SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
(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 December 29, 1996
[ ] 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 ________________
Commission File No. 33-95796
CLUCKCORP INTERNATIONAL, INC.
(Name of Small Business Issuer in its Charter)
Texas 76-0406417
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) Number)
1250 N.E. Loop 410, Suite 335
San Antonio, Texas 78209
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (210) 824-2496
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
$.01 Par Value Common Stock
Common Stock Purchase Warrants
(Title of Class)
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Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes __X__ No _____
As of February 28, 1997, 2,366,030 shares of the Registrant's $.01 par
value Common Stock were outstanding. As of February 28, 1997, the market value
of the Registrant's $.01 par value Common Stock, excluding shares held by
affiliates, was $13,847,355 based upon a closing bid price of $6.88 per share of
Common Stock on the NASDAQ SmallCap Market.
Check if there is no disclosure contained herein of delinquent filers in
response to Item 405 of Regulation S-B, and will not be contained, to the best
of the 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
The Registrant's revenues for its most recent fiscal year were $263,892.
The following documents are incorporated by reference into Part III, Items
9 through 12 hereof: None.
2
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Except for the historical information contained herein, the matters set
forth in this Report include forward-looking statements within the meaning of
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements are subject to risks and uncertainties
that may cause actual results to differ materially. These risks and
uncertainties are detailed throughout the Report and will be further discussed
from time to time in the Company's periodic reports filed with the Commission.
The forward-looking statements included in the Report speak only as of the date
hereof.
Introduction
The Company owns, operates and franchises quick service restaurants under
the name "Harvest Rotisserie" which feature marinated oak-roasted rotisserie
chicken, oak-roasted turkey breast, roast ham, meatloaf, an assortment of
sandwiches and other fresh homestyle food items. Harvest Rotisserie restaurants
(sometimes referred to as the "Restaurant(s)") emphasize rotisserie oak-roasted
chicken, turkey and fresh homestyle side dishes consistent with what the Company
believes to be (i) an increased consumer demand for take-home prepared foods,
(ii) an emphasis on lower fat foods such as chicken and turkey, and (iii) the
popularity of homestyle cooking. Harvest Rotisserie side dishes include cold
dishes such as coleslaws and salads and hot dishes such as baked beans,
stuffing, corn, parsley potatoes, macaroni and cheese, steamed fresh vegetables,
mashed potatoes and gravy, rice, creamed spinach, cheese rice and baked cinnamon
apples. The Company maintains strict quality standards in purchasing, storing,
preparing and serving its entrees, side dishes, desserts and other products.
To date, the Company has opened three Restaurants in San Antonio, Texas
(one of which it used as both a training facility and a public restaurant) and
one Restaurant in Corpus Christi, Texas. The Company has also executed leases or
acquired property to develop four additional Restaurants in San Antonio and
Houston, Texas. The Company seeks to enter into traditional single Restaurant
franchise agreements as well as area development agreements although it has not
yet executed any franchise agreements and currently has no area development
agreements in effect. Area development agreements require the area developer to
develop a specified number of Restaurants within a delineated territory in
accordance with a development schedule. Management believes that area
development agreements allow for the more rapid development of a target market
area by generally more experienced restaurant operators who are able to realize
economies of scale resulting from locating a number of Restaurants in a given
area. These operators often require less management supervision by Company
personnel and provide the Company with higher franchise fee income in a shorter
period of time.
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History
The Company was incorporated in Texas in June 1993 under the name Clucker's
Tex-Mex Venture, Inc. and changed its name to CluckCorp International, Inc. in
April 1995. Prior to November 1994, the Company was an area developer for
Cluckers Wood Roasted Chicken, Inc. ("CWRC"), the developer and franchisor of
the original "Cluckers" restaurant concept. The Company acquired from WaterMarc
Food Management, Inc. ("WaterMarc"), formerly Billy Blues Food Corporation and
an affiliate of the Company, the Cluckers franchise development rights for
Texas, Mexico and certain Central American countries. After CWRC had opened ten
company-owned restaurants between 1991 and 1994 in Florida, Georgia and New York
and had sold franchises for an additional 165 restaurants, controlling interest
in CWRC was purchased by Kenny Rogers Roasters, Inc. ("Roasters") in November
1994. The Company then exchanged its Cluckers area development agreement with
CWRC for systems, franchising materials, signage and the exclusive right to use
the Cluckers name, trademark and service mark solely in Texas. The Company did
not acquire international rights to the Cluckers name because neither CWRC nor
anyone else had obtained any international rights, other than the Mexican and
Central American rights described above. However, the Company subsequently
registered the Cluckers name in Mexico and applied for trademarks to use the
Cluckers name and logos in the United Kingdom, Canada, Singapore and Malaysia.
The Company is licensed to use the Cluckers name only in Texas, and is
obligated to pay a license fee of 2% of gross sales applicable only to its
Cluckers restaurants in Texas for the first 10 years and 1% of gross sales
thereafter. No such license fees are required for Restaurants outside the United
States. In February 1995 and July 1995, the Company formed Cluckers Restaurants,
Inc. and Harvest Restaurants, Inc., respectively, wholly-owned Texas corporate
subsidiaries, to act as franchisors for the Company's Cluckers and Harvest
Rotisserie restaurants.
In February 1996, the Company decided to concentrate on the development,
operation and franchising of Harvest Rotisserie restaurants, which the Company
believes is an improvement over the original Cluckers concept because Harvest
Rotisserie restaurants offer an expanded menu which includes a number of
additional homestyle entrees offering lower fat foods. Accordingly, in January
1997, the Company converted its only Cluckers Restaurant to a Harvest Rotisserie
Restaurant.
In July 1996, the Company sold 1,000,000 shares of Common Stock and
2,300,000 common stock purchase warrants (the "IPO Warrants") in an initial
public offering ("IPO") of its securities through Global Equities Group, Inc.
("Global" or the "Representative") as representative of the underwriters of the
IPO. The Company realized net proceeds of approximately $4,700,000 from the IPO
based upon the sale of the Common Stock at $5.50 per share and the IPO Warrants
at $.125 per IPO Warrant.
In February 1997, the Company filed a registration statement on Form SB-2
covering the sale of 500,000 shares of the Company's Convertible Redeemable
Preferred Stock ("Preferred Stock") at $10.00 per share (the "Preferred
Offering"). The registration statement has not been declared effective by the
Commission. There can be no assurance that the registration statement will be
declared effective or that the Company will be successful in selling the
Preferred Stock. See "Application of Preferred Offering Proceeds."
4
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Strategy
The Company seeks to participate in what it perceives as an emerging food
service category consisting of fresh, convenient, homestyle replacement meals.
This category combines the fresh, high quality and flavorful meals generally
associated with traditional home cooking with the convenience and value
associated with fast-food restaurants. In order to promote this category, the
Company will continue to employ the following strategies it adopted in
connection with the development of its Harvest Rotisserie restaurants.
Fresh, High Quality, Convenient Homestyle Meals. The Company will focus on
its Harvest Rotisserie concept of rotisserie oak-roasted chicken, oak-roasted
turkey breast, roast ham, meatloaf, sandwiches and a variety of freshly prepared
side dishes by promoting (i) take-home prepared foods, (ii) the expanding
interest in low fat freshly prepared meals, and (iii) the consumer's desire for
homestyle, complete meals, reminiscent of home cooking. Chicken, turkey and ham
are delivered to the Company's Restaurants several times each week in order to
allow for the fresh preparation of these food products. Cooked food items are
prepared with the use of ovens and steamers, rather than the fryers, grills, and
microwaves used by many other fast-food establishments. The Company maintains
strict quality standards in purchasing, storing, preparing and serving its
entrees, fresh side dishes, desserts and other products. All visible fat is
removed from poultry and ham prior to preparation. The chickens are marinated
for 24 hours in a blend of citrus juices, fresh garlic and natural herbs and
spices and roasted over hardwood flames in a custom built rotisserie at
temperatures as high as 1,200 degrees for ninety minutes. The self-basting
characteristic of rotisserie cooking is believed to reduce fat and result in
moister meat and crispier skin.
Complete Meal Value. The Company emphasizes complete, reasonably-priced
meals rather than focusing on discounting individual items or an a la carte
pricing system. Restaurant meals include a variety of entrees such as rotisserie
oak-roasted chicken, oak-roasted turkey, roast ham and meatloaf,
customer-selected side dishes and desserts. Complete meals begin at
approximately $3.99, and menu combinations provide convenient multiple meal
selections for couples, families or larger groups. The Company's operating
philosophy is to provide high quality, healthful, quick service food rather than
the food often associated with the fast food industry. The Restaurants offer
large food portions, lunch specials and entree combinations at lower prices in
order to create a competitive "price to value" concept.
Distinctive Appearance and Casual Atmosphere. The Company has established
what it considers to be an easily replicable prototype Harvest Rotisserie
restaurant, featuring an efficient operating layout, standardized equipment and
tasteful and distinctive trade dress. The Company believes its Restaurant store
furnishings create an attractive and casual environment for both take-out and
dine-in customers.
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Visible, High Traffic Store Locations. The Company emphasizes free-standing
pad sites or end-cap locations with drive-through windows, ample parking and
easy access to and from high traffic roads. Highly visible signage consistent
with trade dress and local requirements is pursued.
Customer Service Commitment. The Company seeks friendly, customer-oriented,
and highly motivated employees at all positions to help ensure that its
customers have a pleasant dining experience, including a friendly greeting and
individual attention to all aspects of their order. Customers unfamiliar with
particular side dishes are encouraged to taste a sample.
Application of Preferred Offering Proceeds
In February 1997, the Company filed a Registration Statement on Form SB-2
covering the sale of 500,000 shares of preferred stock ("Preferred Stock") at
$10.00 per share (the "Preferred Offering"). Each share of Preferred Stock is
convertible into Common Stock one year after the effective date at a to be
determined conversion price.
The Company intends to use substantially all of the proceeds of the
Preferred Offering to acquire restaurant properties in certain metropolitan
markets and sublease the properties to area developers who will operate the
properties as Harvest Rotisserie restaurants. The Company may require the area
developers to execute promissory notes to the Company representing any
acquisition costs advanced by the Company and may also advance funds to area
developers for costs incurred to convert properties to Harvest Rotisserie
restaurants and for working capital. The Company will then seek to recoup its
costs through franchise fee payments and repayments of any promissory notes
issued by the area developers who will also be responsible to tender restaurant
property lease payments directly to the owners of the properties. If the Company
is unable to locate area developers willing to operate the restaurant properties
or if the area developers are unsuccessful in the operation of the restaurant
properties, the Company may be unable to recoup its investments in the
properties and would be liable for any leases it executed with the owners of the
properties. If the Company is unable to recoup such investments, its financial
condition and results of operations will be severely adversely affected.
In evaluating and selecting restaurant properties for assignment and
sublease to prospective area developers, the Company expects to apply the
following criteria. The Company will limit restaurant properties to a small
number of metropolitan areas which the Company believes currently offer long
range growth potential for its Harvest Rotisserie concept. Each metropolitan
area must offer the Company the opportunity to promptly acquire at least three
properties so that the Company can take advantage of advertising and marketing
economies of scale. The Company will give priority to metropolitan areas in
which it has already located a prospective area developer and which contain
identifiable properties which meet the Company's demographic and population
requirements. The Company does not have specific population criteria for
metropolitan areas, but rather evaluates the population of the metropolitan area
in comparison to the number of Restaurants it believes its prospective area
developer is capable of developing within 24 months. The rates of potential
Restaurants to population determines the Company's ability to realize economies
of scale. In terms of demographics, the Company favors high employment and
recreational population concentrations of middle class white collar workers
generally above the age of 30. Individual properties within a target
metropolitan area will be selected based upon the terms of the underlying
property leases, anticipated costs of conversion to Harvest Rotisserie
restaurants, the ability of the Company to refinance any debt associated with
the property and the ability of the Company to sublease the property to an area
developer.
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There can be no assurance that the Preferred Offering will be declared
effective by the Commission or that the Preferred Stock will be sold. Moreover,
the Company has not entered into any acquisition agreements for restaurant
properties or sublease agreements with prospective area developers and there can
be no assurance it will do so in the future.
Current Operations
The Company's Restaurants prominently display a rotisserie within customer
view. The location of the rotisserie, coupled with the flames emanating from the
hardwood, creates a focal point for the Restaurants. Chicken, turkey and other
entrees may be purchased in varying quantities or in combination with a choice
of side dishes. Most Restaurants offer inside seating and takeout service, range
in size from approximately 1,800 to 3,500 square feet, have drive- through
windows and seating capacities for 45 to 70 diners. Generally, restaurant hours
are from 11 A.M. to 11 P.M., seven days a week.
The Company considers the location of a Restaurant to be critical to its
long-term success and therefore devotes significant efforts to the evaluation of
potential Restaurant sites whether such Restaurant sites are intended for
Company owned, franchised or area developed Restaurants. The site selection
process involves consideration of a variety of factors including (i)
demographics, such as target population density and household income levels,
(ii) specific site characteristics such as visibility, accessibility and traffic
volume, (iii) proximity to activity centers such as prime urban office or retail
shopping districts, suburban shopping areas and hotel and office complexes, (iv)
parking availability and (v) potential competition in the area. The Company's
executive officers inspect and approve Restaurant sites prior to the execution
of a lease. The opening of new Restaurants is contingent upon, among other
things, locating satisfactory sites, negotiating favorable leases or purchase
agreements, completing construction and securing appropriate government permits
and approvals. Once a site is available to the Company and necessary approvals
and permits have been obtained, approximately 60 to 180 days are required to
complete construction and open the Restaurant.
The design of the Restaurants is flexible and may be adapted to local
architectural styles and existing buildings with varying floor plans and
configurations. The Company intends to continue to purchase most of its
restaurant equipment, such as rotisseries, furniture and fixtures from the same
suppliers, in order to promote uniformity of style and format and reduce costs.
7
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The Restaurants are operated under standards set forth in the Company's
operating manuals, including specifications relating to food quality and
preparation, design and decor and day-to-day operations. The standards also
govern the administration, training and conduct of Restaurant personnel.
A typical Restaurant will employ between fifteen and twenty people daily,
generally on a staggered basis designed to match employee work hours to customer
traffic. Restaurant personnel generally include a manager, assistant manager,
cooks, counter personnel and kitchen workers.
The Company believes that the training and development of Restaurant
management personnel is a critical part of its operations. Restaurant management
personnel are trained by the Company for a 30-day period and until each
participant can demonstrate the management skills required to operate a
Restaurant at levels satisfactory to the Company. Restaurant managers are
responsible for day-to-day operations, including food preparation, customer
relations, maintenance, cost control and personnel relations. In addition,
Restaurant managers are responsible for selecting and training new employees who
will generally undergo an on-the-job training period under the supervision of an
experienced employee. Ongoing employee training is the responsibility of the
Restaurant manager.
Restaurant Expansion
The Company intends to open as many Restaurants as its capital will permit.
The amount of capital required will depend in part on whether the developed
Restaurants are Company- owned, or franchised restaurants. The number of
Restaurants opened will also depend upon, among other things, market acceptance
of the Company's Restaurant concept, the hiring of skilled management and other
personnel, the availability of suitable locations, the general ability to
successfully manage growth (including monitoring restaurants, controlling costs
and maintaining effective quality controls), the availability of adequate
financing, and its ability to attract and retain qualified franchisees. To date
the Company has opened four Restaurants and has four other Restaurants under
development but has not entered into any franchise agreements and has no area
development agreements in effect.
The Company estimates that the average cost of opening a Harvest Rotisserie
restaurant in a leased facility, including site selection costs, leasehold
improvements, acquisition of furniture, fixtures and equipment, opening
inventories and certain preopening expenses (including salaries, training,
travel, advertising and promotion), will range from $350,000 to $550,000 per
Restaurant depending upon the size and location of the Restaurant and the amount
of leasehold improvements required. If the Company elects to purchase the land
and/or building, the development costs will be significantly higher.
8
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The Company previously sought to enter into joint venture agreements and
development arrangements to finance a portion of Restaurant development costs,
but was unable to attract joint venture partners upon terms acceptable to it and
has therefore terminated any such arrangements.
Franchise Agreements
The Company has completed a Uniform Franchise Offering Circular ("UFOC")
and related franchise documents for its Harvest Rotisserie restaurant but has
not sold any franchises. The Harvest Rotisserie franchise agreement provides for
(i) a $35,000 per Restaurant franchise fee (except for take-out only stores
which require a $15,000 franchise fee), (ii) a 5% royalty on the Restaurant's
gross revenue and (iii) a reserve for a national and local advertising fund
contribution aggregating up to 3% of gross revenues per Restaurant. The
franchise agreement also provides for a limited area of exclusivity surrounding
the franchised Restaurant in which the Company may neither develop nor grant to
others the right to develop additional Restaurants.
The Company's franchise agreement requires that the Restaurant be operated
in accordance with the operating procedures and menus established by the
Company. The Company conducts regular inspections of its Restaurants to
determine whether they meet applicable quality, service and cleanliness
standards and will work with franchisees to improve substandard performance or
any items of non-compliance revealed in the course of its inspection. The
Company may terminate any franchisee who does not comply with such standards.
The Company believes that maintaining superior food quality, a clean and
pleasing environment and excellent customer service is critical to the
reputation and success of its Restaurants and intends to act aggressively to
enforce applicable contractual requirements. Franchisees could contest such
terminations which would cause the Company to incur potentially significant
legal expenses.
Area Development Agreements
The Company's Harvest Rotisserie area development agreement requires the
development of a specified number of Restaurants within a delineated territory
in accordance with a development schedule. The development schedule will
generally cover three to six years and will have Restaurant operation benchmarks
for the number of Restaurants to be opened and in operation at certain yearly
intervals. It is anticipated that area developers will pay a nonrefundable fee
of $5,000 per Restaurant to be developed and a per Restaurant franchise fee as
each Restaurant is opened. Area development agreements will provide that the
area developer has the exclusive right to open Restaurants within the specified
territory during the term of the development schedule. Once an acceptable lease
for an approved Restaurant site has been fully executed and the Company has
approved design and construction specifications, the Company and the area
developer would enter into a franchise agreement under which the area developer
would become the franchisee for the specific Restaurant to be developed at the
site. The Company has no obligation under its area development agreements beyond
its obligation not to sell franchises to anyone within the area developer's
territory.
9
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Failure to meet development schedules or other breaches of the area
development agreement would lead to termination of the limited exclusivity
provided by the agreement, loss of any deposits paid to the Company,
renegotiation of development and franchise provisions or termination of the
right to build future Restaurants, although such termination would not
necessarily affect the area developer's existing franchise agreements for
developed locations.
In March 1995, prior to defining certain uniform area development agreement
terms, the Company entered into an area development agreement with a stockholder
and former director of the Company, providing for the development of up to ten
Cluckers restaurants in Singapore over a 20-year period. In February 1996,
consistent with the Company's plan to develop solely Harvest Rotisserie
restaurants, the agreement was modified to provide for the development of
Harvest Rotisserie restaurants. The fee under the area development agreement was
$50,000 of which the Company received $20,000 as a deposit in cash and a $30,000
non-interest bearing unsecured promissory note. In October 1996, the Company
refunded $10,000 of the deposit, cancelled the $30,000 promissory note and
reduced the number of Restaurants anticipated to be developed under the
agreement from ten Restaurants to two Restaurants. The developer is under no
obligation to develop any Restaurants in Singapore and, accordingly, the Company
no longer considers its agreement with the developer to constitute an area
development agreement.
No area development agreements are currently in effect, and there can be no
assurance that any Restaurants will be developed under area development
agreements. Negotiations with parties who previously expressed an interest in
area development agreements for Restaurants to be located in McAllen, Texas and
San Francisco, California were terminated. Although the Company continues to
negotiate with a number of entities for area developments in such markets as
Austin, Texas, Baltimore, Maryland, New York, New York and northern California,
there can be no assurance that the Company will execute any area development
agreements in the future.
Marketing
The Company currently markets its four Restaurants on a limited basis
primarily through print media, restaurant signage, direct mail and in-store
displays which emphasize the healthfulness, quality and homestyle nature of the
food products and otherwise promote the rotisserie concept. The Company intends
to expand its advertising efforts (using working capital generated from its IPO
and from revenues from existing Restaurants) to include additional use of print
media, together with radio and television commercials. The Company's advertising
efforts also seek to promote value through the purchase of complete meals or
meal combinations, as opposed to a la carte selection or pricing. Company-owned
and any future franchise Restaurants will contribute to a national advertising
fund to pay for the development of national advertising material and to a
separate fund to pay for advertising in local markets.
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Competition
The food service industry is intensely competitive with respect to food
quality, concept, location, service and price. There are many well-established
food service competitors with substantially greater financial and other
resources than the Company and with substantially longer operating histories.
The Company competes with take-out food service companies, fast-food
restaurants, casual full-service dine-in restaurants, delicatessens,
cafeteria-style buffets and prepared food stores, as well as with supermarkets
and convenience stores. Competitors include national, regional and local pizza
restaurants, Chinese food restaurants, other purveyors of carry- out food and
convenience dining establishments, including such chains as Pizza Hut,
McDonald's and others. Other rotisserie roasted chicken concepts and homestyle
food concepts, such as Boston Market and Kenny Rogers' Roasters, provide direct
and intensive competition. This intense competition has resulted in the sale or
closing of a number of rotisserie roasted chicken restaurants including
establishments operated by some of the larger franchise chains. The inclusion of
roasted or baked chicken at many large, national food service chains, such as
KFC and Roy Rogers, and in supermarkets and convenience stores, creates
significant additional competition for customers. Moreover, other national food
service chains or companies could introduce new rotisserie, roasted or baked
chicken restaurants. The Company believes that its Harvest Rotisserie
restaurants will compete favorably in terms of taste, food quality, convenience,
customer service and value, which the Company believes are the important factors
to the segments of the population the Company currently targets.
Competition in the food service business is often affected by changes in
consumer tastes, national, regional and local economic and real estate
conditions, demographic trends, traffic patterns, the cost and availability of
labor, purchasing power, availability of product and local competitive factors.
Some or all of these factors could cause the Company and future franchisees to
be adversely affected.
The Company also competes for franchisees with multinational fast food
chains, national and regional restaurant chains and other regional and local
restaurant franchisors. Most restaurant franchisors have greater market
recognition and greater financial, marketing and human resources than the
Company.
Trademarks and Service Marks
The Company has registered with the United States Patent and Trademark
Office ("PTO") its "Harvest Rotisserie" name, trademark and service mark
("MARKS"). There can be no assurance that the Company will obtain sufficient
protection for its Harvest Rotisserie Marks or, that it will have the financial
resources to enforce or defend its Marks. The Company has the exclusive right in
Texas to use the Cluckers name, trademark and service mark which have been
registered with the PTO. In addition, the Company has registered the Cluckers
name in Mexico and has applied to register the Cluckers name (or, in certain
cases, the name in connection with additional words or graphics) in the United
Kingdom, Canada, Singapore and Malaysia. The Company has no current intention to
use the Cluckers name or trademark as it is currently concentrating its efforts
on its Harvest Rotisserie Restaurant concept.
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Regulation
The Company's Restaurants must comply with federal, state and local
government regulations applicable to consumer food service businesses generally,
including those relating to the preparation and sale of food, minimum wage
requirements, overtime, working and safety conditions, mandated health insurance
coverage and citizenship requirements, as well as regulations relating to
zoning, construction, health, business licensing and employment. The Company
believes that it is in material compliance with these provisions.
Certain states and the Federal Trade Commission require a franchisor to
provide specified disclosure statements to potential franchisees before granting
a franchise. Additionally, many states require the franchisor to register its
Uniform Franchise Offering Circular ("UFOC") with the state before it may offer
a franchise. The Company believes that its Harvest Rotisserie UFOC (together
with any applicable state versions or supplements) complies with both the
Federal Trade Commission guidelines and all applicable state laws regulating
franchising in those states in which the Company intends to offer franchises.
Insurance
The Company carries general liability, product liability and commercial
insurance of up to $2,000,000 which it believes is adequate for businesses of
its size and type. However, there can be no assurance that the Company's
insurance coverage will remain adequate or that insurance will continue to be
available to the Company at reasonable rates. In the event coverage is
inadequate or becomes unavailable, the Company could be materially adversely
affected. The Company has carried workers' compensation insurance since August
1995.
Franchisees will be required to maintain certain minimum standards of
insurance pursuant to their franchise agreements including commercial general
liability insurance, worker's compensation insurance and all risk property and
casualty insurance. The Company requires that it be named as an additional
insured on any such policies.
Employees
At February 28, 1997, the Company employed four executive officers, six
salaried corporate employees and approximately 100 Restaurant employees. The
Company believes that its relations with its employees are satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases 2,500 square feet of space for its executive offices in
San Antonio, Texas under a 12 month lease expiring June 30, 1997 for $2,500 per
month. The Company believes its executive office facilities are adequate for its
needs in the foreseeable future and that additional space is available at
reasonable rates.
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The Company has opened four Harvest Rotisserie restaurants. Subsequent to
its IPO, the Company cancelled three proposed Restaurant property leases and
substituted three of the leases set forth below. The lease substitutions were
made because the Company concluded that the new leases offered superior
locations to the original leases. Details concerning the Company's four current
and four planned Restaurants are described below. The Company expects that all
four planned Restaurants will be Company-owned and operated and will open in
1997.
<TABLE>
<CAPTION>
Form of Lease Monthly
Location Ownership Expiration Rent(3)
- -------- --------- ---------- -------
<S> <C> <C> <C>
Fredericksburg Road Building Lease August 1998 $2,554
San Antonio, TX
Walzem Road Building Lease February 2006 $2,700
San Antonio, TX
Tezel Road(1) Real Estate Not Applicable Not Applicable
San Antonio, TX Owned
Hwy 281/Loop 1604(1) Ground Lease February 2022 $4,500
San Antonio, TX
DeZavala Road(1) Ground Lease May 2027 $5,000
San Antonio, TX
South Braeswood Road Building Lease January 2004 Greater of $3,000 or
Houston, TX 5% of gross sales
4620 Broadway Building Lease January 2002 $4,900
San Antonio
South Padre Island Drive Building Lease November 1999 $5,000
Corpus Christi, TX(2)
</TABLE>
(1) Sites substituted for previous sites.
(2) In January 1997, the Company purchased the furniture, fixtures and
equipment of an existing restaurant property (through the assumption of
$100,000 of debt in connection with the property) and converted the
property to a Harvest Rotisserie restaurant.
(3) Monthy rents are subject to customary escalation clauses in future periods
generally tied to a consumer price index or increases in the landlord's
operating expenses on the property.
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ITEM 3. LEGAL PROCEEDINGS
Not applicable.
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
The Company's Common Stock has traded on The NASDAQ SmallCap Market tier of
the NASDAQ Stock Market ("NASDAQ SmallCap Market") under the symbol "ROTI" since
July 9, 1996.
The following table sets forth for the quarters indicated the range of high
and low sales prices of the Company's Common Stock as reported by the NASDAQ
SmallCap Market.
<TABLE>
<CAPTION>
Price
--------------------
By Quarter Ended: High Low
-------- --------
<S> <C> <C> <C>
October 6, 1996 ........................................ $ 8.25 $ 5.67
December 29, 1996 ...................................... $ 7.75 $ 5.75
April 20, 1997 (through February 28, 1997) ............. $ 7.13 $ 6.00
</TABLE>
As of February 28, 1997, the Company had approximately 600 beneficial
holders of its Common Stock.
Dividend Policy
The Company has never paid cash dividends on its Common Stock and intends
to retain earnings, if any, for use in the operation and expansion of its
business. The amount of future dividends, if any, will be determined by the
Board of Directors based upon the Company's earnings, financial condition,
capital requirements and other conditions.
Description of Securities
Common Stock
The Company is authorized to issue 10,000,000 shares of $.01 par value
Common Stock. At February 28, 1997, there were 2,366,030 shares of Common Stock
outstanding. The holders of Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders, including the
election of directors. There is no right to cumulate votes in the election of
directors. The holders of Common Stock are entitled to any dividends that may be
declared by the Board of Directors out of funds legally available therefor
subject to any prior rights of holders of Preferred Stock. In the event of
liquidation or dissolution of the Company, holders of Common Stock are entitled
to share ratably in all assets remaining after payment of liabilities and the
liquidation preferences of any outstanding shares of Preferred Stock. Holders of
Common Stock have no preemptive rights and have no right to convert their Common
Stock into any other securities. All of the outstanding shares of Common Stock
are fully paid and non-assessable.
15
<PAGE>
Preferred Stock
The Company is authorized to issue 5,000,000 shares of preferred stock,
$1.00 par value. The preferred stock may, without action by the stockholders of
the Company, be issued by the Board of Directors from time to time in one or
more series for such consideration and with such relative rights, privileges and
preferences as the Board may determine. Accordingly, the Board has the power to
fix the dividend rate and to establish the provisions, if any, relating to
voting rights, redemption rate, sinking fund, liquidation preferences and
conversion rights for any series of preferred stock issued in the future.
The Series A Redeemable Convertible Preferred Stock ("Preferred Stock")
offered in the Preferred Offering has been authorized by the Board of Directors
of the Company as a new series of the Company's preferred stock, $1.00 par
value, consisting of up to 1,000,000 shares. The shares of Preferred Stock when
issued will be fully paid and non-assessable under Texas law. The Company
expects that the Preferred Stock will be convertible into Common Stock at a
formula to be determined and will pay dividends in cash or in Common Stock of
the Company. There can be no assurance that the Company will successfully
complete the sale of any Preferred Stock in the Preferred Offering.
It is not possible at this time to state the actual effect of any other
authorization of Preferred Stock upon the rights of holders of Common Stock
until the Board determines the specific rights of the holders of any other
series of preferred stock. The Board's authority to issue preferred stock also
provides a convenient vehicle in connection with possible acquisitions and other
corporate purposes, but could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock. Accordingly,
the issuance of preferred stock may be used as an "anti-takeover" device without
further action on the part of the stockholders of the Company, and may adversely
affect the holders of the Common Stock.
IPO Warrants
There are 2,300,000 IPO Warrants outstanding (each of which entitles the
holder to purchase one share of Common Stock at $4.00 per share until July 9,
2001). The exercise price and the number of shares issuable upon exercise of the
IPO Warrants are subject to adjustment in certain events, including the issuance
of Common Stock as a dividend on shares of Common Stock, subdivisions or
combinations of the Common Stock or similar events. The IPO Warrants do not
contain provisions protecting against dilution resulting from the sale of
additional shares of Common Stock for less than the exercise price of the IPO
Warrants or the then current market price of the Company's Common Stock.
IPO Warrants may be redeemed in whole or in part, at the option of the
Company, upon 30 days' notice, at a redemption price equal to $.01 per IPO
Warrant at any time after July 9, 1997 if the closing price of the Company's
Common Stock on NASDAQ averages at least $8.00 per share for a period of 20
consecutive trading days.
16
<PAGE>
Holders of IPO Warrants may exercise their IPO Warrants for the purchase of
shares of Common Stock only if a current prospectus relating to such shares is
then in effect and only if such shares are qualified for sale, or deemed to be
exempt from qualification, under applicable state securities laws. The Company
is required to use its best efforts to maintain a current Prospectus relating to
such shares of Common Stock at all times when the market price of the Common
Stock exceeds the exercise price of the IPO Warrants until the expiration date
of the IPO Warrants, although there can be no assurance that the Company will be
able to do so.
The shares of Common Stock issuable on exercise of the IPO Warrants will
be, when issued in accordance with the IPO Warrants, fully paid and
non-assessable. The holders of the IPO Warrants have no rights as stockholders
until they exercise their IPO Warrants.
Representative Warrants
The Company has issued to the Representative of its IPO Warrants to
purchase up to 100,000 shares of Common Stock at $6.60 per share and 200,000
warrants at $.15 per Warrant. Each Warrant entitles the holder to purchase one
share at $4.00 per share.
Other Outstanding Common Stock Purchase Warrants
The Company has issued 325,280 common stock purchase warrants each
exercisable at $2.50 per share until December 1997, of which 257,280 have been
exercised. The Company is required to register the 257,280 shares of Common
Stock underlying the subject warrants by August 10, 1997.
Stock Transfer and Warrant Agent
Corporate Stock Transfer, Inc., Denver, Colorado, is the stock transfer
agent and IPO Warrant agent for the Company's securities.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The Company was organized in June 1993, and opened its San Antonio Cluckers
restaurant in January 1994. The Company's operating results for 1994 and 1995,
including its limited revenues and ongoing losses primarily reflect the
operations of its one Cluckers restaurant located in San Antonio, Texas. During
the fourth quarter of 1994, the Company established its corporate offices and
began the initial development of its franchising program. During the third
quarter of 1995 the Company began refinements to its Cluckers restaurant which
evolved into the Harvest Rotisserie restaurant, and the Company completed
development of the Harvest Rotisserie franchise program during this period. In
February 1996 the Company elected to limit its activities to the development of
Harvest Rotisserie restaurants, and opened its first Harvest Rotisserie
restaurant in November 1996. In January and February 1997, the Company opened
two additional Harvest Rotisserie Restaurants, and in January 1997, the Company
converted its San Antonio Cluckers restaurant to a Harvest Rotisserie
restaurant, at a cost of $25,000. To date, the Company has four restaurants in
operation, but has not sold any franchises nor does it have any area development
agreements currently in effect.
17
<PAGE>
Results of Operations-Fiscal Year 1996 Compared to Fiscal Year 1995
Revenues. Restaurant revenues for 1996 were $263,892, a 16.4% increase as
compared to 1995. The increase in revenues was due to the opening of an
additional restaurant in November 1996. On a comparative basis, same store
revenues decreased $32,820 or 14.5% between 1996 and 1995. The decrease in same
store sales was due in part to a further reduction in the restaurant operating
hours which was implemented during the second quarter of 1996. The restaurant is
currently open five days each week from 11 a.m. to 2 p.m. and is also being used
as a training facility. Restaurant revenues in 1996 were approximately 34% of
capacity for this restaurant and below the restaurant's operating costs.
Management attributes the low sales volumes to the partial use of the restaurant
as a training facility, reduced hours of operation and the lack of a
drive-through window at the restaurant, which is located in a shopping center.
Management anticipates that the sales volume for this restaurant may improve
marginally in future periods after conversion to a Harvest Rotisserie and due to
enhanced name recognition as the Company opens additional Restaurants in the San
Antonio area although there can be no such assurance. The Company expects that
most new Restaurants will be free-standing with drive-through windows.
During 1995 revenues included an area development fee for $50,000 with a
then director of the Company. The area development agreement was subsequently
modified extensively. See "Certain Transactions."
Costs and Expenses. Cost of food and paper was 46.4% of restaurant revenues
for 1996, as compared to 36.3% in 1995. The increase in food and paper costs
resulted primarily from food usage for recipe development for the Company's
expanded Harvest Rotisserie menu, and the opening of an additional restaurant in
November 1996, which typically has higher costs during the initial periods after
opening.
Restaurant salaries, benefits, occupancy and related expenses, and
operating expenses include all other restaurant level operating expenses, the
major components of which are direct and indirect labor, payroll taxes and
benefits, operating supplies, rent, advertising, repairs and maintenance,
utilities, and other occupancy costs. The combined total of these expenses was
$257,806 or 97.7% of restaurant revenue for 1996 as compared to 277,646 or 122%
for 1995. A substantial portion of these costs are fixed or indirectly variable
and therefore were disproportionate to restaurant revenues for both periods.
18
<PAGE>
General and administrative expenses increased $693,593 or 122% in 1996 as
compared to 1995. The increase resulted from the establishment of the Company's
corporate offices in 1996 and expenses associated with the Company's financing,
franchising, and expansion activities. In 1996, these expenses included
salaries, benefits and contract services (25%), professional fees and offering
expenses (37%), travel related expenses (10%), advertising and promotion (11%)
and other general and administrative expenses (17%).
Preopening expenses increased by $71,711 for 1996 as compared to the same
period in 1995. A substantial portion of the increase relates to initial costs
associated with the development of a new Harvest Rotisserie restaurant which
opened in November 1996.
Interest and Debt Discount Expense. Interest and debt discount expense
increased to $454,818 for 1996 as compared to $140,497 for 1995. The significant
increase relates to the issuance of $1,684,000 face amount of 10% Bridge Notes
from December 1994 to March 1996. The total amount of amortized debt discount in
1996 was $367,153. The Bridge Notes were repaid in full in July 1996 from
proceeds of the Company's IPO.
Net Loss. The Company incurred a net loss of $2,011,254 for 1996 as
compared to $924,483 for 1995. The increase in net loss for 1996 was primarily
the result of significantly higher interest, debt discount expenses and general
and administrative expenses. The Company expects to incur significant losses in
future periods until it generates sufficient revenues from expanded restaurant
operations or from franchising activities to offset ongoing operating and
expansion costs.
Results of Operations-Fiscal Year 1995 Compared to Fiscal Year 1994
Revenues. Revenues for 1995, were comprised of $226,678 from restaurant
operations and $50,000 for an area development fee from a stockholder of the
Company. Revenues from restaurant operations were derived entirely from the San
Antonio Cluckers restaurant which opened in January 1994. Restaurant revenues
for 1995 decreased 7.1% as compared to 1994, which only included eleven months
of restaurant operations. Annualized restaurant sales volumes for 1995 were
14.8% below 1994 levels, and were approximately 30% of capacity for the
restaurant and below the restaurant's operating costs for both periods. The
decrease in revenues is due in part to a reduction in the restaurant operating
hours which was implemented during the third quarter of 1995. The restaurant is
currently open five days each week from 11 a.m. to 2 p.m. and is also being used
as a training facility. Management attributes the low sales volumes to the
partial use of the restaurant as a training facility and the lack of a
drive-through window at the restaurant, which is located in a shopping center.
The Company expects that most new Restaurants will be in free-standing
facilities with drive-through windows.
Costs and Expenses. Cost of food and paper improved to 36.3% of restaurant
revenues for the year ended December 31, 1995, as compared to 43.3% for 1994.
The improvement in gross margins resulted primarily from efficiencies in food
preparation as the restaurant matured following the initial opening in January
1994.
19
<PAGE>
Restaurant salaries, benefits, occupancy and related expenses, and
operating expenses include all other restaurant level operating expenses, the
major components of which are direct and indirect labor, payroll taxes and
benefits, operating supplies, rent, advertising, repairs and maintenance,
utilities and other occupancy costs. The combined total of these expenses was
$277,646, or 122% of restaurant revenues and $320,935, or 132% of restaurant
revenues for 1995 and 1994, respectively. A substantial portion of these costs
are fixed or indirectly variable and therefore were disproportionate to
restaurant revenues for both periods. The decrease in these expenses as a
percentage of restaurant revenues was due to improved cost controls implemented
during the fourth quarter of 1994.
General and administrative expenses increased $369,964, or 187% in 1995 as
compared to 1994 primarily due to the establishment of the Company's corporate
offices and expenses associated with the Company's financing, franchising and
expansion activities. In 1995, these expenses included salaries, benefits and
contract services (29%), professional fees and public offering expenses (39%),
travel related expenses (15%), advertising and promotion (6%), and other general
and administrative expenses (11%).
Preopening expenses of $59,363 in 1995 consisted primarily of lease costs
for maintaining a restaurant site for future development in Houston, Texas.
Preopening expenses of $25,783 in 1994 consisted of certain expenses incurred in
connection with the opening of the San Antonio restaurant.
Interest and debt discount expense of $140,497 for 1995, relates to the
issuance of $1,074,500 face amount of 10% Bridge Notes, from December 1994 to
November 1995, and included $87,659 of amortized debt discount. Interest expense
of $29,063 in 1994 relates to a note payable with an affiliate.
Net Loss. The Company incurred a net loss of $924,483 for 1995 as compared
to $494,024 for 1994. The increase in net loss in 1995 was primarily the result
of significantly higher general and administrative expenses and interest
expense, which offset an area development fee and slightly improved restaurant
operating results.
Liquidity and Capital Resources
The Company has incurred losses from operations since inception and as of
December 29, 1996, has an accumulated deficit of $3,576,796. The Company is not
currently generating sufficient revenues from operations to meet its cash
requirements. Management anticipates that the Company must increase revenues
from existing Restaurants, open at least four additional restaurants and realize
revenues from its franchise program to generate a positive cash flow from
operations, although there can be no such assurance. The Company estimates it
will require up to six months to realize increases in revenues from operations.
The ability of the Company to fund costs associated with its operations and
expansion plans is dependent upon the successful development of its Restaurants,
its franchising activities, and its ability to obtain additional capital through
future debt or equity placements.
20
<PAGE>
The Company requires capital principally for the expansion of its
Restaurant operations, for general and administrative expenses and to fund costs
associated with the promotion of its franchise program. During 1996, the Company
invested $1,059,654 in property and equipment, of which approximately $985,000
was for the development of two restaurants (which opened in November 1996 and
February 1997). To date, the Company has funded its operations and capital needs
with funds provided from the sale of its securities, including its IPO which
raised net proceeds of approximately $4,700,000. The Company does not have a
working capital line of credit with any financial institution. Future sources of
Liquidity will be limited to the Company's ability to obtain additional debt or
equity funding which will be difficult to obtain until and unless the Company
begins to generate earnings. Management's plan is to move the Company toward
profitable operations in fiscal 1997, and to seek additional capital to fund
further expansion of its operations.
Between December 1994 and March 1996, the Company issued a total of
$1,684,500 of 10% unsecured Bridge Notes. Proceeds from the Bridge Notes were
used for working capital purposes, development of the Company's initial
franchising program and to pay certain costs associated with the Company's IPO.
The Bridge Notes were repaid on July 15, 1996 using a portion of the proceeds
from the IPO.
Internal sources of capital are limited to the Company achieving profitable
operations in future periods or raising additional capital from investors. The
Company anticipates that its existing capital resources will enable it to
maintain its current operations for at least 12 months; however, full
implementation of its expansion plans is dependent upon the completion of the
Preferred Offering. If the Company does not complete the Preferred Offering, its
expansion plans will be curtailed.
21
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The financial information required by this item is found beginning on
page F-1.
22
<PAGE>
CluckCorp International, Inc.
Contents
December 29, 1996
Audited Financial Statements Page
Report of Independent Certified Public Accountants F-1
Balance Sheets ................................... F-2
Statements of Operations ......................... F-3
Statements of Stockholders' Equity ............... F-4
Statements of Cash Flows ......................... F-5
Notes to Financial Statements .................... F-6
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
CluckCorp International, Inc.
San Antonio, Texas
We have audited the accompanying balance sheets of CluckCorp International, Inc.
as of December 29,1996 and December 31, 1995, and the related statements of
operations, stockholders' equity, and cash flows for the fiscal years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CluckCorp International, Inc.
as of December 29, 1996 and December 31, 1995, and the results of its operations
and its cash flows for the fiscal years then ended, in conformity with generally
accepted accounting principles.
/S/ Akin, Doherty, Klein & Feuge, P.C.
- --------------------------------------
Akin, Doherty, Klein & Feuge, P.C.
San Antonio, Texas
February 6, 1997
F-1
<PAGE>
CluckCorp International, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 29, December 31,
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash ............................................ $ 1,271,443 $ 126,447
Cash, restricted ................................ 220,000 --
Inventories ..................................... 8,658 5,044
Deferred financing costs ........................ -- 144,074
Other current assets ............................ 10,590 --
Note receivable from stockholder ................ -- 40,000
----------- -----------
Total Current Assets ....................... 1,510,691 315,565
Property and Equipment, net ......................... 1,156,362 150,868
Other Assets
Intangible property rights, net of accumulated
amortization of $139,825 and $99,875 .......... 259,675 299,625
Deposits ........................................ 83,257 25,007
Other assets .................................... 127,727 34,780
----------- -----------
470,659 359,412
----------- -----------
$ 3,137,712 $ 825,845
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Bridge notes payable, net of unamortized discount
of $ -0- and $133,523 ......................... $ -- $ 940,977
Accounts payable, trade ......................... 134,204 161,642
Accrued liabilities ............................. 220,406 89,043
Note payable to bank ............................ 200,000 --
----------- -----------
Total Current Liabilities .................. 554,610 1,191,662
Commitments and contingencies
Common stock subject to rescission, 0 shares
in 1996 and 57,750 shares in 1995 .................. -- 195,818
Stockholders' Equity
Preferred stock
Common stock - $.01 par value; 10,000,000 shares
authorized, 2,112,750 shares issued and
outstanding in 1996 and 990,000 in 1995 .... 21,128 9,900
Additional paid - in capital .................... 6,138,770 994,007
Accumulated deficit ............................. (3,576,796) (1,565,542)
----------- -----------
Total Stockholders' Equity (Deficit) ....... 2,583,102 (561,635)
----------- -----------
$ 3,137,712 $ 825,845
=========== ===========
</TABLE>
See notes to financial statements.
F-2
<PAGE>
CluckCorp International, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Fiscal Years Ended
December 29, December 31,
1996 1995
----------- ------------
<S> <C> <C>
Revenues
Restaurant operations ............. $ 263,892 $ 226,678
Area development fee, stockholder . 50,000
----------- -----------
263,892 276,678
Costs and Expenses
Cost of food and paper ............ 122,530 82,171
Restaurant salaries and benefits .. 125,954 127,400
Occupancy and related expenses .... 58,191 63,605
Operating expenses ................ 73,661 86,641
Preopening expenses ............... 131,074 59,363
General and administrative expenses 1,261,198 567,605
Depreciation and amortization ..... 104,467 73,879
----------- -----------
Total costs and expenses ..... 1,877,075 1,060,664
----------- -----------
Loss from operations .................. (1,613,183) (783,986)
Other income (expense)
Interest income ................... 56,747
Interest expense and debt discount (454,818) (140,497)
----------- -----------
(398,071) (140,497)
Net Loss .............................. $(2,011,254) $ (924,483)
=========== ===========
Net loss per common share ............. $ (1.29) $ (.75)
=========== ===========
Weighted average number of common
and common equivalent shares
outstanding ......................... 1,553,824 1,224,531
=========== ===========
</TABLE>
See notes to financial statements.
F-3
<PAGE>
CluckCorp International, Inc.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Total
Common Stock Additional Stockholders'
--------------------------- Paid-In Accumulated Equity
Shares Amount Capital Deficit (Deficit)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 .... 990,000 $ 9,900 $ 994,007 $ (641,059) $ 362,848
Net loss for the year ......... -- -- -- (924,483) (924,483)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1995 .. 990,000 9,900 994,007 (1,565,542) (561,635)
Issuance of common stock in
initial public offering .... 1,000,000 10,000 4,730,290 -- 4,740,290
Other issuances of common stock 65,000 650 219,233 -- 219,883
Common stock no longer subject
to rescission ............. 57,750 578 195,240 -- 195,818
Net loss for the year ......... (2,011,254) (2,011,254)
----------- ----------- ----------- ----------- -----------
Balance at December 29, 1996 .. 2,112,750 $ 21,128 $ 6,138,770 $(3,576,796) $ 2,583,102
=========== =========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
CluckCorp International, Inc.
Statements of Cash Flows
Operating Activities
<TABLE>
<CAPTION>
Fiscal Years Ended
December 29, December 31,
1996 1995
----------- -----------
<S> <C> <C>
Operating Activities
Net loss for the year ...................................... $(2,011,254) $ (924,483)
Adjustments to reconcile net loss
to net cash used in operations:
Depreciation and amortization ......................... 94,109 73,879
Amortization of bridge note discount .................. 367,154 87,659
Loss on forfeited deposits ............................ -- 17,338
Changes in operating assets and liabilities:
Cash, restricted .................................. (20,000) --
Inventories ....................................... (3,614) (2,046)
Deferred financing costs .......................... 144,074 (142,429)
Other current assets .............................. (10,590) (40,000)
Accounts payable and accrued expenses ............. 103,925 133,037
----------- -----------
Net cash (used) by operating activities ........................ (1,336,196) (797,045)
Investing Activities
Purchases of property and equipment ........................ (1,059,654) (5,071)
Increase in deposits and other assets ...................... (151,197) (57,395)
----------- -----------
Net cash (used) by financing activities ........................ (1,210,851) (62,466)
Financing Activities
Net proceeds from sale of common stock and warrants ........ 4,960,173 --
Net proceeds from sale of common stock subject to rescission -- 195,818
Proceeds from issuance of bridge notes payable ............. 376,370 764,318
Proceeds from bank borrowings .............................. 200,000 --
Restricted cash for note payable ........................... (200,000) --
Repayments of stockholder advances ......................... 40,000 (16,889)
Repayments of bridge notes payable ......................... (1,684,500) --
----------- -----------
Net cash provided by financing activities ...................... 3,692,043 943,247
----------- -----------
Net increase in cash ........................................... 1,144,996 83,736
Cash at beginning of year ...................................... 126,447 42,711
----------- -----------
Cash at End of Year ............................................ $ 1,271,443 $ 126,447
=========== ===========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
CluckCorp International, Inc.
Notes to Financial Statements
December 29, 1996 and December 31, 1995
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization: CluckCorp International, Inc. ("CluckCorp" or the "Company") was
organized in the State of Texas on June 18, 1993, and is an operator and
developer of a quick service restaurant concept. The Company currently operates
three restaurants in San Antonio and one restaurant in Corpus Christi, Texas.
The restaurants provide high quality, quick service food featuring marinated
oak-roasted rotisserie chicken with a variety of homemade side dishes.
The Company incorporated two wholly-owned subsidiaries during 1995, Cluckers
Restaurants, Inc. and Harvest Restaurants, Inc., to act as franchisors for the
Company's restaurants. Neither subsidiary conducted operations during 1996.
Fiscal Year: In 1996, the Company adopted a 52/53 - week fiscal year ending on
the last Sunday in December. The fiscal year is divided into thirteen four-week
periods. The first quarter consists of four periods and each of the remaining
three quarters consist of three periods, with the first, second and third
quarters ending 16 weeks, 28 weeks and 40 weeks respectively, into the fiscal
year.
Cash and Cash Equivalents: The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents. At December 29, 1996, the Company had deposits of $218,795 in
a financial institution which exceeded the FDIC insured amount.
Inventories: Inventories are stated at the lower of cost (first-in, first-out
method) or market and consist primarily of restaurant food and paper.
Property and Equipment: Property and equipment are stated at cost. Depreciation
is provided using the straight-line method over the estimated useful lives of
the respective assets (generally seven years for furniture, fixtures and
equipment and 15 to 20 years for leasehold improvements), or applicable lease
terms, if less. Maintenance and repairs are charged to expense as incurred,
while improvements which increase the value of the property and extend the
useful lives are capitalized.
Intangible Property Rights: The Company obtained under an agreement with
Cluckers Wood Roasted Chicken, Inc. (CWRC), an unaffiliated Florida corporation,
an exclusive license to use all of CWRC's intangible property rights in the
State of Texas. Intangible property rights acquired from CWRC are stated at
original acquired cost and amortized over a ten year period. The Company
periodically assesses the valuation of the rights in light of projected
operating results and economic conditions and impairments are recognized when
the expected future undiscounted operating cash flows derived from such rights
are less than their carrying value. No impairments have been recognized to date.
Amortization expense of $39,950 is included in the accompanying statements of
operations for each of the last two fiscal years.
Deferred Offering and Financing Costs: Deferred offering costs are netted
against the equity offering to which they apply when the proceeds are received.
Deferred financing costs are amortized over the life of the respective notes
payable.
Revenue Recognition: Revenue from restaurant and product sales are recognized in
the period in which food and beverage products are sold. Revenue from
nonrefundable area development fees is recognized when all material services or
conditions relating to the area development sale have been substantially
performed or satisfied by the Company.
Preopening Costs: Preopening costs, which consist primarily of salaries and
other direct expenses relating to the set up, initial stocking, training, and
general management activities incurred prior to the opening of new stores, are
charged to expense as incurred.
Advertising Costs: Advertising costs of $133,366 and $35,820 during the fiscal
years ended December 29, 1996 and December 31, 1995, respectively, were charged
to expense as incurred.
F-6
<PAGE>
CluckCorp International, Inc.
Notes to Financial Statements
December 29, 1996 and December 31, 1995
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - Continued
Income Taxes: In accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes", deferred tax assets and liabilities are
recognized for temporary differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements. A valuation
allowance is provided against net deferred tax assets when realization during
the next fiscal year is uncertain.
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
reporting period. Actual results could differ from those estimates.
NOTE B - NOTES PAYABLE
At December 29, 1996, the Company had outstanding a $200,000 note payable to a
financial institution. The note, which is collateralized by a $200,000
certificate of deposit, bears interest at the rate of 6.50% and is payable in
monthly installments of interest only. The principal and accrued interest is due
at the maturity date of November 3, 1997.
At December 31, 1995, the Company had bridge notes payable outstanding of
$940,977, net of unamortized discount of $133,523. The notes were issued to
individuals in four separate private offerings from May, 1995 through March,
1996, and were paid off in full with the proceeds from the Company's initial
public offering completed in July 1996. During the fiscal years ended in 1996
and 1995, $367,153 and $87,659 of discount applicable to the bridge notes was
amortized to interest expense.
The Company's weighted-average interest rate on it short-term borrowings, before
amortization of debt discount, was 9. 8% in 1996 and 10.5% in 1995. After
considering amortization of debt discount, the weighted-average interest rate
was 50.6% in 1996 and 28.1% in 1995.
NOTE C - SUPPLEMENTAL FINANCIAL STATEMENT DATA
Property and equipment consists of the following:
December 29, December 31,
1996 1995
----------- -----------
Land ............................ $ 160,000 $ --
Buildings ....................... 240,400 --
Furniture, fixtures and equipment 365,719 78,150
Leasehold improvements .......... 487,515 115,830
----------- -----------
1,253,634 193,980
Less accumulated depreciation ... (97,272) (43,112)
----------- -----------
Property and equipment, net . $ 1,156,362 $ 150,868
=========== ===========
F-7
<PAGE>
CluckCorp International, Inc.
Notes to Financial Statements
December 29, 1996 and December 31, 1995
NOTE C - SUPPLEMENTAL FINANCIAL STATEMENT DATA - Continued
Accrued liabilities consists of the following at:
December 29, December 31,
1996 1995
-------- --------
Accrued payroll and related liabilities $ 21,416 $ 6,874
Accrued interest payable .............. -- 51,758
Accrued reporting costs ............... 94,900 --
Accrued property lease payments ....... 100,000 29,500
Other accrued liabilities ............. 4,090 911
-------- --------
$220,406 $ 89,043
======== ========
NOTE D - OPERATING LEASES
The Company currently conducts all its operations and maintains its
administrative offices in leased facilities. The Company also has entered into
lease agreements for facilities in San Antonio, Texas which the Company intends
to develop as restaurants in the future. Lease terms generally are ten years
with two or three five-year renewal options. Most of the leases contain
escalation clauses and require payment of common area maintenance charges or
taxes, insurance and other expenses. The Company also leases certain equipment
under non-cancelable operating leases having terms expiring at various dates
through 2001. Rental expense under operating lease agreements, including common
area maintenance charges, was $156,393 and $120,262 for the periods ended
December 29, 1996 and December 31, 1995, respectively.
Future minimum lease payments which are required under operating leases that
have initial or remaining non-cancelable lease terms in excess of one year are
as follows:
Years Ended December: Amount
--------------------- ------
1997 $ 297,710
1998 283,285
1999 258,331
2000 257,121
2001 256,435
Thereafter 1,592,780
------------
Total future minimum payments $ 2,945,662
============
F-8
<PAGE>
CluckCorp International, Inc.
Notes to Financial Statements
December 29, 1996 and December 31, 1995
NOTE E - FEDERAL INCOME TAXES
Deferred income taxes resulted from the following temporary differences and loss
carryforwards at:
December 29, December 31,
1996 1995
----------- -----------
Deferred tax asset - loss carryforwards . $ 3,400,000 $ 1,565,542
=========== ===========
Net deferred tax asset at expected rates $ 1,156,000 $ 532,284
Less valuation allowance ................ (1,156,000) (532,284)
----------- -----------
Deferred tax asset allowed $ -- $ --
=========== ===========
The Company has not recorded any income tax expense (benefit) since its
inception. The Company's tax operating loss carryforwards are available for
utilization against taxable income and expire in various amounts from 2008
through 2011.
NOTE F - STOCKHOLDERS' EQUITY
Initial Public Offering: In July 1996, the Company sold 1,000,000 shares of
common stock and 2,300,000 warrants to purchase common stock in an initial
public offering of its securities. The Company realized net proceeds of
$4,740,290 from the offering based upon the sale of the common stock at $5.50
per share and the warrants at $.125 per warrant.
Reverse Common Stock Split: On July 17, 1995, the Board of Directors authorized
a five-for-two reverse common stock split. All references to number of shares
and to stock warrants as well as per share information have been adjusted to
reflect the stock split on a retroactive basis.
Preferred Stock: The Company has authorized 5,000,000 shares of $1 par value
preferred stock, none of which is issued or outstanding. Dividend rates,
conversion rights, redemption and voting rights and liquidation rates have not
been set by the Board of Directors. See Note K.
Common Stock Subject to Rescission: At December 31, 1995, the Company had
classified 118,750 shares of common stock issued between August 1995 and March
1996 in connection with the sale of $1,197,500 of bridge notes as temporary
equity due to the uncertainty as to whether the private placement exemption
could be claimed since these securities were sold after the filing of the
Registration Statement. Without the exemption, the transactions could be
considered integrated with the offering, subjecting the Company to potential
liability for sales of unregistered securities. All bridge note holders were
repaid their investment upon the closing of the initial public offering in July
1996. However, the possibility exists the Company could be liable for a claim by
the bridge lenders in connection with the issuance of the 118,750 shares of
common stock to them at a rate of $3.83 per share (or an aggregate of $454,812),
which is the per share value, before offering costs, attributed to the common
stock. Management considers the likelihood of a claim being filed to be remote
and has reclassified these shares as equity at December 29, 1996.
Stock Option Plan: In July 1994, the Company adopted a stock option plan which
provides for the granting of either incentive stock options or non-qualified
stock options. Options can be issued to officers, employees, directors and
outside consultants; however, incentive stock options are issuable only to
eligible officers and employees. The Company has reserved a total of 250,000
shares of common stock for the plan.
F-9
<PAGE>
CluckCorp International, Inc.
Notes to Financial Statements
December 29, 1996 and December 31, 1995
NOTE F - STOCKHOLDERS' EQUITY - Continued
The Company applies APB Opinion 25 and related interpretations in accounting for
this plan. The Company considers the options granted to be for future services
and accordingly, no compensation cost would have been recognized in 1996 or 1995
had the Company applied the provisions of SFAS Number 123.
A summary of the status of the Company's stock option plan as of December 29,
1996 and December 31, 1995, and changes during the fiscal years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1996 1995
------------------------------ ----------------------------
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding options at beginning of year 80,000 $ 2.50 -- $ --
Granted 206,000 5.94 80,000 2.50
Exercised -- -- -- --
Forfeited (80,000) 2.50 -- --
-------- -------
Outstanding options at end of year 206,000 5.94 80,000 2.50
======== =======
Options exercisable at year end -- 16,000
======== =======
Weighted-average fair value of
options granted during the year $ 1.62 --
</TABLE>
The following table summarizes information about the options outstanding at
December 29, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------ ----------------------------
Number Weighted-Average Number
Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Price at 12/29/96 Contractual Life Exercise Price at 12/29/96 Exercise Price
- -------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 3.85 6,000 4.6 years $ 3.85 - $ 3.85
6.00 200,000 4.8 years 6.00 - 6.00
-------- ------------
206,000 4.8 years 5.94 - 5.92
======== ============
</TABLE>
F-10
<PAGE>
CluckCorp International, Inc.
Notes to Financial Statements
December 29, 1996 and December 31, 1995
NOTE F - STOCKHOLDERS' EQUITY - Continued
Warrants: The following is a summary of warrant activity, after giving effect to
the July 17, 1995 reverse stock split:
<TABLE>
<CAPTION>
Warrants/ Exercise
Issue Date Purpose Options Price Expiration
- ---------- ------- ------- ----- ----------
<S> <C> <C> <C> <C>
April 1994 Private sale of common stock 100,000 $ 2.50 December 31, 1997
August 1994 Private sale of common stock 30,480 2.50 December 31, 1997
December 1994 Bridge notes 35,600 2.50 December 31, 1997
May 1995 Bridge notes 159,200 2.50 December 31, 1997
July 1996 Initial public offering 2,300,000 4.00 July 9, 2001
July 1996 Initial public offering 100,000 6.60 July 9, 2001
July 1996 Initial public offering 200,000 4.15 July 9, 2001
----------
Outstanding at December 29, 1996 2,925,280
=========
</TABLE>
NOTE G - RELATED PARTY TRANSACTIONS
In March 1995, the Company entered into an area development agreement with a
stockholder of the Company for the exclusive license to develop up to ten
restaurants in Singapore over a 20-year period. The fee under the area
development agreement was $50,000, of which the Company had received $20,000. A
non-interest bearing unsecured promissory note initially due March 30, 1996 was
extended to September 30, 1996. In December 1996, the area development agreement
was modified to reduce the number of restaurants that can be developed from ten
to two and reduce the fee from $50,000 to $10,000. The stockholder was refunded
$10,000 and the balance of the note was charged to expense.
On August 10, 1995, the Company entered into a five year employment agreement
with its Chairman and Chief Executive Officer. Annual compensation is fixed at
the larger of $75,000 or 20% of all franchise and area development fees paid to
the Company, together with 5% of all royalty fees received by the Company under
any franchise agreements and area development agreements executed during the
Chairman's employment. In September 1996, the employment agreement was amended
to increase his salary from $75,000 to $90,000 per year.
During 1996, the Company paid its Chairman and Chief Executive Officer $29,800
for certain fixed assets used in the operations of the Company.
The Company has a $20,000 certificate of deposit which collateralizes a personal
loan for an officer of the Company.
NOTE H - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The Company paid interest of $139,423 during the fiscal year ended December 29,
1996. No interest was paid during the fiscal year ended December 31, 1995, and
no federal or state taxes were paid during fiscal years ended December 31, 1996
and 1995.
F-11
<PAGE>
CluckCorp International, Inc.
Notes to Financial Statements
December 29, 1996 and December 31, 1995
NOTE I - LOSS PER SHARE
Loss per common share is computed by dividing net loss by the weighted average
number of shares outstanding during each period plus, when their effect is
dilutive, common stock equivalents consisting of certain shares subject to stock
options and warrants. In 1996, the inclusion of additional shares assuming the
exercise of the stock options and warrants would have been antidilutive.
Loss per common share is calculated as follows:
Fiscal
Year Ended
December 29, December 31,
1996 1995
----------- ------------
Net loss ....................................... $(2,011,254) $ (924,483)
=========== ============
Weighted average number of shares outstanding .. 1,553,824 1,001,287
Common stock equivalents due to assumed exercise
of options and warrants ..................... -- 223,244
----------- ------------
1,553,824 1,224,531
Net loss per common share ...................... $ (1.29) $ (.75)
=========== ============
NOTE J - FAIR VALUE OF FINANCIAL INSTRUMENTS
The only financial instruments of the Company at December 29, 1996, are cash and
notes payable. The carrying amount of the financial instruments approximate fair
value.
NOTE K - SUBSEQUENT EVENTS
In January 1997, warrants to purchase 253,280 shares of common stock were
exercised, resulting in proceeds to the Company of $633,200.
In February, 1997, the Company filed a Registration Statement on Form SB-2
covering the sale of 500,000 shares of the Company's Convertible Redeemable
Preferred Stock. The stock is being offered at $10 per share and is convertible
at the option of the holder into common stock at any time after one year from
the effecitve date of the offering, at a to be determined conversion price.
There is no assurance that the Registration Statement will be declared effective
by the Securities and Exchange Commission, or that the Company will be
successful in selling the Preferred Stock.
F-12
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on
accounting or financial disclosure.
23
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers
The following table sets forth certain information regarding the Company's
executive officers and directors:
<TABLE>
<CAPTION>
Officer or
Name Age Office Director Since
---- --- ------ --------------
<S> <C> <C> <C>
William J. Gallagher(1)(2) 57 Chairman of the Board of June 1993
Directors and Chief
Executive Officer
Larry F. Harris 38 President, Chief Operating October 1996
Officer and Director
Sam Bell Steves Rosser 33 Vice President - Development, June 1993
Treasurer and Director
Michael M. Hogan(1)(2) 48 Director August 1996
Theodore M. Heesch(1)(2) 60 Director August 1996
Joseph Fazzone 36 Chief Financial Officer January 1997
</TABLE>
(1) Member of the Compensation Committee. (2) Member of the Audit Committee.
On August 12, 1996, Jeffrey M. Morehouse resigned as a director and on
November 25, 1996, Henry H. Salzarulo resigned as a director. On December 9,
1996, D.W. Gibbs resigned as Chief Executive Officer and a director. On December
9, 1996, William J. Gallagher, the Company's Chairman, assumed the duties of
Chief Executive Officer and in the same date Larry F. Harris, the Company's
Executive Vice President, was appointed President and a director.
Directors hold office for a period of one year from their election at the
annual meeting of stockholders and until their successors are duly elected and
qualified. Officers of the Company are elected by, and serve at the discretion
of, the Board of Directors. None of the above individuals has any family
relationship with any other except Mr. Rosser who is Mr. Gallagher's son-in-law.
Directors not employed by the Company receive $750 each for attending Board of
Directors' meetings and are reimbursed for out-of-pocket expenses.
24
<PAGE>
Background
The following is a summary of the business experience of each executive
officer and director of the Company for at least the last five years:
William J. Gallagher has been President of Jagbanc Capital Ltd., a merchant
bank headquartered in San Antonio, Texas since September 1994. From February
1991 to September 1994, Mr. Gallagher was the founder and then Chairman and CEO
of WaterMarc Food Management, Inc., which operated 32 Marcos Mexican
Restaurants, Billy Blues Barbecue Grills, Longhorn Cafes and BBQ Pete's
restaurants and sold Chris' Pitts and Billy Blues Bar-B-Q sauce. From February
1990 until September 1992, Mr. Gallagher was a Vice President at Kemper
Securities. Prior to 1990, Mr. Gallagher founded or co-founded several companies
including Sunny's National Stores (a 150-unit convenience store chain in Texas),
American Drive-Inn (an 18-unit drive-in restaurant chain in Houston, Texas) and
the Guadalupe Valley Winery in New Braunfels, Texas. Mr. Gallagher also served
as a director of CWRC from June 1993 to November 1994. He is the Company's
Chairman and Chief Executive Officer for which he devotes approximately 90% of
his time to the Company's affairs.
Larry F. Harris joined the Company in October 1996 as its Executive Vice
President and Chief Operating Officer and was appointed its President in
December 1996. From December 1994 to September 1996 he was Chief Operating
Officer for a Monterey Pasta Company franchisee. From June 1994 to December
1994, he was director of operations for a Boston Market area developer and from
1984 to 1992, he was employed by Pizza Hut, Inc. in various capacities including
National Director of Operations for Mexico.
Sam Bell Steves Rosser joined the Company in June 1993, as its president
and assumed the duties of Vice President Development in March 1995. He was
employed by Olive Garden restaurants as a member of the store operating staff
from March 1992 until May 1993. From October 1988 until December 1991, he was
employed by Dwight L. Lieb, a real estate developer, as a commercial property
manager and leasing agent.
Michael M. Hogan received his BBA degree in accounting from the University
of Texas at Austin in 1972 and has been engaged in the private practice of
accounting since 1975. His practice emphasizes restaurant formation, operation
and financing. From 1987 to 1989, he was a co-founder and Chief Financial
Officer of the 18 unit American Drive-Inns restaurants in Houston, Texas and in
1990 was one of the founders of two Tejas Grill restaurants in Austin, Texas.
Mr. Hogan has provided consulting services to the Company from time to time
amounting to less than $5,000 for the year ended December 29, 1996.
Theodore M. Heesch has been a registered architect specializing in
restaurant and hotel design since 1967. From 1981 to 1987, he was employed by
McFaddin Kendrick, Inc., an entertainment club developer, as Executive Vice
President. In 1988, Mr. Heesch formed TMHI to offer consulting services to the
hospitality industry, specializing in the design and development of food and
beverage facilities. In June 1994, Mr. Heesch became Senior Vice President of
Development for McFaddin Partners, a restaurant developer.
25
<PAGE>
Joseph Fazzone has provided accounting and financial consulting services in
San Antonio, Texas as a sole practitioner since November 1994. From December
1991 to November 1994, he served as Chief Financial Officer of WaterMarc Food
Management, Inc., a restaurant operator and franchisor founded by Mr. Gallagher.
From 1990 to 1991, he served as Corporate Controller of TI-IN Network, Inc., a
San Antonio based educational satellite broadcasting network. From 1989 to 1990,
he served as Manager-Corporate Planning and Financial Analysis of Intelogic
Trace, Inc., a nationwide computer service provider. From 1984 to 1989, Mr.
Fazzone served as an Audit Manager with the San Antonio office of Ernst & Young.
Mr. Fazzone devotes approximately 60% of his time to the Company's affairs. Mr.
Fazzone is a certified public accountant, having received a B.B.A. degree in
accounting from Southwest Texas State University and an M.B.A. degree from the
University of Texas at San Antonio.
Significant Employees
Manuel P. Ortiz has been the Company's Director of Operations since
November 1996. He managed and co-owned Country Fair restaurant from 1990 to
1992, and was managing partner of a Boston Market restaurant from 1992 to 1994.
From 1994 until he joined the Company in November 1996, he was the General
Manager in Texas for Red Robin International.
Richard N. Trimble has been the Company's Vice President of Operations
since May 1995 and its Director of Franchise Operations since November 1996. Mr.
Trimble joined Church's Fried Chicken ("Church's") in 1971, and was its District
Manager for East Texas from 1973 to 1982 and its Director of Operations for St.
Louis, Missouri from 1982 to 1986. From 1986 to 1989, Mr. Trimble was Regional
Vice President of Church's for southeast U.S. operations, directing the
operations of approximately 250 restaurants. From February 1989 to December
1993, he was a Church's franchisee in East Texas, operating two restaurants and
from December 1993 until he joined the Company in May 1995, he was an
independent restaurant consultant.
26
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
paid to the Company's executive officer for the years ended December 29, 1996
and December 31, 1995 and 1994.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Long-Term
Compensation Compensation
Name and Other Annual Awards All Other
Principal Position Year Salary Bonus Compensation Options Compensation
- ------------------ ---- ------ ----- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Sam Bell Steves Rosser 1995 $49,500 $0 $0 $0 $0
Vice President,
Treasurer and 1994 49,800 0 0 0 0
Director
D.W. Gibbs 1996 73,214 0 0 0 0
Chief Executive 1995 30,750 0 0 0 0
Officer, President
and Director
William J. Gallagher 1996 79,209 0 3,640 0 0
Chairman and 1995 59,211 0 0 0 0
Chief Executive
Officer
</TABLE>
On March 17, 1995, the Company entered into an employment agreement through
December 31, 1995 and monthly thereafter, with D.W. Gibbs, the Company's former
Chief Executive Officer and a director, pursuant to which the Company agreed to
pay Mr. Gibbs $3,000 per month through December 31, 1995, and $6,250 per month
thereafter and issue to him options to purchase 80,000 shares of the Company's
Common Stock at $2.50 per share exercisable until March 31, 2000. The stock
options vest at the rate of options to purchase 16,000 shares per year
commencing with the year ending March 31, 1996. Mr. Gibbs resigned on December
9, 1996 at which time he earned options to purchase a total of 16,000 shares.
Mr. Gibbs advised the Company that he might seek legal counsel if the Company
and he could not negotiate separation compensation. Mr. Gibbs did not have an
employment agreement with the Company at the time of his resignation and
accordingly, the Company did not negotiate separation compensation.
27
<PAGE>
In August 1995, the Company entered into a five-year employment agreement
with William J. Gallagher, its Chairman, to act as its franchise sales director
based upon a salary equal to the greater of $75,000 per year or 20% of all
franchise and area development fees paid to the Company, together with 5% of all
royalty fees received by the Company under any franchise agreements and area
development agreements which were executed during the time of Mr. Gallagher's
employment agreement. Mr. Gallagher was appointed Chief Executive Officer of the
Company in December 1996 and continues to be responsible for franchise and area
development sales. In September 1996, Mr. Gallagher's employment agreement was
amended to increase his base salary from $75,000 to $90,000 per year.
Larry F. Harris, the Company's President, is paid a base salary of $90,000
per year and is entitled to incentive bonuses aggregating up to an additional
$90,000 computed under a formula based upon the number of Company operated
Restaurants in operation and gross revenues in connection with the Restaurants.
Stock Option Plan
In July 1994, the Company adopted its 1994 Stock Option Plan (the "Plan"),
which provides for the grant to employees, officers, directors and consultants
of options to purchase up to 250,000 shares of Common Stock, consisting of both
"incentive stock options" within the meaning of Section 422A of the United
States Internal Revenue Code of 1986 (the "Code") and "non-qualified" options.
Incentive stock options are issuable only to employees of the Company, while
non-qualified options may be issued to non-employee directors, consultants and
others, as well as to employees of the Company.
The Plan is administered by the Board of Directors, which determines those
individuals who shall receive options, the time period during which the options
may be partially or fully exercised, the number of shares of Common Stock that
may be purchased under each option and the option price.
The per share exercise price of the Common Stock subject to an incentive
stock option may not be less than the fair market value of the Common Stock on
the date the option is granted. The per share exercise price of the Common Stock
subject to a non-qualified option is established by the Board of Directors. The
aggregate fair market value (determined as of the date the option is granted) of
the Common Stock that any employee may purchase in any calendar year pursuant to
the exercise of incentive stock options may not exceed $100,000. No person who
owns, directly or indirectly, at the time of the granting of an incentive stock
option to him, more than 10% of the total combined voting power of all classes
of stock of the Company is eligible to receive any incentive stock options under
the Plan unless the option price is at least 110% of the fair market value of
the Common Stock subject to the option, determined on the date of grant.
Non-qualified options are not subject to these limitations.
No incentive stock option may be transferred by an optionee other than by
will or the laws of descent and distribution, and during the lifetime of an
optionee, the option will be exercisable only by him or her. In the event of
termination of employment other than by death or disability, the optionee will
have three months after such termination during which he or she can exercise the
option. Upon termination of employment of an optionee by reason of death or
permanent total disability, his or her option remains exercisable for one year
thereafter to the extent it was exercisable on the date of such termination. No
similar limitation applies to non-qualified options.
28
<PAGE>
Options under the Plan must be granted within ten years from the effective
date of the Plan. The incentive stock options granted under the Plan cannot be
exercised more than ten years from the date of grant except that incentive stock
options issued to 10% or greater stockholders are limited to five year terms.
All options granted under the Plan provide for the payment of the exercise price
in cash or by delivery to the Company of shares of Common Stock already owned by
the optionee having a fair market value equal to the exercise price of the
options being exercised, or by a combination of such methods of payment.
Therefore, an optionee may be able to tender shares of Common Stock to purchase
additional shares of Common Stock and may theoretically exercise all of his
stock options with no additional investment other than his original shares. Any
unexercised options that expire or that terminate upon an optionee ceasing to be
an officer, director or an employee of the Company become available once again
for issuance.
As of the date of this Report, options to purchase 237,000 shares have been
granted under the Plan, of which 215,000 options have been issued to the
Company's executive officers and directors, as follows. None of such options
have vested or have been exercised.
<TABLE>
<CAPTION>
Number of Exercise
Name Options Granted Price Expiration Date
---- --------------- ----- ---------------
<S> <C> <C> <C>
William J. Gallagher 100,000 $6.00 September 2001
Larry F. Harris 40,000 6.00 September 2001
Theodore M. Heesch 25,000 6.00 September 2001
Michael M. Hogan 25,000 6.00 September 2001
Joseph Fazzone 25,000 6.00 January 2002
-------
Totals 215,000
</TABLE>
29
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of December 29, 1996
concerning stock ownership of the Company's Common Stock by all persons known to
the Company to own beneficially 5% or more of the outstanding shares of Common
Stock, by each director and by all directors and officers as a group. There are
no shares of Preferred Stock outstanding.
Except as otherwise noted, the persons named in the table own the shares
beneficially and of record and have sole voting and investment power with
respect to all shares of Common Stock shown as owned by them, subject to
community property laws, where applicable. Each stockholder's address is in care
of the Company at 1250 N.E. Loop 410, Suite 335, San Antonio, Texas 78209. The
table also reflects all shares of Common Stock which each individual has the
right to acquire within 60 days from the date hereof upon exercise of stock
options or common stock purchase warrants.
Number of
Shares of
Common
Stock Owned Percent of
of Record Common Stock
Name and Beneficially Owned
---- ---------------- -----
William J. Gallagher(1)(2) ....................... 146,667 6.6%
Larry F. Harris(3) ............................... -0- --
Sam Bell Steves Rosser(1) ........................ 66,666 3.2%
Michael M. Hogan(4) .............................. 265,000 12.4%
Theodore M. Heesch(5) ............................ 25,000 1.2%
JEB Investment Company(6) ........................ 240,000 11.4%
All officers and directors ....................... 478,333 22.2%
as a group (6 persons)(2)(3)(4)(5)(6)
(1) Messrs. Gallagher and Rosser may be deemed to be "promoters" and "founders"
of the Company as those terms are defined under the Securities Act of 1933,
as amended, and the rules and regulations promulgated thereunder.
(2) Includes stock options to purchase up to 100,000 shares of Common Stock at
$6.00 per share which vest in July 1997.
(3) Mr. Harris has been granted options to purchase 40,000 shares at $6.00 per
share, which vest in August 1997.
(4) Represents 240,000 shares owned by JEB Investment Company of which Mr.
Hogan is the President and a principal stockholder, and stock options to
purchase up to 25,000 shares of Common Stock at $6.00 per share.
(5) Represents stock options to purchase up to 25,000 shares of Common Stock at
$6.00 per share which vest in July 1997.
(6) Michael M. Hogan, a director of the Company, is the President and a
principal (and the controlling) stockholder of JEB Investment Company. The
JEB Investment Company shares are currently the subject of a foreclosure
action by WaterMarc Food Management, Inc. See "Item 12."
30
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
William J. Gallagher, the Company's Chairman and Chief Executive Officer,
along with certain other stockholders and directors of the Company, are or were
stockholders, officers and/or directors of WaterMarc Food Management, Inc.
("WaterMarc") during the time the transactions described in the next following
paragraph occurred. Mr. Gallagher continues to be a stockholder of WaterMarc,
although not a principal stockholder. The Company believes that the transactions
described below were fair, reasonable and consistent with the terms of
transactions which the Company could have entered into with nonaffiliated third
parties. All future transactions with affiliates will be approved by a majority
of the Company's disinterested directors.
In June 1993, WaterMarc assigned to the Company all of the development
rights it had obtained for Cluckers restaurants at an original cost to WaterMarc
of 47,000 shares of its common stock. On June 18, 1993, these shares were
tendered by WaterMarc to Cluckers Wood Roasted Chicken, Inc., ("CWRC") the
Cluckers franchisor, and valued at $8.50 per WaterMarc share, or a total of
$399,500. The development rights consisted of Cluckers franchise rights in
Houston, Galveston, Dallas and San Antonio, Texas, and area development rights
in Mexico and Central America. In consideration of this assignment, the Company
issued to WaterMarc a convertible promissory note ("Note") due June 30, 1998 in
the amount of $800,000 payable at the option of the Company in whole, or in
part, in cash or Common Stock of the Company. The Note bore interest at 8% per
annum, and was secured by all the assets of the Company and the stockholdings of
Messrs. Gallagher, Coleman and Rosser. The substantial increase in the Note
above the $399,500 of consideration paid by WaterMarc for the area development
rights was attributable to the rights to the Mexico and Central America markets,
which WaterMarc and the Company believed to have more value and market
development potential than had been assigned by CWRC. During 1994, the Company
repaid $315,000 of the Note and the Company and WaterMarc agreed to convert the
remaining portion of the Note and other advances to the Company from WaterMarc
totalling approximately $42,000, and $63,430 of accrued interest, into 240,000
shares of the Company's Common Stock, (valued at $2.50 per share by the
Company's Board of Directors), which shares were subsequently sold by WaterMarc
to JEB Investment Company ("JEB") for $1,800,000 payable by JEB in the form of a
promissory note secured by the 240,000 shares, bearing interest at 9% per annum
and payable June 30, 1996. In September 1996, WaterMarc reduced the principal
amount of the promissory note due to it from JEB to $600,000. In December 1996,
WaterMarc commenced foreclosure proceedings upon the 240,000 shares held by JEB
and has advised the Company it intends to sell the shares immediately upon
obtaining title to them. Michael M. Hogan, a director of the Company, is the
President and a principal (and the controlling) stockholder of JEB.
In June 1993, the Company issued 200,000 shares of its Common Stock to
Messrs. Gallagher, Coleman and Rosser, officers and directors of the Company,
for services rendered valued at $5,000, or $.025 per share which was the par
value of the Common Stock at the time of issuance. During the same month, the
Company issued 100,000 shares of its Common Stock to two investors for services
rendered valued at $12,500 or $.125 per share, an increase of $.10 per share
which was acceptable to the two investors because they were not founders of the
Company and provided services rather than cash.
31
<PAGE>
In August 1993, the Company sold 240,000 shares of its Common Stock to a
seven member investor group which included Bruce T. McGill, Henry H. Salzarulo,
and Jeffrey M. Morehouse, then directors of the Company, for $300,000 or $1.25
per share in order to finance the development of the Company's first Cluckers
restaurant in San Antonio, Texas.
In April 1994, the Company sold 100,000 units of its securities at $2.50
per unit to a seven member investor group which included Henry H. Salzarulo and
Jeffrey M. Morehouse, then directors of the Company. Each unit consisted of one
share of Common Stock and a warrant to purchase an additional share at $2.50 per
share at any time until April 1996. In March 1996, the expiration date of the
warrant was extended to December 1997.
In August 1994, the Company sold 110,000 shares of its Common Stock at
$2.50 per share to an investor group none of whom were officers, directors or
principal stockholders of the Company.
The sales of Common Stock described in the three prior paragraphs reflect
an increase in price from $1.25 to $2.50 per share and were the result of
negotiations between the Company and the named investors. The Company believes
it was able to realize a higher price per share in later transactions because
the Company's business had matured and the perceived risk associated with the
business had lessened.
In March 1995, the Company entered into an employment agreement with D.W.
Gibbs, its then Chief Executive Officer and a director and in August 1995, the
Company entered into an employment agreement with Mr. Gallagher, the Chairman
and Chief Executive Officer of the Company which was subsequently amended in
September 1996. See "Management-Executive Compensation."
In March 1995, the Company executed an agreement with Bruce T. McGill, then
a director of the Company, to develop up to ten Cluckers restaurants in
Singapore over a 20-year period. Mr. McGill agreed to pay a $50,000 license fee
(including $20,000 in cash and a promissory note for $30,000), a 5% royalty and
a 4% advertising fee on gross revenues generated from the Cluckers restaurants.
The license was converted to apply to Harvest Rotisserie restaurants in March
1996. In October 1996, the Company refunded $10,000 of the deposit, cancelled
the $30,000 promissory note and reduced the number of Restaurants under the
agreement from ten Restaurants to two Restaurants. Under the agreement, Mr.
McGill also has a right of first refusal until March 30, 1997, to match the
terms of any license the Company agrees to sell to develop Harvest Rotisserie
restaurants in Malaysia.
32
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
Exhibit No. Title
2.01 Articles of Incorporation of the Registrant, as amended(1)
2.02 Bylaws of the Registrant(1)
2.03 Articles of Incorporation of Harvest Restaurants, Inc.(1)
2.04 Bylaws of Harvest Restaurants, Inc.(1)
2.05 Articles of Incorporation of Cluckers Restaurants, Inc.(1)
2.06 Bylaws of Cluckers Restaurants, Inc.(1)
10.01 Incentive Stock Option Plan(1)
10.02 Settlement Agreement with Cluckers Wood Roasted Chicken,
Inc.(1)
10.12 Uniform Franchise Offering Circular (Cluckers)(1)
10.13 Form of Franchise Agreement (Cluckers)(1)
10.14 Form of Area Development Agreement (Cluckers)(1)
10.15 Employment Agreement with Mr. Gallagher(1)
10.16 Employment Agreement with Mr. Gibbs(1)
10.17 Area Development Agreement with Mr. McGill(1)
10.20 Uniform Franchise Offering Circular (Harvest Rotisserie)(1)
10.21 Form of Area Development Agreement (Harvest Rotisserie)(1)
10.22 Form of Franchise Agreement (Harvest Rotisserie)(1)
10.23 License Agreement(1)
10.24 License Agreement(1)
33
<PAGE>
34
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has duly caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized, in San Antonio, Texas, on March 26, 1997.
CLUCKCORP INTERNATIONAL, INC.
By: /s/ William J. Gallagher
----------------------------
William J. Gallagher
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Report has been signed below by the following persons on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ William J. Gallagher Chairman of the Board of March 26, 1997
- ------------------------------------ Directors and Chief Executive ----------------
William J. Gallagher Officer
/s/ Larry F. Harris President and Director March 26, 1997
- ------------------------------------ ----------------
Larry F. Harris
/s/ Sam Bell Steves Rosser Vice President - Development, March 26, 1997
- ------------------------------------ Treasurer and Director ----------------
Sam Bell Steves Rosser
/s/ Michael M. Hogan Director March 26, 1997
- ------------------------------------ ----------------
Michael M. Hogan
/s/ Theodore M. Heesch Director March 26, 1997
- ------------------------------------ ----------------
Theodore M. Heesch
/s/ Joseph Fazzone Chief Financial Officer and March 26, 1997
- ------------------------------------ Principal Accounting Officer ----------------
Joseph Fazzone
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-END> DEC-29-1996
<EXCHANGE-RATE> 1.00
<CASH> 1,491,443
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 8,658
<CURRENT-ASSETS> 1,510,691
<PP&E> 1,253,634
<DEPRECIATION> 97,272
<TOTAL-ASSETS> 3,137,712
<CURRENT-LIABILITIES> 554,610
<BONDS> 0
0
0
<COMMON> 21,128
<OTHER-SE> 2,561,974
<TOTAL-LIABILITY-AND-EQUITY> 3,137,712
<SALES> 263,892
<TOTAL-REVENUES> 263,892
<CGS> 122,530
<TOTAL-COSTS> 380,336
<OTHER-EXPENSES> 131,074
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 454,818
<INCOME-PRETAX> (2,011,254)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,011,254)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,011,254)
<EPS-PRIMARY> (1.29)
<EPS-DILUTED> (1.29)
</TABLE>
