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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
(Fee required)
For the fiscal year ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(No fee required)
For the transition period from to
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Commission file number 0-20718
FOODQUEST, INC.
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(Name of Small Business Issuer in its Charter)
Florida 65-0343280
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(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
11900 Biscayne Boulevard, Suite 509, Miami, Florida 33181
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(Address of Principal Executive Offices) (Zip Code)
(305) 899-2585
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Issuer's Telephone Number, Including Area Code
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $.01 par value per share
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(Title of class)
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act during the past 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
- --
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained herein, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. X
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State issuer's revenues for its most recent fiscal year: $8,150,013
State the aggregate market value of the voting stock held by non-
affiliates computed by reference to the price at which the stock was sold, or
the average bid and asked prices of such stock, as of a specified date within
the past 60 days.
$1,098,914 as of May 31, 1996
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
3,218,271 shares of Common Stock, $.01 par value per share, as of May 31, 1996
If the following documents are incorporated by reference, describe
them and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into
which the document is incorporated: (1) any annual report to security holders;
(2) any proxy or information statement; and (3) any prospectus filed pursuant to
Rule 424(b) or (c) under the Securities Act of 1933.
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Item 1. Description of Business.
General
The Company owns and operates one Clucker's restaurant in Broward
County, Florida. Additionally, the Company is a partner in a joint venture
owning the operating and development rights for Kenny Rogers Roasters(R)
Restaurants in the metropolitan area of Atlanta, Georgia. The Company owns four
Roasters concept restaurants in Dade County, Florida, currently under
management by Roasters Corp. pursuant to a contract dated March 31, 1996, to
sell those restaurants to Roasters Corp. From December 1, 1994 until
March 31, 1996, the Company was an area developer of Kenny Rogers Roasters(R)
restaurants in Dade County, Florida; the metropolitan area of Atlanta, Georgia;
and the countries of Belgium, the Netherlands and Luxembourg. In addition, an
area developer of the Company operates one Clucker's restaurant located in San
Antonio, Texas. From May 1990 until November 11, 1994, the Company engaged in
the business of developing, owning and franchising "Clucker's" restaurants. Both
types of restaurants are quick-service restaurants that feature wood roasted
rotisserie chicken and freshly prepared side dishes designed for eat-in, carry-
out and drive-thru service.
The Company is a Florida corporation that was incorporated in
May 1992. The Company has two wholly-owned subsidiaries: (i) Clucker's Wood
Roasted Chicken, Inc. - Suniland; and (ii) Clucker's International Franchise
Corporation.
The Company's principal executive office is located at 11900 Biscayne
Boulevard, Suite 509, North Miami, Florida 33181. Its telephone number is
(305) 899-2585.
Recent Developments
On March 31, 1996, the Company entered into a joint venture with
Atlanta Roasters, Inc., another area developer of Kenny Rogers Roasters, with
respect to four Roasters concept restaurants in the metropolitan area of
Atlanta, Georgia, including two restaurants owned by the Company.
The Company has a 49.9% interest in the Atlanta joint venture, and
sold its Alpharetta and Marietta Roasters concept restaurants to the joint
venture for approximately $1,300,000. The purchase price includes the assumption
by the joint venture of equipment lease obligations and unpaid royalty fees owed
Roasters Franchise Corp. in connection with the two restaurants. The Company
received a promissory note for the $1,011,423 balance of the purchase price. The
note is secured by the two restaurants that the Company sold to the joint
venture.
Atlanta Roasters, Inc. has a 50.1% interest in the Atlanta joint
venture and sold two Roasters concept restaurants, one located in Stockbridge,
Georgia, and one located on North Druid Hills Road in Atlanta, to the joint
venture on terms similar to those for the Company. Atlanta Roasters will manage
the joint venture and the joint venture's restaurants for a management fee equal
to 2% of the restaurants' gross sales plus $250 per month per restaurant for
accounting services rendered.
On March 31, 1996, the Company also entered into a contract to sell
its four Roasters concept restaurants in Dade County, Florida (collectively, the
"Restaurants"), to Roasters Corp. for an aggregate purchase price of $3,393,918
and borrowed $500,000 from Roasters Corp. on a secured basis. Roasters Corp.
owns approximately 54% of the Company's outstanding common stock.
The purchase price in the contract to sell the Restaurants includes
(a) cancellation of $1,653,657 in debt owed by the Company to Roasters Corp. and
its affiliates and (b) assumption by Roasters Corp. of $843,127 in other
obligations owed by the Company to Roasters Corp. and its affiliates, and
(c) assumption by Roasters Corp. of $843,460 in third-party debt and equipment
lease obligations of the Company. The sale is subject to approval by the
Company's shareholders and landlords' and lenders' consents. The Company had
received offers from unaffiliated third parties, but the Roasters Corp. offer
was the highest received, and exceeded the valuation of the Restaurants that the
Company received from an outside valuation consultant.
The closing of the sale is to occur by July 31, 1996, which the
Company estimates should allow sufficient time to seek shareholder approval of
the sale. Pending the sale, Roasters Corp. will manage the Restaurants pursuant
to a Management Agreement dated March 31, 1996. Roasters Corp. will receive all
of the net revenues from the operation of the Restaurants as a management fee.
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The $500,000 loan from Roasters Corp. is interest free and is due upon
the earlier of the date on which the Registrant's shareholders approve the sale
to Roasters Corp. or August 1, 1996. The loan is secured by the four restaurants
to be sold to Roasters Corp.
Company-Owned Restaurant Locations
The locations of the Company's 5 wholly-owned and 2 partnership
restaurants and their designations as either Roasters or Clucker's restaurants
are as follow:
Dade County, Florida -
875 N.W. 42nd Avenue, Miami (Roasters)
1000 N.E. 163rd Street, Miami (Roasters)
12290 Biscayne Boulevard, North Miami (Roasters)
10755 Sunset Drive, Miami (Roasters)
Broward County, Florida
5001 Sheridan Street, Hollywood (Clucker's)
Metropolitan Atlanta
1100 Northpoint Drive, Alpharetta (Roasters)
1325 Powers Ferry Road, Marietta (Roasters)
On June 12, 1995, the Company acquired from Paradise Dining Rooms,
Inc., a Florida corporation ("Sunset"), a Kenny Rogers Roasters restaurant
located at 10755 Sunset Drive, Miami, Dade County, Florida (the "Dade County
Restaurant"), and the lease for a site of a future restaurant located in Broward
County, Florida (the "Broward County Site"). The Company also assumed Sunset's
obligation on a construction contract for the Broward County Site. The Company
has since assigned the lease and the construction contract for the Broward
County Site to Roasters Corp. The aggregate purchase price for the Dade County
Restaurant and the Broward County Site was $833,043 (the "Purchase Price"). The
Purchase Price was comprised of (i) cash from working capital of $366,755;
(ii) a $272,277 principal amount promissory note (the "New Note"); and (iii) the
assumption of a $194,000 principal amount promissory note (the "Assumed Note").
The New Note bears interest at 8% for two quarterly installments. Thereafter the
New Note bears interest at 9% and is payable in 14 equal quarterly installments.
There is no prepayment penalty. The New Note is collateralized by the equipment
and leasehold improvements of the Dade County Restaurant and by a collateral
assignment of the lease for the Dade County Restaurant. The Assumed Note bears
interest at the prevailing prime rate plus 2% and is collateralized by the
furniture, fixtures and equipment, and leasehold improvements in the Dade County
Restaurant.
The Company closed a Clucker's concept restaurant in July 1995 when
its ground lease expired. Additionally, the Company closed two poorly performing
Clucker's concept restaurants in October 1995. The Company opened a Roasters
concept restaurant in Metropolitan Atlanta in August 1995 which was closed in
March 1996 because of poor performance. The Company owned and operated two joint
ventured Roasters concept restaurants through December 31, 1995. The Company's
interest in the joint venture was sold to Roasters Corp. on December 31, 1995.
The Company managed the joint venture until March 31, 1996 for a fee equal to
3.5% of gross sales.
Plan of Operation
The Company's primary business objectives are to 1) consummate the
sale of its Dade County, Florida restaurants to Roasters Corp., 2) negotiate the
settlement of its trade payables to allow for prospective working capital, and
3) identify a viable merger or acquisition which will allow for Company growth.
The Company will pursue investment opportunities consistent with its expertise
and history as a restaurant operations and development company. Nico B.M.
Letschert, an outside director, is currently the only director of the Company.
He has remained a director in order to oversee, for the benefit of the Company's
shareholders, the Company's efforts to achieve its primary business objectives,
the accomplishment of which there is no assurance. At his request, Ronald T.
Linares, who is currently the only officer of the Company, has agreed to remain
as the Company's Vice President and Chief Financial Officer at least through the
Company's 1996 Annual Meeting of Shareholders to provide necessary operational
management for the Company during that time.
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In conjunction with the proposed sale of its Dade County restaurants,
the Company will relinquish its rights to develop the Roasters concept in its
territories of 1) Dade County, Florida, 2) Metropolitan Atlanta, and 3) the
countries of Belgium, the Netherlands and Luxembourg. The Company has no plans
to expand the Clucker's concept.
Restaurant Operations and Management
The Company entered into a management agreement pursuant to which
Roasters will manage the Company's Roasters concept restaurants in Dade County,
Florida until the consummation of the contract to sell said restaurants to
Roasters. The agreement calls for Roasters to receive any net proceeds from the
operation of the restaurants. The Company will pay Roasters no other fees in
conjunction with the management agreement.
Purchasing
The Company currently receives the benefits of Roasters negotiated
pricing. Roasters directly negotiates with wholesale suppliers to ensure
consistent quality and freshness of products in its chain of restaurants and to
obtain competitive pricing. The Company will continue to benefit from this
purchasing power through the consummation of the restaurant sale. There is no
guarantee the Company's food purveyors will continue to extend the current
pricing subsequent to the sale of its Roasters restaurants. The Company does not
believe that the termination of such an arrangement will have an adverse effect
on operations because of the small size of its Clucker's operations.
Franchise Relationship with Roasters
Master Development Agreement
The Company and Roasters have entered into a Master Development
Agreement pursuant to which the Company can develop Roasters restaurants in the
territories of Dade County, Florida; Atlanta, Georgia; Dallas/Fort Worth, Texas;
and the countries of Belgium, the Netherlands, and Luxembourg. The development
agreement will terminate as a result of the Company's sale of its Dade County
restaurants to Roasters.
Franchise Agreements
The Company and Roasters have also entered into Franchise Agreements
for each of the Roasters restaurants in Dade County acquired by the Company
pursuant to the Restaurant Acquisition Agreement dated December 1, 1994. The
Company pays Roasters a royalty fee of 4% of gross sales of each of these
restaurants instead of Roasters' standard fee of 4.5% of gross sales.
Roasters current standard franchise agreement provides for a term of
20 years, payment to Roasters of a royalty fee of 4.5% of gross sales and
payment to Roasters advertising promotion fund of 0.50% of gross sales (which
was decreased recently from 0.75%, and which can be increased to 1%). The
current agreement also provides that the franchisee will spend at least 3% of
net sales for local or regional advertising.
The Company's Franchise Agreements will terminate as a result of its
sale of the restaurants to Roasters.
Competition
The Company competes in the restaurant industry with quick-service and
full-service restaurants. The restaurant industry is highly competitive with
respect to price, speed of service, restaurant location and food quality, and is
often affected by changes in consumer tastes, consumer concerns about the
nutritional quality of food, local and national economic conditions affecting
consumer spending habits, population trends and traffic patterns. Major chains,
which have substantially greater financial resources and longer operating
histories than the Company, dominate the industry. Within the chicken segment of
the restaurant industry, the Company believes that its primary competitors are
other non-fried chicken chains, such as Boston Market and Pollo Tropical, many
of which have operating concepts similar to that of the Company. Other
competitors are national fried chicken chains, including Kentucky Fried Chicken;
Church's Fried Chicken; Popeye's Famous Fried Chicken; and others, certain of
which also offer rotisserie chicken
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as a menu item. In addition, a change in pricing or other marketing strategies
of one or more of these competitors could have an adverse impact on the
Company's sales and earnings in related markets.
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 state and local
licensing, zoning, land use, construction and environmental regulation and
various health, sanitation, safety and fire standards. The Company is also
subject to the Americans with Disabilities Act of 1990, which, among other
things, requires restaurants to meet federally mandated access and use
requirements.
The Company is subject to the Fair Labor Standards Act and various
state laws governing such matters as minimum wage requirements, overtime and
other working conditions and citizenship requirements. Some of the Company's
food service personnel are paid at rates related to the federal minimum wage and
recent increases in the minimum wage will increase the Company's labor costs.
The Company believes that it is operating in substantial compliance
with applicable laws and regulations governing its operations.
Employees
As of May 31, 1996, the Company had approximately 18 employees, of
which 13 were part-time employees. None of the employees is subject to a
collective bargaining agreement. The Company believes that its relationship with
its employees is good.
Other Events During Fiscal 1996
In July 1995, the Company entered into an agreement with Chart House
Enterprises, Inc., a Delaware corporation ("Chart House"), to purchase Paradise
Bakery, Inc., a Delaware corporation and a wholly-owned subsidiary of Chart
House ("Paradise"), for approximately $6.2 million in cash and promissory notes
(the "Paradise Acquisition"). Paradise operates and franchises retail bakeries
and bakery cafes featuring cookies, muffins and assorted bakery items. Soups,
salads and sandwiches are also offered at most locations. At that time, Paradise
operated seven bakeries located in Southern California, and franchisees operated
43 bakeries in eight states and Canada. In 1994, Paradise had pre-tax income of
approximately $971,000, total revenues of approximately $4.6 million and system-
wide sales of approximately $30 million. In addition, the Company entered into
agreements to purchase 10 Paradise retail bakeries with annual aggregate sales
in 1994 of approximately $7.2 million from two commonly-owned Paradise
franchisees for approximately $3.0 million, composed of assumed debt and 279,167
shares, subject to certain adjustments, of the Company's Common Stock (the
"Franchisee Acquisition"), and one seat on the Company's Board of Directors.
For the purpose of financing the Paradise Acquisition, the Company
entered into an agreement with a private investment group (the "Investment
Group") for the private placement of 1,411,765 shares of the Company's Common
Stock at $4.25 per share for an aggregate purchase price of $6 million. The
Investment Group would also have received three-year warrants to purchase
500,000 shares of the Company's Common Stock at an exercise price of $4.75 per
share and the right to designate two persons as directors of the Company. The
Investment Group at that time was a franchisee of, and a minority shareholder
in, Roasters Corp. but was previously unaffiliated with the Company. In a
companion transaction, Roasters would have sold to the Investment Group 900,000
shares of the Company's Common Stock and warrants to purchase 1,000,000 shares
of the Company's Common Stock that it owns.
The Investment Group was unable to fund the private placement and
forfeited its deposit in accordance with the agreement between the Company and
it. The Company had until December 15, 1995, to provide Chart House with
evidence of the funds to close the Paradise Acquisition, which the Company was
unable to do. On that date, Chart House notified the Company that Chart House
had executed a binding definitive stock purchase agreement for the sale of
Paradise to a third party, which terminated the agreement between the Company
and Chart House. As a result, neither the Paradise Acquisition nor the
Franchisee Acquisition occurred.
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Item 2. Description of Property.
All of the sites for the Company's existing restaurants are leased
from unaffiliated parties. Each of the leases is for a term in excess of ten
years, inclusive of renewal options. The leases generally require the Company
to maintain the respective properties and pay the cost of insurance and taxes.
The Company's executive offices occupy approximately 3,400 square feet
of office space in North Miami, Florida. The lease for that space expires in
October 1996, subject to the Company's option to renew.
Item 3. Legal Proceedings.
In October 1993, the Company instituted a lawsuit in the United States
District Court for the Southern District of Florida against Jack Pesso d/b/a
J.P. Enterprises, et al. The Company is primarily alleging trademark
infringement subsequent to defendants' breach of the franchise agreement by
payment and non-monetary defaults. The Company is seeking a permanent
injunction barring defendants from using the name "Clucker's " in order to
conform to the non-competition covenants of the franchise agreement and an
undetermined amount of damages. The defendants have asserted counterclaims
citing a breach of the franchise agreement based on the Company's failure to
provide assistance and misstatements of the Company's history, and are seeking
compensatory damages of at least $24 million. The parties have conducted
settlement negotiations, although a settlement of the action cannot be assured.
On December 15, 1994, Robert B. Pine, the Company's area developer for
the northeastern part of New Jersey, instituted a lawsuit against the Company,
its franchising subsidiary, Roasters Corp., and David L. Scharps, in the United
States District Court for the Southern District of Florida. The plaintiff had
entered into a franchise agreement with the Company in July 1993, opened one
restaurant and then closed it in October 1994. In the lawsuit, the plaintiff
alleges claims against the Company for breach of contract; breach of fiduciary
duty and implied duty of good faith and fair dealing; fraud, misrepresentation
and negligence; violations of Florida and New Jersey law pertaining to
franchises; rescission; promissory and equitable estoppel; and along with
Roasters, violations of the federal antitrust laws. The plaintiff seeks to
recover from the Company in excess of $3 million in actual and compensatory
damages, including, but not limited to, out-of-pocket expenses; lost profits;
loss of future profits; loss of goodwill; interest; damages for pain, suffering,
and emotional distress; reasonable attorneys' fees; costs; punitive damages in
excess of $10 million; and with respect to the antitrust claims, treble damages
in excess of $9 million and invalidation of the Stock Purchase Agreement dated
August 16, 1994, among the Company, Roasters Corp., and Mr. Scharps (the
"Company Agreement"). The Company disputes Mr. Pine's allegations and is
vigorously defending this lawsuit. On January 31, 1996, the court granted the
Company's motion to compel arbitration by the American Arbitration Association,
and stay the lawsuit pending the results of the arbitration.
On September 11, 1995, Olga Garcia instituted a lawsuit against the
Company, Roasters Corp., Roosters J.V., Roosters Investment Corporation, Rodberg
Construction, and Calusa Partners, in the Circuit Court of the Eleventh Judicial
Circuit in and for Dade County, Florida. In the lawsuit the plaintiff alleges
claims against the Company for negligence in maintaining and operating the
restaurant. The plaintiff seeks to recover unspecified damages, including, but
not limited to permanent and total disability; permanent injury; medical
expense; aggravation of an existing condition; lost earnings and earning
capacity; and scarring and disfigurement in connection with an accident
occurring at a Company run Kenny Rogers Roasters restaurant. The Company
disputes Ms. Garcia's allegations and is vigorously defending this lawsuit.
On November 17, 1994, each of Jay O. Darling, Robert H. Brickles, and
Scott Yackee instituted a lawsuit against the Company in the Circuit Court of
the Eleventh Judicial Circuit in and for Dade County, Florida. The plaintiffs'
claims were based on alleged breaches of employment agreements by the Company
and the damages claimed correspond to severance compensation and the value of
shares of the Company's common stock allegedly due under the respective
employment agreements. The Company settled all of these lawsuits in the first
half of calendar 1995 for cash and securities whose aggregate value is less than
10% of the Company's current assets at March 26, 1995. In connection with such
settlement, Messrs. Darling, Brickles and Yackee were issued an aggregate of
25,000 shares, and such shares were registered pursuant to the Securities Act of
1933, as amended.
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Other than the foregoing, neither the Company nor any of its
subsidiaries is a party to, nor is any of their respective property subject to,
any pending or, to its knowledge, threatened governmental, administrative or
judicial proceedings that would have a materially adverse effect upon the
Company's financial condition or such property.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
a. Market Information
The Company's Common Stock and Public Warrants traded from November
1992 to July 7, 1996 on the SmallCap Market(R) of the National Association of
Securities Dealers Automated Quotation System (NASDAQ), under the symbols FOOQ
AND FOOQW, respectively. Effective July 8, 1996 the Company's Common Stock and
Public Warrants began trading on the NASDAQ OTC Bulletin Board(R). The
quotations set forth below are inter-dealer quotations, without retail mark-ups,
mark-downs or commissions and do not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Common Stock Public Warrants
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Quarterly Period Ended High Bid Low Bid High Bid Low Bid
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<S> <C> <C> <C> <C>
March 31, 1996 $1.3125 $0.625 $0.65625 $0.3125
December 31, 1995 $3.50 $0.8125 $0.75 $0.3125
September 24, 1995 $3.875 $2.5625 $1.0625 $0.5625
June 26, 1995 $5.75 $3.50 $2.00 $0.75
March 26, 1995 $6.875 $5.25 $2.875 $2.00
December 25, 1994 $8.875 $6.00 $4.625 $2.625
September 25, 1994 $10.125 $4.50 $5.125 $0.8125
June 26, 1994 $9.875 $4.625 $4.375 $0.75
</TABLE>
b. Holders
On May 31, 1996, the Company's Common Stock was held by approximately
1,055 holders of record.
c. Dividends
The Company has never paid any cash dividends on its Common Stock and
has no intention of paying cash dividends in the foreseeable future. The Company
intends to retain any earnings it may realize to finance its future growth.
Item 6. Management's Discussion and Analysis or Plan of Operations
Comparison of Fiscal Years Ended March 31, 1996 and March 26, 1995
Results of Operations
Sales
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The Company's restaurant sales were $7,652,030 in fiscal 1996 compared
to $5,778,766 in fiscal 1995, an increase of $1,873,264 or 32.4%. The increase
was due to several factors: (1) an increase in sales at four Roasters
restaurants acquired during fiscal 1995 of $2,878,384, (2) an increase in sales
from two Roasters restaurants either acquired or built during fiscal 1996 of
$1,094,729, (3) a decrease in sales from three Clucker's restaurants closed
during fiscal 1996 of $1,275,915, (4) a decrease in sales for two restaurants
closed during fiscal 1995 of $637,528, and (5) a decrease in same store sales of
$186,406, or 9.8% for two restaurants open for both fiscal years. The decrease
in sales is attributable to an increase in direct competition in the trade areas
of both restaurants, combined with a decrease in local store marketing for one
of the two restaurants.
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Management fee income was $76,188 for fiscal 1996 compared to $23,985
for the previous year, an increase of $52,203 or 217.6%. The increase is
attributable to a full year of management fees in fiscal 1996 versus only four
months in fiscal 1995. Effective March 31, 1996 the Company had relinquished its
management contracts with Roasters Corp. and Roosters J.V. and does not
contemplate any significant management fee income in fiscal 1997.
Franchise income was $421,795 for fiscal 1996 compared with $30,964 for
fiscal 1995, an increase of $390,831. The increase is attributable to the
recognition of deferred franchise fee revenue from the Company's one franchisee.
The franchisee recently filed a registration statement for the sale of common
stock from which the franchisee planned on funding its expansion into a new
restaurant concept, Harvest Rotisserie. The franchisee has also registered the
Clucker's Wood Roasted Chicken brand and trademarks in certain foreign markets
and intends to franchise the Clucker's concept in those markets. These
activities are outside of the scope of the franchising relationship the Company
and franchisee currently maintain. The Company has interpreted these strategies
as an intent to concentrate on areas of its business other than developing its
franchised areas.
Cost of Sales
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Cost of sales, consisting of food and paper products, was $2,929,282,
for fiscal 1996 compared with $2,282,222 for fiscal 1995 or 38.3% and 39.5% of
sales in 1996 and 1995 respectively. The decrease is attributable primarily to
the increased number of Roasters concept units operated combined with improved
purchasing efficiencies available through the Roasters franchise system. During
fiscal 1996 the Company broadened its line of entree items to include roasted
turkey, ribs and freshly prepared sandwiches. These menu extensions raised cost
of sales due to training issues and their inherently more expensive nature. The
Company believes these costs are negated by the diversification brought to the
menu.
Restaurant Operating Expenses
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Restaurant operating expenses consisting of labor, occupancy and other
direct restaurant expenses were $4,678,339 for fiscal 1996 compared with
$3,638,467 for fiscal 1995 or 61.1% and 63.0% of sales in 1996 and 1995
respectively. The decrease in expenses is primarily attributable to higher sales
at the unit level. The Company was able to improve its labor costs by
approximately 4% of sales during fiscal 1996 primarily through improved training
and the inherently higher sales at Roasters restaurants. This improvement was
partially offset by higher occupancy related expenses at Roasters restaurants
due to higher rents and property taxes.
Pre Opening Costs
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Pre-opening costs in fiscal 1996 were $68,584 compared to $123,327 in
fiscal 1995. The decrease of $54,743 is due to the opening of only one
restaurant in fiscal 1996 versus two openings in fiscal 1995.
General and Administrative Expenses
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General and administrative expenses were $1,325,170 for fiscal 1996
compared to $1,323,087 for fiscal 1995, an increase of $2,083. The Company has
streamlined significantly its corporate structure to coincide with its strategy
of reducing its overall expense base. The Company does not envision an increase
in general and administrative expenses in the near future.
Franchise Operating Expenses
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Franchise operating expenses, comprised of selling, general and
administrative expenses associated with the Company's Clucker's concept
franchise operations were $0 for fiscal 1996 compared with $192,183 in fiscal
1995. The decrease in franchise operating expenses is a direct result of the
Company's curtailment of its franchising activities. The Company does not
anticipate any future significant expenses related to franchising the Clucker's
concept.
Store Closing Expenses
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Store closing expenses for fiscal 1996 was $1,321,499 compared to
$1,747,627 for fiscal 1995. The amounts relating to fiscal 1996 are attributable
to the closing of three Clucker's concept restaurants, compared with store
closing and relocation costs of
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approximately $1,126,205 in fiscal 1995. The decrease is attributable to a
decrease in amounts paid by the Company related to the negotiation of lease
settlements for closed restaurants, other canceled lease obligations and past
due lease obligations.
Other Expenses
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Other expenses for fiscal 1996 were $1,039,248 compared to $389,986 in
fiscal 1995, an increase of $649,262. Other expenses are comprised of
approximately $281,000 in costs related to the Company's bid to acquire Paradise
Bakery, Inc., the full amortization of pre-paid investment banking fees of
$175,000, the accrual of $140,000 in penalties and taxes related to a state
sales tax examination, approximately $371,000 in amounts accrued or paid in
conjunction with the Company's curtailment of its franchise activity and/or
various settlements of litigation which originated in fiscal 1995, and the
write-off of intangible assets of approximately $73,000 related to the
acquisition of a Clucker's restaurant in fiscal 1995.
Interest Expense
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Interest expense for fiscal 1996 was $281,707 compared to $130,631 for
fiscal 1995, an increase of $151,076. The increase can be primarily attributed
to interest expense incurred related to the Company's acquisition of a Roasters
concept restaurant on June 12, 1995, of approximately $29,800, interest expense
related to three capital lease obligations entered into during fiscal 1996 of
$45,600, and approximately $76,900 more interest expense incurred during fiscal
1996 in relation to the Company's acquisition of restaurants from Roasters Corp.
in December 1994.
Interest Income
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Interest income was $4,134 for fiscal 1996 compared to $16,513 for
fiscal 1995. The decrease in interest income is a result of less cash available
for investment purposes during fiscal 1996 due to working capital problems
during the second half of fiscal 1996.
Liquidity and Capital Resources
At March 31, 1996, the Company had $673,994 in cash and equivalents,
which includes highly liquid investments in cash equivalents, compared with
$851,836 at March 26, 1995. The decrease of $177,842 is due primarily to the net
loss from operations, cash paid in the acquisition of a Roasters concept
restaurant, the construction of a Roasters concept restaurant, partially offset
by amounts raised through the sale of the Company's stock, amounts received in
equipment sale/leaseback transactions, and a bridge loan received.
Working capital at March 31, 1996, was a deficit of $2,735,374 compared
with a positive working capital of $203,545 at March 26, 1995. The decrease is
attributable to decreases in cash, amounts owed by an affiliate, and increases
in accounts payable, accrued liabilities, amounts owed to affiliates, and the
current portion of notes payable, partially offset by a decrease in other
current liabilities.
Cash used by operations was $248,348 in fiscal 1996 compared with
$3,046,916 used in fiscal 1995, a decrease of $2,798,568. The decrease is
primarily attributable to a decrease in net loss of $830,050, an increase in
accounts payable of $756,005, an increase in amounts owed to affiliates of
$300,503, and a decrease in amounts owed from affiliates of $473,504, partially
offset by a decrease in deferred revenue of $421,795.
Cash used in investing activities was $605,048 for fiscal 1996 compared
to $2,039,820 used in the prior fiscal year, a decrease of $1,434,772. The
decrease is primarily attributable to a decrease in cash used for acquisitions
of $1,459,906. The Company sold an ownership interest in a joint venture in
fiscal 1996 for $213,833 in cash and the satisfaction of certain liabilities.
Cash provided by financing activities was $675,554 for fiscal 1996
compared to $5,582,406 during fiscal 1995, a decrease of $4,906,852. The
decrease is directly attributable to a decrease in proceeds from the issuance of
common stock of $5,335,244, and repayments made on capital leases, partially
offset by proceeds from equipment sale-leasebacks of $358,493, and a decrease in
amounts repaid on notes payable of $173,758.
10
<PAGE>
The Company incurred losses from operations of $4,084,665 during fiscal
1996 in addition to losses of $4,914,715 in fiscal 1995. Such losses resulted in
a deterioration of the Company's working capital position. The losses incurred
in fiscal 1996 relate to the closing of three poorly performing Clucker's
restaurants, the closing of one poorly performing Roasters restaurant, and the
operations of those four restaurants. Additionally, the Company has reserved for
potential litigation expenses. The losses in fiscal 1995 primarily relate to the
Company's franchising activities and the operations of several poorly performing
Clucker's concept restaurants during fiscal 1994 and 1995.
The Company has determined that the strategy of operating franchised
restaurants of a developing concept in only two territories; Dade County,
Florida, and Atlanta, Georgia, does not provide enough current upside potential
for net income growth in a public company. Additionally, the Company's ability
to raise expansion capital was negatively impacted by the Company's history
(prior to the November 1994 change in control) of extensive litigation, and
poorly performing in-line Clucker's concept restaurants. The lack of expansion
capital prevented the Company from expanding its base of Roasters concept
restaurants quickly enough to offset general and administrative expenses. This
hampered the Company's ability to reduce operating losses.
The Company's short-term strategy to improve its financial position
includes the sale of its Roasters concept restaurants to improve liquidity, the
reduction of operating losses by streamlining its general and administrative
costs, and the improvement of restaurant level margins by implementing tighter
administrative controls.
In conjunction with its current strategy, the Company has sold its
Atlanta Roasters restaurants to a joint venture, and has entered into a contract
to sell its Miami restaurants to Roasters Corp. Additionally, the Company has
closed three under performing Clucker's concept restaurants. The Company will
seek to further reduce its general and administrative costs, and will begin
pursuing acquisition or merger candidates that offer the best potential for net
income growth and maximization of shareholder value.
The Company's primary capital requirements in the short-term are for
working capital. Failure to obtain such funding would adversely affect the
Company's ability to fund its operations. The Company's long-term capital
requirements are for the acquisition or merger of a restaurant concept providing
for both potential income and unit growth. The Company currently has a tax-loss,
carry-forward of approximately $10.8 million. The Company believes the
combination of the tax benefits and management expertise it possesses will make
it an attractive candidate for such a transaction. The Company's capital
requirements, once it identifies an acquisition or merger candidate, will need
to be funded through debt and equity financing, of which there can be no
assurance that it would be available or, if available, that it would be on terms
favorable to the Company.
Comparison of Fiscal Years Ended March 26, 1995 and March 27, 1994
Results of Operations
Sales
- -----
The Company's restaurants sales were $5,778,766 in fiscal 1995 compared
to $4,856,671 in fiscal 1994, an increase of $922,095 or 19.0%. The increase was
due to several factors: (1) sales from the four acquired Roasters restaurants of
$1,299,919, (2) an increase in sales for fiscal 1995 versus fiscal 1994 for
three restaurants open for only part of fiscal 1994 of $771,372, (3) a decrease
in sales in a restaurant closed during fiscal 1995 of $495,457 and (4) a
decrease in same restaurant sales of $653,739 or 24.3% for three Clucker's
concept restaurants open for both fiscal years. The decrease in same restaurant
sales is attributable to increased direct competition in the trade areas of
these restaurants. The Company does not contemplate this effect occurring in its
other restaurants based on the fact that competitive expansion in its primary
geographic trade areas has already occurred.
Franchise and royalty revenues were $30,964 for fiscal 1995 compared
with $139,887 for fiscal 1994, a decrease of $108,923 or 77.9%. The Company
recognizes franchise fee income in accordance with Statements of Financial
Standards No. 45, which requires the deferral of franchise fee income until
substantial performance of the franchisor's obligations occurs. The Company has
significantly curtailed its franchise activities as a result of its strategy of
becoming predominantly an operator of restaurants.
Management fee income was $23,985 for fiscal 1995 compared to no such
income for fiscal 1994. The increase is directly attributable to the Company's
management of two joint venture restaurants for a management fee.
11
<PAGE>
Cost of Sales
- -------------
Cost of sales, consisting of food and paper products, was $2,282,222
for fiscal 1995 compared with $1,828,581 for fiscal 1994 or 39.5% and 37.7% of
sales in 1995 and 1994 respectively. The increase is attributable to high food
costs experienced in two Clucker's concept restaurants opened during calendar
1995 and to the inefficiencies encountered in restaurant openings, as well as
sales discount and other promotional campaigns during the first three quarters
of the fiscal year. Because the Company had only six restaurants in operation
for most of the first three quarters of fiscal 1995, the results of these
underperforming restaurants heavily impacted the overall cost of sales
performance of the Company. The Company expects to continue to decrease cost of
sales to levels comparable to fiscal 1994 based on the following factors.
Roasters concept restaurants are operated at more favorable margins and process
food more efficiently, while providing the guest a good value. Additionally, the
Company has begun utilizing the purchasing efficiencies available to members of
the Roasters' franchising system with its inherent economies of scale.
Restaurant Operating Expenses
- -----------------------------
Restaurant operating expenses consisting of labor, occupancy and other
direct restaurant expenses were $3,638,467 for fiscal 1995 compared with
$2,701,834 for fiscal 1994 or 63.0% and 55.6% of sales in 1995 and 1994,
respectively. The increase in restaurant operating expenses as a percentage of
sales is directly attributable to the performance of two Clucker's concept
restaurants opened during calendar 1995, and the relative decline of the other
Clucker's concept restaurants in comparison with fiscal 1994. The new
restaurants, both of which were closed during fiscal 1995, suffered substantial
operating losses primarily due to low sales. The Clucker's concept restaurants
in operation during both 1995 and 1994 suffered declining sales and were not
able to perform at levels capable of covering certain fixed operating costs.
The Company was able to implement various labor scheduling strategies
during the fourth quarter that allowed it to lower operating labor costs by
approximately 4% of sales. The Company believes it can further improve its labor
efficiency through further development of higher volume Roasters concept
restaurants.
Pre-Opening Costs
- -----------------
Pre-opening costs in fiscal 1995 were $123,327 compared to $426,198 in
fiscal 1994. The decrease of $302,871 is due primarily to fewer restaurant
openings during fiscal 1995 (one opening and one remodel) versus four restaurant
openings in fiscal 1994 (including one relocation and the opening of one joint
venture restaurant).
General and Administrative Expenses
- -----------------------------------
General and administrative expenses were $1,323,087 for fiscal 1995
compared to $1,391,611 for fiscal 1994, a decrease of $68,524. The decline is
attributable to two factors. The new management of the Company has decreased its
overall corporate manpower to coincide with its commitment to operating solely
as a restaurant operating organization. The Company believes it can maintain an
efficient corporate structure while continuing to support its field operations
and to satisfy its administrative and supervisory needs. Additionally, the
Company has reduced the amount of capital and human resources expended on
litigation support and the professional fees associated with litigation.
Franchise Operating Expenses
- ----------------------------
Franchise operating expenses comprised of selling, general and
administrative expenses associated with the Company's franchise operations were
$192,183 for fiscal 1995 compared to $698,476 for fiscal 1994, a decrease of
$506,293. The decrease in franchise operating expenses is a direct result of the
Company's curtailment of its franchise operations. The Company does not
anticipate any future significant expenses related to franchising the Clucker's
concept.
Deferred Revenue
- ----------------
The Company had $421,795 of deferred franchise fee income at
March 26, 1995, compared with a balance of $564,301 at March 27, 1994, a
decrease of $142,506. Deferred revenue at March 26, 1995, consists of $53,294 of
area development fees, $50,000 of unit franchise fees and $318,501 of territory
fees. The decrease is attributable to the opening of one franchised restaurant
12
<PAGE>
during fiscal 1995 and the Company's decision to curtail its franchise operating
activities. The Company reimbursed several franchisee groups deferred franchise
fees totaling $173,667 during fiscal 1995 and received in return releases and
canceled development agreements.
Store Closing Expenses
- ----------------------
Restaurant closing expenses for fiscal 1995 was $1,747,627 compared to
$210,692 for fiscal 1994. The increase is attributable to approximately $547,000
in amounts paid to negotiate lease settlements for closed restaurants, other
canceled lease obligations and past due lease obligations. The cost of closing
and relocating restaurants was approximately $1,126,205 during fiscal 1995.
Other Expenses
- --------------
Other expenses for fiscal 1995 were $389,986 compared to $18,714 in
fiscal 1994, an increase of $371,272. Other expense was comprised primarily of
various settlements which arose as a result of the Company's transaction with
Roasters, as well as the Company's decision to curtail its franchising
activities.
Interest Expense
- ----------------
Interest expense for fiscal 1995 was $130,631 compared to $74,518 for
fiscal 1994, an increase of $56,113. Of the increase $28,000 is attributable to
interest incurred as a result of the restaurant acquisition from Roasters in
December 1994 and $21,700 was incurred as a result of a bridge loan made to the
Company by Roasters during the second through fourth quarters of the fiscal
year.
Interest Income
- ---------------
Interest income was $16,513 for fiscal 1995 compared to $38,901 for
fiscal 1994. The decrease is a result of less funds being available for
investment during fiscal 1995 due to the expansion of the Company's restaurant
base and the general results of operations.
Liquidity and Capital Resources
At March 26, 1995, the Company had $851,836 in cash and cash
equivalents, which includes highly liquid investments in cash equivalents,
compared with a balance of $356,166 at March 27, 1994. The increase of $495,670
is due primarily to a sale of the Company's Common Stock, an increase in amounts
due to affiliates, and an increase in accrued expenses, which were partially
offset by the acquisition of four Roasters restaurants, an ownership interest in
a joint venture, the remodel of an existing restaurant, an increase in amounts
due from affiliates, a decrease in accounts payable, a decrease in deferred
revenue, a decrease in deferred rent, and the net loss from operations. The net
loss from operations is offset by non-cash expenses for depreciation and
amortization; and the loss on sale/disposal of fixed assets.
Working capital at March 26, 1995, was $203,545 compared with a deficit
of $102,925 at March 27, 1994, an increase of $306,470. The increase is
attributable to the increase in cash versus the comparable period in fiscal 1994
and the amounts due from an affiliate of $479,238.
Cash used by operations was $3,046,916 in fiscal 1995 compared with
$1,458,339 used in fiscal 1994, an increase of $1,588,577. The increase in cash
used by operations is primarily attributable to the increase in net loss of
$2,272,584, which was partially offset by an increase in depreciation and
amortization expense of $649,749 and non-cash restaurant relocation and related
expenses of $1,126,205.
Cash used for investing activities amounted to $2,039,820 for fiscal
1995 compared to $3,021,476 used in the prior fiscal year, a decrease of
$981,656. The decrease is partially due a non-cash acquisition of fixed assets,
and the acquisition of restaurant equipment via capital lease obligations of
$176,134 during fiscal 1995 as compared to no capital lease obligations during
fiscal 1994, and all equipment and leasehold improvements purchased with cash in
fiscal 1994. The Company purchased an ownership interest in a joint venture
during fiscal 1995 for $363,667.
13
<PAGE>
Cash provided by financing activities was $5,582,406 for fiscal 1995
compared to $2,362,325 during fiscal 1994, an increase of $3,220,081. The
increase is attributable to an increase in amounts received from the issuance of
the Company's common stock of $3,519,134, and a reduction in amounts paid to
shareholders of $59,632, partially offset by a decrease in amounts received from
joint ventures of $176,556 and a decrease in net proceeds received from long-
term debt of $182,129.
The Company incurred losses from operations of $4,914,715 during the
year ended March 26, 1995. Such losses have resulted in a deterioration of the
Company's working capital position and primarily relate to the Company's
franchising activities and the operations of several poorly performing
restaurants during fiscal 1994 and 1995. The Company's strategy to improve its
financial position includes the reduction of operating losses, the addition of
capital via capital and operating leases to fund its short-term expansion needs,
and equity financing to be used in acquiring food concepts that complement its
current operations.
Item 7. Financial Statements
See Pages F-1 through F-24 of this report.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
The Company's Current Report on Form 8-K/A2, dated November 11, 1994,
is hereby incorporated by reference.
14
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promotors and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Directors and Executive Officers
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
In Office
Name Age Position(s) Since
- ----------------------- --- -------------------------- ---------
<S> <C> <C> <C>
Ronald T. Linares 33 Vice President and
Chief Financial Officer 1994
Nico B. M. Letschert 41 Director 1994
</TABLE>
Each director holds office until the next annual meeting of shareholders and
until his successor has been elected and qualifies or until his earlier
resignation, removal from office or death. Pursuant to the underwriting
agreement between the Company and Noble Investment Co. of Palm Beach ("Noble")
regarding the 1992 initial public offering of the Company's Common Stock and the
placement agreement between the Company and Noble regarding the 1993-1994
Regulation S off-shore private placements, the Company has granted Noble the
right to designate two members of the Company's Board of Directors. Mr.
Letschert is the only Director whom Noble has currently designated. As a
result, Noble may subsequently appoint a person to the Company's Board of
Directors without shareholder consent or approval who will serve until the next
annual meeting of shareholders.
Mr. Letschert, an outside director, is currently the only director of
the Company. He has remained a director in order to oversee, for the benefit of
the Company's shareholders, the Company's efforts to achieve its primary
business objectives, the accomplishment of which there is no assurance. At his
request, Mr. Linares, who is currently the only officer of the Company, has
agreed to remain as the Company's Vice President and Chief Financial Officer at
least through the Company's 1996 Annual Meeting of Shareholders to provide
necessary operational management for the Company during that time.
Business Experience
Ronald T. Linares has been the Vice President and Chief Financial
Officer of the Company since November 1994. Prior to such appointment, from
September 1993 until November 1994, Mr. Linares served as Assistant Controller
for Roasters with responsibilities for budgeting and finance. Mr. Linares served
as Director of Restaurant Accounting for Arby's Inc. from 1991 through August
1993.
Nico B. M. Letschert has been a director of the Company since July
1994. Mr. Letschert was the President of Noble from 1984 to July 12, 1995, and
is currently the Chief Executive Officer of Noesis Capital Corp., a firm engaged
in corporate finance and money management. Mr. Letschert is also a member of the
Board of Directors of Capital Multimedia, Inc.; Futuremedia PLC; and Watermarc
Food Management Co. Prior to Mr. Letschert's election to the Company's Board of
Directors, Noble acted as the Company's underwriter and placement agent with
respect to offers and sales of certain securities of the Company and also acted
as a consultant to the Company.
Family Relationships
There are no family relationships between or among any of the Directors
or executive officers of the Company.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors, executive officers and
persons who own more than 10% of any class of equity securities of the Company
registered pursuant to Section 12 of the Exchange Act to file with the
Securities and Exchange Commission initial reports of ownership of the Company's
15
<PAGE>
equity securities on Form 3 and reports of changes therein on Forms 4 and 5.
Based solely on copies of such reports furnished to the Company pursuant to
Rule 16a-3(a) under the Exchange Act and upon written representation by such
persons, all persons subject to the reporting requirements of Section 16(a) of
the Exchange Act filed the required reports on a timely basis during the fiscal
year ended March 31, 1996.
Item 10. Executive Compensation
The following table (the "Summary Table") sets forth all plan and non-
plan compensation awarded to, earned by, or paid to the Company's Chief
Executive Officer (the "Named Officer"), during fiscal 1996. None of the
Company's other executive officers at March 31, 1996, has total fiscal year 1996
annual salary and bonus in excess of $100,000.
Summary Compensation Table
--------------------------
<TABLE>
<CAPTION>
Long-Term Compensation
Annual Compensation Awards
-------------------------------------------------------------------------------------
Securities
Other Underlying
Annual Options/ All Other
Salary Bonus Compensation SARs Compensation
Name and Principal Position Year ($) ($) ($) (#) ($)
- ---------------------------- ---- ------ ----- ------------ ----- ------------
<S> <C> <C> <C> <C> <C> <C>
Gregory G. Dollarhyde, 1996 0(1) 0(1) 0(1) 0(1) 0(1)
former Chief Executive 1995 0(1) 0(1) 0(1) 50,000(1) 0(1)
Officer (from November
11, 1994, to March 8, 1996)
</TABLE>
____________________
(1) Mr. Dollarhyde's compensation, other than stock options, was earned at
Roasters Corp. in conjunction with his responsibilities as Vice Chairman of
that company.
During the fiscal year ended March 31, 1996, no other compensation not
otherwise referred to herein was paid or awarded by the Company to the Named
Officer, the aggregate amount of which compensation, with respect to any such
person, exceeded the lesser of $50,000 or 10% of the annual salary and bonus
reported in the Summary Table for such person.
There are no standard or other arrangements pursuant to which any
director of the Company is or was compensated during the Company's last fiscal
year for services as a director, for committee participation or special
assignments.
The Company does not have any compensatory plan or arrangement,
including payments to be received from the Company with respect to any person
named in the Summary Table, which plan or arrangement results or will result
from the resignation, retirement or any other termination of such person's
employment with the Company and its subsidiaries or from a change in control of
the Company or a change in such person's responsibilities following a change in
control and the amount involved, including all periodic payments or
installments, exceeds $100,000.
16
<PAGE>
Options Granted During Last Fiscal Year
The following table sets forth information concerning option grants
during the fiscal year ended March 31, 1996 to the Named Officer.
Individual Grants
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Shares Underlying % of Total Options
Options Granted to Exercise
Granted (1) Employees in Price Expiration
Name (#) Fiscal Year (1) ($/Share) Date
---- ----------- --------------- --------- ----------
<S> <C> <C> <C> <C>
Gregory G. Dollarhyde 75,000 52.26% $4.75 6/1/99
</TABLE>
_________________________
(1) The vesting of these options was contingent upon the acquisition of
Paradise Bakery, Inc. Because that acquisition did not occur, these options
never vested.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information, as of May 31, 1996,
regarding the Company's Common Stock owned of record or beneficially by (i) each
shareholder who is known by the Company to beneficially own in excess of 5% of
the outstanding shares of Common Stock, (ii) each director and executive
officer, and (iii) all directors and executive officers as a group. As of
May 31, 1996, there were 3,218,271 shares of Common Stock of the Company
issued and outstanding. Except as noted, the address of each beneficial owner is
the Company's address.
<TABLE>
<CAPTION>
Number of Shares Approximate
Name and Address Beneficially Owned Percent
of Beneficial Owner (1) of Class
------------------- ------------------ -----------
<S> <C> <C>
Roasters Corp. 3,731,386 (2) 71.8% (2)
899 West Cypress Creek Road
Suite 500
Fort Lauderdale, Florida 33309
Nico B. M. Letschert 381,167 (3) 10.9% (3)
1801 Clint Moore Road
Boca Raton, Florida 33487
David L. Scharps 194,000 (4) 5.8% (4)
540 Brickell Avenue
#421
Miami, Florida 33131
Ronald T. Linares 105,000 (5) 3.2% (5)
2 Officers and 486,167 (6) 14.2% (6)
Directors as a Group
</TABLE>
_________________________
(1) Unless otherwise noted, the Company believes that all persons named in the
table have sole voting and investment power with respect to all shares of
Common Stock beneficially owned by them.
17
<PAGE>
(2) Includes warrants to purchase an additional 1,980,000 shares of Common
Stock at an exercise price of $6.00 per share.
(3) Represents 1,667 shares of Common Stock owned; 130,000 shares of Common
Stock that may be acquired upon exercise of options granted to
Mr. Letschert; and 249,500 shares of Common Stock that may be acquired upon
exercise of certain warrants.
(4) Includes 100,000 shares of Common Stock that may be acquired upon the
exercise of warrants.
(5) Represents shares of Common Stock that may be acquired upon exercise of
options.
(6) Includes an aggregate of 484,500 shares of Common Stock that may be
acquired upon the exercise of options and warrants.
Item 12. Certain Relationships and Related Transactions
Transactions with Roasters
1995 Transactions
Master Development Agreement and Franchise Agreements
The Company and Roasters entered into a Master Development Agreement
pursuant to which the Company can develop Roasters' restaurants in the
territories of Dade County, Florida; Atlanta, Georgia; Dallas/Fort Worth, Texas;
and the countries of Belgium, the Netherlands and Luxembourg. The agreement's
minimum development schedule requires the Company to develop nine restaurants in
1995, two in Dade County, three in the Atlanta area; and four in Dallas/Fort
Worth, Texas; however, Roasters informed the Company that the development
requirement for Dallas/Fort Worth, Texas, has been eliminated. It requires the
Company to develop 12 restaurants in 1996, two in Dade County, Florida; four in
the Atlanta area; and six in Dallas/Fort Worth, Texas; however, Roasters
informed the Company the development requirements for Dallas/Fort Worth, Texas,
have been eliminated. Thereafter, the Company must develop two restaurants per
year in the Atlanta area and four per year in Dallas/Fort Worth, Texas, until a
target population of 70,000 per restaurant is achieved. Roasters verbally agreed
to extend each time period specified in the agreement by one year.
The number of potential restaurants covered by the Master Development
Agreement was determined by negotiation between Roasters and the Company. In the
event the Company is unable to meet its performance schedule, and Roasters gives
60 days' written notice to the Company of such default, the rights of the
Company pursuant to the Master Development Agreement would terminate. All rights
and duties under existing individual franchise agreements would continue
provided no defaults exist thereunder. Roasters has on occasion temporarily
waived defaults of defaulting franchisees, and may do so with respect to the
Company in the future, provided the Company could demonstrate a substantial
likelihood of curing such default.
The Company and Roasters have also entered into Franchise Agreements
for each of the Roasters restaurants acquired by the Company pursuant to the
Restaurant Acquisition Agreement. The Company will pay Roasters a royalty fee of
4% of the net sales of each of these restaurants instead of Roasters standard
royalty fee of 4.5% of net sales.
Pursuant to the Master Development Agreement, the specific locations
selected by the Company for future restaurants in the foregoing territories will
subsequently be designated in separate franchise agreements. The Company will be
required to pay Roasters the standard $29,500 franchise fee upon signing a
franchise agreement for a new location. Generally, a franchise agreement will be
executed once the Company enters into a lease for the new location.
Roasters current standard franchise agreement provides for a term of 20
years, payment to Roasters of a royalty fee of 4.5% of net sales and payment to
Roasters advertising fund of 3/4% of gross sales, (1/2% of gross sales at
January 1, 1996), which may be increased to 1% of gross sales. The current
agreement also provides that the franchisee will spend at least 3% of net sales
for local or regional advertising. In addition, Roasters requires each
franchisee to have an approved full-time operator for the supervision and
conduct of the franchise.
18
<PAGE>
In conjunction with the agreement for the sale of the Dade County
restaurants to Roasters and subject to the occurrence of the closing pursuant
thereto, the Company's Master Development Agreement, as well as the individual
Franchise Agreements for the restaurants located in Dade County, Florida, would
terminate.
Restaurant Acquisition Agreement
Effective December 1, 1994, the Company entered into a Purchase and
Sale Agreement (the "Restaurant Acquisition Agreement") with Roasters, pursuant
to which the Company acquired all of the assets of two Roasters restaurants
located in Dade County, Florida, and two Roasters restaurants located in
Alpharetta and Marietta, Georgia, respectively. The Company also acquired
Roasters' 50% partnership interest in an additional two Roasters restaurants
located in Dade County, Florida (the six restaurants are hereinafter
collectively referred to as the "Restaurants"). Each of the Restaurants or the
interests therein was purchased at its net book value.
The aggregate purchase price for the Restaurants was $3,053,717 (the
"Purchase Price"). The Purchase Price was comprised of (i) cash from working
capital in the amount of $1,838,184; (ii) accounts receivable of $61,533; and
(iii) a $1,153,657 principal amount promissory note (the "Note"). The Note bears
interest at the rate of 10% per annum. Quarterly interest payments are required
to be made by the Company and the entire principal balance, plus all accrued but
unpaid interest thereon, is due and payable on June 1, 1996. There is no
prepayment penalty. The Note is secured by the assets of two of the four
Restaurants purchased and the partnership interest purchased in each of the two
other Restaurants. The maturity date of the Note was extended to May 1, 1997, in
December 1995.
Under the Restaurant Acquisition Agreement, Roasters assigned its
interest in the leases for each of the Restaurants and the Company assumed the
obligations thereunder. In addition, the Company entered into a standard
Roasters franchise agreement for each of the Restaurants. However, the Company
will pay Roasters s royalty fee of 4% of the gross sales of each of the
Restaurants instead of Roasters' standard royalty fee of 4.5% of gross sales.
Loan to Company
In accordance with the provisions of the Company Agreement, Roasters on
August 18, 1994, made a loan of $300,000 to the Company for working capital
purposes. The loan initially bore interest at 6% per annum and was secured by
the Company's restaurant in Tucker, Georgia. On each of October 13 and October
26, 1994, Roasters lent the Company an additional $100,000, for an aggregate
additional amount of $200,000, for the same purposes and on the same terms. The
$500,000 loan was originally payable on November 11, 1994. However, the Company
and Roasters modified the loan to provide for payment upon the sale of the
Tucker property. The Tucker property was sold in March 1995, and full payment
was made to Roasters upon such sale.
Company Agreement
Pursuant to the Company Agreement, Roasters paid $5 million to the
Company in exchange for: (a) 896,057 shares of Common Stock, subject to certain
post-closing upward adjustments; and (b) warrants to purchase an additional
2,000,000 shares of Common Stock exercisable at a purchase price of $6.00 per
share on or prior to November 10, 1995 (the "Roasters Warrants). The $6.00
issuance price per share of Common Stock and the $6.00 warrant price per share
were determined with respect to the trading price of the Common Stock on NASDAQ
prior to July 22, 1994, the date upon which the Company and Roasters executed
the letter of intent relating to the Company Agreement.
The Roasters Warrants are subject to the same terms and conditions as
the Public Warrants, which also have an exercise price of $6.00 per share and
were sold in the Company's 1992 initial public offering. In the event that the
Company calls the Public Warrants for redemption or extends their expiration
date, the Roasters Warrants will also be called or extended upon the same terms
and conditions. To date, Roasters has not exercised any of the Roasters
Warrants.
Also pursuant to the Company Agreement, the Company dismissed with
prejudice previously instituted legal proceedings against Roasters, John Y.
Brown, Jr. and Kenny Rogers and certain of their affiliates (the "Roasters
Litigation"). The basis for the Roasters Litigation had been alleged trade dress
infringement, unfair competition and deceptive and unfair business practices by
Roasters and other defendants.
19
<PAGE>
In September 1995, the Company extended the expiration date on the
Public Warrants and the Roasters Warrants to November 10, 1996.
1996 Transactions
Restaurant Sale Agreement
Effective March 31, 1996, the Company entered into a contract (the
"Sale Contract") to sell its four Roasters concept restaurants in Dade County,
Florida (collectively, the "Restaurants"), to Roasters Corp. for an aggregate
purchase price of $3,393,918. Each of the restaurants will be sold at
approximately its book value.
The purchase price in the Sale Contract to sell the Restaurants
includes (a) cancellation of $1,653,657 in debt owed to Roasters Corp.,
(b) assumption by Roasters Corp. of $843,127 in other obligations owed by the
Company to Roasters Corp. and its affiliates, and (c) assumption by Roasters
Corp. of $843,460 in third party debt and equipment lease obligations of the
Company. The sale is subject to approval by the Company's shareholders' and
landlords' and lenders' consents. The offer from Roasters was the best offer
received and is slightly above the valuation of the Restaurants that the Company
obtained from an outside valuation consultant.
The closing of the sale is to occur by July 31, 1996. Pending the sale,
Roasters Corp. will manage the Restaurants pursuant to a Management Agreement
(the "Roasters Management Agreement") dated March 31, 1996. Pursuant to the
Roasters Management Agreement, Roasters Corp will receive all of the net
revenues from the operation of the Restaurants until the closing as a management
fee.
Under the Sale Contract, the Company will assign its interest in the
leases for each of the Restaurants and Roasters assumed the obligations
thereunder.
Master Development Agreement, International Master Development
Agreement, and Franchise Agreements
On December 1, 1994, the Company entered into a Masters Development
Agreement for the development of restaurants in Dade County, Florida, and the
area of Atlanta, Georgia, and an International Master Development Agreement for
the countries of Belgium, the Netherlands, and Luxembourg. Additionally, on
December 1, 1994, pursuant to the Purchase and Sale Agreement executed that day,
the Company entered into Franchise Agreements for each of the four restaurants
acquired that day. In accordance with the Sale Contract, as of the closing the
Company's Master Development Agreement and International Master Development
Agreement will terminate. Additionally, as of the closing of the Sale Contract
the Franchise Agreements for each of the Restaurants will be terminated, and
Roasters will release the Company from the obligations thereunder.
Second Loan to Company
In accordance with the provisions of the Sale Contract, Roasters on
March 31, 1996 , made a loan (the "Second Loan") of $500,000 to the Company for
working capital purposes. The Second Loan is interest-free and is secured by
substantially all of the assets of the Restaurants. The Second Loan is due upon
the earlier of the date on which the Company's shareholders approve the sale to
Roasters Corp. or August 1, 1996.
Sale of Partnership Interest
Effective January 1, 1996, the Company entered into a Purchase and Sale
Agreement (the "Partnership Sale Agreement") with Roasters Corp. pursuant to
which the Company sold its fifty percent partnership interest in Roosters J.V.,
(the "Partnership"), a Florida partnership which owns two Roasters restaurants
(the "Partnership Restaurants"), located in Dade County, Florida.
The aggregate purchase price in the Partnership Sale Agreement was
$438,000 (the "Purchase Price"). The Purchase Price was comprised of (a) cash in
the amount of $213,833, (b) the satisfaction of amounts owed by the Company to
certain affiliates of Roasters in the amount of $99,661, and (c) an adjustment
to the Purchase Price for a working capital shortfall in the joint venture of
$124,506.
20
<PAGE>
The Company continued managing the Partnership until March 31, 1996,
for a fee of 3.5% of gross sales of the Partnership Restaurants. Effective March
31, 1996, pursuant to the Sale Contract executed with Roasters, the Company
terminated its Management Contract with the Partnership.
Transactions with Helen B. Scharps and/or David L. Scharps
Formation of the Company
Prior to June 1992, Helen B. Scharps ("H. Scharps") had been the sole
owner of the entire equity interest in each of the Company's wholly owned
operating subsidiaries (the "Operating Companies") since their respective dates
of organization, for which she paid the Operating Companies an aggregate of
approximately $78,000 between 1989 and 1992. David L. Scharps ("D. Scharps"), a
son of H. Scharps, was actively involved in the organization of the Operating
Companies and became the Chief Executive Officer of each of them upon their
organization.
In June 1992, H. Scharps sold 70% of the equity interest of the
Operating Companies to D. Scharps for his promissory note in the original
principal amount of $70,000 bearing interest at 10% per annum and due and
payable in June 1995. H. Scharps and D. Scharps then acquired 300,000 and
700,000 shares of the Company's Common Stock and options to purchase 60,000 and
140,000 shares of the Company's Common Stock, respectively, from the Company in
exchange for the entire equity interest of the Operating Companies. The options
were exercisable at a price of $4.00 per share until June 30, 1995. The 200,000
shares of Common Stock underlying the options were previously registered
pursuant to the Securities Act. H. Scharps and D. Scharps had the right to
require the Company to keep the Prospectus that is a part of the registration
statement current by means of post-effective amendments so that they can
publicly sell such stock.
In connection with the settlement of a claim by Isicoff & Ragatz,
P.A., the attorneys that represented the Company in the previous litigation
against Roasters (the "Litigation Attorneys"), H. Scharps and D. Scharps
assigned to the Litigation Attorneys options to purchase 20,000 and 15,000
shares, respectively. The options were exercised in October 1995 for a total of
18,768 shares of the Company's Common Stock. On December 4, 1995 the Company
signed a promissory note in the amount of $162,075 payable to the Litigation
Attorneys. The note is payable over 12 months and bears interest at 9% per
annum. The note is guaranteed by Roasters Corp. against default. Upon payment of
the promissory note in full, the Litigation Attorneys will tender the 18,768
shares of Common Stock to the Company for cancellation.
The expiration date for the remaining options to purchase 40,000 shares
of the Company's Common Stock held by H. Scharps has been extended by mutual
agreement to 45 days following the effective date of a registration statement
of the Company that included the shares underlying the options (the
"Registration Statement"). By letter dated June 16, 1995, the Company offered
to extend the expiration date for the remaining options to purchase 125,000
shares of the Company's Common Stock held by D. Scharps. However, D. Scharps did
not respond to the offer; therefore, his options expired on June 30, 1995, in
accordance with their terms. The Company has since issued options to purchase an
identical number of shares at the same exercise price to D. Scharps subsequent
to D. Scharps notifying the Company he intended to execute the extension offer,
but was unable to do so because he was out of the country. Such newly-issued
options expire 30 days following the effective date of the Registration
Statement. The Company decided to issue the replacement options to avoid a
dispute with D. Scharps regarding the Company's registration obligations for the
shares of Common Stock underlying the original options.
Debt to H. Scharps and Conversion into Equity
From 1989 to June 1992, H. Scharps lent an aggregate of approximately
$600,000 to the Operating Companies, which used the funds for expansion and
working capital. The Company in 1992 granted H. Scharps the option to convert
the loans into shares of the Company's Common Stock at a conversion price of
$4.00 per share. The option expires on the earlier of (a) the mandatory
conversion of the loans described in the next paragraph; (b) written notice from
FOODQUEST that it is prepaying in full one or more of the loans, provided,
however, that if the prepayment is not of all of the loans, then the optional
conversion right terminates only as to the loan(s) being prepaid in full; or
(c) payment of any of the loans in full in accordance with their terms. All of
the loans made by H. Scharps to the Operating Companies bear interest at the
rate of 12% per annum and are secured by substantially all of the assets of each
of the Operating Companies and D. Scharps' shares of the Company's Common Stock.
As of August 16, 1994, the aggregate outstanding principal balance of the loans
was $469,029.
21
<PAGE>
Pursuant to the terms of a Stock Purchase Agreement dated
August 16, 1994, among the Company, D. Scharps, H. Scharps, Gary M. Scharps and
Cathy Bayer (the "Principal Shareholders Agreement"), the notes from the Company
or any of its subsidiaries that evidence the aggregate debt to H. Scharps, any
and all documentation with respect to any and all collateral securing such
notes, and any and all necessary and appropriate documentation to effect the
release of such collateral were, contemporaneously with the closing pursuant to
the Company Agreement, placed in escrow (the "Escrow Agreement") with Broad and
Cassel, the Company's legal counsel. If the average closing bid price per share
for the Company' Common Stock for the 10 trading days immediately preceding the
effective date (the "Effective Date") of a registration statement including the
shares into which the loans can be converted (the "Registration Statement")
equals or exceeds $4.25 per share, then, upon such effectiveness, the aggregate
debt would convert into 117,257 shares of the Company's Common Stock, the escrow
would terminate and the collateral would be released.
However, if the average closing bid price per share for the Company's
Common Stock for the 10 trading days immediately preceding the Effective Date
did not equal or exceed $4.25 per share, then the conversion would not occur on
the Effective Date but instead occur on the first business day thereafter upon
which both (a) the average closing bid price per share for FOODQUEST's Common
Stock on the 10 trading days immediately preceding such business day equals or
exceeds $4.25 per share, and (b) the Prospectus contained in the Registration
Statement is current. If such conversion did not occur by December 31, 1995,
then the notes would be payable in accordance with their respective current
terms.
On January 2, 1996, pursuant to the terms of the Escrow Agreement, the
Company returned to H. Scharps the notes evidencing the Company's debt, the
documentation with respect to the collateral, and the documentation necessary to
effect the release of such collateral. In accordance with the Principal
Shareholders Agreement, the Company began making payments of principal and
interest on the debt owed to H. Scharps. As of March 31, 1996, the aggregate
outstanding principal balance of the loans was $351,764.
Consulting Agreement
In conjunction with the Company Agreement, the Company and D. Scharps
entered into a Consulting Agreement dated November 11, 1994 (the "Consulting
Agreement"), pursuant to which D. Scharps was to perform consulting services for
the Company on an exclusive basis to the extent requested by the Company for a
period of one year. D. Scharps received compensation of $85,000 during such
period in connection with providing the consulting services.
Noncompetition Agreement
D. Scharps and the Company also entered into a Noncompetition Agreement
dated November 11, 1994 (the "Noncompetition Agreement"), pursuant to which
D. Scharps agreed that, for a period of two years, he will not directly or
indirectly engage in any business activities, the substantial part of which is
the retail sale of rotisserie or roasted chicken meals or the granting of area
development rights or franchises for the same. During such period D. Scharps is
also prohibited from competing with the Company by soliciting or inducing or
influencing certain suppliers of the Company to discontinue or reduce their
relationship with the Company. D. Scharps is also prohibited from recruiting,
soliciting or influencing any of the Company's employees for competitive
purposes or from interfering with certain relations of the Company. In
consideration of his agreements pursuant to the Noncompetition Agreement, he
received warrants to purchase an aggregate of 100,000 shares of Common Stock
exercisable at purchase price of $6.00 per share on or prior to
November 10, 1995. In conjunction with the extension of the Public Warrants and
Roasters Warrants, the expiration date on the warrants held by D. Scharps was
extended to November 10, 1996.
Transaction with Gary M. Scharps
Clucker's Wood Roasted Chicken, Inc.-Suniland, a Florida Corporation
("CWRI-Suniland"), a wholly-owned subsidiary of the Company, and G.M.S.
Enterprises, Inc., a Florida corporation ("G.M.S."), of which Gary M. Scharps
("G. Scharps"), a son of H. Scharps and the brother of D. Scharps, was the sole
shareholder, in March 1993, formed a general partnership known as Clucker's of
Suniland to own and operate a Clucker's restaurant in South Miami, Florida.
G.M.S. assigned to Michael Internoscia a 4% interest in the partnership. As a
result, CWRI-Suniland owned 50.1% of the partnership, G.M.S. owned 45.9% of the
partnership and Mr. Internoscia owned the remaining 4% of the partnership. As of
November 11, 1994, CWRI-Suniland and G.M.S. had contributed $227,984 and
$178,500, respectively, to the partnership and had received distributions from
the partnership of
22
<PAGE>
$24,412 and $44,802, respectively. G. Scharps also entered into an employment
agreement with the partnership, pursuant to which he was the general manager of
the partnership's restaurant and received an annual salary of $40,000.
Simultaneously with the closing of the Company Agreement, CWRI-Suniland
purchased G.M.S. and Mr. Internoscia's interests in the restaurant for a
purchase price of $225,000, which consisted of $185,000 determined pursuant to a
predetermined fixed price under the partnership agreement with respect to the
purchase of G.M.S.'s and Mr. Internoscia's partnership interests by CWRI-
Suniland and an additional $40,000 paid by CWRI-Suniland to G.M.S. in exchange
for the exclusive geographic area of operation by a Clucker's restaurant, which
$40,000 was negotiated by Roasters, on behalf of the Company and CWRI-Suniland,
and by G. Scharps on behalf of G.M.S. The former management of the Company was
unable to determine if the $40,000 portion of the purchase price is the price
that would have been paid for exclusive geographic rights by an unaffiliated
third party. In addition, the employment agreement with G. Scharps was
terminated.
Options Granted to Directors
The Company's former Board of Directors on July 18, 1994, granted
options to Nico B. M. Letschert for the purchase of 30,000 shares of the
Company's Common Stock at $4.625 per share. The options expire on July 18, 1997,
or upon his earlier resignation, removal from office or death. On April 4, 1996,
Mr. Letschert, as the Company's sole director, granted himself five-year options
for the purchase of 100,000 shares of the Company's common stock at $1.00 per
share, which exceeded the market price of the stock at the time of grant.
The Company's former Board of Directors on July 18, 1994, granted
options to Douglas Rudolph for the purchase of 30,000 shares of the Company's
Common Stock at $4.625 per share. The options vested immediately and expire on
July 18, 1997.
The Company's former Board of Directors on August 23, 1993, granted
options to William J. Gallagher, then a director of the Company, for the
purchase of 30,000 shares of the Company's Common Stock at $9.75 per share. The
options vested immediately and expire on August 23, 1996. Pursuant to an
agreement dated August 30, 1994, with Tex-Mex Ventures, Inc., one of the
Company's area developers in which Mr. Gallagher has an interest, the exercise
price for the options was reduced to $7.00 per share.
The Company's Board of Directors on November 17, 1994, granted options
to Gregory G. Dollarhyde and Andrew S. Howard, both Directors of the Company,
for the purchase of 50,000 and 15,000, respectively, shares of the Company's
Common Stock at $6.00 per share. The options vested immediately and expire on
November 17, 1999, or their respective earlier cessation to be either a
director, officer or consultant of the Company. Mr. Howard tendered his
resignation to the Company on November 30, 1996. Mr. Dollarhyde resigned as
Chairman and Chief Executive Officer on March 4, 1996.
Transactions with Atlanta FOODQUEST, LLC
Operating Agreement
On March 31, 1996, the Company entered into a joint venture agreement
(the "Operating Agreement") with Atlanta Roasters, Inc., another area developer
of Kenny Rogers Roasters, for the ownership, operation and development of the
Roasters concept in the metropolitan Atlanta area. The joint venture (the
"Venture") was formed as Atlanta FOODQUEST, LLC, in the state of Georgia. The
Venture is comprised of four restaurants including two formerly owned by the
Company in Alpharetta and Marietta, Georgia. The Company has a 49.9% interest in
the Venture. Atlanta Roasters has a 50.1% interest in the venture, and will
manage the Venture for a management fee equal to 2% of gross sales.
Additionally, Atlanta Roasters will receive $250 per restaurant per month for
accounting services provided. The term of the Operating Agreement is through
December 31, 2020. Under the Operating Agreement, the Company assigned its
interest in the leases of each of the Restaurants and the Venture assumed the
obligations thereunder.
Purchase and Sale Agreement
In conjunction with the Operating Agreement the Company entered into a
Purchase and Sale Agreement (the "Atlanta Sale Agreement"), in which the Company
sold its Alpharetta and Marietta Roasters concept restaurants to the Venture for
approximately
23
<PAGE>
$1,300,000. The sale price (the "Atlanta Sale Price") in the Atlanta Sale
Agreement was comprised of (a) assumption by the Venture of $258,903 of
equipment lease obligations, (b) assumption by the Venture of $29,674 in unpaid
royalty fees owed to Roasters Franchise Corp., (c) assumption by the Venture of
$24,952 in trade payables, and (d) a promissory note (the "Atlanta Note") for
the $1,011,423 balance of the Atlanta Sale Price. The Atlanta Note bears
interest at 8% per annum and is payable interest only for one year, then in
monthly payments of principal and interest based on a seven year amortization
for two years, and then by payment of the remaining amount due on April 1, 1999.
The Atlanta Note is secured by substantially all of the assets of the Alpharetta
and Marietta restaurants.
24
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits.
3.1 December 1994 Restated Articles of Incorporation of the Company.
Exhibit 3.1 to the Company's Registration Statement on Form SB-2,
File No. 33-89936, is hereby incorporated by reference.
3.2 December 1994 Amended Bylaws. Exhibit 3.2 to the Company's Registration
Statement on Form SB-2, File No. 33-89936, is hereby incorporated by
reference.
4.1 Specimen Certificate of Common Stock. Exhibit 4.1 to the Company's
Registration Statement on Form SB-2, File No. 33-89936, is hereby
incorporated by reference.
4.2 Form of Common Stock Purchase Warrant ("Public Warrant"). Exhibit 4(a)
to the Company's Registration Statement on Form S-1, File No. 33-49146,
is hereby incorporated by reference.
4.3 Form of Warrant Agreement between the Company and North American
Transfer Co. Exhibit 3 to the Company's Registration Statement on
Form 8-A File No. 0-20718, is hereby incorporated by reference.
4.4 Form of Warrant ("Registered Warrants", "Additional Warrants", and
"Warrants"). Exhibit 4.4 to the Company's Registration Statement on
Form SB-2, File No. 33-89936, is hereby incorporated by reference.
4.5 Form of Underwriter Warrant ("Underwriter's Warrant", and "Unit
Warrant"). Exhibit 4(e) to the Company's Registration Statement on
Form S-1, File No. 33-49146, is hereby incorporated by reference.
4.6 Form of Amendment to Public Warrant. Exhibit 4.6 to the Company's
Registration Statement on Form SB-2, File No. 33-89936, is hereby
incorporated by reference.
4.7 Form of Amendment to Warrant Agreement. Exhibit 4.7 to the Company's
Registration Statement on Form SB-2, File No. 33-89936, is hereby
incorporated by reference.
4.8 Form of Amendment for Registered Warrants, Additional Warrants and
Warrants. Exhibit 4.8 to the Company's Registration Statement on
Form SB-2, File No. 33-89936, is hereby incorporated by reference.
10.1 Stock Purchase Agreement dated as of August 16, 1994, as amended, among
the Company, Roasters Corp. and David L. Scharps. Exhibit 10.1 to the
Company's Current Report on Form 8-K dated November 11, 1994 (Items 1,4
and 7), is hereby incorporated by reference.
10.2 Stock Purchase Agreement dated as of August 16, 1994, as amended, among
the Company, David L. Scharps, Helen B. Scharps, Gary M.Scharps and
Cathy Bayer. Exhibit 10.2 to the Company's Current Report on Form 8-K
dated November 11, 1994 (Items 1,4 and 7), is hereby incorporated by
reference.
10.3 Management Agreement dated as of November 11, 1994, by and between the
Company and Roasters Corp. Exhibit 10.3 to the Company's Registration
Statement on Form SB-2, File No. 33-89936, is hereby incorporated by
reference.
10.4 Master Development Agreement Dated December 1, 1994, between the Company
and Roasters Franchise Corp. Exhibit 10.4 to the Company's Registration
Statement on Form SB-2, File No. 33-89936, is hereby incorporated by
reference.
10.5 Form of Kenny Rogers Franchise Agreement between Roasters Franchise
Corp. and the Company. Exhibit 10.5 to the Company's Registration
Statement on Form SB-2, File No. 33-89936, is hereby incorporated by
reference.
25
<PAGE>
10.6 Purchase and Sale Agreement dated December 1, 1994, between the Company
and Roasters Corp. Exhibit 10 to the Company's Current Report or
Form 8-K dated December 1, 1994, is hereby incorporated by reference.
10.7 Area Development Agreement dated June 18, 1993, between Clucker's
Franchise Corporation and Billy Blues Food Corp. (San Antonio/Dallas,
Texas). Exhibit 10(x) to the Company's Annual Report on Form 10-KSB for
the fiscal year ended March 28, 1993, is hereby incorporated by
reference.
10.8 Area Development Agreement dated June 18, 1993, between Clucker's
International Franchise Corporation and Billy Blues Food Corp.
(Houston/Galveston, Texas). Exhibit 10(y) to the Company's Annual Report
on Form 10-KSB for the fiscal year ended March 28, 1993, is hereby
incorporated by reference.
10.9 Area Development Agreement dated June 18, 1993, between Clucker's
International Franchise Corporation and Billy Blues Food Corp. (Mexico
and Central America). Exhibit 10(z) to the Company's Annual Report on
Form 10-KSB for the fiscal year ended March 28, 1993, is hereby
incorporated by reference.
10.10 Letter Amendment dated August 30, 1994, amending Exhibits 10.7-10.9.
Exhibit 10.10 to the Company's Registration Statement on Form SB-2, File
No. 33-89936, is hereby incorporated by reference.
10.11 Settlement Agreement dated November 3,1994, between the Company and
Josepthal, Lyon & Ross, Incorporated. Exhibit 10.11 to the Company's
Registration Statement on Form SB-2, File No. 33-89936, is hereby
incorporated by reference.
10.12 Settlement Agreement dated November 11, 1994, by and among the Company,
Roasters Corp., David L. Scharps, Helen B. Scharps, Isicoff & Ragatz,
P.A. and Eric D. Isicoff. Exhibit 10.12 to the Company's Registration
Statement on Form SB-2, File No. 33-89936, is hereby incorporated by
reference.
10.13 1992 Key Employee Stock Incentive Plan, as Amended. Exhibit 10.1 to
Registration Statement on Form S-8 filed on December 30, 1994, is hereby
incorporated by reference.
10.14 Form of Stock Option Agreement between the Company and its Directors or
Executive Officers. Exhibit 10.14 to the Company's Registration
Statement on Form SB-2, File No. 33-89936, is hereby incorporated by
reference.
10.15 Employment Agreement dated August 2, 1993, between the Company and Brian
Charles Lee. Exhibit 10(aa) to the Company's Registration Statement on
Form SB-2, File No. 33-66204, is hereby incorporated by reference.
10.16 Consulting Agreement dated November 11, 1994, between the Company and
David L. Scharps. Exhibit 10.16 to the Company's Registration Statement
on Form SB-2, File No. 33-89936, is hereby incorporated by reference.
10.17 Noncompetition Agreement dated November 11, 1994, between the Company
and David L. Scharps. Exhibit 10.17 to the Company's Registration
Statement on Form SB-2, File No. 33-89936, is hereby incorporated by
reference.
10.18 Stock Purchase Agreement dated as of June 22, 1995, between the Company
and Pacific Foods, Ltd. Exhibit 10.18 to the Company's Registration
Statement on Form SB-2, File No. 33-89936, is hereby incorporated by
reference.
10.19 Agreement and Plan of Reorganization dated as of July 7, 1995, by and
among the Company; Paradise Acquisition Corp.; Chart House Enterprises,
Inc.; and Paradise Bakery, Inc. (the "Paradise Bakery Agreement").
Exhibit 10.19 to the Company's Registration Statement on Form SB-2, File
No. 33-89936, is hereby incorporated by reference.
10.20 Purchase and Sale Agreement dated June 12, 1995, between Paradise Dining
Rooms, Inc., and the Company - Exhibit 10 to the Company's Current
Report on Form 8-K dated June 12, 1995, is hereby incorporated by
reference.
10.21 Letter of Intent dated as of May 27, 1995, between the Company and
Venture 88, Inc. Exhibit 10.21 to the Company's Registration Statement
on Form SB-2, File No. 33-89936, is hereby incorporated by reference.
26
<PAGE>
10.22 Letter of Intent dated as of May 27, 1995, by and among the Company;
Founders Venture, Inc.; Daniel E. Patterson; Mark Patterson; Carter
Holmes; and David Birzon. Exhibit 10.22 to the Company's Registration
Statement on Form SB-2, File No. 33-89936, is hereby incorporated by
reference.
10.23 Asset Purchase Agreement dated as of August 21, 1995, between the
Company and Venture 88, Inc. Exhibit 10.23 to the Company's Registration
Statement on Form SB-2, File No. 33-89936, is hereby incorporated by
reference.
10.24 Agreement and Plan of Reorganization dated as of August 21, 1995, by and
among the Company; Founders Venture, Inc.; Daniel E. Patterson; Mark
Patterson; Carter Holmes; and David Birzon. Exhibit 10.24 to the
Company's Registration Statement on Form SB-2, File No. 33-89936, is
hereby incorporated by reference.
10.25 First Amendment to Paradise Bakery Agreement. Exhibit 10.25 to the
Company's Registration Statement on Form SB-2, File No. 33-89936, is
hereby incorporated by reference.
10.26 Purchase and Sale Agreement dated March 31, 1996, between the Company
and Atlanta FOODQUEST, LLC. Exhibit 10.1 to the Company's Current Report
on Form 8-K dated March 31, 1996, is hereby incorporated by reference.
10.27 Purchase and Sale Agreement dated March 31, 1996, between the Company
and Roasters Corp. Exhibit 10.2 to the Company's Current Report on
Form 8-K dated March 31, 1996, is hereby incorporated by reference.
10.28 Management Agreement dated March 31, 1996, between the Company and
Roasters Corp. Exhibit 10.3 to the Company's Current Report on Form 8-K
dated March 31, 1996, is hereby incorporated by reference.
10.29 Operating Agreement dated March 12, 1996, between the Company and
Atlanta Roasters, Inc.
21 Subsidiaries of the Company - Clucker's Wood Roasted Chicken, Inc. -
Suniland; Clucker's International Franchise Corporation.
(b) Reports on Form 8-K.
Not applicable.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, FOODQUEST, Inc. has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized, in the City of
Miami, Florida on the 10th day of July, 1996.
FOODQUEST, INC.
By:/s/Ronald T. Linares
---------------------------------------
Ronald T. Linares, Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/Ronald T. Linares Vice President and July 10, 1996
- --------------------------- Chief Financial Officer
Ronald T. Linares
/s/Nico B. M. Letschert Director July 10, 1996
- ---------------------------
Nico B.M. Letschert
</TABLE>
28
<PAGE>
Index to Financial Statements
Pages
Introduction F-2
Consolidated Financial Statements:
Balance Sheets F-3
Statements of Operations F-4
Statements of Shareholders' Equity (Capital Deficiency) F-5
Statements of Cash Flows F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-24
F-1
<PAGE>
Introduction
------------
The accompanying consolidated financial statements are presented as unaudited as
the Company's independent accountants of record have not completed an audit of
the Company's consolidated financial statements for the fiscal year ended March
31, 1996. However, the Company's management is of the opinion that the
financial statements fairly present the Company's consolidated financial
position, results of operations and cash flows and contain all the disclosures
required under generally accepted accounting principles, assuming the Company
can continue as a going concern.
F-2
<PAGE>
FOODQUEST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1996 and March 26, 1995
<TABLE>
<CAPTION>
1996 1995
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 673,994 $ 851,836
Receivables and refundable deposits, net
of allowance for doubtful accounts of $0
and $25,495, respectively 82,642 179,920
Inventories 40,774 72,963
Prepaid expenses 69,817 68,536
Advance to joint venture 5,734 479,238
Notes receivable 0 50,000
------------ ------------
Total current assets 872,961 1,702,493
Property and equipment, net 3,320,174 4,906,985
Investment in joint ventures 795,459 310,951
Intangible assets, net of accumulated amortization
of $15,319 and $5,391, respectively 275,789 74,914
Other assets 0 175,000
------------ ------------
Total assets $ 5,264,383 $ 7,170,343
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Current liabilities:
Notes payable, current portion $ 1,067,326 $ 14,158
Accounts payable 886,204 197,448
Capital leases, current portion 60,347 34,746
Accrued liabilities 694,197 630,167
Other current liabilities 269,558 242,229
Due to affiliate 630,703 330,200
Deferred franchise revenue 0 50,000
------------ ------------
Total current liabilities 3,608,335 1,498,948
Notes payable, long-term portion 1,628,514 1,836,010
Capital leases, long-term portion 264,128 121,212
Deferred franchise revenue 0 371,795
Deferred rent 3,218 15,062
------------ ------------
Total liabilities 5,504,195 3,843,027
------------ ------------
Commitments and contingencies (Notes 10 and 15)
Shareholders' equity (capital deficiency):
Preferred stock, $.01 par value, authorized
5,000,000 shares, none outstanding 0 0
Common stock, $.01 par value, authorized
20,000,000 shares, 3,218,271 shares and
3,104,503 shares issued and outstanding in 1996
and 1995, respectively 32,183 31,045
Additional paid-in capital 12,065,258 11,548,859
Accumulated deficit (12,337,253) (8,252,588)
------------ ------------
Total shareholders' equity (capital deficiency) (239,812) 3,327,316
------------ ------------
Total liabilities and shareholders' equity (capital deficiency) $ 5,264,383 $ 7,170,343
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-3
<PAGE>
FOODQUEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the fiscal years ended March 31, 1996 and March 26, 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Revenues:
Restaurant sales $ 7,652,030 $ 5,778,766
Franchise and royalty revenue 421,795 30,964
Management fee income 76,188 23,985
-------------- --------------
Total revenues 8,150,013 5,833,715
-------------- --------------
Operating costs and expenses:
Cost of restaurant sales 2,929,282 2,282,222
Operating labor and related expenses 2,457,724 2,113,519
Occupancy and related expenses 815,275 493,788
Other direct restaurant operating expenses 1,405,340 1,031,160
Pre-opening costs 68,584 123,327
General and administrative expenses 1,325,170 1,323,087
Franchise operating expenses 0 192,183
Store closing expenses 1,321,499 1,747,627
Other expenses 1,039,248 389,986
Depreciation and amortization 491,591 884,865
-------------- --------------
Total operating expenses 11,853,713 10,581,764
-------------- --------------
Operating loss (3,703,700) (4,748,049)
Interest expense, net (277,573) (114,118)
Equity in loss of joint venture (103,392) (52,548)
-------------- --------------
Net loss $ (4,084,665) $ (4,914,715)
============== ==============
Net loss per common share $ (1.29) $ (1.94)
============== ==============
Weighted average number of common shares outstanding 3,171,979 2,533,122
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-4
<PAGE>
FOODQUEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CAPITAL
DEFICIENCY)
for the fiscal years ended March 31, 1996 and March 26, 1995
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at March 27, 1994 2,098,306 $ 20,983 $ 6,089,006 $ (3,337,873) $ 2,772,116
Issuance of common shares
in Regulation S offering 101,640 1,016 755,744 0 756,760
Issuance of common stock 500 5 2,995 0 3,000
Issuance of common stock,
net of related costs 896,057 8,961 4,811,023 0 4,819,984
Issuance of common stock
in settlement of litigation 5,000 50 45,575 0 45,625
Issuance of common shares
in conjunction with stock
option exercise 3,000 30 17,970 0 18,000
Excess of purchase price over
net assets acquired from company
under common control 0 0 (173,454) 0 (173,454)
Net loss 0 0 0 (4,914,715) (4,914,715)
------------- ------------- ------------- ------------- -------------
Balance at March 26, 1995 3,104,503 31,045 11,548,859 (8,252,588) 3,327,316
Issuance of common stock 70,000 700 261,800 0 262,500
Issuance of common stock in
settlement of litigation 43,768 438 150,404 0 150,842
Excess of sales price over net
assets sold to company under
common control 0 0 104,195 0 104,195
Net loss 0 0 0 (4,084,665) (4,084,665)
------------- ------------- ------------- ------------- -------------
Balance at March 31, 1996 3,218,271 $ 32,183 $ 12,065,258 $ (12,337,253) $ (239,812)
============= ============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-5
<PAGE>
FOODQUEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the fiscal years ended March 31, 1996 and March 26, 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,084,665) $ (4,914,715)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 491,591 884,865
Provision for bad debts 50,000 20,000
Write-off of intangible assets 72,914 0
Write-down of marketable securities 0 19,942
Provision for loss contingencies 155,820 225,090
Equity in loss of joint venture 103,392 52,716
Settlement of litigation through issuance 312,917 45,625
of common shares and notes payable
Non cash store closing expenses 1,204,835 1,126,205
Changes in operating assets/liabilities excluding
effects of acquisitions and dispositions:
Receivables 147,278 (45,689)
Inventories 23,116 (4,354)
Prepaid expenses (17,947) (39,226)
Due from affiliates and officer 473,504 (403,041)
Intangible assets 0 (7,051)
Other assets 175,000 (5,600)
Accounts payable 756,005 (408,241)
Accrued liabilities 143,699 318,414
Other current liabilities (122,671) 17,139
Due to affiliate 300,503 330,200
Deferred franchise revenue (421,795) (142,506)
Deferred rent (11,844) (116,689)
---------------- ----------------
Cash used in operating activities (248,348) (3,046,916)
---------------- ----------------
Cash flows from investing activities:
Cash paid for acquisition of restaurants, (366,776) (1,826,682)
net of cash acquired
Proceeds from sale of interest in joint venture 213,833 0
Purchase of minority interest in joint venture 0 (225,000)
Proceeds from sale of marketable securities 0 247,058
Purchase of property and equipment (452,105) (732,339)
Proceeds from sale of property and equipment 0 497,143
---------------- ----------------
Cash used in investing activities (605,048) (2,039,820)
---------------- ----------------
Cash flows from financing activities:
Proceeds from notes payable 500,000 500,000
Repayments of notes payable (341,580) (515,338)
Proceeds from sales and leaseback of 358,493 0
equipment treated as financing
Payments on capital leases (103,859) 0
Net proceeds from issuance of common stock 262,500 5,597,744
---------------- ----------------
Cash provided by financing activities 675,554 5,582,406
---------------- ----------------
Net (decrease) increase in cash and cash equivalents (177,842) 495,670
Cash and cash equivalents, beginning of year 851,836 356,166
---------------- ----------------
Cash and cash equivalents, end of year $ 673,994 851,836
================ ================
Supplemental cash flow information:
Cash paid during the year for interest $ 130,731 $ 100,298
================ ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-6
<PAGE>
FOODQUEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
for the fiscal years ended March 31, 1996 and March 26, 1995
Supplemental Schedule of Noncash Investing and Financing Activities:
- -------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Capitalized leases and equipment acquired in echange for a note payable in 1996 $ 227,874 $ 0
Note payable issued in settlement of litigation 162,075 0
Common stock issued in settlement of litigation 150,842 45,625
Net assets of restaurants acquired:
Cash $ 0 $ 11,502
Prepaid expenses 3,002 0
Inventories 4,495 27,859
Property and equipment 543,983 2,454,421
Investment in joint venture 0 363,667
Other 0 150,245
---------------- ----------------
Total assets 551,480 3,007,694
---------------- ----------------
Accrued liabilities 5,582 0
Capital lease obligation 0 176,134
Deferred rent 0 13,173
---------------- ----------------
Total liabilities assumed 5,582 189,307
---------------- ----------------
Net assets acquired 545,898 2,818,387
---------------- ----------------
Purchase price:
Cash 366,776 1,838,184
Notes Payable (including notes payable assumed) 466,277 1,153,657
---------------- ----------------
833,053 2,991,841
---------------- ----------------
Excess of purchase price over net assets acquired $ 287,155 $ 173,454
================ ================
Net book value of minority interest acquired:
Purchase price - cash $ 0 $ 225,000
Minority interest acquired 0 184,706
---------------- ----------------
Excess of purchase price $ 0 $ 40,294
================ ================
Net assets sold to joint venture treated as captital contributions:
Cash $ 2,305 $ 0
Prepaid expenses 19,668 0
Inventories 13,568 0
Property and equipment 1,073,447 0
---------------- ----------------
Total assets sold 1,108,988 0
---------------- ----------------
Accounts payable 24,952 0
Accrued royalties 29,674 0
Capital lease obligations 258,903 0
---------------- ----------------
Total liabilities assumed 313,529 0
---------------- ----------------
Net assets sold $ 795,459 $ 0
================ ================
Consideration received - notes receivable 1,011,423 0
Less excess of sales price over net assets disposed (215,964) 0
---------------- ----------------
Net investment in joint venture $ 795,459 $ 0
================ ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
FOODQUEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations and Organization:
FOODQUEST, Inc., formerly known as Clucker's Wood Roasted Chicken, Inc. (the
Company or FOODQUEST), organized under the laws of the State of Florida, owns
and develops restaurants under the Kenny Rogers Roasters (KRR) and Clucker's
Wood Roasted Chicken concepts, and licenses the Clucker's Wood Roasted
Chicken concept.
The principal business of the Company has been the operation of quick service
restaurants specializing in wood roasted chicken, and other freshly prepared
foods. The Company had five owned restaurants open at March 31, 1996, of
which four were Kenny Rogers Roasters restaurants in Dade County, Florida,
and one Clucker's Wood Roasted Chicken restaurant in Broward County,
Florida. Additionally, the Company owned a 49.9% interest in a joint venture
franchising the Kenny Rogers Roasters concept in Metropolitan Atlanta,
Georgia which owns and operates four Kenny Rogers Roasters restaurants.
There was one franchised Clucker's Wood Roasted Chicken restaurant in
operation at March 31, 1996. There were 11 owned restaurants open at March
26, 1995, of which seven were Company owned Kenny Rogers Roasters restaurants
two of which are owned through a joint venture, four were company owned
Clucker's Wood Roasted Chicken restaurants and one was a franchised Clucker's
Wood Roasted Chicken restaurant.
As discussed more fully in Note 5, the Company entered into a contract to
sell four of its Roasters concept restaurants to its majority shareholder,
Roasters Corp. (Roasters) which if completed would result in the sale of
substantially all of the Company's assets. The sale is contingent on
obtaining shareholder approval by shareholders other than Roasters.
Accordingly, there is no assurance that the sale of the restaurants will be
completed.
2. Change in Control:
On November 11, 1994, Roasters purchased 1,751,386 shares of common stock of
the Company which shares represented approximately 56% of the Company's
outstanding shares on that date (54% as of March 31, 1996). The stock
purchase consisted of 896,057 shares of newly issued common stock sold for
$5,000,000 and 855,329 shares purchased from a major shareholder. The
Company also issued warrants to Roasters to purchase 2,000,000 shares of its
common stock for $6 per share, with the option period commencing on November
11, 1994 and originally expiring on November 10, 1995. During fiscal year
1996, the Company's Board of Directors extended the expiration date on the
warrants through November 10, 1996. A lawsuit previously filed by the
Company against Roasters was dismissed at the time of stock purchase.
F-8
<PAGE>
FOODQUEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Summary of Significant Accounting Policies:
Basis of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All material intercompany balances and transactions have
been eliminated. The Company's investments in non-controlled joint ventures
are accounted for under the equity method.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the supporting period.
Actual results could differ from those estimates.
Fiscal Year
The Company's fiscal year ends on the Sunday nearest to March 31. The fiscal
years ended March 31, 1996 and March 26, 1995 were comprised of 53 and 52
weeks, respectively.
Cash Equivalents
The Company considers highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents. At
times, the Company maintains cash in its corporate accounts which exceeds
federally insured limits. The Company has not experienced any losses in such
accounts.
Inventories
Inventories consisting primarily of food and other restaurant supplies, are
stated at the lower of cost (first-in, first-out method) or market value.
Property and Equipment
Property and equipment, including leasehold improvements, are stated at cost.
Depreciation is generally provided on a straight-line basis over the
estimated useful lives of the respective assets. Leasehold improvements and
equipment under capital leases are amortized on a straight-line basis over
the shorter of the estimated useful life of the asset, or the lease term
including all option periods expected to be utilized. Maintenance and repair
costs are expensed as incurred. Expenditures for significant renewals or
betterments to properties and equipment are added to the basis of the asset.
Gains or losses on dispositions are reflected in current operations.
F-9
<PAGE>
FOODQUEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Summary of Significant Accounting Policies, Continued:
Intangible Assets
Intangible assets consists primarily of the excess of purchase price over
fair value of restaurants acquired (goodwill) which is being amortized over
twenty years. The Company periodically evaluates the carrying value of
goodwill and intangible assets to measure and recognize the possible
impairment of these assets.
Franchise Fee Income
Franchise fees are deferred until substantial performance of the franchisor's
obligations are complete. Satisfaction of the franchisor obligation is
complete when the franchisee has begun store operations. The Company is
currently not operating as a franchisor, and as such, anticipates no
significant franchise fee income or expenses in the near future.
Income Taxes
The Company utilizes the liability method of accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based
on the difference between the financial statement and tax bases of assets and
liabilities using the enacted tax rates expected to be in effect for the year
in which the differences are expected to reverse. A valuation allowance is
established when it is more likely than not that some or all of the deferred
tax assets will not be realized.
Per Share Data
Per share data is based on the weighted average number of common shares
outstanding during each year after considering the exercise of dilutive stock
options, stock warrants and conversion of convertible debt into common stock.
For 1996 and 1995, stock options, stock warrants and convertible debt are not
considered because they have an anti-dilutive effect.
Costs of Opening and Closing Restaurants
The costs of opening new restaurants (Pre-opening costs) consisting of
salaries and other direct costs incidental to the opening of the Company's
restaurants, are charged against operations as incurred. When operations are
discontinued and a restaurant is closed, the remaining investment, net of
salvage value, is charged against operations and, for leased facilities a
provision is made for the remaining leased liability, net of expected
sublease income.
Reclassifications
Certain reclassifications have been made to the 1995 financial statements to
conform with the 1996 presentation.
F-10
<PAGE>
FOODQUEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Summary of Significant Accounting Policies, Continued:
New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed of," which the Company is required to adopt
effective April 1, 1996. SFAS No. 121 establishes accounting standards for
the impairment of long-lived assets, certain identifiable intangibles and
goodwill. The Company has not determined the impact, if any, this
pronouncement will have on its consolidated financial statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which the Company is required to adopt effective April 1,
1996. SFAS No. 123 establishes optional alternative accounting methods for
stock-based compensation as well as new required disclosures. The Company
has elected to account for stock-based compensation under previously-existing
accounting guidance. As such, SFAS No. 123 will be adopted in fiscal year
1997 for disclosure purposes only and will not impact the Company's financial
position, annual operating results or cash flows.
4. Acquisitions:
On June 12, 1995, the Company acquired from Paradise Dinning Rooms, Inc.
("Paradise") all of the assets of a KRR restaurant located in Dade County,
Florida and assumed loans collateralized by the restaurants. The Company also
assumed Paradise's obligation for the construction and leasing of the site
for a future restaurant located in Broward County, Florida. The purchase
price amounted to approximately $833,000 consisting of cash of approximately
$367,000, a promissory note of $272,000 and the assumption of $194,000 in
notes payable. The promissory note is collateralized by the assets of the
restaurant purchased from Paradise. The acquisition was recorded utilizing
the purchase method of accounting. The purchase price was allocated to the
fair value of the assets acquired and liabilities assumed and resulted in
goodwill of approximately $287,000.
F-11
<PAGE>
FOODQUEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. Acquisitions, Continued:
On December 1, 1994, the Company acquired from Roasters all of the assets of
four KRR restaurants located in metropolitan Atlanta, Georgia, and Dade
County, Florida and assumed the lease obligations for each of the acquired
restaurants. The Company also acquired a 50% ownership in Roosters J.V.
(Roosters), a joint venture which operates two restaurants in Dade County,
Florida, and exclusive rights to develop restaurants in Dade County, Florida,
parts of metropolitan Atlanta, Georgia and Dallas/Ft. Worth, Texas. The
purchase price amounted to approximately $3.0 million, consisting of cash of
$1.8 million and a promissory note of approximately $1.2 million. The
promissory note is collateralized by the assets of the four restaurants
purchased and the Company's interest in Roosters. The acquisition has been
accounted for as a business combination of companies under common control and
has been accorded treatment similar to that of a pooling of interests for
financial reporting purposes. Accordingly, the purchase price was allocated
to the net book value of the assets acquired and liabilities assumed and
resulted in cost in excess of net book value of approximately $173,000 which
was reflected as a charge to additional paid-in capital.
The following unaudited pro forma data gives effect to the purchases as if
they had been consummated as of the beginning of fiscal year 1995. The pro
forma data has been prepared for comparative purposes only and does not
purport to be indicative of what would have occurred had the purchases been
made at the beginning of fiscal 1995 or the results which may occur in the
future.
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Total revenue $ 8,415,013 $ 8,427,313
Net loss (4,058,665) (5,138,084)
Net loss per share (1.28) (1.66)
</TABLE>
In April 1993, the Company and a corporation owned by a related party of the
then existing Chief Executive Officer of the Company, entered into a joint
venture to own and operate a Clucker's restaurant in South Florida. At March
27, 1994, the Company owned 50.1% of the joint venture and consolidated the
entity in its financial statements. During fiscal 1995, the Company purchased
the remaining interest of the joint venture for $225,000 cash. The Company
recorded approximately $40,000 as goodwill.
F-12
<PAGE>
FOODQUEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. Pending Sale of Restaurants:
On March 31, 1996 the Company entered into a contract to sell its four KRR
restaurants in Dade County, Florida (collectively, the "Dade Restaurants"),
to Roasters for an aggregate purchase price of $3,393,918 and in this
connection, borrowed $500,000 from Roasters. The purchase price includes
(a) the cancellation of $1,653,657 in debt owed by the Company to Roasters,
and (b) the assumption by Roasters of $843,127 of other obligations owed by
the Company to Roasters and its affiliates and (c) assumption by Roasters of
$843,460 in debt and equipment lease obligations of the Company.
The closing of the sale is contingent upon approval of the transaction by
shareholders other than Roasters and landlords' and lenders consent. There
is no assurance that the sale of the restaurants will be completed. Until
the sale is consummated, Roasters will manage the Dade Restaurants pursuant
to a Management Agreement dated March 31, 1996 which entitles Roasters to
receive all revenues from the operation of the Dade Restaurants after payment
of all operating expenses including rent, payment of insurance premiums,
equipment lease payments, payment of interest and principal on all loans
collateralized by the Dade Restaurants and similar such payments.
6. Property and Equipment:
Property and equipment consists of the following at March 31, 1996 and March
26, 1995:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Building $ 952,018 $ 952,018
Machinery and equipment 1,105,886 1,999,873
Leasehold improvements 1,634,869 2,578,600
Smallwares 29,357 41,283
Furniture and fixtures 129,981 384,325
------------ ------------
3,852,111 5,956,099
Less accumulated depreciation and amortization 531,937 1,049,114
------------ ------------
$ 3,320,174 $ 4,906,985
============ ============
</TABLE>
Depreciation and amortization expense was approximately $478,225 and
$882,527, principally attributable to restaurant operations, for the fiscal
years ended March 31, 1996 and March 26, 1995, respectively.
F-13
<PAGE>
FOODQUEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. Investment in Joint Ventures:
Investment in joint ventures consists of the following at March 31, 1996 and
March 26, 1995:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Atlanta Foodquest, LLC $ 795,459 $ 0
Roosters J.V. 0 310,951
----------- -----------
$ 795,459 $ 310,951
=========== ===========
</TABLE>
As of March 31, 1996, the Company entered into a joint venture, Atlanta
Foodquest LLC (LLC) with Atlanta Roasters, Inc., another area developer of
KRR restaurants, with respect to four KRR restaurants in the metropolitan
area of Atlanta, Georgia, including two restaurants owned by the Company.
The Company sold its Alpharetta and Marietta Roasters concept restaurants
(collectively, the "Atlanta Restaurants") to LLC for approximately $1,300,000
and received a 49.9% interest in LLC. The purchase price includes the
assumption by LLC of equipment lease obligations and unpaid royalty fees owed
Roasters in connection with the Atlanta Restaurants totaling approximately
$314,000. The Company received a promissory note for the $1,011,423 balance
of the purchase price. The note is collateralized by the Atlanta
Restaurants.
The Company's investment in joint venture of $795,459 at March 31, 1996
represents the Company's 49.9% interest in LLC. The Company has classified
the amount of the promissory notes receivable obtained as consideration in
connection with the Company's sale of the Atlanta Restaurants to LLC of
$1,011,423 net of the excess of sales price over net assets disposed of
$215,964 as investment in joint venture. Management of the Company has
determined that the sale of the Atlanta Restaurants to LLC represents the
Company's capital contribution in exchange for its 49.9% interest in LLC. The
investment represents the Company's carrying basis at March 31, 1996 of the
assets sold to LLC.
Effective January 1, 1996, the Company sold its 50% interest in Roosters to
Roasters for a purchase price of $438,000 consisting of (i) cash of
approximately $214,000, (ii) the satisfaction of certain liabilities of
approximately $100,000 and (iii) an adjustment to the purchase price for a
working capital shortfall in the joint venture of approximatley $126,000.
The Company also assigned its interest in the leases for each of the
restaurants owned by Roosters, and Roasters assumed the obligations
thereunder.
F-14
<PAGE>
FOODQUEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. Investment in Joint Ventures, Continued:
Summarized financial data of the joint ventures as of and for the periods
ended March 31, 1996 and March 26, 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Financial position:
Total assets $ 2,400,000 $ 1,354,032
Total liabilities 2,400,000 732,130
------------ ------------
Total equity $ 0 $ 621,902
============ ============
Results of operations:
Revenue $ 1,532,050 $ 685,285
Restaurant operating expenses 1,656,501 750,297
Depreciation and amortization 81,819 40,084
------------ ------------
Net loss $ (206,270) $ (105,096)
============ ============
</TABLE>
The results of operations represent the operations of Roosters for the nine
months ended on January 1, 1996, for fiscal year 1996, and the four months
ended March 26, 1995 for fiscal year 1995.
8. Income Taxes:
The significant components of net deferred income taxes as of March 31, 1996
and March 26, 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Reserves and contingent liabilities $ 461,000 $ 420,000
Deferred franchise revenue 0 156,000
Property and equipment 18,000 164,000
Other, net (10,000) 77,000
Capital loss carryforwards 48,000 103,000
Net operating loss carryforwards 4,249,000 2,169,000
------------ ------------
4,766,000 3,089,000
Valuation allowance (4,766,000) (3,089,000)
------------ ------------
Net deferred tax asset $ 0 $ 0
============ ============
</TABLE>
F-15
<PAGE>
FOODQUEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS, Continued
8. Income Taxes, Continued:
The Company has net operating loss carryforwards of approximately $10,756,000
and $5,765,000 at March 31, 1996 and March 26, 1995, respectively, for
federal and state income tax purposes available to offset future taxable
income expiring, if not used, periodically through the year 2010. A portion
of the net operating loss carryforwards are subject to an annual limitation
of approximately $1,225,000, because of the change in control as discussed in
Note 2. The Company also has capital loss carryforwards of approximately
$122,000 at March 31, 1996 available to offset future capital gains expiring,
if not used, periodically through the year 2000.
The difference in the tax benefit as computed using the statutory tax rate
and the actual tax benefit computed, is principally due to the 100% valuation
allowance on the net operating loss.
9. Notes Payable
Notes payable at March 31, 1996 and March 26, 1995 consist of the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Note payable with interest payable monthly at 6% through May
1996, principal due at maturity in May 1996, no collateral. $ 75,000 $ 75,000
Majority shareholder note payable with interest payable
quarterly at 10%, through April 1997, principal due at maturity
in May 1997, collateralized by equipment and leasehold
improvements. 1,153,657 1,153,657
Note payable with interest and principal payable monthly at
7% through June 2003, collateralized by a building. 139,542 152,482
Notes payable with interest payable monthly at 12%, principal
payable semiannually with a ballon payment due in May 1996,
January 1997, and March 1998, collateralized by equipment
and leasehold improvements, convertible into common stock
at a conversion price of $4 until December 31, 1995. 351,764 469,029
</TABLE>
F-16
<PAGE>
FOODQUEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. Notes Payable, Continued:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Note payable with interest and principal payable monthly at the
prime rate plus 2% through March 1998, collateralized by
equipment. 146,000 0
Note payable with interest and principal payable quarterly at
9% through June 1999, collateralized by equipment. 161,672 0
Note payable with interest and principal payable
monthly at 10% through October 1996, no collateral. 45,297 0
Note payable with interest and principal payable
monthly at 9% through December 1996, no collateral. 122,908 0
Majority shareholder note payable with principal due at the
earlier of August 1, 1996 or the approval by shareholders of the
sale of certain restaurants to Roasters Corp., non-interest
bearing, collateralized by restaurant assets under contract for
sale. 500,000 0
------------ ------------
Total 2,695,840 1,850,168
Less current portion 1,067,326 14,158
------------ ------------
Long term portion $ 1,628,514 $ 1,836,010
============ ============
</TABLE>
Future principal maturities of long-term debt outstanding at March 31, 1996 are
as follows:
<TABLE>
<CAPTION>
Fiscal year ending March,
- ------------------------
<S> <C>
1997 $ 1,067,326
1998 1,452,481
1999 70,959
2000 32,772
2001 19,954
Thereafter 52,348
------------
$ 2,695,840
============
</TABLE>
F-17
<PAGE>
FOODQUEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. Commitments:
The Company conducts its restaurant operations from facilities under land
and building leases, which have been classified as operating leases. All of
the leases expire within the next 19 years, and contain various renewal
options. The rental payments for most facilities are based on a minimum
rental plus contingent rental based on a percentage of the restaurants'
gross sales in excess of a stipulated amount. The Company is generally
obligated for the facilities operating costs including property taxes,
insurance and maintenance.
Approximate future minimum payments under operating leases, including all
option periods which the Company believes will be exercised, with
noncancellable initial terms of one year or more as of March 31, 1996, for
the next five years and in the aggregate thereafter are as follows:
<TABLE>
<CAPTION>
Fiscal year ending March,
- ------------------------
<S> <C>
1997 $ 405,000
1998 307,000
1999 218,000
2000 173,000
2001 149,000
Thereafter 736,000
--------------
$ 1,988,000
==============
</TABLE>
Lease expenses for fiscal 1996 and 1995 was $597,201 and $408,099, respectively.
The Company leases certain equipment under agreements which are classified as
capital leases. Future minimum payments under capital leases as of
March 31, 1996 are as follows:
<TABLE>
<CAPTION>
Fiscal year ending March,
- ------------------------
<S> <C>
1997 $ 99,615
1998 99,615
1999 99,615
2000 99,615
2001 32,559
--------------
431,019
Less imputed interest 106,544
--------------
324,475
Less current portion 60,347
--------------
Long-term portion $ 264,128
==============
</TABLE>
F-18
<PAGE>
FOODQUEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. Capital Stock:
Preferred Stock
The Company is authorized to issue up to 5,000,000 shares of preferred
stock, par value $.01 per share (the "Preferred Stock"). The Preferred Stock
may be issued from time to time in one or more classes or series, each class
or series of which shall have the voting powers, designations, preferences
and relative rights as fixed by resolution of the Board of Directors,
without the consent or approval of the Company's shareholders. The Preferred
Stock may rank prior to the Common Stock as to dividend rights, liquidation
preferences, or both, and may have extraordinary or limited voting rights.
The Company has no present intention of issuing any Preferred Stock.
Stock Options
In September 1992, the Company adopted the 1992 Key Employee Stock Incentive
Plan (the Plan). The Plan is designed to serve as an incentive to officers,
directors, other key employees and consultants. The Company has reserved
600,000 and 200,000, shares of its common stock as of March 31, 1996 and
March 26, 1995, respectively for distribution under the Plan. As of March
31, 1996, the Company granted options to purchase an aggregate of 40,000
shares of common stock under the Plan at exercise prices ranging from $1.25
to $10.375 per share, of which all are outstanding. The options become
vested and exercisable ratably over a three year period.
The Company's current and former Board of Directors have been granted
options to purchase an aggregate of 90,000 shares of the Company's common
stock at prices ranging from $4.625 to $7.00 per share. The options are
fully vested and expire at various times during the period from August 23,
1996 to July 18, 1997.
The Company granted options to former officers of the Company for the
purchase of 75,000 shares of the Company's common stock at $6.00 per share,
for services rendered. The options are currently vested and exercisable.
The Company issued options to purchase 40,000 shares of the Company's common
stock with an exercise price of $4.00 per share to Helen Scharps in
connection with the formation of the Company. The shares are vested and
exercisable.
Stock Warrants
The Company had 3,291,500 warrants outstanding as of March 31, 1996. Each
warrant entitles the holder of record to purchase a like number of shares of
common stock.
F-19
<PAGE>
FOODQUEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. Capital Stock, Continued:
There were 747,500 public warrants and 149,500 warrants issued in connection
with a private placement outstanding at March 31, 1996 and March 26, 1995,
respectively. Each of the warrants entitles the warrant holder to purchase a
like number of shares of common stock at a price of $6.00 per share through
November 10, 1995. During fiscal year 1996 the Company's Board of Directors
extended the expiration date on the warrants through November 10, 1996. The
public warrants are redeemable at a price of $ .01 per warrant. The warrants
are redeemable at the option of the Company upon thirty days' notice to the
warrantholders upon such time as the market prices of shares of the
Company's common stock in the principal market therefore have exceeded 120%
of the then exercise price of the warrants for a period of not less than
twenty consecutive business days. During such thirty day period, the
warrantholders shall have the right to exercise their warrants. The right to
purchase shares of the Company's common stock upon exercise of the warrants
are forfeited unless the warrants are exercised prior to the date specified
in the notice of redemption.
The Company has outstanding 2,145,000 warrants to purchase shares of common
stock at a purchase price of $6.00 per share on or prior to November 10,
1995. During fiscal year 1996 the Company's Board of Directors extended the
expiration date on the warrants through November 10, 1996. The warrants are
subject to the same terms and conditions as the public warrants.
The Company has outstanding 100,000 Placement Agent Warrants to purchase a
like number of shares of common stock at a purchase price of $9.35 per
share. The Placement Agent Warrants were issued in connection with private
placements of the Company's securities in December 1993 and April 1994
pursuant to Regulation S promulgated pursuant to the Securities Act of 1933
as amended. The Placement Agent Warrants are exercisable with respect to
50,000 shares through December 20, 1997 and with respect to another 50,000
shares through April 20, 1998.
The Company has outstanding 74,750 Underwriter's Warrants and 74,750 Unit
Warrants to purchase a like number of shares of common stock. The
Underwriter's Warrants were issued in connection with the underwriting of
the Company's securities in November, 1992, and are exercisable through
November 9, 1997, at a purchase price of $7.20 per Unit. Each Unit is
composed of one share of common stock and one Unit Warrant, which entitles
the holder to purchase one share of common stock at a price of $6.00 per
share and is also exercisable through November 9, 1997.
F-20
<PAGE>
FOODQUEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
12. Store Closing Expenses:
During fiscal 1996, the Company closed two of its Clucker's concept
restaurants, and one of its KRR restaurants. In addition, the Company did
not exercise its option to renew its lease in a third Clucker's concept
restaurant. The disposal of equipment and improvements, and the cost of
lease settlements in connection with these restaurant closings resulted in a
loss of $1,321,499.
During fiscal 1995, the Company closed two of its Clucker's concept stores.
The disposal of equipment and improvements in connection with these store
closings resulted in a loss of $557,022.
The Company sold a Clucker's concept store in the metropolitan Atlanta area
during March 1995. The proceeds of the sale of land, building, improvements
and equipment was $494,287, net of expenses resulting in a loss of $569,183.
In addition, $547,000, related to lease settlements for closed restaurants,
other cancelled and past due lease obligations was recorded.
13. Other Expenses:
Other expenses for fiscal year 1996 consists primarily of $281,000 in costs
related to the Company's unsuccessful bid to acquire a business, the full
amortization of prepaid investment banking fees of $175,000, the accrual of
$140,000 in penalties and taxes related to a sales tax examination,
approximately $371,000 in amounts accrued or paid in conjunction with the
Company's curtailment of its franchise activity and various settlements of
litigation, and the write-off of intangible assets of approximately
$73,000.
Other expenses for fiscal year 1995 consisted of approximately $390,000
related to the settlement of litigation.
F-21
<PAGE>
FOODQUEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
14. Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, receivables, accounts
payable, accrued and other current liabilities and notes payable approximate
fair value because of the short-term maturity of these items. The estimated
fair values may not be representative of actual values that could have been
realized as of year end or that will be realized in the future.
15. Litigation:
In October 1993, the Company instituted a lawsuit in the United States
District Court for the Southern District of Florida against Jack Pesso d/b/a
J.P. Enterprises, et al. The Company is primarily alleging trademark
infringement subsequent to defendants' breach of the franchise agreement by
payment and nonmonetary defaults. The Company is seeking a permanent
injunction barring defendants from using the name "Cluckers", in order to
conform to the non-competition covenants of the franchise agreement and an
undetermined amount of damages. The defendants have asserted counterclaims
citing a breach of the franchise agreement based on the Company's failure to
provide assistance and misstatement of the Company's history, and are
seeking compensatory damages of at least $24 million. Recently, the parties
have entered into settlement negotiations, although a settlement of the
action cannot be assured.
On December 15, 1994, Robert B. Pine, the Company's area developer for the
northeastern part of New Jersey, instituted a lawsuit against the Company, a
franchising subsidiary, Roasters and David L. Scharps in the United States
District Court for the Southern District of Florida. The plaintiff had
entered into a franchise agreement with the Company in July 1993, opened one
restaurant and then closed it in October 1994. The plaintiff alleges claims
against the Company for breach of contract; breach of fiduciary duty and
implied duty of good faith and fair dealing; fraud, misrepresentation and
negligence; violations of Florida and New Jersey law pertaining to
franchises; rescission; promissory and equitable estoppel; and, along with
Roasters, violations of federal antitrust laws. The plaintiff seeks to
recover from the Company in excess of $3 million in actual and compensatory
damages, including, but not limited to, out-of-pocket expenses; lost
profits; loss of future profits; loss of goodwill; damages for pain,
suffering and emotional distress; reasonable attorney's fees; costs; and
interest; punitive damages in excess of $10 million; and with respect to the
antitrust claims, treble damages in excess of $9 million and invalidation of
the Company Agreement. The Company disputes Mr. Pine's allegations and is
vigorously defending this lawsuit.
F-22
<PAGE>
FOODQUEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. Litigation, Continued:
On November 17, 1994, each of Jay O. Darling, Robert H. Brickles, and Scott
Yackee instituted a lawsuit against the Company in the Circuit Court of the
Eleventh Judicial Circuit in and for Dade County, Florida. The plaintiffs'
claims were based on alleged breaches of employment agreements by the
Company and the damages claimed correspond to severance compensation and the
value of shares of the Company's common stock allegedly due under the
respective employment agreements. The Company settled all of these lawsuits
in the first half of calendar 1995 for cash and securities whose aggregate
value is less than 10% of the Company's current assets at March 26, 1995. In
connection with such settlement, Messrs. Darling, Brickles, and Yackee were
issued an aggregate of 25,000 shares, and such shares were registered
pursuant to the Securities Act of 1933, as amended.
On September 11, 1995, Olga Garcia instituted a lawsuit against the Company,
Roasters Corp., Rooster J.V., Roosters Investment Corporation, Rodberg
Construction, and Calusa Partners, in the circuit court of the Eleventh
Judicial Circuit in and for Dade County, Florida. In the lawsuit the
plaintiff alleges claims against the Company for negligence in maintaining
and operating the restaurant. The plaintiff seeks to recover unspecified
damages, including, but not limited to permanent and total disability;
permanent injury; medical expense; aggravation of an existing condition;
lost earnings and earning capacity; scarring and disfigurement in connection
with an accident occurring at a Company run Kenny Rogers Roasters
restaurant. The Company disputes Ms. Garcia's allegations and is vigorously
defending this lawsuit.
In the normal course of business, various other claims and lawsuits have
been filed or are pending against the Company.
Although there are no assurances the above described actions will be
resolved favorably, management does not believe the outcome of any of the
suits described above will have a material adverse effect on the Company's
financial condition or results of operations. Accordingly, the Company has
not accrued for amounts that would be necessary if any of the above actions
were resolved for material amounts against the Company. However, if the
outcome of any of the above described claims are not resolved on terms
favorable to the Company, the Company may not be able to satisfy any such
amounts based on its present financial condition.
F-23
<PAGE>
FOODQUEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
16. Related Party Transactions:
As of March 31, 1996 and March 26, 1995, the Company had various amounts due
to Roasters. The Company owed $160,700 and $58,878, respectively, for
royalties pursuant to the Master Development Agreement executed in
connection with the store purchase agreement executed on December 1, 1994
obligating the Company to pay Roasters a royalty fee of 4% of the gross
sales of each of the restaurants. In addition, the Company owed Roasters
approximately $458,795 and $271,322 as of March 31, 1996 and March 26, 1995,
respectively, for amounts paid on the Company's behalf.
As of March 26, 1995, the Company was owed $479,238 from Roosters for among
other things, management fees, payroll expenses and other expenses paid on
Roosters behalf. All amounts owed were repaid subsequent to March 26, 1995.
In accordance with the Company's Master Development Agreement, all KRR
restaurants contribute a percentage (.50% at March 31, 1996 and .75% at
March 26, 1995) of sales to the KRR advertising production fund, which is
responsible for the development and production of marketing materials and
programs. In addition, restaurants must join their regional advertising
cooperative once established, and contribute a percentage of sales to the
Co-op, which is responsible for the purchase of advertising media.
17. Going Concern Considerations:
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
suffered significant net losses for the years ended March 31, 1996 and March
26, 1995 and does not presently have the cash resources to satisfy its
current obligations.
The Company expects to meet its liquidity needs for fiscal 1997 partially
through the sale of the Dade Restaurants and to the extent necessary from
continued loans or equity fundings from Roasters, for which there are no
assurances such loans or fundings will occur. The Company is also
negotiating with certain of its trade creditors to extend and/or settle
amounts due such creditors at discounted amounts. In addition, the Company
plans to actively pursue a viable merger or acquisition candidate. There can
be no assurance that the Company will meet its liquidity needs during fiscal
1997.
The aforementioned conditions raise substantial doubt about the Company's
ability to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments that might result should
the uncertainties be unfavorably resolved or the Company is unable to
continue as a going concern.
F-24
<PAGE>
Exhibit 10.29
OPERATING AGREEMENT
THIS AGREEMENT is made and entered into on March 12, 1996, by and
between FOODQUEST, Inc., a Florida corporation ("Foodquest"), and Atlanta
Roasters, Inc. ("Atlanta").
WITNESSETH:
A. Roasters is the owner of a format and operating system for the
operation of Kenny Rogers Roasters restaurants (the "Roasters Format") for the
preparation and sale of unique food products and service in connection
therewith, and is engaged in operating and granting franchises to operate shops
using the Roasters Format (the "Restaurants") and any and all service marks,
trademarks, tradenames, copyrights, patents, slogans and logos as are now or may
be adopted by Roasters in connection with the operation of a Restaurant (the
"Roasters Marks").
B. Atlanta is the owner and operator of two (2) Restaurants, which
are located at 2916 North Druid Hills Road, Atlanta, Georgia ("Druid Hills
Restaurant") and 3573 Highway 138 SE, Stockbridge, Georgia ("Stockbridge
Restaurant") and is otherwise experienced in restaurant management.
C. Foodquest is the owner and operator of three (3) Restaurants,
which are located at 1325 Powers Ferry Road, Marietta, Georgia ("Marietta
Restaurant"), 1100 Northpoint Drive, Alpharetta, Georgia ("Alpharetta
Restaurant"), and 9641 Highway 5, Douglasville, Georgia 30135 ("Douglasville
Restaurant").
D. Pursuant to the terms hereof, Foodquest and Atlanta desire to
enter into a venture for the development and ownership of Restaurants in the
geographical locations set forth herein.
NOW, THEREFORE, in consideration of the payment of good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, and
also in consideration of the performance by the parties of the terms, conditions
and covenants herein contained, the parties agree as follows:
1. Basic Terms.
-----------
a. The Joint Venture.
-----------------
Foodquest and Atlanta hereby agree to form a limited liability
company which will be governed by the terms and conditions provided for herein
(the "Venture") for the right to develop, own and operate Restaurants in the
Atlanta, Georgia area ("Development Area").
The Venture shall be known as Atlanta Foodquest LLC or such other
name as the parties may mutually agree upon. If available in any of the above
areas, the Venture shall be organized as a limited liability company and this
Agreement shall act as the operating agreement for such organization.
Each member of the Venture shall be free to engage in any other
business activity for its exclusive benefit, including but not limited to the
operation and ownership of other Restaurants in areas outside the Development
Area and other restaurant concepts. Further, no member of the Venture shall be
deemed a partner of, or agent for, the other member except to the extent
necessary for specific purposes of the Venture.
The Venture shall automatically terminate on the earlier of:
(a) December 31, 2020; or (b) its dissolution according to the terms of this
Agreement. The result and legal effect of any dissolution shall be as
specified herein.
b. Ownership and Capital Contribution.
----------------------------------
Profits and losses of the Venture shall be allocated as follows:
Atlanta 50.1%
Foodquest 49.9%
<PAGE>
These percentages are subject to dilution as set forth in this
Agreement.
c. Further Development.
-------------------
The members acknowledge that the initial capital contributions
and debt financing provided herein may not be sufficient to operate the
Venture's business as contemplated herein.
(i) Whenever it is determined by Atlanta that the Venture's
capital is or is presently likely to become insufficient for the conduct of its
business, Atlanta shall, by written notice to Foodquest, call for additional
contributions to capital; provided however, that any such call shall be binding
upon Foodquest only if made pursuant to and in accordance with one or more
budgets previously approved by Foodquest pursuant to Section 2b or 3b(2) below.
Each member shall make such additional contribution to capital in cash no later
than the date specified in the notice, or no sooner than thirty (30) days after
the notice is given. Each member's share shall be in proportion to its then
share of the Venture capital accounts (each member's share under Section 1c(i)
and (ii), a "Requested Amount").
If the call for additional contributions to capital does not
fall within the previously approved budgets and it relates to capital
expenditures for new restaurants and Foodquest does not contribute its share of
such call, Atlanta, at its option, may pay the entire amount with the result
that Atlanta will own the Restaurant as to which the call relates and the
Venture shall have no interest in such Restaurant.
(ii) If Atlanta fails to timely make a capital call pursuant
to Section 1c(i), above, notwithstanding the fact that the Venture's capital is
or is presently likely to become insufficient for the conduct of its business
through the payment of the Venture's obligations in its ordinary course of
business, Foodquest shall have the right, by written notice to Atlanta, to call
for additional contribution to capital in cash no later than the date specified
in the notice, or no sooner than thirty (30) days after the notice is given.
Each member's share shall be in proportion to its then share of the Venture
capital accounts.
d. Failure to Make Contribution.
----------------------------
(i) In the event a member (the "noncontributing Member")
shall fail to contribute within the thirty (30) day notice period referred to in
Section 1c(i) or (ii) above, all or a portion of its Requested Amount (the sum
not so advanced hereinafter referred to as the "Deficiency"), the nonfailing
member (the "Contributing Member") may, in addition to all other rights and
remedies it may have in law or equity:
(1) (a) withdraw the amount it had contributed as its
Requested Amount, or (2) advance directly to the Venture, as a capital
contribution made for the account of the Noncontributing Member, an additional
amount equal to the Deficiency, which advance shall constitute a loan to the
Noncontributing Member (a "Default Loan") from the Contributing Member payable
on demand with interest thereon at the lesser of two percent per annum in excess
of the "Prime Rate" (as hereinafter defined) or the highest rate permitted under
applicable law, which loan shall be repaid from all distributions which the
Noncontributing Member would otherwise have been entitled to receive from the
Venture (i.e., profits, fees, expenses directly incurred, etc.) but for this
provision, such distributions to be credited first to unpaid interest and then
to unpaid principal of such Default Loan, or (3) advance directly to the Venture
an additional amount equal to the Deficiency, as a loan (a "Deficiency Loan")
deemed made by the Noncontributing Member to the Venture with interest at the
lesser of the Prime Rate or the highest rate permitted by applicable law, which
Deficiency Loan shall constitute a Deficiency Loan from the Contributing Member
to the Noncontributing Member to be repaid as provided in (2) above, and convert
such Contributing Member's corresponding capital contribution to a loan to the
Venture (a "Capital Loan") with interest at the rate described in (2) above; and
(2) if any part of the principal balance of a Default
Loan or Deficiency Loan shall have remained outstanding for 120 days or more,
for an additional 45 days after said 120 day period, the Contributing Member
shall have the option to consider the amount of said unpaid principal balance of
principal and
2
<PAGE>
interest of any such Default Loan or Deficiency Loan, and, effective from the
date of making the advance of the Deficiency by the Contributing Member, the
Capital Account of the Contributing Member shall be increased by the amount of
the Deficiency; provided, however, that notwithstanding anything herein to the
contrary, if the Capital Account of the Noncontributing Member is thereby
reduced to twenty five percent (25%) or less of the then total of the Capital
Accounts of the Venture, the Contributing Member shall have the option,
exercisable within thirty (30) days of such event, to purchase the remaining
equity interest of the Noncontributing Member in the Venture for an amount equal
to the amount the Noncontributing Member would have been entitled to receive if
the Venture had sold the assets of the Venture for their fair market value, and
satisfied all liabilities and obligations of the Venture, and distributed said
net amount to the members in satisfaction of their interests in the Venture.
The provisions of this section shall be applicable each
time that a member shall fail to contribute pursuant to this Agreement all or
any portion of its Requested Amount. The members hereby acknowledge to one
another that, because of the great likelihood of damage to the other member and
to the Venture that may result, and the difficulty in calculating the damage
that may result, from failure of a member to make a capital contribution when
required, the agreement set forth herein permitting reductions and, under
certain circumstances, the purchase of the Capital Account of a member for
failure to make a required contribution and the basis of calculation for such
reductions and purchases have been approved by the members as fair and
reasonable provisions for liquidated damages in lieu of any other remedy for
such failure to make required contribution.
(ii) The right of the members to require any additional
contributions under the terms of this Agreement shall not be construed as
conferring any rights or benefits to or upon any party not a party to this
Agreement, including, but not limited to, the holder of any obligations secured
by a mortgage, deed of trust, security interest or other loan or encumbrance
upon or affecting the member or any interest of a member therein or the projects
or any part thereof or interest therein, none of whom is intended to be, or
shall in any respect be deemed to be, a beneficiary hereof.
(iii) For purposes of this Agreement, "Prime Rate" shall mean
the prime rate of interest (or "base lending rate") announced as such from time
to time in the Wall Street Journal. The interest rate on all loans payable by
reference to the Prime Rate shall be calculated and adjusted on a daily basis,
based upon the Prime Rate in effect from time to time. Any interest on such a
loan in any fiscal year which is not paid shall, if not prohibited by law, be
added to the principal amount of such loan.
2. Development Procedures.
----------------------
The Venture shall develop Restaurants in the Development Area as
financing for such Restaurants becomes available.
a. Site Selection.
--------------
Either member may select site or sites within the Development Area
and shall submit the site for approval by the other member. Foodquest shall have
a reasonable time from the receipt of said submittal to send a representative to
the site selected and review the site selection criteria. In any case, a site
shall not be developed by the Venture if it has not been approved by Foodquest.
Foodquest will not incur any liability to Atlanta for site rejection or
approval.
b. Design and Budget Approval.
--------------------------
Upon the mutual selection of a site and prior to construction, the
Venture shall prepare a budget outlining all anticipated costs and expenses
associated with leasing or purchasing and developing the Restaurant. All costs
and expenses associated with acquiring, developing and operating the Restaurant,
substantially in accordance with the budget approved by Foodquest, will be borne
by the Venture.
3
<PAGE>
c. Restaurant Purchase from Atlanta.
--------------------------------
Promptly after execution of this Agreement, Atlanta shall sell the
Druid Hills Restaurant and the Stockbridge Restaurant, subject to any equipment
financing, to the Venture for One Million Dollars ($1,000,000) plus the amount
of $100,000, which represents the amount of the unused reservation fee paid by
Atlanta to the franchisor and less (i) the payoff amount for any equipment
financing and (ii) the amount due the franchisor for royalty fees. The price
includes all inventories, deposits and prepaid items. The purchase price will be
paid to Atlanta in the form of a promissory note, which has the following terms:
(i) interest is at 8% per annum; (ii) the term of the note is 3 years;
(iii) interest only shall be payable the first year; (iv) after the first year,
principal and interest on the note shall be payable using a seven year straight
line amortization with the principal and any accrued interest due at the end of
three years. The Venture shall assume up to Twenty Five Thousand Dollars
($25,000) of accounts payable of Atlanta relating to the operations of the
restaurants.
d. Restaurant Purchase from Foodquest.
----------------------------------
Promptly after execution of this Agreement, Foodquest shall sell
the Marietta Restaurant and the Alpharetta Restaurant, subject to any equipment
financing to the Venture for One Million Three Hundred Thousand Dollars
($1,300,000) less (i) the payoff amount for any equipment financing and (ii) the
amount due the franchisor for royalty fees. This price includes all inventories,
deposits and prepaid items. The purchase price will be paid to Foodquest in the
form of a promissory note, which has the following terms: (i) interest is at 8%
per annum; (ii) the term of the note is 3 years; (iii) interest only shall be
payable the first year; (iv) after the first year, principal and interest on the
note shall be payable using a seven year straight line amortization with the
principal and any accrued interest due at the end of three years. The Venture
shall assume up to Twenty Five Thousand Dollars ($25,000) of accounts payable of
Foodquest relating to the operations of the Restaurants.
3. Rights, Powers and Duties of the Members.
----------------------------------------
a. The following actions may not be taken by either member
without the express approval and consent of the other member:
(a) any act in contravention of this Agreement;
(b) any act that would make it impossible to carry on the
ordinary business of the Venture;
(c) cause a judgment to be entered against the Venture;
(d) admit a person as a substitute member;
(e) change and reorganize the Venture into any other legal
form;
(f) borrow money in the name of the Venture from third
parties, except for the purposes set forth in this
Agreement, in excess of Ten Thousand Dollars ($10,000);
and
(g) cause the Venture to guarantee, endorse or become
contingently liable upon the obligations of any other
person, firm or entity.
b. Foodquest and Atlanta shall mutually agree on the following:
(a) in accordance with generally accepted principles of
accounting consistently applied, and unless otherwise
provided in this Agreement, whether items of
4
<PAGE>
income, gains, loss, deduction, or credit shall be
treated either as capital or extraordinary items, or
alternatively, as profit or loss items;
(b) capital expenditures for the Restaurants; and
(c) the hiring and continued employment of a regional
director of operations; provided however, if Atlanta
and Foodquest cannot mutually agree on the hiring or
continued employment of a regional director of
operations within thirty (30) days of the issue
arising, Atlanta shall select the CEO so long as the
CEO has the qualifications necessary to properly manage
and administer a multi-unit restaurant development of
the type contemplated herein. If either party is not
satisfied with the performance of the regional director
of operations any time after six (6) months from the
date of his appointment as such, subject to performance
guidelines to be agreed upon by the parties, Atlanta
shall terminate the regional director and a new
regional director will be selected as provided herein.
The regional director of operations shall have the
right to receive twenty percent (20%) of the equity of
the Venture. Such interest shall vest in equal amounts
at the end of year one and the end of year two;
however, if the Restaurants are sold during year one,
ten percent (10%) of the equity shall vest immediately
prior to such sale. Each of Atlanta and Foodquest
shall have its interest in the Venture reduced
proportionately.
4. Management of Restaurants.
-------------------------
a. Subject to Section 4 above, Manager is hereby delegated the
responsibility for making and implementing those decisions relating to the day-
to-day management of the Restaurants. Manager shall operate the Restaurants in
accordance with (i) generally accepted business standards, (ii) in compliance
with the guidelines established by the franchisor regarding the operation of a
Restaurant as a Kenny Rogers Roasters Restaurant, and (iii) all applicable laws,
rules and regulations governing a Restaurant including, but not limited to,
health, labor, zoning and environmental laws. In furtherance of this
responsibility, Manager is authorized to exercise and perform, among other
things, in accordance with and subject to the provisions hereof, the following
powers and duties:
(a) to perform any and all acts or activities customary or
incident to the management and operation of the
Restaurant;
(b) to manage and operate the Restaurant and negotiate
agreements with others with respect to the Restaurant
containing such terms, provisions and conditions as are
required to operate any day-to-day restaurant business;
(c) to administer all marketing, advertising, promotional
and public relations plans with respect to the
Restaurant which are authorized by the members; and
(d) to recruit, train or replace any employees required in
the Restaurant operation and establish all salaries and
incentives for all management and employees in
conformity with the standard for the restaurant
industry; otherwise, Foodquest must give its prior
written approval;
(e) to select and open bank accounts; and
(f) to execute, acknowledge and deliver any and all
instruments to effectuate any of the foregoing powers.
5
<PAGE>
Without limiting the generality of the foregoing, Atlanta shall
cause the Venture and each Restaurant to acquire and maintain insurance in types
and amounts, and with deductibles, customary in the industry.
b. Financial Reports.
-----------------
(a) Financial Reports. On or before the twentieth (20th)
-----------------
day following the close of a calendar month or other similar accounting period
adopted by the Venture, the Venture shall furnish the members with a Profit and
Loss Statement prepared in accordance with generally accepted accounting
principles. Within thirty (30) days after the end of each of the first three
quarters of the fiscal year of the Venture, the Venture shall furnish the
members with a detailed Profit and Loss Statement depicting the results of each
Restaurant's operations during such quarter and a Balance Sheet of each
Restaurant as of the end of such quarter. Within ninety (90) days after the
close of each fiscal year, the Venture shall furnish the members, at the
Venture's expense, a detailed Profit and Loss Statement depicting the results of
each Restaurant's operations during such year and an audited financial statement
for the Venture as of the end of such year, to be audited by Foodquest's
auditors so long as such auditors are a nationally-recognized accounting firm.
The Venture shall make available to the members such additional fiscal reports
as the members shall from time to time require.
(b) Books and Records, Inspection and Audit Rights. At all
----------------------------------------------
times during the term of this Agreement, Atlanta shall keep full, adequate and
customary books of accounts, reflecting the results of operations of each
Restaurant. Atlanta shall accord to the Venture, each of its members or their
duly authorized agents the right to enter upon any part of each Restaurant at
all reasonable times for the purpose of examining or inspecting each Restaurant
and/or examining, inspecting or auditing its records of operation, or any other
purpose which either member shall deem advisable. Atlanta shall meet with
Foodquest and its duly authorized agents at reasonable times and intervals at
Foodquest's home office for review of each Restaurant's records of operation, or
any other purpose. In the event either of the members shall conduct an audit of
the books and records maintained by Atlanta regarding each Restaurant which
shall disclose any understatement of income or overstatement of expenses, the
Venture shall immediately pay to the members any amounts that would have been
due had these items been properly accounted for. In addition, if the audit
discloses a misstatement of either profits or gross sales exceeding two percent
(2%) of the correct amount due, Atlanta shall also pay immediately to the member
conducting the audit, as appropriate, the entire cost of such audit (including,
without limitation, travel, lodging, meals, salaries and other expenses of
auditing personnel and/or certified public accountant retained to conduct the
audit). Atlanta shall be the Tax Matters Partner (as that term is used in the
Internal Revenue Code) of the Venture for federal income tax purposes.
5. Fees and Royalties.
------------------
a. Management Fee.
--------------
In consideration for managing the Venture and each of the
Restaurants, the Venture shall pay Atlanta a management fee of an amount equal
to two percent (2%) of the gross sales of the Restaurants, plus Two Hundred
Fifty Dollars ($250) per month per Restaurant. For this fee, Atlanta will
provide all supervisory service above the Restaurant level management and
provide all administrative and accounting services. This fee will be payable on
or before the tenth (10th) day of the month following the month during which the
sales were made.
b. Franchise Fee.
-------------
The Venture shall pay the franchisor a franchise fee of $25,000
for the first new Restaurant developed by the Venture and for every second
Restaurant thereafter. For each Restaurant that the Venture is required to pay a
franchise fee, the Venture shall be credited with $10,000 until the $100,000 of
reservation fees has been used by the Venture.
6
<PAGE>
c. Royalty Fee.
-----------
In connection with this Venture, for a period of three years from
the date the Venture commences business, the franchisor will be paid a royalty
fee of three percent (3%) of the Gross Sales (as defined in the Franchise
Agreement) of each Restaurant payable on or before the tenth (10th) day of the
month following the month during which the Gross Sales were made. This reduced
royalty fee shall terminate as to any Restaurant if that Restaurant is sold to a
third party. Additionally, the franchisor has agreed to accept, as payment for
past due royalty fees, a promissory note with interest payable monthly at the
rate of eight percent (8%) per annum and the principal payable at the end of one
(1) year from the date this Venture commences business.
6. Allocation of Income, Losses and Distributions.
----------------------------------------------
a. For income tax and financial accounting purposes, all net
income and losses from operations of this Venture and each Restaurant opened
pursuant to this Agreement shall be allocated to Foodquest and Atlanta in
proportion to their profits and loss percentages set forth in Section 1b herein.
b. Until the promissory notes described in Sections 2c and 2d
are paid in full, there shall be no distributions of Distributable Cash.
Thereafter, all Distributable Cash (other than that arising from a liquidation
of the venture which liquidation proceeds shall be distributed based on Section
7c, second paragraph herein) shall be paid or distributed to the Members, not
less frequently than annually, to the extent available, in proportion to their
profits and loss percentages set forth in Section 1b herein.
"Distributable Cash" means, with respect to any fiscal period,
------------------
all cash receipts from operations in the ordinary course of business, sale and
financing proceeds, insurance proceeds, and any and all other sources, of any
kind whatsoever, without deduction for depreciation, but after deducting
payments for Operating Cash Expenses, payments required to be made in connection
with any loan to the Venture or any other loan secured by a lien on any Venture
asset, capital expenditures with respect to any such asset, and any amounts set
aside for the restoration, increase or creation of Reserves.
"Operating Cash Expenses" means, with respect to any fiscal
-----------------------
period, the amount of cash disbursed in the ordinary course of business during
such period, including without limitation, all cash expenses, such as
advertising, promotion, property management, insurance premiums, royalty fees,
taxes, utilities, repair, maintenance, management fees, oversight fees, legal,
accounting, bookkeeping, computing, equipment use, travel on Venture business,
telephone expenses and salaries, and direct expenses of Venture employees (if
any) and agents while engaged in Venture business. Operating Cash Expenses shall
include fees paid by the Venture to any Member or any affiliate thereof
permitted by this Agreement, and the actual cost of goods, materials and
administrative services used for or by the Venture, whether incurred by any
Member, any affiliate thereof or any non-affiliate in performing functions set
forth in this Agreement reasonably requiring the use of such goods, materials or
administrative services. Operating Cash Expenses shall not include expenditures
paid from Reserves.
"Reserves" means, with respect to any fiscal period, funds set
--------
aside or amounts allocated during such period to reserves which shall be
maintained in amounts deemed sufficient by mutual consent of the Members for
working capital, to pay taxes, insurance, debt service, repairs, replacements or
renewals, and for other costs or expenses incident to the ownership or operation
of any property.
7. Dissolution, Winding Up and Liquidation.
---------------------------------------
The Venture shall be dissolved in the happening of one or more of the
following events:
(1) Termination of the undertaking specified in this Agreement
(including, without limitation, a sale of substantially all
the assets of the Venture);
7
<PAGE>
(2) A material breach of the terms of this Agreement by a
member, including, but not limited to the failure to make
the payments described herein;
(3) General assignment by a member for the benefit of creditors;
(4) Filing by a member of a voluntary petition in bankruptcy or
a petition or any answer seeking an arrangement with
creditors; or
(5) Entering against a member of a court order approving a
petition filed against it under federal bankruptcy law.
Upon dissolution of the Venture, it shall be wound up and
liquidated as quickly as circumstances allow. The assets of the Venture shall be
applied to the Venture and liabilities in the following order:
(a) Amounts owing to creditors other than members of the
Venture;
(b) Amounts owing to members of the Venture for loans made by
the members;
(c) The balance, to the members in accordance with their
positive capital account balances determined after taking
into account all capital account adjustments for the Venture
taxable year during which such liquidation occurs (other
than those made as a result of the distributions set forth
in this Section 7(c)), by the end of the taxable year in
which such liquidation occurs or, if later, within 90 days
after the date of the liquidation.
For purposes of Section 7(c) herein, capital accounts shall
be determined for each member by crediting such capital accounts for that
member's initial and subsequent capital contributions to the Venture and that
member's share of the Venture's income, and reducing that member's capital
account for that member's distributions from the Venture and that member's share
of the Venture's losses. Capital accounts are intended to be maintained
consistently with Treasury Regulation 1.704-1(b)(1)(iv) and shall be kept
accordingly.
8. Transfer of Interest.
--------------------
Except as otherwise provided in this Agreement, no member of this
Venture may sell, assign, transfer, encumber or otherwise dispose of any
interest in the Venture, Venture property or assets without the prior written
consent of the other member of the Venture.
Notwithstanding the foregoing or any other provision of this
Agreement, however, if all of the other Members do not approve of a proposed
assignment of an interest in the Venture by unanimous written consent (which may
be withheld in the sole and absolute discretion of any such Member), the
transferee of an interest shall have no right to participate in the management
and affairs of the Venture or to become a Member of the Venture. A transferee
that does not become a Member shall be entitled only to receive the share of
profits or other compensation by way of income and the return of Capital
Contributions to which the transferor Member would otherwise have been entitled
(such right to participate in the Management and affairs of the Venture to
remain with the transferor Member).
9. Miscellaneous.
-------------
a. Costs and Expenses. Each party hereto agrees to pay,its own
------------------
costs and expenses incurred in negotiating this Agreement and consummating the
transactions described herein.
b. Entire Agreement. This Agreement constitutes the entire
----------------
agreement between the parties hereto with respect to the subject matter hereof.
It supersedes all prior negotiations, letters and understandings relating to the
subject matter hereof.
8
<PAGE>
c. Amendment. This Agreement may not be amended, supplemented
---------
or modified in whole or in part except by an instrument in writing signed by the
party or parties against whom enforcement of any such amendment, supplement or
modification is sought.
d. Choice of Law. This Agreement will be interpreted,
-------------
construed and enforced in accordance with the laws of the State of Florida
except with regard to matters dealing with the laws of the limited liability
company in which case the laws of the State of Georgia shall apply.
e. Construction. The parties hereto and their respective legal
------------
counsel participated in the preparation of this Agreement; therefore, this
Agreement shall be construed neither against nor in favor of any of the parties
hereto, but rather in accordance with the fair meaning thereof.
f. Effect of Waiver. The failure of any party at any time or
----------------
times to require performance of any provision of this Agreement will in no
manner affect the right to enforce the same. The waiver by any party of any
breach of any provision of this Agreement will not be construed to be a waiver
by any such party of any succeeding breach of that provision or a waiver by such
party of any breach of any other provision.
g. Severability. The invalidity, illegality or unenforceability
------------
of any provision or provisions of this Agreement will not affect any other
provision of this Agreement, which will remain in full force and effect, nor
will the invalidity, illegality or unenforceability of a portion of any
provision of this Agreement affect the balance of such provision. In the event
that any one or more of the provisions contained in this Agreement or any
portion thereof shall for any reason be held to be invalid, illegal or
unenforceable in any respect, this Agreement shall be reformed, construed and
enforced as if such invalid, illegal or unenforceable provision had never been
contained herein.
h. Enforcement. Should it become necessary for any party to
-----------
institute legal action to enforce the terms and conditions of this Agreement,
the successful party will be awarded reasonable attorney's fees at all trial and
appellate levels, expenses and costs. Any suit, action or proceeding with
respect to this Agreement shall be brought in the courts of Broward County in
the State of Florida or in the U.S. District Court for the Southern District of
Florida. The parties hereto hereby accept the exclusive jurisdiction of those
courts for the purpose of any such suit, action or proceeding.
Venue for any such action, in addition to any other venue
permitted by statute, will be Broward County, Florida. The parties hereto hereby
irrevocably waive, to the fullest extent permitted by law, any objection that
any of them may now or hereafter have to the laying of venue of any suit, action
or proceeding arising out of or relating to this Agreement or any judgment
entered by any court in respect thereof brought in Broward County, Florida, and
hereby further irrevocably waive any claim that any suit, action or proceeding
brought in Broward County, Florida, has been brought in an inconvenient forum.
The parties hereto acknowledge and agree that any party's remedy
at law for a breach or threatened breach of any of the provisions of this
Agreement would be inadequate and such breach or threatened breach shall be per
se deemed as causing irreparable harm to such party. Therefore, in the event of
such breach or threatened breach, the parties hereto agree that, in addition to
any available remedy at law, including but not limited to monetary damages, an
aggrieved party, without posting any bond, shall be entitled to obtain, and the
offending party agrees not to oppose the aggrieved party's request for,
equitable relief in the form of specific enforcement, temporary restraining
order, temporary or permanent injunction, or any other equitable remedy that may
then be available to the aggrieved party.
i. Binding Nature. This Agreement will be binding upon and
--------------
will inure to the benefit of any successor or successors of the parties hereto.
9
<PAGE>
j. No Third-Party Beneficiaries. No person shall be deemed to
----------------------------
possess any third-party beneficiary right pursuant to this Agreement. It is the
intent of the parties hereto that no direct benefit to any third party is
intended or implied by the execution of this Agreement.
k. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which will be deemed an original and all of which together
will constitute one and the same instrument.
l. Notices. All written notices and reports permitted or
-------
required to be delivered by the provisions of this Agreement shall be deemed so
delivered at the time delivered by hand, or by any two of the following: (i) one
(1) business day after transmission by telegraph, facsimile transmission or
other electronic system, or (in the event confirmation of receipt shall be
necessary) (ii) five (5) business days after being placed in the hands of a
commercial courier service for express delivery, or (iii) fourteen (14) business
days after transmittal via registered mail, return receipt requested, postage
prepaid and addressed as follows:
If to Foodquest:
Foodquest, Inc.
11900 Biscayne Boulevard
Miami, FL 33181
Attention: Gregory G. Dollarhyde
Telephone No: 305/899-2585
Fax No: 305/899-2875
If to Atlanta:
Atlanta Roasters, Inc.
1000 Abernathy Road
Atlanta, GA 30328
Either of the above addresses may be changed at any time with ten
days prior notice given as provided above.
m. Arbitration of Disputes. Any controversy, dispute, or claim
-----------------------
of whatever nature arising out of, in connection with, or in relation to the
interpretation, performance or breach of this Agreement, including any claim
based on contract, tort, or statute, shall be settled, at the request of any
party to this Agreement, by final and binding arbitration conducted at a
location determined by the arbitrator in Fort Lauderdale, Florida, administered
by and in accordance with the then existing Rules of practice and procedure of
the American Arbitration Association ("AAA") or any successor thereof, in
accordance with the commercial arbitration rules of the AAA where such rules are
not inconsistent with the provisions of this section. Judgment upon any award
rendered by the arbitrator may be entered by any state or federal court having
jurisdiction thereof. The arbitrator shall determine which is the prevailing
party and shall include in the award that party's reasonable attorney's fees and
costs (including arbitration costs).
If the Venture shall operate pending the adjudication of the
matter in dispute (whether by arbitration or by judicial process, as
applicable), Foodquest shall be considered the trustee of the prevailing party
and shall be required to make a full and complete accounting of such
trusteeship.
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first written above.
ATLANTA ROASTERS, INC. FOODQUEST, INC., a Florida corporation
By: /s/David Womick By: /s/David E. Goldstein
----------------------------- ------------------------------------
Name: David Womick Name: David E. Goldstein
--------------------------- ----------------------------------
Title: President Title: Vice President-Operations
-------------------------- ---------------------------------
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ITS
CONSOLIDATED BALANCE SHEET DATED MARCH 31, 1996 AND CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE YEAR ENDED MARCH 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 673,994
<SECURITIES> 0
<RECEIVABLES> 82,642
<ALLOWANCES> 0
<INVENTORY> 69,817
<CURRENT-ASSETS> 872,961
<PP&E> 3,320,174
<DEPRECIATION> 531,937
<TOTAL-ASSETS> 5,264,383
<CURRENT-LIABILITIES> 3,608,335
<BONDS> 3,020,315
0
0
<COMMON> 32,183
<OTHER-SE> (271,995)
<TOTAL-LIABILITY-AND-EQUITY> 5,264,383
<SALES> 7,652,030
<TOTAL-REVENUES> 8,150,013
<CGS> 2,929,282
<TOTAL-COSTS> 4,678,339
<OTHER-EXPENSES> 4,196,092
<LOSS-PROVISION> 50,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,084,665)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,084,665)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,084,665)
<EPS-PRIMARY> (1.29)
<EPS-DILUTED> (1.29)
</TABLE>
