in the
foreseeable future. The Company is obligated to pay dividends at the rate of 5%
per annum (which generally may be in cash or Common Stock) on its Series A
Convertible Preferred Stock issued in March 1996. The Company is also obligated
to pay dividends at the rate of 6% per annum (which generally may be in cash or
Series B Preferred Convertible Stock) on its Series B Convertible Preferred
Stock issued in February 1997. See "Business - Recent Developments."
Page 16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share amounts and number of restaurants)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
<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.
Page 17
<PAGE>
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. See "Business - Business Risks".
Calendar years 1996 and 1997 marked periods of continued expansion for the
Company as the Company opened 12 (of which 10 are still open) and 14 (of which
11 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
restaurant locations in the Washington D.C. beltway area and decided 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 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.
Page 18
<PAGE>
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 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."
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 $ 4,071
------- -------- -------- ------ ------ -------
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 1,071 2,582
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 2,807 6,771
------- -------- -------- ------ ------ -------
Operating income (loss) $(7,696) $(10,094) $(19,272) $ 55 $ (789) $(2,700)
======= ======== ======== ====== ====== =======
</TABLE>
Page 19
<PAGE>
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.
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.
Page 20
<PAGE>
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 Item 1. "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 sixteen restaurants which
operated during both the current and prior calendar years and twelve 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
years 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 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.
Page 21
<PAGE>
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
Kitchen(TM) 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 1996 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.
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.
Page 22
<PAGE>
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 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 twelve 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 has 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 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.
Page 23
<PAGE>
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
Page 24
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information concerning directors and executive officers of the Registrant is
incorporated herein by reference to the Company's definitive proxy statement
which will be filed with the Commission within 120 days of the Company's fiscal
year end.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation of the Registrant is
incorporated herein by reference to the Company's definitive proxy statement
which will be filed with the Commission within 120 days of the Company's fiscal
year end.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owner and
management of the Registrant is incorporated herein by reference to the Company
definitive Proxy Statement which will be filed with the Commission within 120
days of the Company's fiscal year end.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning security ownership of certain beneficial owner and
management of the Registrant is incorporated herein by reference to the Company
definitive Proxy Statement which will be filed with the Commission within 120
days of the Company's fiscal year end.
Page 25
<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.
Page 26
<PAGE>
(a)(3) EXHIBITS
The following exhibits are filed in the order hereinafter listed:
<TABLE>
<CAPTION>
EXHIBIT
- -------
<S> <C>
3.1 Restated Certificate of Incorporation of Registrant/1/
3.2 Amended and Restated Bylaws of Registrant, as amended March 1992/2/
3.3 Bylaw Amendment Changing year-end/3/
3.4 Certificate of Amendment to the Restated Certificate of Incorporation of Koo Koo Roo, Inc./10/
3.5 Certificate of Designations of 5% Convertible Preferred Stock/9/
4.1 Form of Certificate for Common Stock of Registrant/1/
4.2 Form of Certificate for 5% Convertible Preferred Stock of Registrant/9/
4.3 Form of Amendment to the Restated Certificate of Incorporation of Registrant/9/
4.4 Certificate of Designations of 5% Convertible Preferred Stock of Registrant/9/
4.5 Form of Warrant Agreement used in connection with the Company's February 1995
private placement of Company Common Stock and Warrants/8/
4.6 Form of Warrant Agreement used in connection with the Company's June 1995 private
placement of Company Common Stock and Warrants/8/
4.7 Form of Stock Purchase Agreement dated March 12, 1996 by and among the Registrant
and the purchasers named therein/9/
4.8 Form of Preferred Stock Investment Agreement dated March 20, 1996 by and among the
Registrant and the purchasers named therein/9/
4.9 Certificate of Designations of Series B 6% Convertible Preferred Stock/13/
4.10 Form of Certificate for Series B 6% Convertible Preferred Stock/13/
4.11 Form of Series B Preferred Stock Investment Agreement dated February 27, 1997 by and
among the Registrant and the purchasers named therein/13/
4.12 Form of 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 Mosslin 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/
</TABLE>
Page 27
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
- -------
<S> <C>
10.63 KKRO Partners, L.P. Purchase Agreement dated as of September 26, 1995 by and
between the Company and KKRO Partners, L.P./8/
10.64 KKRO Partners, L.P. Liquidation Agreement dated as of September 28, 1995 by and
between the Company and KKRO Partners, L.P./8/
10.65 Form of Warrant Agreement used in connection with the Company's February 1995
private placement of Company Common Stock and Warrants /8/
10.66 Form of Warrant Agreement used in connection with the Company's June 1995
private placement of Company Common Stock and Warrants/8/
10.67 Form of Stock Purchase Agreement dated March 12, 1996 by and among the
Registrant and the purchasers named therein/9/
10.68 Form of Preferred Stock Investment Agreement dated March 20, 1996 by and
among the Registrant and the purchasers named therein/9/
10.69 Agreement for Acquisition of Color Me Mine, Inc./10/
10.70 Canadian Letter of Intent/10/
10.71 Business Development Services Agreement, dated as of May 8, 1996, by and
between the Registrant and Restaurant Marketing Corporation/11/
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/17/
23.1 Consent of BDO Seidman, LLP/17/
27.1 Financial Data Schedule/17/
</TABLE>
footnotes
- ------------
<TABLE>
<S> <C>
/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).
</TABLE>
Page 28
<PAGE>
/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 third quarter 1997 charge of $4.8 million.
Page 29
<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: March 27, 1998 By: /S/ A. WILLIAM ALLEN
----------------------------------
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 March 27, 1998
- ----------------------- and Director
A. William Allen (Principal Executive Officer)
/S/ LEE A. IACOCCA Chairman of the Board March 27, 1998
- -----------------------
Lee A. Iacocca
/S/ WILLIAM M. MCKAY Chief Financial Officer March 27, 1998
- ----------------------- and Treasurer
William M. McKay (Principal Financial Officer)
/S/ JEANNE GILES Vice-President, Controller March 27, 1998
- ----------------------- (Principal Accounting Officer)
Jeanne Giles
/S/ MEL HARRIS Director March 27, 1998
- -----------------------
Mel Harris
/S/ DONALD WOHL Director March 27, 1998
- -----------------------
Donald Wohl
/S/ ROBERT F. KAUTZ Director March 27, 1998
- -----------------------
Robert Kautz
</TABLE>
Page 30
<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,
-------------------
ASSETS 1996 1997
------ ------- -------
<S> <C> <C>
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
======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
<S> <C> <C>
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>
Common Preferred
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
(In thousands)
Increase (Decrease) in Cash and Cash Equivalents
<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.
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.
F-7
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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.
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.
F-8
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Stock-Based Compensation
In 1996, the Company adopted for footnote disclosure purposes
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123) which requires that companies measure the cost of
stock-based employee compensation at the grant date based on the value of the
award and recognize this cost over the service period. The value of the stock
based award is determined using a pricing model whereby compensation cost is the
excess of the fair value of the stock as determined by the model at grant date
or other measurement date over the amount an employee must pay to acquire the
stock.
Net Loss Per Common Share
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.
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.
F-9
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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 non-current assets of $728,000, long-term assets of $3,992,000
and total liabilities of $1,392,000 as well as the $7.0 million 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.
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
-------- ---------
<S> <C> <C>
(In thousands)
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>
F-10
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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 restaurant concept in Canada ("Koo Koo Koo Canada"). The Company holds
a 40% 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.
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>
F-11
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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.
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.
F-12
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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 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.
F-13
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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.
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>
Weighted Average
Number of 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-14
<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>
Weighted Average
Number of 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-15
<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 Average
Exercise Price ----------------------------- Weighted Average
Per Share Shares Life (Years) Exercise Price Shares Exercise 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-16
<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-17
<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 an $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.
F-18
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In August 1995, the Company acquired certain development and joint
venture rights for possible future locations in the State of Florida and certain
portions of Georgia. As consideration for this agreement, the Company granted a
non-plan stock option to purchase 300,000 shares of Common Stock at $4.50 per
share, a price lower than the quoted market price at the time the option was
granted. The rights were recorded at the excess of the market value over the
exercise price which amounted to $414,000 and is being amortized over a period
of ten years. In May 1996, the agreement was modified whereby all future
locations will be developed as joint ventures through newly-formed partnerships
of which the Company will own a 50% interest. In consideration for this
amendment, the Company granted the area developer options to purchase 350,000
shares of the Company's Common Stock at $8.00 per share.
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-19
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(concluded)
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-20
<PAGE>
Exhibit 21.1
Koo Koo Roo, Inc.
Subsidiaries of the Registrant
------------------------------
Name of Subsidiary* % Owned State of Incorporation
----------------------------- ------- ----------------------
Arrosto Coffee Company, Inc. 100% California
Color Me Mine, Inc. 90% California
Color Me Mine Franchising, Inc. (1) California
The Hamlet Group, Inc. 100% California
HH of Virginia, Inc. (2) Virginia
HH of Maryland, Inc. (2) Maryland
* Insignificant subsidiaries have been omitted
----------------------------
(1) 100% owned subsidiary of Color Me Mine, Inc.
(2) 100% owned subsidiaries of The Hamlet Group, Inc.
<PAGE>
Exhibit 23.1
------------
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Koo Roo Roo, Inc.
Los Angeles, California
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (333-3360), in the Registration Statement on Form S-3
(333-23-263) and in the Registration Statement on Forms S-8 of our report dated
March 20, 1998 relating to the consolidated financial statements of Koo Koo Roo
Inc., appearing in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
BDO SEIDMAN, LLP
Los Angeles, California
March 20, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 DEC-31-1997
<CASH> 4,591 6,940
<SECURITIES> 5,220 5,712
<RECEIVABLES> 1,803 2,544
<ALLOWANCES> 0 0
<INVENTORY> 815 1,237
<CURRENT-ASSETS> 12,625 17,519
<PP&E> 31,307 45,227
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 49,772 75,463
<CURRENT-LIABILITIES> 5,518 19,483
<BONDS> 0 0
0 0
10 4
<COMMON> 159 268
<OTHER-SE> 42,380 42,477
<TOTAL-LIABILITY-AND-EQUITY> 49,772 75,463
<SALES> 36,608 68,338
<TOTAL-REVENUES> 36,608 68,338
<CGS> 26,160 47,437
<TOTAL-COSTS> 46,702 87,610
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 95 807
<INCOME-PRETAX> 8,550 19,636
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 8,550 19,636
<DISCONTINUED> 735 9,786
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (9,285) (29,422)
<EPS-PRIMARY> (.83) (1.55)
<EPS-DILUTED> (.83) (1.55)
</TABLE>
