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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 27, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 33-14051
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KOO KOO ROO ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0197361
(Incorporated in) (I.R.S. Employer
Identification No.)
18831 Von Karman Avenue, Irvine, CA 92612
(Address of principal executive offices)
Telephone: (949) 757-7900
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value.
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Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to the filing
requirements for at least the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [_]
The aggregate market value of the registrant's common stock held by non-
affiliates of the registrant as of March 19, 1999 was approximately $36.6
million. All directors, officers and more than 10% stockholders of registrant
are deemed affiliates of registrant for the purpose of calculating such
aggregate market value. The registrant, however, does not represent that such
persons, or any of them, would be deemed "affiliates" of the registrant for
any other purpose under the Securities Exchange Act of 1934 or the Securities
Act of 1933.
As of March 19, 1999, the registrant had issued and outstanding 180,380,513
shares of common stock, $.01 par value per share.
Documents Incorporated by Reference
Notice of 1999 Annual Meeting and Proxy Statement (Part III of Form 10-K)
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KOO KOO ROO ENTERPRISES, INC.
PART I
Item 1. BUSINESS
Background
Koo Koo Roo Enterprises, Inc., formerly known as Family Restaurants, Inc.
(together with its subsidiaries, the "Company"), was incorporated in Delaware
in 1986. The Company is primarily engaged in the operation of restaurants in
the full-service and fast-casual segments. Information relating to periods
ending prior to October 30, 1998 included in this report relates to the
historical operations of Family Restaurants, Inc. and, except as otherwise
indicated, does not reflect the operations of Koo Koo Roo, Inc., a Delaware
corporation ("KKR"), which the Company acquired on October 30, 1998. At
December 27, 1998, the Company operated 314 restaurants in 28 states,
approximately 65% of which are located in California, Ohio, Pennsylvania,
Indiana and Michigan, and franchised and licensed 23 restaurants outside the
United States.
Recent Merger
On October 30, 1998, the Company, FRI-Sub, Inc. ("Merger Sub"), an indirect
wholly-owned subsidiary of the Company, and KKR consummated a merger (the
"Merger"), pursuant to which Merger Sub was merged with and into KKR, with KKR
as the surviving corporation. As a result of the Merger, each outstanding
share of common stock of KKR was converted into the right to receive one share
of common stock of the Company (the "Company Common Stock"). Immediately prior
to the Merger, a stock dividend was declared pursuant to which approximately
121.96 shares of Company Common Stock were distributed for each share of
Company Common Stock outstanding. Prior to the Merger, the Company provided a
$3 million loan (the "Bridge Loan") to a subsidiary of KKR, which was repaid
after completion of the Merger. Additionally, in connection with the Merger,
FRI-MRD Corporation, a wholly owned subsidiary of the Company ("FRI-MRD"),
issued $24 million aggregate face amount of new senior secured discount notes
(the "New MRD Notes") for net proceeds of $21.7 million, and the Company
expanded the Foothill Credit Facility (as defined below) by an additional
$20 million. The proceeds from the sale of the New MRD Notes were used to
acquire all of the outstanding capital stock of The Hamlet Group, Inc.
("Hamlet") from KKR immediately prior to the consummation of the Merger (the
"Hamlet Acquisition"). The Merger and the Hamlet Acquisition were accounted
for as a purchase. Accordingly, the results of operations and financial
position of KKR (including Hamlet) were combined with the results of
operations and financial position of the Company's operations from October 30,
1998 forward.
The Company believes that, since the completion of the Merger, confusion
between the name of the Company, its KKR subsidiary and the Koo Koo Roo
restaurant concept has led to misunderstandings within the restaurant industry
and among the Company's stockholders and vendors. Accordingly, the Company is
considering changing the name of the Company to better convey the Company's
position as a multi-brand restaurant operating company.
Other Historical Events
On May 23, 1996, the Company completed the sale of its family restaurant
division, which operated full-service family-style restaurants primarily under
the Coco's and Carrows names (the "Family Restaurant Division"), in exchange
for $125 million cash, $150 million principal amount of 12 1/2% Senior Notes
due in 2004 (the "FRD Notes") and the assumption of $31.5 million of long-term
debt, primarily consisting of capitalized lease obligations. Based on the
subsequent completion of a closing balance sheet, the purchase price was
increased and such increase was satisfied by the issuance of $6.9 million in
additional FRD Notes. Cash proceeds from the sale were used to pay
indebtedness outstanding under the Old Credit Facility (as defined below) of
$82 million, to help fund the repurchases of the Notes (as defined below) and
for general corporate purposes. As of March 19, 1999, the Company had sold or
exchanged all of the FRD Notes.
1
On July 3, 1996, the Company repurchased $151 million aggregate principal
amount of its 9 3/4% Senior Notes due 2002 (the "Senior Notes") and $108.6
million aggregate principal amount of its 10 7/8% Senior Subordinated Discount
Notes due 2004 (the "Discount Notes" and together with the Senior Notes, the
"Notes") in exchange for (or from the proceeds from the sale of) $133.5
million aggregate principal amount of the FRD Notes. In separate transactions,
the Company repurchased (i) an additional $8.5 million aggregate principal
amount of its Discount Notes in the third quarter of 1996 and (ii) an
additional $30 million aggregate principal amount of its Senior Notes and an
additional $2 million aggregate principal amount of its Discount Notes in the
fourth quarter of 1996.
On January 10, 1997, the Company entered into a five-year, $35 million
credit facility (the "Foothill Credit Facility") with Foothill Capital
Corporation ("Foothill") to provide for the ongoing working capital needs of
the Company. The Foothill Credit Facility replaced the Company's old credit
facility with Credit Lyonnais (the "Old Credit Facility"). In connection with
the Merger, the Company increased the Foothill Credit Facility to $55 million.
The Foothill Credit Facility now provides for up to $35 million in revolving
cash borrowings and up to $55 million in letters of credit (less the
outstanding amount of revolving cash borrowings). The Foothill Credit Facility
is secured by substantially all of the real and personal property of the
Company and contains restrictive covenants.
On August 12, 1997, FRI-MRD issued senior discount notes (the "Senior
Discount Notes") in an aggregate face amount of $61 million at a price of
approximately 75% of par. The Senior Discount Notes are due on January 24,
2002. No cash interest is payable on the Senior Discount Notes until July 31,
1999, at which time interest will be payable in cash semi-annually at the rate
of 15% per annum, with the first cash interest payment due on January 31,
2000. The Senior Discount Notes were issued to certain existing holders of the
Company's Senior Notes in exchange for $15.6 million of Senior Notes plus
approximately $34 million of cash. On January 14 and 15, 1998, FRI-MRD issued
an additional $14 million aggregate face amount of the Senior Discount Notes
to the same purchasers at a price of 83% of par. FRI-MRD received
approximately $11.6 million in cash as a result of this subsequent sale.
Proceeds from the sales of the Senior Discount Notes have been and will
continue to be used to fund the Company's capital expenditure programs and for
general corporate purposes.
On June 9, 1998, FRI-MRD entered into a Note Agreement pursuant to which on
October 30, 1998 FRI-MRD issued $24 million aggregate face amount of New MRD
Notes at a price of approximately 90% of par resulting in net proceeds of
$21.7 million. The New MRD Notes are due on January 24, 2002. No cash interest
is payable on the New MRD Notes until July 31, 1999, at which time interest
will be payable in cash semi-annually at the rate of 14% per annum with the
first cash interest payment due on January 31, 2000. The New MRD Notes are
redeemable by FRI-MRD, in whole or in part, on or before January 23, 2001, at
a price of 105% of the accreted value thereof, or after January 23, 2001, at a
price of 102.5% of the accreted value thereof. Proceeds from the sale of the
New MRD Notes were used exclusively to purchase all of the outstanding shares
of Hamlet, and the New MRD Notes are secured by all of such outstanding shares
of Hamlet.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--Liquidity and Capital Resources--Liquidity."
Ongoing Restaurant Operations
The Company operated 314 restaurants primarily under the Chi-Chi's, El
Torito, Casa Gallardo, Koo Koo Roo and Hamburger Hamlet concepts at December
27, 1998. The Chi-Chi's, El Torito and Casa Gallardo restaurants serve
moderately priced, high-quality Mexican food and a wide selection of alcoholic
and non-alcoholic beverages. The Company is the largest operator of full-
service Mexican restaurants in the United States, based upon both number of
restaurants and annual revenues. Koo Koo Roo restaurants are in the emerging
food category of fresh, convenient meals--meals with the convenience and value
associated with quick service, but the quality, freshness and variety
associated with upscale, casual full-service restaurants. The Hamburger Hamlet
restaurants are full-service casual dining restaurants known for their quality
service and their extensive variety of distinctive products.
2
The average food check per person (excluding alcoholic beverage sales) for
1998 by concept is as follows:
Chi-Chi's.............................................................. $8.12
El Torito.............................................................. 9.86
Casa Gallardo.......................................................... 8.34
Koo Koo Roo............................................................ 8.70
Hamburger Hamlet....................................................... 10.18
Chi-Chi's restaurants generally contain from 5,000 to 10,600 square feet of
floor space and accommodate approximately 200 to 400 guests in the restaurant
and lounge. El Torito restaurants generally contain from 7,500 to 11,000
square feet of floor space and accommodate approximately 300 to 400 guests in
the restaurant and lounge. The Company's Mexican restaurants are generally
located in freestanding buildings in densely populated suburban areas, and the
Company believes their festive atmosphere and moderate prices are especially
appealing to family clientele. Koo Koo Roo restaurants generally contain from
2,700 to 3,100 square feet of floor space and accommodate approximately 75 to
85 guests.
Site Selection
The selection of sites for new restaurants is the responsibility of the
senior management of El Torito Restaurants, Inc. ("El Torito"), Chi-Chi's,
Inc. ("Chi-Chi's") and KKR. Typically, potential sites are brought to the
attention of the Company by real estate brokers and developers familiar with
the Company's needs. Sites are evaluated on the basis of a variety of factors,
including demographic data, land use and environmental restrictions,
competition in the area, ease of access, visibility, availability of parking
and proximity to a major traffic generator such as a shopping mall, office
complex, stadium or university.
Employees
At December 27, 1998, the Company had 20,096 employees, of whom 18,629 were
restaurant employees, 1,130 were field management and 337 were corporate
personnel. Employees are paid on an hourly basis, except restaurant managers,
corporate and field management and administrative personnel. Restaurant
employees include a mix of full-time and part-time, mostly hourly personnel,
enabling the Company to provide services necessary during hours of restaurant
operations. The Company has not experienced any significant work stoppages and
believes its labor relations are good.
Competition
The restaurant business is highly competitive and is affected by changes in
the public's eating habits and preferences, population trends and traffic
patterns and local and national economic conditions affecting consumer
spending habits. Key competitive factors in the industry are the quality and
value of the food products offered, quality and speed of service,
attractiveness of facilities, advertising, name identification and restaurant
location. Each of the Company's restaurants competes directly or indirectly
with locally-owned restaurants, as well as with restaurants with national or
regional images, many of which have greater financial, marketing, personnel
and other resources than the Company. The Company is required to respond to
various factors affecting the restaurant industry, including changes in
consumer preferences, tastes and eating habits, demographic trends and traffic
patterns, increases in food and labor costs, competitive pricing and national,
regional and local economic conditions. The failure to compete successfully
could have a material adverse effect on the Company's financial condition and
results of operations.
The Company's Mexican restaurants have encountered increased competition in
recent years, both from new Mexican full-service restaurants and from
restaurants offering Mexican food products as part of an overall casual dining
concept.
Koo Koo Roo restaurants participate in the quick-service segment which is
highly competitive with respect to price, service and location. In addition,
the quick-service segment is characterized by the frequent introduction
3
of new products, accompanied by substantial promotional campaigns. In recent
years numerous competitors, including those in the casual dining and quick-
service segment have introduced products, including products featuring
chicken, that were developed to capitalize on growing consumer preference for
food products that are, or are perceived to be, more healthful, nutritious,
lower in calories and lower in fat content. Management believes that Koo Koo
Roo will be subject to increased competition from companies whose products or
marketing strategies address these consumer preferences. There can be no
assurance that consumers will regard the Koo Koo Roo products as sufficiently
distinguishable from competitive products (such as, for example, those offered
by El Pollo Loco and Boston Market) or that substantially equivalent products
will not be introduced by existing or new competitors.
Government Regulation
Each of the Company's restaurants is subject to Federal, state and local
laws and regulations governing health, sanitation, environmental matters,
safety, the sale of alcoholic beverages and regulations regarding hiring and
employment practices. The Company believes it has all licenses and approvals
material to the operation of its business, and that its operations are in
material compliance with applicable laws and regulations.
The Company is subject to Federal and state laws governing matters such as
minimum wages, overtime and other working conditions. Approximately half of
the Company's employees are paid at rates related to the minimum wage.
Therefore, increases in the minimum wage or decreases in the allowable tip
credit (tip credits reduce the minimum wage that must be paid to tipped
employees in certain states) increase the Company's labor costs. This is
especially true in California, where there is no tip credit. Effective October
1, 1996, the Federal minimum wage was increased from $4.25 to $4.75, and
effective September 1, 1997, it was further increased to $5.15. However, a
provision of the new measure effectively froze the minimum wage for tipped
employees at current levels by increasing the allowable tip credit in those
states which allow for a tip credit. Furthermore, in California, voters
approved a proposition on November 5, 1996 that increased the state's minimum
wage to $5.00 on March 1, 1997 and further increased the state's minimum wage
to $5.75 on March 1, 1998. In response to the minimum wage increases on
October 1, 1996, March 1, 1997 and March 1, 1998, the Company raised menu
prices at its El Torito restaurants in an effort to recover the higher payroll
costs. Chi-Chi's also raised menu prices in October and December 1997 as a
result of the cumulative impact of these minimum wage increases. Similarly, in
March 1998, KKR also raised menu prices for its Koo Koo Roo restaurants. No
minimum wage increases are scheduled for 1999 at this time, but pressure
continues for further increases at both the Federal and California levels.
The Company is also subject to both Federal and state regulations governing
disabled persons' access to its restaurant facilities, including the Americans
with Disabilities Act ("ADA"), which became effective in January 1992. If the
ADA were interpreted to require a higher degree of accessibility for disabled
persons than presently established, it could have a significant economic
impact on the Company, inasmuch as such interpretation could require the
Company, and the restaurant industry as a whole, to make substantial
modifications to its restaurant facilities.
Currently, the Company franchises and licenses 22 restaurants
internationally. See "--Franchised and Licensed Restaurants." The Company
believes its franchises are operating in substantial compliance with
applicable laws and regulations governing such operations.
Trademarks and Service Marks
The Company regards its trademarks and service marks as important to the
identification of its restaurants and believes that they have significant
value in the conduct of its business. The Company has registered various
trademarks and service marks with the United States Patent and Trademark
Office. In addition to its Federal registrations, certain trademarks and
service marks have been registered in various states and selected
international markets in which the Company operates restaurants. Also, many of
the Company's menus, training manuals and other printed manuals utilized in
conjunction with its business are copyrighted.
4
Franchised and Licensed Restaurants
In May 1994, El Torito and Coco's Restaurants, Inc. ("Coco's"), a former
indirect subsidiary of the Company, entered into a license agreement, which,
among other things, granted to Coco's an exclusive right and license that
permits Coco's to grant other parties a sublicense to develop the Company's El
Torito Mexican restaurant concept in Japan. As a result, in April 1995, Coco's
entered into a Technical Assistance and License Agreement, which, among other
things, granted to Coco's Japan Co., Ltd. ("CJCL") the right to develop the
Company's El Torito Mexican restaurant concept in Japan. At December 27, 1998,
CJCL operated seven El Torito restaurants in Japan.
On October 15, 1997, Chi-Chi's entered into a binding term sheet agreement
with its licensee, Chi-Chi's International Operations, Inc. ("CCIO"), whereby
the parties agreed to resolve various ongoing disputes. Under the general
provisions of the term sheet, (i) the rights to develop Chi-Chi's restaurants
throughout the world, except in areas of currently existing Chi-Chi's
franchises, have been transferred back to Chi-Chi's; (ii) for a period of five
years, CCIO shall operate the existing 12 international Chi-Chi's restaurants
for Chi-Chi's in exchange for a fee equal to all royalties and fees payable
from the international franchisees and licensees; (iii) CCIO has the right to
convert the existing 12 international Chi-Chi's restaurants to other concepts;
and (iv) under certain conditions, Chi-Chi's has the right to terminate the
management arrangement with CCIO within five years. As a result of the term
sheet, Chi-Chi's will not receive any royalties or license fees from CCIO or
the currently existing international Chi-Chi's restaurant operations until
Chi-Chi's terminates the management agreement with CCIO. In 1996, Chi-Chi's
received no royalties from CCIO due to a payment abatement, and during 1997,
Chi-Chi's received royalties of $16,000 from CCIO.
KKR entered into an agreement in 1995 with a group of Canadian business
leaders to form a partnership to develop the Koo Koo Roo restaurant concept in
Canada ("KKR Canada"). KKR and KKR Canada entered into a license agreement in
1996, which, among other things, granted to KKR Canada an exclusive right and
license to develop Koo Koo Roo restaurants throughout Canada. KKR currently
has a 28% ownership interest in KKR Canada. KKR Canada opened three
restaurants in 1997, all in the greater Toronto area, one of which was closed
in early 1999. No additional restaurants are planned at this time. Discussions
are underway concerning the purchase of KKR Canada by another company. No
royalties are currently being paid under the KKR Canada arrangement. In
addition, KKR has signed license agreements covering England and Israel. No
restaurants have been developed to date under these agreements.
In 1996, the Company established El Torito Franchising Company ("ETFC") to
market domestically and internationally the El Torito Mexican restaurant
concept. There is currently no domestic franchise activity. On January 16,
1997, ETFC entered into a Master Franchise and Development Agreement with
Evliyaoglu Ltd. ("EL"), pursuant to which EL was granted the rights to develop
a minimum of 20 El Torito restaurants over 15 years in Turkey. At December 27,
1998, EL operated one El Torito restaurant in Turkey. In addition, on
February 13, 1998, ETFC entered into a Master Franchise and Development
Agreement with UVECO Holding, Inc. ("UVECO"), pursuant to which UVECO was
granted the rights to develop 21 El Torito restaurants over 20 years in seven
countries in the Middle East.
As described above, under existing license and other franchise agreements,
seven El Torito restaurants are operated in Japan, one El Torito restaurant is
operated in Turkey, 12 Chi-Chi's restaurants are operated in international
markets and two Koo Koo Roo restaurants are operated in Toronto, Canada.
Franchise and license fees were $235,000 for the year ended December 27, 1998.
This compares to $219,000 for the year ended December 28, 1997 and $1,605,000
for the year ended December 29, 1996, of which 92% was from Coco's restaurants
licensed by CJCL. The license arrangement with CJCL for Coco's restaurants was
transferred upon completion of the sale of the Family Restaurant Division in
1996.
5
Certain Risk Factors
Substantial Leverage
The Company currently has a significant amount of indebtedness. The
following chart shows certain important credit statistics as of the dates
specified below:
For the Years Ended
-------------------------
December 27, December 28,
1998 1997
------------ ------------
($ in thousands)
Total Debt......................................... $239,649 $202,649
Stockholders' deficit.............................. (21,137) (26,194)
Deficiency of losses to cover fixed charges........ (62,733) (31,084)
This substantial indebtedness could have important consequences. For
example, it could:
. increase the Company's vulnerability to adverse general economic and
industry conditions;
. limit the Company's ability to obtain additional financing to fund
future working capital, capital expenditures, acquisitions and other
general corporate requirements;
. require the Company to dedicate a substantial portion of its cash flow
from operations to payments on indebtedness, thereby reducing the
availability of cash flow to fund working capital, capital expenditures,
acquisitions and other general corporate purposes;
. limit the Company's flexibility in planning for, or reacting to, changes
in its business and the industry in which it operates;
. place the Company at a competitive disadvantage compared to its
competitors that have less debt; and
. subject the Company to covenants that will restrict, among other things,
its ability to borrow money, conduct affiliate transactions, lend or
otherwise advance money to non-subsidiaries, pay dividends or advances
and make certain other payments and, under its credit facility, require
it to maintain specified financial ratios and earnings.
Failure to comply with certain covenants in the Company's debt instruments
could result in an event of default which, if not cured or waived, could have
a material adverse effect on the Company.
Ability to Service Debt
The Company's ability to make payments on and to refinance its indebtedness
and to fund planned capital expenditures will depend on its ability to
generate cash in the future. This, to a certain extent, is subject to general
economic, financial, competitive, legislative, regulatory and other factors
that are beyond the Company's control.
The Company can give no assurance that its business will generate sufficient
cash flow from operations, that currently anticipated cost savings and
operating improvements will be realized on schedule or that future borrowings
will be available in an amount sufficient to enable the Company to pay its
indebtedness or to fund other liquidity needs. If the Company is unable to
generate sufficient cash flow from operations in the future to service its
debt, it may be required, among other things, to seek additional financing in
the debt or equity markets, to refinance or restructure all or a portion of
its indebtedness, to sell selected assets or to reduce or delay planned
capital expenditures. Such measures may not be sufficient for the Company to
service its debt. In addition, there can be no assurance that any such
financing, refinancing or sale of assets will be available on commercially
reasonable terms or at all.
History of Losses
For the years ended December 27, 1998 and December 28, 1997, the Company
recorded net losses of $63.1 million and $31.6 million, respectively. For the
same periods, the Company recorded operating losses of $38.1 million and $11.6
million, respectively. Although the Company believes that the Merger will
result in
6
improvements to revenues and reductions in costs, there can be no assurance
that the Company will achieve profitable operations in the future.
Potential difficulties in integrating KKR into the Company
The Company previously operated separately from KKR. A factor in the success
of the combined organization is the ability to integrate the operations of
KKR, a process that is still taking place, without a loss of key employees or
suppliers, loss of customer patronage, increases in operating or other costs
or other difficulties. In addition, the Company may not be able to realize the
cost savings and other benefits that were sought from the Merger.
Future Growth and Financing
The Company's growth strategy includes remodeling existing restaurants and
developing new restaurants, which may include future development, construction
and renovation projects. The extent and timing of any such projects will
depend upon various factors, including available cash flow, the ability to
obtain additional financing (including landlord contributions) and the
availability of suitable locations, many of which are beyond the Company's
control. In addition, the Company is subject to the risks inherent in any
development activity, including, but not limited to, disruption of existing
operations, delays in receipt of permits, licenses or other regulatory
approvals, shortages of materials or skilled labor, work stoppages, and
weather interferences, any of which could delay development or result in
substantial cost increases.
Control by Principal Stockholder
The former partners of Apollo FRI Partners, L.P. ("Apollo") own
approximately 55% of the Company's outstanding common stock and have the
ability to control the election of directors and the results of virtually all
other matters submitted to a vote of the stockholders. Such concentration of
ownership, together with the anti-takeover effects of certain provisions in
the Delaware General Corporate Law and the Company's charter documents may
have the effect of delaying or preventing a change of control of the Company.
Key Personnel
The Company's success depends to a significant extent on retaining the
services of its executive officers and directors, particularly Mr. Kevin
Relyea, the Company's Chief Executive Officer and Chairman of the Board. The
Company does not maintain key man insurance. The loss of the services of key
employees or directors (whether such loss is through resignation or other
causes) or the inability to attract additional qualified personnel could have
an adverse effect on the Company's financial condition and results of
operations. The Company has entered into an employment agreement with Mr.
Relyea that expires on December 31, 2001.
Forward Looking Statements
This document includes "forward looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act
including, in particular, the statements about the Company's plans,
strategies, and prospects. When used in this document and the documents
incorporated herein by reference, the words "believes," "expects,"
"anticipates," "intends," "plans," "estimates" or similar expressions are
intended to identify in certain circumstances, forward looking statements.
Although the Company believes that its plans, intentions and expectations
reflected in or suggested by such forward looking statements are reasonable,
it can give no assurance that such plans, intentions or expectations will be
achieved. Important factors that could cause actual results to differ
materially from the forward looking statements made in this document are set
forth above and elsewhere in this document and in the documents incorporated
herein by reference. Given these uncertainties, the Company cautions against
undue reliance on such statements or projections. The Company does not
undertake any obligation to update these forward looking statements or
projections. All forward looking statements attributable to the Company or
persons acting on the Company's behalf are expressly qualified in their
entirety by the preceding cautionary statements.
7
Item 2. PROPERTIES
Of the 314 restaurants operated by the Company as of December 27, 1998, the
Company owned the land and buildings for 31, owned the buildings and leased
the land for 52 and leased both land and buildings for the remaining 231
restaurants. The full-service restaurants are primarily free-standing units
ranging from approximately 5,000-11,000 square feet. KKR restaurants generally
approximate 2,700 to 3,100 square feet. Most of the leases provide for the
payment of a base rental or approximately 5% to 6% of gross sales, whichever
is greater, plus real estate taxes, insurance and other expenses.
The leases (assuming exercise of all options) have terms expiring as
follows:
Number of
Lease Expiration Restaurants
---------------- -----------
1999-2003........................................................ 14
2004-2008........................................................ 29
2009-2013........................................................ 65
2014-2018........................................................ 60
2019 and later................................................... 115
---
Total.......................................................... 283
===
In addition, the Company owns a 43,120 square-foot building in Irvine,
California which houses support personnel for the Company. The Company leases
34,200 square feet of space in an office building in Irvine, California which
houses El Torito and KKR operations staff, the Company's headquarters
personnel and certain support functions of the Company. The Company also
leases 26,270 square feet of space in a building in Louisville, Kentucky which
houses the Chi-Chi's operations and support functions and various other
smaller offices and warehouses. As a result of the Merger, the Company remains
liable for the vacant KKR headquarters office comprising 11,400 square feet in
Los Angeles. This lease expires on May 31, 1999.
Substantially all of the Company's assets have been pledged under the
Foothill Credit Facility. However, of the 83 owned restaurants at December 27,
1998 (buildings or land and buildings), two were subject to security interests
in favor of other third parties.
8
Approximately 39% of the Company's restaurants are located in California.
Revenues are dependent on discretionary spending by consumers, particularly by
consumers living in the communities in which the restaurants are located. A
significant weakening in any of the local economies in which the restaurants
operate (particularly California) may cause the residents of such communities
to curtail discretionary spending which, in turn, could have a material effect
on the results of operations and financial position of the entire Company. In
addition, the results achieved to date by the Koo Koo Roo restaurants in the
core Southern California market may not be indicative of the prospects or
market acceptance of a larger number of restaurants, particularly in wider and
more geographically dispersed areas with varied demographic characteristics.
The Company's geographic concentration of restaurants could have a material
adverse effect on its financial condition and results of operations. The
following table details the Company-operated restaurants by state of operation
as of December 27, 1998:
Total
Hamburger Number of
Chi-Chi's El Torito Koo Koo Roo Hamlet Restaurants
--------- --------- ----------- --------- -----------
California................ 0 77 34 10 121
Ohio...................... 28 0 0 0 28
Pennsylvania.............. 24 0 0 0 24
Indiana................... 14 2 0 0 16
Michigan.................. 16 0 0 0 16
Maryland.................. 10 0 0 2 12
Virginia.................. 10 0 0 2 12
Missouri.................. 2 8 0 0 10
Wisconsin................. 10 0 0 0 10
Illinois.................. 7 1 0 0 8
Minnesota................. 7 0 0 0 7
New Jersey................ 7 0 0 0 7
Iowa...................... 6 0 0 0 6
Kentucky.................. 6 0 0 0 6
New York.................. 5 0 0 0 5
Florida................... 0 0 4 0 4
Massachusetts............. 3 0 0 0 3
Nevada.................... 0 1 2 0 3
Oregon.................... 0 3 0 0 3
West Virginia............. 3 0 0 0 3
Arizona................... 0 2 0 0 2
Kansas.................... 2 0 0 0 2
Connecticut............... 1 0 0 0 1
Delaware.................. 1 0 0 0 1
Nebraska.................. 1 0 0 0 1
North Dakota.............. 1 0 0 0 1
South Dakota.............. 1 0 0 0 1
Washington................ 0 1 0 0 1
--- --- --- --- ---
Total................... 165 95 40 14 314
=== === === === ===
In the past four years, the Company has divested more than 100 restaurants,
and the Company currently has a substantial portfolio of closed, subleased and
assigned properties. Because the ability of any particular acquiror to satisfy
its obligations under any subleased or assigned lease depends on its ability
to generate sufficient revenues in the acquired restaurant, there can be no
assurance that the Company will not incur significant and unplanned costs in
connection with such leases. It is expected that ongoing divestment activities
will add to this portfolio of closed, subleased and assigned properties. From
time to time, the Company has been required to
9
reassume leases associated with these properties, but it has generally been
able to relet them in a reasonable period of time. As of December 27, 1998,
the Company was attempting to lease eight closed properties with an annual
carrying cost of $1.4 million. The failure to relet such leases on favorable
economic terms, or at all, or increases in the carrying costs associated with
such leases, could have a material adverse effect on the Company's financial
condition and results of operations.
Item 3. LEGAL PROCEEDINGS
The Company is involved in various litigation matters incidental to its
business. The Company does not believe that any of the claims or actions filed
against it will have a material adverse effect upon the consolidated financial
position or results of operations of the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 29, 1998, the majority stockholder of the Company, acting by
written consent, consented to: (a) the adoption of the Fifth Restated
Certificate of Incorporation of the Company; (b) amending and restating the
By-laws of the Company; (c) the 1998 Stock Incentive Plan; and (d) changing
the name of the Company to Koo Koo Roo Enterprises, Inc.
10
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
From September 15, 1986 (date of incorporation) through October 30, 1998,
there was no established public trading market for the Company's Common Stock.
Commencing November 2, 1998 with the consummation of the Merger, and
continuing until February 1, 1999, the Company's Common Stock traded in and
was listed for quotation through the National Association of Securities
Dealers Automated Quotation System ("Nasdaq") National Market. Beginning
February 2, 1999, the Company's Common Stock has traded in the NASD Over-the-
Counter Bulletin Board Market.
The following table sets forth for the periods identified the high and low
closing price of the Company Common Stock, as reported by the applicable
market.
High Low
----- -----
Year Ended December 1996
First Quarter N/A N/A
Second Quarter................................................ N/A N/A
Third Quarter................................................. N/A N/A
Fourth Quarter................................................ N/A N/A
Year Ended December 1997
First Quarter................................................. N/A N/A
Second Quarter................................................ N/A N/A
Third Quarter................................................. N/A N/A
Fourth Quarter................................................ N/A N/A
Year Ended December 1998
First Quarter................................................. N/A N/A
Second Quarter................................................ N/A N/A
Third Quarter................................................. N/A N/A
Fourth Quarter (beginning November 2, 1998)................... $1.25 $0.53
At March 19, 1999, there were 997 stockholders of record of Company Common
Stock.
The Securities and Exchange Commission ("SEC") recently amended certain
rules under the Securities Exchange Act of 1934 regarding the use of a
company's discretionary proxy voting authority with respect to stockholder
proposals submitted to a company for consideration at such company's next
annual meeting. Stockholder proposals submitted to the Company outside the
processes of Rule 14a-8 (i.e., the procedures for placing a stockholders'
proposal in the Company's proxy materials) (i) will be considered untimely
with respect to the 1999 annual meeting of stockholders unless received at a
reasonable time before the Company begins to print and mail its proxy
materials and (ii) will be considered untimely with respect to all subsequent
annual meetings of stockholders if received by the Company more than 120 days
or less than 90 days prior to the anniversary date of the immediately
preceding annual meeting of stockholders.
The Company has not paid cash dividends to holders of Company Common Stock
since its incorporation. The Company has retained, and expects to continue to
retain, all available earnings, if any, generated by its operations for the
maintenance, development and growth of its business, and does not anticipate
paying dividends on Company Common Stock in the foreseeable future. In
addition, each of the indentures, as amended, (collectively, the "Indentures")
governing the Company's outstanding Senior Notes and Discount Notes, the note
agreements governing the FRI-MRD Senior Discount Notes and the New MRD Notes
and the Foothill Credit Facility restricts or prohibits the Company's ability
to pay dividends.
11
Item 6. SELECTED FINANCIAL DATA
Predecessor
Successor Company (1) Company (1)
------------------------------------------------------------------ -----------
As of and
for
As of and for the Years Ended the Eleven For the One
---------------------------------------------------- Months Ended Month Ended
Dec. 27, Dec. 28, Dec. 29, Dec. 31, Dec. 25, Jan. 26,
1998 1997 1996 1995 1994 1994
----------- ----------- ----------- ----------- ------------ -----------
($ in thousands, except per share amounts)
Statement of Operations
Data:
Sales................... $ 472,653 $ 463,724 $ 724,229 $ 1,134,359 $ 1,048,674 $ 64,741
Cost of Sales:
Product cost........... 126,788 123,803 200,379 322,194 293,413 19,184
Payroll and related
costs................. 165,207 162,807 273,536 419,185 377,569 24,780
Occupancy and other
operating expenses.... 125,177 129,428 181,730 275,164 243,147 13,712
Depreciation and
amortization........... 22,916 22,395 33,802 52,561 44,658 2,800
General and
administrative
expenses............... 27,417(2) 30,186 41,742 56,245 49,059 4,071
Opening expense......... 3,345 188 673 5,275 3,988 0
Gain (loss) on
disposition of
properties............. (7,993) (3,885) (8,600) (12,067) (5,685) 12
Gain on sale of
division............... 0 0 62,601 0 0 0
Provision for
divestitures and write-
down of long-lived
assets................. 27,661 2,640 0 44,500 144,780(3) 0
VCU termination
expense(4)............. 4,223 0 0 0 0 0
Restructuring costs..... 0 0 6,546 4,392 0 0
Reorganization items.... 0 0 0 0 0 479,427
Interest expense, net... 24,659 19,476 36,725 65,277 51,419 4,097
Income tax provision.... 400 509 890 1,208 1,773 55
----------- ----------- ----------- ----------- ----------- --------
Income (loss) before
extraordinary item..... (63,133) (31,593) 2,207 (123,709) (166,817) 475,481
Extraordinary gain on
extinguishment of
debt................... 0 0 134,833 0 2,941 72,561
----------- ----------- ----------- ----------- ----------- --------
Net income (loss)....... (63,133) (31,593) 137,040 (123,709) (163,876) 548,042
Preferred dividends..... 0 0 0 0 0 1,698
----------- ----------- ----------- ----------- ----------- --------
Net income (loss)
attributable to common
shares................. $ (63,133) $ (31,593) $ 137,040 $ (123,709) $ (163,876) $546,344
=========== =========== =========== =========== =========== ========
Net income (loss) per
share--basic and
diluted(5):
Income (loss) before
extraordinary item.... $ (0.48) $ (0.26) $ 0.02 $ (1.02) $ (1.35)
Extraordinary item..... -- -- 1.11 -- --
----------- ----------- ----------- ----------- -----------
Net income (loss)...... $ (0.48) $ (0.26) $ 1.13 $ (1.02) $ (1.35)
=========== =========== =========== =========== ===========
Weighted average shares
outstanding--basic and
diluted(5)............. 131,309,797 121,515,391 121,515,391 121,515,391 121,687,283
=========== =========== =========== =========== ===========
Balance Sheet Data:
Working capital
(deficiency)........... $ (92,770) $ (66,412) $ (85,524) $ 45,114 $ (155,481)
Current assets.......... 35,790 45,117 46,612 267,077 43,015
Total assets............ 348,186 289,768 307,606 551,270 734,598
Current liabilities..... 128,560 111,529 132,136 221,963 198,496
Non-current portion of
long-term debt,
including capitalized
lease obligations...... 237,151 199,955 165,325 455,203 536,495
Common stockholders'
equity (deficit)....... (21,137) (26,194) 5,399 (131,576) (7,259)
Selected Consolidated
Financial Ratios and
Other Data:
EBITDA(6)............... $ 28,064(2) $ 17,500 $ 26,842 $ 61,571 $ 85,486 $ 2,994
Net income (loss)....... (63,133) (31,593) 137,040 (123,709) (163,876) 548,042
Net cash provided by
(used in) operating
activities............. (2,495) (13,105) (21,857) 6,083 18,346 (18,252)
Capital expenditures.... 27,691 13,588 9,848 38,022 65,618 779
Net cash provided by
(used in) investing
activities............. (41,760) (16,631) 165,024 (19,615) (64,167) (192,610)
Net cash provided by
(used in) financing
activities............. 29,444 28,434 (117,717) 13,663 31,858 223,754
Deficiency of earnings
(losses) to cover fixed
charges(7)............. (62,733) (31,084) (59,504) (122,501) (165,044)
Restaurants open at end
of period.............. 314 275 281 670 702 524
Ratio of EBITDA to
interest expense, net.. 1.14x 0.90x 0.73x 0.94x 1.66x 0.73x(8)
- -------
12
(1) Reference to the "Predecessor Company" refers to The Restaurant
Enterprises Group, Inc. and its consolidated subsidiaries (excluding Chi-
Chi's) with respect to information relating to periods prior to January
27, 1994 included herein, and reference to the "Successor Company" refers
to Koo Koo Roo Enterprises, Inc. (formerly known as Family Restaurants,
Inc.) and its consolidated subsidiaries, giving effect to the acquisition
on January 27, 1994, when Apollo, Green Equity Investors, L.P. and
Foodmaker, Inc. acquired approximately 98% of the Common Stock and Chi-
Chi's was merged with and into a subsidiary of the Company. The results of
operations and financial position of KKR (including Hamlet) have been
combined with the results of operations and financial position of the
Company from October 30, 1998 forward.
(2) Includes the reversal of accrued management fees of $2,500,000 payable to
Apollo that the Company will not be required to pay.
(3) Chi-Chi's reported significant sales declines in the second half of 1994
which continued into 1995. These sales declines resulted in operating
performance for Chi-Chi's which was significantly lower than anticipated
when Chi-Chi's was acquired on January 27, 1994. These operating results
caused the Company to reevaluate its business strategy for Chi-Chi's.
Consistent with this strategic reevaluation, the Company revised its
forecasts for the future operations of Chi-Chi's which resulted in a
significant reduction in projected future cash flows and a lower valuation
of the business. The Company determined that its projected results for
Chi-Chi's would not support the future amortization of the remaining Chi-
Chi's goodwill balance of $144,780,000 at December 25, 1994. Accordingly,
the Company wrote off the remaining unamortized Chi-Chi's goodwill balance
of $144,780,000 in the fourth quarter of 1994.
(4) Compensation expense of $4.2 million was recorded in the fourth quarter of
1998 in connection with the termination of the Company's Value Creation
Units Plan. Such expense consisted of a $4 million cash payment and
approximately $0.2 million for the intrinsic value of stock options
granted on December 9, 1998 in connection with the termination of awards
under the Value Creation Units Plan. The stock options are fully vested
options to purchase up to, in the aggregate, 3% of the fully diluted
Company Common Stock immediately following the Merger (including shares to
be reserved for issuance under the Company's 1998 Stock Incentive Plan).
Such options have a per share strike price of $.50 and are not exercisable
for a period of 90 days after issuance.
(5) Net income per share for the Predecessor Company is not meaningful due to
debt discharge, the issuance of new common stock and fresh start
reporting.
(6) EBITDA is defined as earnings (loss) before opening costs, gain (loss) on
disposition of properties, gain on sale of division, provision for
divestitures and write-down of long-lived assets, VCU termination expense,
restructuring costs, interest, taxes, depreciation and amortization and
extraordinary items. The Company has included information concerning
EBITDA herein because it understands that such information is used by
certain investors as one measure of an issuer's historical ability to
service debt. EBITDA should not be considered as an alternative to, or
more meaningful than, operating income (loss) as an indicator of operating
performance or to cash flows from operating activities as a measure of
liquidity. Furthermore, other companies may compute EBITDA differently,
and therefore, EBITDA amounts among companies may not be comparable.
(7) For the periods presented, the Company's earnings (losses) are inadequate
to cover fixed charges by the amounts disclosed. For the purposes of
calculating the deficiency of earnings (losses) to fixed charges
(i) earnings (losses) represent income (loss) before income taxes, fixed
charges, gain on sale of division and extraordinary gain on extinguishment
of debt and (ii) fixed charges consist of interest on all indebtedness,
interest related to capital lease obligations and amortization of debt
issuance costs and discounts relating to indebtedness. Information for the
Predecessor Company is not meaningful.
(8) Ratio of EBITDA to interest expense is based on the Company's historical
capital structure which is not representative of the Company's capital
structure subsequent to January 27, 1994.
13
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain information and statements included in this Management's Discussion
and Analysis of Financial Condition and Results of Operations, including,
without limitation, statements containing the words "believes," "anticipates,"
"expects," "intends, "plans," "estimates" and words of similar import,
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 and involve known and unknown risks
and uncertainties that could cause actual results of the Company or the
restaurant industry to differ materially from expected results expressed or
implied by such forward-looking statements. Although it is not possible to
itemize all of the factors and specific events that could affect the outlook
of a restaurant company operating in a competitive environment, factors that
could significantly impact expected results include (i) the development of
successful marketing strategies for the Company's restaurants, (ii) the effect
of national and regional economic conditions, (iii) the availability of
adequate working capital, (iv) competitive products and pricing, (v) changes
in legislation, (vi) demographic changes, (vii) the ability to attract and
retain qualified personnel, (viii) changes in business strategy or development
plans, (ix) business disruptions, (x) changes in consumer preferences, tastes
and eating habits, (xi) increases in food and labor costs, (xii) the Company's
ability to mitigate the impact of the year 2000 issue successfully and (xiii)
potential difficulties in combining the operations of KKR with the Company.
The Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
On October 30, 1998, the Company, Merger Sub and KKR consummated the Merger,
pursuant to which Merger Sub was merged with and into KKR, with KKR as the
surviving corporation. As a result of the Merger, each outstanding share of
common stock of KKR was converted into the right to receive one share of
Company Common Stock. Immediately prior to the Merger, a stock dividend was
declared pursuant to which approximately 121.96 shares of Company Common Stock
were distributed for each share of Company Common Stock outstanding
immediately prior to the Merger. Prior to the Merger, the Company provided the
Bridge Loan to a subsidiary of KKR. Additionally, in connection with the
Merger, FRI-MRD issued the New MRD Notes pursuant to the Senior Secured
Discount Note Agreement dated June 9, 1998 for which it received net proceeds
of $21.7 million, and the Company expanded the Foothill Credit Facility by an
additional $20 million. The proceeds from the sale of the New MRD Notes were
used to complete the Hamlet Acquisition immediately prior to the consummation
of the Merger.
Information relating to periods ending prior to October 30, 1998 included
herein relates to the historical operations of Koo Koo Roo Enterprises, Inc.
(formerly known as Family Restaurants, Inc.) and, except as otherwise
indicated, does not reflect the operations of KKR, which the Company acquired
on October 30, 1998.
Liquidity and Capital Resources
Liquidity
The Company reported net cash used in operating activities for the years
ended December 27, 1998 and December 28, 1997 of $2.5 million and $13.1
million, respectively. Cash needs are being funded by available cash balances,
supplemented, as necessary, by working capital advances available under the
Foothill Credit Facility. In addition, in 1997 and 1998 FRI-MRD has raised
approximately $67.3 million in cash from the issuance of the Senior Discount
Notes and the New MRD Notes to supplement its cash needs. The Company's
viability has been and will continue to be dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, and
to comply with the terms of its financing agreements.
Statement of Cash Flows. For the year ended December 27, 1998, net cash used
in operating activities was $2.5 million compared to $13.1 million for the
year ended December 28, 1997. The difference in cash received from customers,
franchisees and licensees as compared to cash paid to suppliers and employees
improved by $17.9 million from 1997 to 1998 which more than offset cash paid
for opening costs of $3.0 million and for
14
VCU termination expense of $4.0 million in 1998. For 1998, net cash used in
investing activities was $41.8 million compared to $16.6 million for the same
period in 1997. The increase in net cash used in investing activities of $25.2
million was due to Merger-related expenditures of $17.0 million and an
increase in capital expenditures of $14.1 million which more than offset
decreases in mandatory lease buybacks of $2.7 million, lease termination
payments of $1.5 million and an increase in proceeds from disposal of property
and equipment of $3.4 million. For 1998, net cash provided by financing
activities was $29.4 million compared to $28.4 million for the same period in
1997. During 1998 and 1997, $33.3 million and $33.9 million in net proceeds
from the issuance of notes was received, respectively, while reductions of
long-term debt decreased by $0.4 million and payment of debt issuance costs
decreased by $1.3 million from 1997.
For the year ended December 28, 1997, the Company reported net cash used in
operating activities of $13.1 million compared to net cash used in operating
activities of $21.9 million for the year ended December 29, 1996. The
improvement in net cash used in operating activities of $8.8 million was due
to a $21.6 million reduction in interest paid and no restructuring costs in
1997 versus $6.5 million of such costs in 1996. These improvements were
partially offset by a reduction in cash received from customers, franchisees
and licensees net of cash paid to suppliers and employees. For 1997, the
Company reported net cash used in investing activities of $16.6 million
compared to net cash provided by investing activities of $165.0 million in
1996. This difference was primarily due to a $173.6 million reduction in
proceeds from (i) the disposal of property and equipment; (ii) the sale of the
Family Restaurant Division, net; and (iii) the sale of notes receivable, net.
For 1997, the Company reported net cash provided by financing activities of
$28.4 million compared to net cash used in financing activities of $117.7
million in 1996. During 1997, $33.9 million in net proceeds from the issuance
of notes was received, while in 1996, repurchases of notes and repayment of
working capital borrowings amounted to $32.5 million and $79.8 million,
respectively.
EBITDA. For the year ended December 27, 1998, the Company reported EBITDA
(defined as earnings (loss) before opening costs, gain (loss) on disposition
of properties, gain on sale of division, provision for divestitures and write-
down of long-lived assets, VCU termination expense, restructuring costs,
interest, taxes, depreciation and amortization and extraordinary items) of
$28.1 million, compared to $17.5 million for 1997. The $10.6 million
improvement was due to the continuing impact of El Torito and Chi-Chi's cost
reduction and reengineering strategies, which have improved operating margins,
improving comparable restaurant sales trends, $0.4 million contributed by KKR
for November and December 1998 and the $2.5 million reversal of certain
management fee accruals that the Company will not be required to pay. This
improved EBITDA is the continuation of the trend that began in 1996 when new
management was installed at both El Torito and Chi-Chi's. Since 1995, the
divisional EBITDA of the Company's ongoing operations is set forth in the
following table.
Divisional
EBITDA
----------------
El Chi-
Fiscal Year Ended Torito Chi's
----------------- ------- --------
($ in thousands)
December 31, 1995(a)....................................... $13,508 $(10,455)
December 29, 1996.......................................... 11,956 (4,278)
December 28, 1997.......................................... 17,627 36
December 27, 1998.......................................... 22,869 1,426
- --------
(a) Includes 53 weeks of operations and, in accordance with Company policy at
that time, excludes certain unallocated corporate overhead.
The Company has included information concerning EBITDA herein because it
understands that such information is used by certain investors as one measure
of an issuer's historical ability to service debt. EBITDA should not be
considered as an alternative to, or more meaningful than, operating income
(loss) as an indicator of operating performance or to cash flows from
operating activities as a measure of liquidity. Furthermore, other companies
may compute EBITDA differently, and therefore, EBITDA amounts among companies
may not be comparable.
15
Working Capital Deficiency. The Company operates with a substantial working
capital deficiency because (i) restaurant operations are conducted primarily
on a cash (and cash equivalent) basis with a low level of accounts receivable,
(ii) rapid turnover allows a limited investment in inventories and (iii) cash
from sales is usually received before related accounts payable for food,
beverages and supplies become due. The Company had a working capital
deficiency of $92.8 million on December 27, 1998.
Credit Facility. The Foothill Credit Facility:
. provides for up to $35 million in revolving cash borrowings and up to
$55 million in letters of credit (less the outstanding amount of
revolving cash borrowings);
. is secured by substantially all of the real and personal property of the
Company;
. contains restrictive covenants; and
. expires on January 10, 2002.
The Company is in compliance with all financial ratios at December 27, 1998.
Letters of credit are issued under the Foothill Credit Facility primarily to
provide security for future amounts payable under the Company's workers'
compensation insurance program ($16.4 million of such letters of credit were
outstanding as of March 19, 1999). No revolving cash borrowings were
outstanding as of March 19, 1999.
Senior Discount Notes. On August 12, 1997, FRI-MRD issued an aggregate
principal amount of $61 million of its Senior Discount Notes to certain
holders of the Company's Senior Notes in exchange for $15.6 million of Senior
Notes plus approximately $34 million of cash. On January 14 and 15, 1998, FRI-
MRD issued an additional $14 million aggregate principal amount of its Senior
Discount Notes to the same purchasers for approximately $11.6 million in cash.
The Senior Discount Notes are due on January 24, 2002. No cash interest is due
on the Senior Discount Notes until July 31, 1999, at which time interest will
be payable in cash semi-annually at the rate of 15% per annum with the first
cash interest payment due on January 31, 2000. The Senior Discount Notes are
redeemable by FRI-MRD, in whole or in part, on or before January 23, 2001, at
a price of 107.5% of the accreted value thereof, or after January 23, 2001, at
a price of 103.75% of the accreted value thereof. The Senior Discount Notes
contain covenants that restrict FRI-MRD, including limitations on (i) the
incurrence of certain indebtedness and liens, (ii) the ability to make certain
restricted payments, (iii) certain mergers, consolidations and asset sales and
(iv) certain transactions with affiliates. Proceeds from the sales of the
Senior Discount Notes have been and will continue to be used to fund the
Company's capital expenditure programs and for general corporate purposes.
Senior Secured Discount Notes. On June 9, 1998, FRI-MRD entered into a Note
Agreement pursuant to which on October 30, 1998 FRI-MRD issued $24 million
aggregate face amount of New MRD Notes at a price of approximately 90% of par
resulting in net proceeds of $21.7 million. The New MRD Notes are due on
January 24, 2002. No cash interest is payable on the New MRD Notes until July
31, 1999, at which time interest will be payable in cash semi-annually at the
rate of 14% per annum with the first cash interest payment due on January 31,
2000. The New MRD Notes are redeemable by FRI-MRD, in whole or in part, on or
before January 23, 2001, at a price of 105% of the accreted value thereof, or
after January 23, 2001, at a price of 102.5% of the accreted value thereof.
The New MRD Notes contain covenants that restrict FRI-MRD, including
limitations on (i) the incurrence of certain indebtedness and liens, (ii) the
ability to make certain restricted payments, (iii) certain mergers,
consolidations and asset sales, (iv) certain transactions with affiliates and
(v) the issuance of any equity securities of Hamlet. Proceeds from the sale of
the New MRD Notes were used exclusively to purchase all of the outstanding
shares of Hamlet, and the New MRD Notes are secured by all of such outstanding
shares of Hamlet.
16
Other. The Company continues to be highly leveraged and has significant debt
service requirements as follows:
Cash
Interest Principal
-------- ---------
($ in millions)
1999.................................................. $14.3 $ 2.5
2000.................................................. 28.7 2.7
2001.................................................. 28.6 2.5
2002.................................................. 5.6 204.0
2003.................................................. 3.7 1.1
2004.................................................. 0.6 31.6
In order to continue to fund its capital expenditure programs, management
has begun considering various alternatives to reduce near-term debt service
requirements and extend current maturity dates. There can be no assurance that
the Company will be able to repay or refinance the Notes, or that FRI-MRD will
be able to repay or refinance the Senior Discount Notes or the New MRD Notes,
at their respective maturities. The Company continues to consider additional
sources of cash, such as the sale of non-core assets.
Capital Resources
Net cash used in investing activities was $41.8 million for the year ended
December 27, 1998, including $27.7 million for capital expenditures, as
compared to net cash used in investing activities of $16.6 million for fiscal
1997 and net cash provided by investing activities of $165 million for fiscal
1996. The net cash provided by investing activities for 1996 was primarily due
to the completion of the sale of the Company's Family Restaurant Division and
certain notes receivable.
Capital expenditures of up to approximately $36 million have been identified
for fiscal 1999, including approximately $6 million devoted to normal
improvements of the Company's restaurants. The Company is continuing its
remodeling of both El Torito and Chi-Chi's restaurants and is committing
approximately $18 million to $19 million for this purpose in fiscal 1999. The
Company also anticipates opening up to 11 new El Torito restaurants, including
the new "El Torito Express" concept, and five new Koo Koo Roo restaurants, and
the Company is also planning to upgrade El Torito's in-store point-of-sale
("POS") technology during fiscal 1999.
By December 27, 1998, the Company had completed the remodeling of 32 El
Torito restaurants, primarily in the Los Angeles/Orange County and Sacramento
markets, and 45 Chi-Chi's restaurants, in various markets (including five
restaurants that tested an enhanced remodel package).
Year 2000
Background. In the past, many computers, software programs, and other
information technology ("IT systems"), as well as other equipment relying on
microprocessors or similar circuitry ("non-IT systems"), were written or
designed using two digits, rather than four, to define the applicable year. As
a result, date-sensitive systems (both IT systems and non-IT systems) may
recognize a date identified with "00" as the year 1900, rather than the year
2000. This is generally described as the Year 2000 issue. If this situation
occurs, the potential exists for system failures or miscalculations, which
could impact business operations.
The SEC has asked public companies to disclose four general types of
information related to Year 2000 preparedness: the company's state of
readiness, costs (historical and prospective), risks and contingency plans.
See SEC Release No. 33-7558 (July 29, 1998). Accordingly, the Company has
included the following discussion in this report, in addition to the Year 2000
disclosures previously filed with the SEC.
State of Readiness. The Company began a concerted effort to address its Year
2000 issues in fiscal 1997. In fiscal 1998, the Company formalized the effort
with a team that includes the Chief Executive Officer, General
17
Counsel, Chief Financial Officer and Vice President of Information Services.
This team decided in early 1998 that the Company's best course of action was
to replace the IT systems that were not Year 2000 compliant with new hardware
and software. In addition to improving processes and allowing wider access to
data, the new systems would be Year 2000 compliant.
The Company believes that it has identified all significant IT Systems that
require replacement in connection with Year 2000 issues. Internal resources
have been used, and are continuing to be used, to make the required changes
and test Year 2000 readiness. The required modifications of all significant
systems are well underway. The Company plans on completing the replacement and
testing of all significant systems by September 1999. The Company is in the
process of identifying all non-IT systems that require replacement or update.
Non-IT systems that may have a significant impact on the Company are expected
to be replaced or updated by September 1999.
In addition, the Company has communicated with suppliers, banks, vendors and
others with whom it does significant business (collectively, its "business
partners") to determine their Year 2000 readiness and the extent to which the
Company is vulnerable to any other organization's Year 2000 issues. Based on
these communications and related responses, the Company is monitoring the Year
2000 preparations and state of readiness of its business partners. Although
the Company is not aware of any significant Year 2000 problems with its
business partners, there can be no guarantee that the systems of other
organizations on which the Company's systems rely will be converted in a
timely manner, or that a failure to convert by another organization, or a
conversion that is incompatible with the Company's systems, would not have a
material adverse effect on the Company.
Costs. The total cost to the Company of Year 2000 activities has not been
and is not anticipated to be material to its financial position or results of
operations in any given year. The Company spent approximately $2.2 million on
the new software and related hardware and installation costs in 1998 . In
addition, the El Torito in-store POS upgrade discussed in Capital Expenditures
above and POS upgrades in the Company's other operating divisions, including
KKR, which are required for Year 2000 compliancy, are expected to be completed
by September 1999 at a cost of approximately $6.5 million to $7.0 million,
much of which is anticipated to be lease financed. These costs, as well as the
date on which the Company plans to complete the Year 2000 modifications and
testing processes, are based on management's best estimates, which were
derived utilizing numerous assumptions of future events, including the
continued availability of certain resources, third-party modification plans
and other factors. However, there can be no guarantee that these estimates
will be achieved, and actual results could differ from those estimates.
Risks. The Company utilizes IT systems and non-IT systems in many aspects of
its business. Year 2000 problems in some of the Company's systems could
possibly disrupt operations at some restaurants, but the Company does not
expect that any such disruption would have a material adverse impact on the
Company's operating results.
The Company is also exposed to the risk that one or more of its suppliers or
vendors could experience Year 2000 problems that could impact the ability of
such suppliers or vendors to provide goods and services. Although this risk is
lessened by the availability of alternative suppliers, the disruption of
certain services, such as utilities, could, depending upon the extent of the
disruption, potentially have a material adverse impact on the Company's
operations.
Contingency Plans. Based on the above-described plans, the Company does not
believe that significant contingency plans will be necessary but as 1999
unfolds, the Company will begin preparing plans to deal with the possibility
that some suppliers or vendors might fail to provide goods and services on a
timely basis as a result of Year 2000 problems. The Company expects these
contingency plans will generally include the identification, acquisition
and/or preparation of backup systems, suppliers and vendors.
18
Results of Operations
As used herein, "comparable restaurants" are restaurants operated by the
Company on the first day of the earlier fiscal year and that continued in
operation through the last day of the later year being compared.
Fiscal year 1998 as compared to fiscal year 1997
Total sales of $472,653,000 for 1998 increased by $8,929,000 or 1.9% as
compared to 1997. The increase was due to (i) the addition of sales from the
Koo Koo Roo and Hamburger Hamlet restaurants which were acquired in the Merger
and the Hamlet Acquisition on October 30, 1998 and (ii) sales increases in the
comparable El Torito and Chi-Chi's, partially offset by sales decreases for
restaurants sold or closed. The breakdown of the sales increase for 1998 is
detailed below:
1998 Sales
Increase
----------
($ in
thousands)
Sales from the KKR Restaurant Division............................ $ 14,617
Increase in Sales of Comparable Restaurants....................... 4,814
Decrease in Sales of Restaurants Sold or Closed................... (10,502)
--------
$ 8,929
========
Sales for comparable restaurants of $451,928,000 for 1998 increased by
$4,814,000 or 1.1% compared to 1997. The increase is comprised of a $4,223,000
or 1.8% increase in Chi-Chi's and a $591,000 or 0.3% increase in El Torito,
achieved in the face of a continuing competitive operating environment for
restaurants.
1998
Comparable
Sales Increase
--------------
Amount Percent
------ -------
($ in
thousands)
Comparable Chi-Chi's.......................................... $4,223 1.8%
Comparable El Torito.......................................... 591 0.3
------
Total....................................................... $4,814 1.1%
====== ===
El Torito comparable sales for the year were up 0.3% as compared to the same
period in 1997. After the negative impact of the El Nino weather system in the
first quarter of 1998, comparable sales for the second, third and fourth
quarters were up 0.3%, 0.1% and 2.6%, respectively, as compared to the same
periods in 1997. During the third and fourth quarters, El Torito suspended the
use of electronic media for advertising, opting to reach targeted customers
utilizing alternative print media strategies. July began with the introduction
of El Torito's "All New Fajitas" campaign featuring a series of bounce-back
programs. In the fourth quarter, El Torito introduced the "XXL Fajitas
Skillets" promotion which featured seven new Fajitas entrees served on
oversize cast iron skillets. The in-restaurant marketing for the promotion
included brightly colored in-store material featuring an "actual size" Fajitas
skillet. The campaign was advertised utilizing print media and included
special discount offers designed to both generate new guest trial and increase
frequency of existing guests. In addition, El Torito introduced a Traditional
Holiday Combinations menu insert in December in an effort to trade guests into
higher margin entrees. Also contributing to El Torito's improving sales trends
are the positive results of the remodel program which started in 1997. As of
the end of fiscal 1998, El Torito had completed 32 remodels.
Comparable sales for Chi-Chi's were up 1.8% for the year as compared to the
same period in 1997. During the third and fourth quarters of 1998, Chi-Chi's
comparable sales were up 3.1% and 4.7%, respectively, as compared to the same
periods in 1997. July began with the media-supported introduction of Chi-Chi's
"Sizzling Sensation" campaign featuring the new Grilled Steak & Chicken Tower
and other items such as the Sizzling Enchiladas and the new Sizzling Burrito
and Sizzling Chimichanga. A free-standing insert extended the
19
campaign through mid-September and included special discount offers for all
times of the day to boost sales during the historic back-to-school sales lull.
Chi-Chi's continued with its marketing direction through the end of 1998
portraying the concept as a value-oriented, fun Mexican restaurant where you
can "put a little salsa in your life." Also contributing to Chi-Chi's
improving comparable sales trends are the favorable results of the remodel
program begun in 1997. Since the inception of the program, Chi-Chi's has
remodeled 45 restaurants, five of which incorporated an enhanced, more
extensive version of the original remodel concept.
Product costs of $126,788,000 for 1998 increased by $2,985,000 or 2.4% as
compared to 1997 due to the acquisition of the Koo Koo Roo and Hamburger
Hamlet restaurants in the Merger which accounts for $4,699,000 or 157.4% of
the increase, partially offset by the impact of the 22 restaurants sold or
closed since the beginning of 1997. As a percentage of sales, product costs
remained relatively flat, increasing slightly to 26.8% in 1998 from 26.7% in
1997.
Payroll and related costs of $165,207,000 for 1998 increased by $2,400,000
or 1.5% as compared to 1997 due to the acquisition of the Koo Koo Roo and
Hamburger Hamlet restaurants in the Merger which accounts for $5,308,000 or
221.2% of the increase, partially offset by the impact of the 22 restaurants
sold or closed since the beginning of 1997. As a percentage of sales, payroll
and related costs decreased slightly from 35.1% in 1997 to 35.0% in 1998 due
in part to a continuing focus on improving labor scheduling and efficiencies.
The improvement in payroll and related costs as a percentage of sales was
offset, in part, by the impact of the minimum wage increases nationally on
September 1, 1997, and on March 1, 1997 and March 1, 1998 in California.
The Company is subject to Federal and state laws governing matters such as
minimum wages, overtime and other working conditions. Approximately half of
the Company's employees are paid at rates related to the minimum wage.
Therefore, increases in the minimum wage or decreases in the allowable tip
credit (tip credits reduce the minimum wage that must be paid to tipped
employees in certain states) increase the Company's labor costs. This is
especially true in California, where there is no tip credit. Effective October
1, 1996, the Federal minimum wage was increased from $4.25 to $4.75, and
effective September 1, 1997, it was further increased to $5.15. However, a
provision of the new measure effectively froze the minimum wage for tipped
employees at current levels by increasing the allowable tip credit in those
states which allow for a tip credit. Furthermore, in California, voters
approved a proposition on November 5, 1996 that increased the state's minimum
wage to $5.00 on March 1, 1997 and further increased the state=s minimum wage
to $5.75 on March 1, 1998. In response to the minimum wage increases on
October 1, 1996, March 1, 1997 and March 1, 1998, the Company raised menu
prices at its El Torito restaurants in an effort to recover the higher payroll
costs. Chi-Chi's also raised menu prices in October and December 1997 as a
result of the cumulative impact of these minimum wage increases. Similarly, in
March 1998, KKR also raised menu prices. No minimum wage increases are
scheduled for 1999 at this time, but pressure continues for further increases
at both the Federal and California levels.
Occupancy and other operating expenses of $125,177,000 for 1998 decreased by
$4,251,000 or 3.3% as compared to 1997. The decrease was due to (i) the impact
of the 22 restaurants sold or closed since the beginning of 1997, (ii) the
impact of El Torito and Chi-Chi's cost reduction strategies and (iii) a
decrease in media advertising expense in El Torito, partially offset by the
acquisition of the Koo Koo Roo and Hamburger Hamlet restaurants in the Merger
which added $3,234,000 in additional costs. As a percentage of sales,
occupancy and other expenses decreased from 27.9% in 1997 to 26.5% in 1998.
Depreciation and amortization of $22,916,000 for 1998 increased by $521,000
or 2.3% as compared to 1997 due to the acquisition of the Koo Koo Roo and
Hamburger Hamlet restaurants in the Merger which accounts for $1,087,000 or
208.6% of the increase and additional depreciation related to the Company's
ongoing capital expenditure program, partially offset by the impact of the 22
restaurants sold or closed since the beginning of 1997 and the write-down of
certain long-lived assets in 1997 and 1998.
General and administrative expenses of $27,417,000 for 1998 decreased by
$2,769,000 or 9.2% as compared to 1997. As a percentage of sales, general and
administrative expenses decreased from 6.5% in 1997 to 5.8% in
20
1998. General and administrative expenses were relatively flat for the year
after taking into account the impact of $2,500,000 in prior year management
fee accrual reversals and no similar fees accrued in 1998, partially offset by
$1,012,000 in incremental expenses related to completing the Merger and the
Hamlet Acquisition and absorbing the KKR divisional operations. Management
continues to closely evaluate the Company's general and administative cost
structure for savings opportunities and expects that, as a result of the
Merger and the Hamlet Acquisition, general and administrative expenses will
decrease as a percentage of sales.
Opening costs are incurred in connection with the opening or remodeling of a
restaurant and are principally related to stocking the restaurant and training
its staff. Through the year ended December 28, 1997, the Company's policy had
been to capitalize such opening costs and amortize them over one year. In
April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up
Activities," which specifies that all costs of start-up activities, including
restaurant opening costs, should be expensed as incurred. Although SOP 98-5 is
effective for fiscal years beginning after December 15, 1998, early adoption
was allowed, and the Company elected to adopt the provisions of SOP 98-5 in
the quarter ended March 29, 1998. Accordingly, $344,000 of unamortized opening
costs at December 28, 1997 (classified as other current assets) was expensed
in the condensed consolidated statement of operations for the quarter ended
March 29, 1998. Opening costs incurred during the year ended December 27, 1998
were $3,001,000. Amortization of opening costs of $188,000 and $673,000 in the
comparable periods of 1997 and 1996 have been reclassified.
The Company reported a loss on disposition of properties of $8.0 million for
1998 compared to a loss of $3.9 million in 1997. These amounts reflect losses
associated with restaurant divestments and closures in such periods. In
addition, also included in 1998 is a $3.0 million increase in the Company=s
reserve for carrying costs of closed properties and the write-off of $2.2
million in notes receivable related to prior restaurant divestments.
As a result of a continued review of operating results and as part of its
strategic planning process for 1999, the Company identified 48 non-strategic
Chi-Chi's restaurants which are not part of the Chi-Chi's long-term core
market focus. In connection with this analysis, the Company analyzed the
carrying value of the long-lived assets of these restaurants, determined the
anticipated costs of divestment and recorded a provision for divestitures of
$22.9 million, which included reducing the assets' carrying value to their
estimated fair market value. The Company is actively marketing these
restaurants for divestment, and the majority of the restaurants continue in
operation. In addition, the Company identified 12 other restaurants with
impaired values and recorded a write-down of long-lived assets of $4.8
million.
Interest expense, net of $24,659,000 for 1998 increased by $5,183,000 or
26.6% as compared to 1997 primarily resulting from (i) the issuance of the
Senior Discount Notes in August 1997 and January 1998 and the accretion of
interest thereon and (ii) the issuance of the New MRD Notes on October 30,
1998 and the accretion of interest thereon, partially offset by the
elimination of cash interest expense associated with the $15.6 million of
Senior Notes received as part of the exchange on August 12, 1997.
Compensation expense of $4.2 million was recorded in the fourth quarter of
1998 in connection with the termination of the Company's Value Creation Units
Plan. Such expense consisted of a $4 million cash payment and approximately
$0.2 million for the intrinsic value of stock options granted on December 9,
1998 in connection with the termination of awards under the Value Creation
Units Plan. The stock options are fully vested options to purchase up to, in
the aggregate, 3% of the fully diluted Company Common Stock immediately
following the Merger (including shares to be reserved for issuance under the
Company's 1998 Stock Incentive Plan). Such options have a per share strike
price of $.50 and are not exercisable for a period of 90 days after issuance.
Fiscal year 1997 as compared to fiscal year 1996
Total sales of $463,724,000 for 1997 decreased by $260,505,000 or 36.0% as
compared to 1996. The decrease was due to (i) the loss of sales from the
Family Restaurant Division which was sold by the Company
21
on May 23, 1996, (ii) sales decreases for restaurants sold or closed and (iii)
sales declines in the comparable El Toritos and Chi-Chi's. The breakdown of
the sales decline for 1997 is detailed below:
1997 Sales
Decreases
----------
($ in
thousands)
Sales of the Family Restaurant Division.......................... $(194,464)
Decrease in Sales from Restaurants Sold or Closed................ (42,995)
Decrease in Sales from Comparable Restaurants.................... (23,046)
---------
$(260,505)
=========
Sales for comparable restaurants of $456,965,000 for 1997 decreased by
$23,046,000 or 4.8% compared to 1996. The decrease was comprised of a
$21,816,000 or 8.2% decline in Chi-Chi's and a $1,230,000 or 0.6% decline in
El Torito primarily reflecting a continuing competitive operating environment
for restaurants.
1997 Comparable
Sales Decrease
-----------------
Amount Percent
-------- -------
($ in thousands)
Comparable Chi-Chi's...................................... $(21,816) (8.2)%
Comparable El Torito...................................... (1,230) (0.6)
-------- ----
Total................................................... $(23,046) (4.8)%
======== ====
El Torito comparable sales for fiscal 1997 were down slightly as compared to
the same period in 1996. El Torito had hired a new advertising agency, Grey
Advertising, to continue to refine and build upon its long-term marketing
strategy, positioning El Torito as a "Mexican Getaway." Both television and
radio commercials were utilized to communicate this position. In addition, the
theme was incorporated into all in-store materials and menus.
Chi-Chi's continued with its new marketing direction through the end of 1997
portraying the concept as a value-oriented, fun Mexican restaurant where you
can "put a little salsa in your life." A new menu was introduced in December
that expanded the product offerings to appeal to a greater segment of the
population. Barbequed and grilled meats, related to Mexican cuisine, but not
considered traditional Mexican dishes, were added along with additional
Mexican entrees. Chi-Chi's comparable sales trend for 1997 improved
5.4 percentage points over that of 1996 with comparable sales down 8.2% for
1997 as compared with the 1996 versus 1995 negative trend of 13.6% for the
same group of restaurants.
Product cost of $123,803,000 for 1997 decreased by $76,576,000 or 38.2% in
1997 as compared to 1996 primarily due to the sale of the Family Restaurant
Division which accounted for $54,187,000 or 70.8% of the decrease, as well as
the impact of the 47 other restaurants sold or closed since the end of fiscal
1995. In addition, El Torito and Chi-Chi's cost reduction strategies further
contributed to product cost savings by revising product specifications,
reducing the number of ingredients used and controlling inventories. As a
percentage of sales, product cost declined to 26.7% in 1997 as compared to
27.7% in 1996.
Payroll and related costs of $162,807,000 for 1997 decreased by $110,729,000
or 40.5% as compared to 1996 primarily due to the sale of the Family
Restaurant Division which accounted for $72,997,000 or 65.9% of the decrease,
as well as the impact of the 47 other restaurants sold or closed since the end
of fiscal 1995. As a percent of sales, payroll and related costs decreased
from 37.8% in 1996 to 35.1% in 1997 due in part to savings realized from the
El Torito and Chi-Chi's cost reduction strategies which focused on improving
labor scheduling and efficiencies. The improvement in payroll and related
costs was offset, in part, by the impact of the minimum wage increases
nationally on October 1, 1996 and September 1, 1997 and on March 1, 1997 in
California.
Occupancy and other operating expenses of $129,428,000 for 1997 decreased by
$52,302,000 or 28.8% as compared to 1996 primarily due to the sale of the
Family Restaurant Division which accounted for $37,568,000
22
or 71.8% of the decrease, as well as the impact of the 47 other restaurants
sold or closed since the end of fiscal 1995. As a percentage of sales,
occupancy and other expenses increased from 25.1% in 1996 to 27.9% in 1997.
These increases primarily reflected (i) the impact of declining sales without
an offsetting reduction in fixed expenses, (ii) an increase in planned media
spending in both El Torito and Chi-Chi's in connection with the implementation
of new marketing campaigns in 1997 to reposition both concepts and (iii) the
lower occupancy and other operating expenses as a percentage of sales in the
Family Restaurant Division in the first five months of 1996.
Depreciation and amortization of $22,395,000 for 1997 decreased by
$11,407,000 or 33.8% as compared to 1996 primarily due to the sale of the
Family Restaurant Division which accounted for $11,162,000 or 97.9% of the
decrease.
General and administrative expenses of $30,186,000 for 1997 decreased by
$11,556,000 or 27.7% as compared to 1996 primarily due to the sale of the
Family Restaurant Division and the elimination of its direct and allocated
general and administrative expenses of $10,014,000. The Company eliminated 134
positions in its Louisville corporate office and 52 positions in its Irvine
corporate offices in connection with its reorganization after the sale of the
Family Restaurant Division. As a percentage of sales, general and
administrative expenses increased from 5.8% in 1996 to 6.5% in 1997 primarily
reflecting general and administrative expenses spread over fewer restaurants.
The Company reported a loss on disposition of properties of $3.9 million for
1997 compared to a loss of $8.6 million in 1996. These amounts reflect losses
associated with restaurant divestments and closures in such periods.
As a result of a continued review of operating results, the Company
identified 18 unprofitable Chi-Chi's restaurants, analyzed the carrying value
of the long-lived assets of these restaurants and recorded a write-down of
long-lived assets of $2.6 million during the second quarter of 1997 to reduce
the assets' carrying value to their estimated fair maket value.
The Company reported no restructuring costs in 1997 versus $6.5 million in
1996. These costs were primarily related to amounts paid to consultants,
professional fees, severance and related costs, and other restructuring
related expenses that were not incurred in 1997.
Interest expense, net of $19,476,000 for 1997 decreased by $17,249,000 or
47.0% as compared to 1996 primarily resulting from (i) lower interest expense
due to the repurchases of $181.0 million aggregate principal amount of the
Company's Senior Notes and $119.1 million aggregate principal amount of its
Discount Notes in the third and fourth quarters of 1996 and the exchange of
$15.6 million of Senior Notes on August 12, 1997, (ii) the repayment of
outstanding revolving debt under the Old Credit Facility in May 1996 and (iii)
the elimination of the Family Restaurant Division's interest costs, primarily
for capitalized lease obligations. These decreases were partially offset by
the increase due to the issuance of the Senior Discount Notes on August 12,
1997 and the accretion of interest thereon.
The Company recorded a gain of $62,601,000 in 1996 as a result of the sale
of the Family Restaurant Division.
The Company recognized an extraordinary gain of $134,833,000 in 1996 as a
result of several repurchases of the Notes.
Accounting Pronouncements
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," an amendment of SFAS No.
87, No. 88 and No. 106. This Statement revises employers' disclosures about
pension and other postretirement benefit plans. It does not change the
measurement
23
or recognition of those plans. It standardizes the disclosure requirements for
pensions and other postretirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair values
of plan assets that will facilitate financial analysis, and eliminates certain
disclosures that are no longer as useful. This Statement is not applicable to
the Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes standards for
derivative instruments and for hedging activities, and requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. The Company has no instruments or
transactions subject to this Statement.
In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-
Backed Securities Retained after the Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise." This Statement requires that after the
securitization of a mortgage loan held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed security as a
trading security. This Statement is not applicable to the Company.
Selected Operating Data
Until the Merger on October 30, 1998, the Company primarily operated full-
service Mexican restaurants in two divisions under the El Torito, Chi-Chi's,
Casa Gallardo and other names. In connection with the Merger and the Hamlet
Acquisition, the Company acquired the Koo Koo Roo and Hamburger Hamlet
restaurant operations. At December 27, 1998 the Company's El Torito restaurant
division operated 95 full-service and fast-casual restaurants, the Company's
Chi-Chi's restaurant division operated 165 full-service restaurants and the
Company's KKR restaurant division operated 54 fast-casual and full-service
restaurants.
24
The following table sets forth certain information regarding the Company,
its El Torito, Chi-Chi's and KKR restaurant divisions, and the various
operations divested in 1996.
For the Years Ended
----------------------------------------
December 27, December 28, December 29,
1998 1997 1996
------------ ------------ ------------
($ in thousands, except average check
amount)
El Torito Restaurant Division
Restaurants Open at End of Period:
Owned/operated..................... 95 96 97
Franchised and Licensed............ 8 9 7
Sales................................ $214,370 $217,949 $219,466
Restaurant Level Cashflow (a)........ 34,807 30,051 26,355
Divisional EBITDA (b)................ 22,869 17,627 11,956
Percentage increase (decrease) in
comparable restaurant sales......... 0.3% (0.6)% (3.0)%
Average check........................ $ 10.15 $ 9.87 $ 9.47
Chi-Chi's Restaurant Division
Restaurants Open at End of Period:
Owned/operated..................... 165 179 184
Franchised and Licensed............ 12 16 18
Sales................................ $243,666 $245,775 $278,065
Restaurant Level Cashflow (a)........ 18,285 16,515 9,674
Divisional EBITDA (b)................ 1,426 36 (4,278)
Percentage increase (decrease) in
comparable restaurant sales......... 1.8% (8.2)% (11.5)%
Average check........................ $ 8.12 $ 7.62 7.54
KKR Restaurant Division (c)
Restaurants Open at End of Period:
Owned/operated..................... 54 0 0
Franchised and Licensed............ 3 0 0
Sales................................ $ 14,617 $ 0 $ 0
Restaurant Level Cashflow (a)........ 1,376 0 0
Divisional EBITDA (b)................ 364 0 0
Percentage decrease in comparable
restaurant sales.................... N.A.% 0% 0%
Average check (Koo Koo Roo
restaurants only)................... $ 8.70 $ 0 $ 0
Ongoing Operations
Restaurants Open at End of Period:
Owned/operated..................... 314 275 281
Franchised and Licensed............ 23 25 25
Sales................................ $472,653 $463,724 $497,531
Divisional EBITDA (b)................ 24,659 17,663 7,678
Divested Operations (d)
Restaurants Open at End of Period:
Owned/operated..................... 0 0 0
Franchised and Licensed............ 0 0 0
Sales................................ $ 0 $ 0 $226,698
Divisional EBITDA (b)................ 0 0 18,877
Total Company
Restaurants Open at End of Period:
Owned/operated..................... 314 275 281
Franchised and Licensed............ 23 25 25
Sales................................ $472,653 $463,724 $724,229
EBITDA (e)........................... 28,064 (f) 17,500 26,842
- --------
25
(a) Restaurant Level Cashflow with respect to any operating division
represents Divisional EBITDA (as defined below) before general and
administrative expenses and any net franchise profit or miscellaneous
income (expense) reported by the respective division.
(b) Divisional EBITDA with respect to any operating division is defined as
earnings (loss) before opening costs, gain (loss) on disposition of
properties, interest, taxes, depreciation and amortization.
(c) Reflects operations for the months of November and December 1998.
(d) Divested Operations in 1996 includes the results of the Family
Restaurant Division until it was divested on May 23, 1996 and the
traditional dinnerhouse restaurants that were divested by year-end
1996.
(e) EBITDA is defined as earnings (loss) before opening costs, gain (loss)
on disposition of properties, gain on sale of division, provision for
divestitures and write-down of long-lived assets, VCU termination
expense, restructuring costs, interest, taxes, depreciation and
amortization and extraordinary items. The Company has included
information concerning EBITDA herein because it understands that such
information is used by certain investors as one measure of an issuer's
historical ability to service debt. EBITDA should not be considered as
an alternative to, or more meaningful than, operating income (loss) as
an indicator of operating performance or to cash flows from operating
activities as a measure of liquidity. Furthermore, other companies may
compute EBITDA differently, and therefore, EBITDA amounts among
companies may not be comparable.
(f) Includes the reversal of accrued management fees of $2,500,000 payable
to Apollo that will not be paid.
Inflation
The inflationary factors which have historically affected the Company's
results of operations include increases in the cost of food, alcoholic
beverages, labor and other operating expenses. In addition, most of the
Company's real estate leases require the Company to pay taxes, maintenance,
insurance, repairs and utility costs, all of which are subject to the effects
of inflation. To date, the Company has offset the effects of inflation, at
least in part, through periodic menu price increases and various cost-cutting
programs, but no assurance can be given that the Company will continue to be
able to offset such increases in the future.
During 1998 and 1997, the effects of inflation did not have a significant
impact on the Company's results of operations.
Seasonality
The Company, as a whole, does not experience significant seasonal
fluctuations in sales. However, the Company's sales tend to be slightly
greater during the spring and summer months.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Financial Statements on page F-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
26
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and executive officers of the Registrant is
incorporated herein by reference to the Company's definitive proxy statement
which will be filed with the Commission within 120 days of the Company's
fiscal year end.
Item 11. EXECUTIVE COMPENSATION
Information concerning executive compensation of the Registrant is
incorporated herein by reference to the Company's definitive proxy statement
which will be filed with the Commission within 120 days of the Company's
fiscal year end.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management of the Registrant is incorporated herein by reference to the
Company's definitive proxy statement which will be filed with the Commission
within 120 days of the Company's fiscal year end.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions with
the Registrant is incorporated herein by reference to the Company's definitive
proxy statement which will be filed with the Commission within 120 days of the
Company's fiscal year end.
27
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page
----
(a) (1) Financial Statements. See the Index to Financial Statements on
page F-1.
(2) Financial Statement Schedule
Schedule II--Valuation and qualifying accounts S-1
(3) Exhibits
2 (a) Stock Purchase Agreement dated as of March 1, 1996 by
and among Family Restaurants, Inc., Flagstar Companies,
Inc., Flagstar Corporation and FRD Acquisition Co.
(Filed as Exhibit 2.1 to the Company's Form 10-Q filed
with the SEC on May 15, 1996.)
2 (b) Agreement and Plan of Merger, dated as of June 9, 1998
by and among the Company, Fri-Sub, Inc. and Koo Koo Roo,
Inc. ("KKR"). (Filed as Exhibit 2.1 to the Company's
Form S-4 filed with the SEC on July 1, 1998.)
3 (a) Fifth Restated Certificate of Incorporation of the
Company. (Filed as Exhibit 4.1 to the Company's Form S-8
filed with the SEC on November 12, 1998.)
3 (b) Amendment to Fifth Restated Certificate of Incorporation
of the Company. (Filed as Exhibit 4.2 to the Company's
Form S-8 filed with the SEC on November 12, 1998.)
*3 (c) Second Amended and Restated Bylaws of the Company.
4 (a) Indenture Dated as of January 27, 1994
Re: $300,000,000 9 3/4% Senior Notes Due 2002. (Filed as
Exhibit 4(a) to the Company's Form 10-K filed with the
SEC on March 28, 1994.)
4 (b) Indenture Dated as of January 27, 1994
Re: $150,000,000 10 7/8% Senior Subordinated Discount
Notes Due 2004. (Filed as Exhibit 4(b) to the Company's
Form 10-K filed with the SEC on March 28, 1994.)
4 (c) First Supplemental Indenture, dated as of July 3, 1996,
between the Registrant and IBJ Schroder Bank & Trust
Company, a New York Banking corporation, as Trustee.
(Filed as Exhibit 10.1 to the Company's Form 8-K filed
with the SEC on July 9, 1996.)
4 (d) First Supplemental Indenture, dated as of July 3, 1996,
between the Registrant and Fleet National Bank, as
successor by merger to Fleet National Bank of
Massachusetts, formerly known as Shawmut Bank, N.A., as
Trustee. (Filed as Exhibit 10.2 to the Company's Form 8-
K filed with the SEC on July 9, 1996.)
4 (e) Note Agreement Dated as of August 12, 1997
Re: Up to $75,000,000 FRI-MRD Corporation Senior
Discount Notes Due January 24, 2002. (Filed as Exhibit
4(e) to the Company's Form 10-Q filed with the SEC on
November 12, 1997.)
4 (f) Joinder Agreement Dated as of January 14, 1998
Re: FRI-MRD Corporation Senior Discount Notes due
January 24, 2002. (Filed as Exhibit 4(f) to the
Company's Form 10-K filed with the SEC on March 30,
1998.)
4 (g) First Amendment dated as of June 9, 1998 to the Note
Agreement dated August 12, 1997. (Filed as Exhibit 4.7
to the Company's Form S-4 filed with the SEC on July 1,
1998.)
28
4 (h) Note Agreement dated as of June 9, 1998 Re: $24,000,000
FRI-MRD Corporation Senior Secured Discount Notes due
January 24, 2002. (Filed as Exhibit 4.8 to the
Company's Form S-4 filed with the SEC on July 1, 1998.)
4 (i) First Amendment dated as of October 30, 1998 to the
Note Agreement dated as of June 9, 1998. (Filed as
Exhibit 4(i) to the Company's Form 10-Q filed with the
SEC on November 12, 1998.)
*4 (j) Waiver dated as of January 29, 1999 to the Note
Agreements dated as of August 12, 1997 and June 9,
1998.
10 (a) The Company's 1994 Incentive Stock Option Plan. (Filed
as Exhibit 10(g) to the Company's Form 10-K filed with
the SEC on March 28, 1994.)
10 (b) The Company's Deferred Compensation Plan. (Filed as
Exhibit 10(k) to the Company's Form 10-K filed with the
SEC on March 27, 1995.)
10 (c) The Company's Severance Plan. (Filed as Exhibit 10(m)
to the Company's Form 10-K filed with the SEC on March
27, 1995.)
10 (d) Lease Indemnification Agreement, dated as of January
27, 1994, by and between the Company and W. R. Grace &
Co.-Conn. (Filed as Exhibit 10(ii) to the Company's
Form 10-K filed with the SEC on March 28, 1994.)
10 (e) Tax Sharing Agreement, dated as of January 27, 1994, by
and among the Company, Foodmaker, Inc. and Chi-Chi's,
Inc. (Filed as Exhibit 10(ll) to the Company's Form 10-
K filed with the SEC on March 28, 1994.)
10 (f) Registration Rights Agreement, dated as of January 27,
1994, by and among the Company and certain of its
shareholders. (Filed as Exhibit 10(mm) to the Company's
Form 10-K filed with the SEC on March 28, 1994.)
*10 (g) The Company's 1997 Management Incentive Compensation
Plan Description.
*10 (h) The Company's 1998 Management Incentive Compensation
Plan Description.
10 (i) Termination of Management Services Agreement between
Leonard Green & Associates, L.P. and the Company, dated
as of November 20, 1995. (Filed as Exhibit 10(s) to the
Company's Form 10-K filed with the SEC on March 31,
1997.)
10 (j) Loan and Security Agreement, dated as of January 10,
1997, between Foothill Capital Corporation and the
Company and its subsidiaries named therein. (Filed as
Exhibit 10(w) to the Company's Form 10-K filed with the
SEC on March 31, 1997.)
10 (k) General Continuing Guarantee, dated as of January 10,
1997, by the Company in favor of Foothill Capital
Corporation. (Filed as Exhibit 10(x) to the Company's
Form 10-K filed with the SEC on March 31, 1997.)
10 (l) Form of subsidiary General Continuing Guarantee, dated
as of January 10, 1997. (Filed as Exhibit 10(y) to the
Company's Form 10-K filed with the SEC on March 31,
1997.)
10 (m) Security Agreement, dated as of January 10, 1997,
between Foothill Capital Corporation and the Company.
(Filed as Exhibit 10(z) to the Company's Form 10-K
filed with the SEC on March 31, 1997.)
10 (n) Form of subsidiary Security Agreement, dated as of
January 10, 1997, between Foothill Capital Corporation
and the subsidiary named therein. (Filed as
Exhibit 10(aa) to the Company's Form 10-K filed with
the SEC on March 31, 1997.)
10 (o) Stock Pledge Agreement, dated as of January 10, 1997,
between the Company and Foothill Capital Corporation.
(Filed as Exhibit 10(bb) to the Company's Form 10-K
filed with the SEC on March 31, 1997.)
29
10 (p) Form of subsidiary Stock Pledge Agreement, dated as of
January 10, 1997, between the subsidiary named therein
and Foothill Capital Corporation. (Filed as
Exhibit 10(cc) to the Company's Form 10-K filed with
the SEC on March 31, 1997.)
10 (q) Trademark Security Agreement, dated as of January 10,
1997, by Chi-Chi's, Inc. in favor of Foothill Capital
Corporation. (Filed as Exhibit 10(dd) to the Company's
Form 10-K filed with the SEC on March 31, 1997.)
10 (r) Trademark Security Agreement, dated as of January 10,
1997, by El Torito Restaurants, Inc. in favor of
Foothill Capital Corporation. (Filed as Exhibit 10(ee)
to the Company's Form 10-K filed with the SEC on March
31, 1997.)
10 (s) First Amendment to the Loan and Security Agreement
dated as of May 23, 1997 by and among the parties
thereto. (Filed as Exhibit 10(gg) to the Company's
Form 10-Q filed with the SEC on August 13, 1997.)
10 (t) Amendment Number Two to Loan and Security Agreement
dated as of August 12, 1997 by and among the parties
thereto. (Filed as Exhibit 10(hh) to the Company's
Form 10-Q filed with the SEC on November 12, 1997.)
10 (u) Distribution Service Agreement, dated as of November
1, 1997, between El Torito Restaurants, Inc. and The
SYGMA Network, Inc. (Portions of this document have
been omitted pursuant to a request for confidential
treatment.) (Filed as Exhibit 10(bb) to the Company's
Form 10-K filed with the SEC on March 30, 1998.)
10 (v) Distribution Service Agreement, dated as of April 30,
1997, between Chi-Chi's, Inc. and Sysco Corporation.
(Portions of this document have been omitted pursuant
to a request for confidential treatment.) (Filed as
Exhibit 10(cc) to the Company's Form 10-K filed with
the SEC on March 30, 1998.)
10 (w) Stock Purchase Agreement dated as of June 9, 1998 by
and between FRI-MRD Corporation and KKR. (Filed as
Exhibit 10.1 to the Company's Form S-4 filed with the
SEC on July 1, 1998.)
10 (x) Bridge Loan Agreement dated as of June 9, 1998 among
the Hamlet Group, Inc., as borrower, KKR, H.H.K. of
Virginia, and H.H. of Maryland, Inc., as guarantors,
and FRI-MRD Corporation, as lender. (Filed as Exhibit
10.2 to the Company's Form S-4 filed with the SEC on
July 1, 1998.)
10 (y) Amendment Number Three to Loan and Security Agreement
dated as of April 9, 1998 by and among the parties
thereto. (Filed as Exhibit 10.29 to Amendment No. 1 to
the Company's Form S-4 filed with the SEC on August
18, 1998.)
10 (z) Amendment Number Four to Loan and Security Agreement
dated as of June 9, 1998 by and among the parties
thereto. (Filed as Exhibit 10.30 to Amendment No. 1 to
the Company's Form S-4 filed with the SEC on August
18, 1998.)
10 (aa) Amendment Number Five to Loan and Security Agreement
dated as of October 30, 1998 by and among the parties
thereto. (Filed as Exhibit 10(hh) to the Company's
Form 10-Q filed with the SEC on November 12, 1998.)
10 (bb) Koo Koo Roo Enterprises, Inc. 1998 Stock Incentive
Plan. (Filed as Exhibit 10(ii) to the Company's Form
10-Q filed with the SEC on November 12, 1998.)
*10 (cc) General Continuing Guarantee dated October 30, 1998 by
The Hamlet Group, Inc.
*10 (dd) Amendment Number One to General Continuing Guarantee
and Security Agreement, dated as of October 30, 1998
between Foothill and the Company.
30
*10 (ee) Amendment Number One to Security Agreement dated
October 30, 1998 between Foothill and FRI-MRD
Corporation.
*10 (ff) Amendment Number One to Stock Pledge Agreement dated
October 30, 1998 between Foothill Capital Corporation
and FRI-MRD Corporation.
*10 (gg) General Continuing Guarantee dated October 30, 1998 by
KKR.
*10 (hh) Security Agreement dated October 30, 1998 between
Foothill Capital Corporation and KKR.
*10 (ii) Amended and Restated Employment Agreement dated as of
November 9, 1998 by and between Kevin S. Relyea, the
Company and certain subsidiaries.
*10 (jj) Amended and Restated Employment Agreement dated as of
November 9, 1998 by and between Roger K. Chamness, the
Company and certain subsidiaries.
*10 (kk) Amended and Restated Employment Agreement dated as of
November 9, 1998 by and between William D. Burt, the
Company and certain subsidiaries.
*10 (ll) Employment Agreement dated as of November 1, 1998 by
and between Gayle A. DeBrosse, the Company and certain
subsidiaries.
*10 (mm) Nominating Agreement dated as of December 1, 1998
between the Company and AIF II, L.P.
*10 (nn) Amendment Number Six to Loan and Security Agreement
dated as of February 26, 1999 by and among the parties
thereto.
*21 (a) List of Subsidiaries.
*21 (b) Names Under Which Subsidiaries Do Business.
*23 Consent of KPMG LLP.
*27 Financial Data Schedule.
(b) Reports on Form 8-K
On November 2, 1998, the Company filed a report on Form 8-K announcing
the completion of the Merger.
- --------
* Filed herewith.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
KOO KOO ROO ENTERPRISES, INC.
/s/ Robert T. Trebing, Jr.
By: _________________________________
Robert T. Trebing, Jr.
Executive Vice President and
Chief Financial Officer
Date: March 29, 1999
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Kevin S. Relyea Chairman, President and Chief March 29, 1999
____________________________________ Executive Officer (Principal
Kevin S. Relyea Executive Officer)
/s/ A. William Allen, III Director March 29, 1999
____________________________________
A. William Allen, III
/s/ Peter P. Copses Director March 29, 1999
____________________________________
Peter P. Copses
/s/ George G. Golleher Director March 29, 1999
____________________________________
George G. Golleher
/s/ Lee A. Iacocca Director March 29, 1999
____________________________________
Lee A. Iacocca
/s/ David B. Kaplan Director March 29, 1999
____________________________________
David B. Kaplan
/s/ Antony P. Ressler Director March 29, 1999
____________________________________
Antony P. Ressler
/s/ Robert T. Trebing, Jr. Executive Vice President and March 29, 1999
____________________________________ Chief Financial Officer
Robert T. Trebing, Jr. (Principal Financial and
Accounting Officer)
32
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
KOO KOO ROO ENTERPRISES, INC.
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of December 27, 1998 and December 28,
1997.................................................................... F-3
Consolidated Statements of Operations for the Years Ended December 27,
1998, December 28, 1997 and December 29, 1996........................... F-4
Consolidated Statements of Common Stockholders' Equity (Deficit) for the
Years Ended December 27, 1998, December 28, 1997 and December 29, 1996.. F-5
Consolidated Statements of Cash Flows for the Years Ended December 27,
1998, December 28, 1997 and December 29, 1996........................... F-6
Notes to Consolidated Financial Statements............................... F-8
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors
Koo Koo Roo Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets of Koo Koo Roo
Enterprises, Inc. (formerly known as Family Restaurants, Inc.) and its
subsidiaries as of December 27, 1998 and December 28, 1997, and the related
consolidated statements of operations, common stockholders' equity (deficit)
and cash flows for the years ended December 27, 1998, December 28, 1997 and
December 29, 1996. In connection with our audits of the consolidated financial
statements, we also audited the financial statement schedule as listed in the
accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Koo Koo
Roo Enterprises, Inc. and its subsidiaries as of December 27, 1998 and
December 28, 1997, and the results of their operations and their cash flows
for the years ended December 27, 1998, December 28, 1997 and December 29, 1996
in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly in all material respects the information shown therein.
KPMG LLP
Orange County, California
March 1, 1999
F-2
KOO KOO ROO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
December 27, December 28,
1998 1997
------------ ------------
($ in thousands)
ASSETS
------
Current assets:
Cash and cash equivalents.......................... $ 17,707 $ 32,518
Receivables........................................ 9,106 3,944
Inventories........................................ 5,020 4,569
Other current assets............................... 3,957 4,086
--------- ---------
Total current assets............................. 35,790 45,117
Property and equipment, net.......................... 201,314 183,601
Reorganization value in excess of amount allocable to
identifiable assets, net............................ 35,129 36,529
Costs in excess of net assets of business acquired,
net................................................. 56,455 0
Other assets......................................... 19,498 24,521
--------- ---------
$ 348,186 $ 289,768
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Current portion of long-term debt, including
capitalized lease obligations..................... $ 2,498 $ 2,694
Accounts payable................................... 22,447 13,959
Self-insurance reserves............................ 25,040 32,515
Other accrued liabilities.......................... 74,833 58,573
Income taxes payable............................... 3,742 3,788
--------- ---------
Total current liabilities........................ 128,560 111,529
Other long-term liabilities.......................... 3,612 4,478
Long-term debt, including capitalized lease
obligations, less current portion................... 237,151 199,955
Stockholders' deficit:
Common stock--authorized 300,000,000 shares, par
value $.01, 178,105,294 shares issued and
outstanding in 1998 and 121,515,391 shares issued
and outstanding in 1997........................... 1,781 1,215
Additional paid-in capital......................... 222,353 154,729
Accumulated deficit................................ (245,271) (182,138)
--------- ---------
Total stockholders' deficit...................... (21,137) (26,194)
--------- ---------
$ 348,186 $ 289,768
========= =========
See accompanying notes to consolidated financial statements.
F-3
KOO KOO ROO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
----------------------------------------
December 27, December 28, December 29,
1998 1997 1996
------------ ------------ ------------
($ in thousands, except per share
amounts)
Sales................................ $ 472,653 $ 463,724 $ 724,229
----------- ----------- -----------
Product costs........................ 126,788 123,803 200,379
Payroll and related costs............ 165,207 162,807 273,536
Occupancy and other operating
expenses............................ 125,177 129,428 181,730
Depreciation and amortization........ 22,916 22,395 33,802
General and administrative expenses.. 27,417 30,186 41,742
Opening costs........................ 3,345 188 673
Loss on disposition of properties,
net................................. 7,993 3,885 8,600
Provision for divestitures and write-
down of long-lived assets........... 27,661 2,640 0
VCU termination expense.............. 4,223 0 0
Restructuring costs.................. 0 0 6,546
----------- ----------- -----------
Total costs and expenses........... 510,727 475,332 747,008
----------- ----------- -----------
Operating loss....................... (38,074) (11,608) (22,779)
Interest expense, net................ 24,659 19,476 36,725
Gain on sale of division............. 0 0 62,601
----------- ----------- -----------
Income (loss) before income tax
provision and extraordinary item.... (62,733) (31,084) 3,097
Income tax provision................. 400 509 890
----------- ----------- -----------
Income (loss) before extraordinary
item................................ (63,133) (31,593) 2,207
Extraordinary gain on extinguishment
of debt............................. 0 0 134,833
----------- ----------- -----------
Net income (loss).................... $ (63,133) $ (31,593) $ 137,040
=========== =========== ===========
Net income (loss) per share--basic
and diluted:
Income (loss) before extraordinary
item.............................. $ (0.48) $ (0.26) $ 0.02
Extraordinary item................. -- -- 1.11
----------- ----------- -----------
Net income (loss).................. $ (0.48) $ (0.26) $ 1.13
=========== =========== ===========
Weighted average shares outstanding--
basic and diluted................... 131,309,797 121,515,391 121,515,391
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-4
KOO KOO ROO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 27, 1998
Notes
Common Stock Additional Receivable
------------------ Paid-in from Accumulated
Shares Amount Capital Stockholders Deficit Total
----------- ------ ---------- ------------ ----------- ---------
($ in thousands)
Balance at December 31,
1995................... 121,515,391 $1,215 $155,663 $(869) $(287,585) $(131,576)
Net income.............. 0 0 0 0 137,040 137,040
Cancellation of notes
receivable from
stockholders........... 0 0 (934) 869 0 (65)
----------- ------ -------- ----- --------- ---------
Balance at December 29,
1996................... 121,515,391 1,215 154,729 0 (150,545) 5,399
Net loss................ 0 0 0 0 (31,593) (31,593)
----------- ------ -------- ----- --------- ---------
Balance at December 28,
1997................... 121,515,391 1,215 154,729 0 (182,138) (26,194)
Net loss................ 0 0 0 0 (63,133) (63,133)
Issuance of common stock
to acquire KKR......... 56,589,903 566 67,437 0 0 68,003
VCU termination
expense................ 0 0 187 0 0 187
----------- ------ -------- ----- --------- ---------
Balance at December 27,
1998................... 178,105,294 $1,781 $222,353 $ 0 $(245,271) $ (21,137)
=========== ====== ======== ===== ========= =========
See accompanying notes to consolidated financial statements.
F-5
KOO KOO ROO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
--------------------------------------
December 27, December 28, December 29,
1998 1997 1996
------------ ------------ ------------
($ in thousands)
Increase (Decrease) in Cash and Cash Equivalents
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers.......... $ 471,716 $ 464,780 $ 727,849
Cash received from franchisees and
licensees............................ 2,018 2,074 2,762
Cash paid to suppliers and employees.. (454,024) (465,069) (711,462)
Cash paid for VCU termination
expense.............................. (4,036) 0 0
Interest received..................... 1,931 2,119 4,176
Interest paid......................... (16,653) (16,747) (38,392)
Opening costs......................... (3,001) 0 0
Restructuring costs................... 0 0 (6,546)
Income taxes paid..................... (446) (262) (244)
--------- --------- ---------
Net cash used in operating
activities......................... (2,495) (13,105) (21,857)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of property and
equipment............................ 4,862 1,492 25,115
Proceeds from sale of FRD, net........ 0 0 121,342
Proceeds from sale of notes
receivable, net...................... 0 3,514 32,116
Cash required for Merger and Hamlet
Acquisition.......................... (17,016) 0 0
Capital expenditures.................. (27,691) (13,588) (9,848)
Mandatory lease buyback, net.......... 0 (2,690) 0
Lease termination payments............ (1,349) (2,891) (3,398)
Capitalized opening costs............. 0 (532) (235)
Other................................. (566) (1,936) (68)
--------- --------- ---------
Net cash provided by (used in)
investing activities............... (41,760) (16,631) 165,024
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchases of notes.................. 0 0 (32,513)
Net proceeds from issuance of notes... 33,304 33,947 0
Repayments of working capital
borrowings, net...................... 0 0 (79,815)
Payment of debt issuance costs........ (1,141) (2,418) (278)
Reductions of long-term debt,
including capitalized lease
obligations.......................... (2,719) (3,095) (5,111)
--------- --------- ---------
Net cash provided by (used in)
financing activities............... 29,444 28,434 (117,717)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents............................ (14,811) (1,302) 25,450
Cash and cash equivalents at beginning
of period.............................. 32,518 33,820 8,370
--------- --------- ---------
Cash and cash equivalents at end of
period................................. $ 17,707 $ 32,518 $ 33,820
========= ========= =========
F-6
KOO KOO ROO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
For the Years Ended
--------------------------------------
December 27, December 28, December 29,
1998 1997 1996
------------ ------------ ------------
($ in thousands)
Reconciliation of Net Income (Loss) to Net Cash Used in Operating Activities
Net income (loss)...................... $(63,133) $(31,593) $ 137,040
-------- -------- ---------
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Depreciation and amortization........ 22,916 22,395 33,802
Amortization of debt issuance costs.. 1,250 1,084 2,125
Expense of unamortized opening
costs............................... 344 0 0
Loss on disposition of properties.... 7,993 3,885 8,600
Provision for divestitures and write-
down of long-lived assets........... 27,661 2,640 0
VCU termination expense related to
stock options....................... 187 0 0
Gain on sale of division............. 0 0 (62,601)
Extraordinary gain on extinguishment
of debt............................. 0 0 (134,833)
Accretion of interest on notes....... 8,757 2,845 9,025
(Increase) decrease in receivables... (819) 304 1,661
(Increase) decrease in inventories... 93 (32) 1,176
(Increase) decrease in other current
assets.............................. 30 (342) 3,563
Increase (decrease) in accounts
payable............................. 4,767 (5,041) (4,792)
Decrease in self-insurance reserves.. (7,475) (2,457) (382)
Decrease in other accrued
liabilities......................... (5,020) (7,040) (17,507)
Increase (decrease) in income taxes
payable............................. (46) 247 1,266
-------- -------- ---------
Total adjustments.................. 60,638 18,488 (158,897)
-------- -------- ---------
Net cash used in operating activities.. $ (2,495) $(13,105) $ (21,857)
======== ======== =========
Supplemental schedule of noncash investing and financing activities:
Capital expenditures and cash flows from financing activities exclude
capitalized leases of $903 in 1998.
See Note 2 for discussion of the Merger.
See Note 7 for discussion of repurchases of the Notes.
Disclosure of accounting policy:
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
See accompanying notes to consolidated financial statements.
F-7
KOO KOO ROO ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Each of the Three Years in the Period Ended December 27, 1998
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Koo Koo Roo Enterprises, Inc., formerly known as Family Restaurants, Inc.
(together with its subsidiaries, the "Company"), was incorporated in Delaware
in 1986. The Company is primarily engaged in the operation of restaurants in
the full-service and fast-casual segments, through its subsidiaries.
Information relating to periods ending prior to October 30, 1998 included
herein relates to the historical operations of Family Restaurants, Inc. and,
except as otherwise indicated, does not reflect the operations of Koo Koo Roo,
Inc., a Delaware corporation ("KKR"), which the Company acquired on October
30, 1998. At December 27, 1998, the Company operated 314 restaurants in 28
states, approximately 65% of which are located in California, Ohio,
Pennsylvania, Indiana and Michigan, and franchised and licensed 23 restaurants
outside the United States.
Fiscal year
The Company reports results of operations based on 52 or 53 week periods
ending on the last Sunday in December. The fiscal years ended December 27,
1998, December 28, 1997 and December 29, 1996 included 52 weeks.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated.
Estimations
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.
Inventories
Inventories consist primarily of food and liquor and are stated at the lower
of cost or market. Costs are determined using the first-in, first-out (FIFO)
method.
Property and equipment
Property and equipment are stated at cost and are depreciated on a straight-
line basis over their estimated useful lives (buildings principally over 25 to
35 years and furniture, fixtures and equipment over 3 to 10 years). Leasehold
improvements are amortized on a straight-line basis over the shorter of their
estimated useful lives or the terms of the related leases. Property under
capitalized leases is amortized over the terms of the leases using the
straight-line method.
Losses on disposition of properties are recognized when a commitment to
divest a restaurant property is made by the Company and include estimated
carrying costs through the expected disposal date.
Advertising
Production costs of commercials and programming are charged to operations
when aired. Costs of other advertising, promotion and marketing programs are
charged to operations in the year incurred.
F-8
KOO KOO ROO ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Franchise and license fees
Initial franchise and license fees are recognized when all material services
have been performed and conditions have been satisfied. Initial fees for 1998
totaled $350,000 and were insignificant for 1997 and 1996. Monthly fees for
all franchise and license arrangements are accrued as earned based on the
respective monthly sales. Such fees totaled $1,331,000 for 1998, $2,215,000
for 1997 and $2,802,000 for 1996 and offset general and administrative
expenses.
Reorganization value
Reorganization value in excess of amounts allocable to identifiable assets
is amortized using the straight-line method over 30 years. Accumulated
amortization of reorganization value amounted to $6,896,000 at December 27,
1998 and $5,496,000 at December 28, 1997.
Costs in excess of net assets of business acquired, net
Costs in excess of net assets of business acquired is amortized using the
straight-line method over 40 years. Accumulated amortization amounted to
$244,000 at December 27, 1998.
Impairment of long-lived assets
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," which generally requires the assessment of certain long-lived assets for
possible impairment when events or circumstances indicate the carrying value
of these assets may not be recoverable.
The Company evaluates property and equipment for impairment by comparison of
the carrying value of the assets to estimated undiscounted cash flows (before
interest charges) expected to be generated by the asset over its estimated
remaining useful life. In addition, the Company's evaluation considers data
such as continuity of personnel, changes in the operating environment, name
identification, competitive information and market trends. Finally, the
evaluation considers changes in management's strategic direction or market
emphasis. When the foregoing considerations suggest that a deterioration of
the financial condition of the Company or any of its assets has occurred, the
Company measures the amount of an impairment, if any, based on the estimated
fair value of each of its assets.
As a result of a continued review of operating results, the Company
identified nine unprofitable Chi-Chi's and three unprofitable El Torito
restaurants which may either take too long to recover profitability or may not
recover at all, despite current marketing and cost control programs. In
connection with this analysis, the Company analyzed the carrying value of the
long-lived assets of these restaurants and recorded a write-down of long-lived
assets of $4.8 million during the fourth quarter of 1998 to reduce the assets'
carrying value to their estimated fair market value.
Also, during 1997, the Company identified 18 unprofitable Chi-Chi's
restaurants with impaired values. In connection with this analysis, the
Company analyzed the carrying value of the long-lived assets of these
restaurants and recorded a write-down of long-lived assets of $2.6 million
during the second quarter of 1997 to reduce the assets' carrying value to
their estimated fair market value.
Opening costs
Opening costs are incurred in connection with the opening or remodeling of a
restaurant and are principally related to stocking the restaurant and training
its staff. Through the year ended December 28, 1997, the
F-9
KOO KOO ROO ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company's policy had been to capitalize such opening costs and amortize them
over one year. In April 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the
Costs of Start-Up Activities," which specifies that all costs of start-up
activities, including restaurant opening costs, should be expensed as
incurred. Although SOP 98-5 is effective for fiscal years beginning after
December 15, 1998, early adoption was allowed, and the Company adopted the
provisions of SOP 98-5 in the quarter ended March 29, 1998.
Accordingly, $344,000 of unamortized opening costs at December 28, 1997
(classified as other current assets) was expensed in the condensed
consolidated statement of operations for the quarter ended March 29, 1998.
Opening costs incurred during 1998 were $3,001,000. Amortization of opening
costs of $188,000 and $673,000 in 1997 and 1996, respectively, has been
reclassified in the accompanying consolidated statements of operations.
Net income (loss) per common share
Statement of Financial Acocunting Standards ("SFAS") No. 128, "Earnings per
Share" specifies the computation, presentation and disclosure requirements for
earnings (loss) per share for entities with publicly held common stock. The
impact of common stock equivalents has not been included since the impact
would be antidilutive for all periods presented.
Share and per share restatement
On October 30, 1998, the Company declared a stock dividend pursuant to which
approximately 121.96 shares of Company Common Stock were distributed for each
share of Company Common Stock outstanding immediately prior to the Merger. All
data with respect to earnings (loss) per share and share information in the
consolidated financial statements has been retroactively adjusted to reflect
the stock dividend.
Stock-based employee compensation
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company measures stock-based employee compensation cost for financial
statement purposes in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and its related
interpretations and includes pro forma information in Note 13. Accordingly,
compensation cost for the stock option grants to employees is measured as the
excess of the quoted market price of the Company's common stock at the grant
date over the amount the employee must pay for the stock.
Comprehensive income
In 1998, the Company adopted SFAS No. 130 ("SFAS 130"), "Reporting
Comprehensive Income." This statement establishes rules for the reporting of
comprehensive income and its components. The adoption of SFAS 130 did not
impact the Company's consolidated financial statements or related disclosures
as the Company does not have any components of other comprehensive income.
Therefore, comprehensive income (loss) equaled net income (loss) for all
periods presented.
Segment disclosures
In 1998, the Company adopted SFAS No. 131 ("SFAS 131"), "Disclosures about
Segments of an Enterprise and Related Information." SFAS 131 establishes
standards for reporting information about operating segments. The Company's
reportable segments are based on restaurant operating divisions.
F-10
KOO KOO ROO ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income taxes
The Company accounts for income taxes using the principles specified in
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes."
Reclassifications
Certain amounts as previously reported have been reclassified to conform to
the 1998 presentation.
NOTE 2--KKR MERGER:
On October 30, 1998, the Company, FRI-Sub, Inc. ("Merger Sub"), an indirect
wholly owned subsidiary of the Company, and KKR consummated a merger (the
"Merger"), pursuant to which Merger Sub was merged with and into KKR, with KKR
as the surviving corporation. The Merger was effected after KKR received
stockholder approval for the Merger at a special meeting of KKR stockholders
held on October 30, 1998.
As a result of the Merger, each outstanding share of common stock, $.01 par
value, of KKR was converted into the right to receive one share of common
stock, par value $.01 per share, of the Company (the "Company Common Stock").
Accordingly, the aggregate number of shares of Company Common Stock issued in
the Merger was approximately 56.6 million. Immediately prior to the Merger, a
stock dividend was declared pursuant to which approximately 121.96 shares of
Company Common Stock were distributed for each share of Company Common Stock
outstanding immediately prior to the Merger. Prior to the Merger, the Company
provided a $3 million loan to a subsidiary of KKR which was repaid after
completion of the Merger. Additionally, in connection with the Merger, FRI-MRD
Corporation, a wholly owned subsidiary of the Company ("FRI-MRD"), issued $24
million aggregate face amount of new senior secured discount notes (the "New
MRD Notes") pursuant to the Senior Secured Discount Note Agreement dated June
9, 1998 for which it received net proceeds of $21.7 million and the Company
expanded the Foothill Credit Facility (as defined below) by an additional
$20 million. The proceeds from the sale of the New MRD Notes were used to
acquire all of the outstanding capital stock of The Hamlet Group, Inc.
("Hamlet") from KKR immediately prior to the consummation of the Merger (the
"Hamlet Acquisition"). The Merger and the Hamlet Acquisition were accounted
for as a purchase. Accordingly, the results of operations and financial
position of KKR (including Hamlet) are combined with the results of operations
and financial position of the Company subsequent to the purchase.
The assets acquired, including the costs in excess of net assets of business
acquired, and liabilities assumed in the Merger and the Hamlet Acquisition are
as follows ($ in thousands):
Tangible assets acquired at fair value......................... $ 44,915
Costs in excess of net assets of business acquired............. 56,699
Liabilities assumed at fair value.............................. (16,595)
--------
Total purchase price........................................... $ 85,019
========
The allocation of purchase price to the fair value of tangible assets
acquired and liabilities assumed is dependent upon certain valuations and
other studies that have not progressed to a stage where there is sufficient
information to make a definitive allocation. Although the purchase price
allocation is preliminary, the Company does not anticipate that there will be
significant changes necessary to arrive at the final allocation.
The following table summarizes unaudited pro forma combined financial
information for the Company, assuming the Merger and the Hamlet Acquisition
occurred as of the beginning of fiscal 1997. The unaudited pro forma combined
financial information is not indicative of the results of operations of the
combined companies
F-11
KOO KOO ROO ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
that would have occurred had the Merger and the Hamlet Acquisition occurred at
the beginning of the periods presented, nor is it indicative of future
operating results. The unaudited pro forma adjustments are based upon
currently available information and certain assumptions that management
believes are reasonable under the circumstances.
Fiscal Year Ended
-------------------------
December 27, December 28,
1998 1997
------------ ------------
(Pro Forma)
($ in thousands, except
per share data)
Consolidated Statements of Operations
Information--
Sales........................................ $546,683 $532,062
Net loss..................................... $(87,219) $(55,205)
Pro forma basic and diluted loss per common
share....................................... $ (0.49) $ (0.31)
Pro forma weighted average number of common
shares outstanding (in thousands)........... 178,105 178,105
NOTE 3--RECEIVABLES:
A summary of receivables follows:
1998 1997
------ ------
($ in
thousands)
Trade, principally credit cards............................. $3,113 $2,057
License and franchise fees and related receivables.......... 254 341
FRD Notes................................................... 3,250 0
Interest on FRD Notes....................................... 186 186
Notes receivable............................................ 153 127
Other....................................................... 2,150 1,233
------ ------
$9,106 $3,944
====== ======
NOTE 4--STRATEGIC DIVESTMENT PROGRAM AND SALE OF RESTAURANTS:
In the fourth quarter of 1998, 48 non-strategic Chi-Chi's restaurants were
designated for divestment (the "Strategic Divestment Program"). In conjunction
with the Strategic Divestment Program, the Company recorded a provision for
divestitures of $22,884,000. This provision consisted of (i) $10,628,000 for
the write-down to net realizable value of the property and equipment
associated with such restaurants, (ii) $1,465,000 for severance costs
associated with approximately three regional managers and 144 restaurant
managers in connection with the restaurants to be divested and (iii)
$10,791,000 for costs associated with lease terminations, subsidized
subleases, brokerage fees and other divestment costs. During 1998, these
restaurants had sales of $48,969,000 and restaurant level operating losses of
$3,978,000. Most of the restaurants are still in operation, and, accordingly,
only $1,645,000 of the divestiture reserves have been utilized as of December
27, 1998. The Strategic Divestment Program is scheduled to be completed over a
12 to 18 month timeframe and the operating results will be included in the
Company's consolidated statement of operations until the divestments are
completed.
On March 1, 1996, the Company entered into a definitive agreement (the "Sale
Agreement") to sell its family restaurant division which operated full-service
family restaurants (the "Family Restaurant Division"). On May 23, 1996, the
Company completed the sale of the Family Restaurant Division in exchange for
$125 million cash, $150 million principal amount of 12 1/2% Senior Notes due
in 2004 (the "FRD Notes"), and the assumption of $31.5 million of long-term
debt, primarily consisting of capitalized lease obligations. Based on the
subsequent
F-12
KOO KOO ROO ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
completion of a closing balance sheet, the purchase price was increased and
such increase was satisfied by the issuance of $6.9 million in additional FRD
Notes. The Company recorded a gain of $62.6 million on the sale of the Family
Restaurant Division, which gain included the effect of the increase in
purchase price of $6.9 million discussed above. Cash proceeds from the sale
were used to pay indebtedness outstanding under the Old Credit Facility (see
Note 7) of $82 million, to help fund the repurchases of the Notes and for
general corporate purposes. As of December 27, 1998, the Company had sold or
exchanged $153.65 million aggregate principal amount of the FRD Notes. The
remaining balance of $3.25 million was sold in January 1999.
NOTE 5--PROPERTY AND EQUIPMENT:
A summary of property and equipment follows:
1998 1997
-------- --------
($ in thousands)
Land................................................... $ 23,700 $ 26,890
Buildings and improvements............................. 156,220 150,223
Furniture, fixtures and equipment...................... 92,887 73,218
Projects under construction............................ 13,592 5,684
-------- --------
286,399 256,015
Accumulated depreciation and amortization.............. (85,085) (72,414)
-------- --------
$201,314 $183,601
======== ========
Property under capitalized leases in the amount of $12,104,000 at December
27, 1998 and $20,880,000 at December 28, 1997 is included in buildings and
improvements. Accumulated amortization of property under capitalized leases
amounted to $6,287,000 at December 27, 1998 and $8,871,000 at December 28,
1997. These capitalized leases primarily relate to the buildings on certain
restaurant properties; the land portions of these leases are accounted for as
operating leases.
In addition, property under capitalized leases in the amount of $810,000 at
December 27, 1998 is included in furniture, fixtures and equipment.
Accumulated amortization of this property under capitalized leases amounted to
$184,000 at December 27, 1998.
Depreciation and amortization relating to property and equipment was
$21,271,000 for 1998, $20,994,000 for 1997 and $30,253,000 for 1996, of which
$2,169,000, $2,236,000 and $4,357,000, respectively, was related to
amortization of property under capitalized leases.
A majority of the capitalized and operating leases have original terms of 25
years, and substantially all of these leases expire in the year 2009 or later.
Most leases have renewal options. The leases generally provide for payment of
minimum annual rent, real estate taxes, insurance and maintenance and, in most
cases, contingent rent, calculated as a percentage of sales, in excess of
minimum rent. The total amount of contingent rent under capitalized leases for
the years ended December 27, 1998, December 28, 1997 and December 29, 1996 was
$938,000, $934,000 and $2,425,000, respectively. Total rental expense for all
operating leases comprised the following:
1998 1997 1996
------- ------- -------
($ in thousands)
Minimum rent.................................... $35,476 $35,521 $45,063
Contingent rent................................. 1,417 1,235 2,058
Less: Sublease rent............................. (5,903) (6,434) (6,293)
------- ------- -------
$30,990 $30,322 $40,828
======= ======= =======
F-13
KOO KOO ROO ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 27, 1998, the present value of capitalized lease payments and
the future minimum lease payments on noncancellable operating leases were:
Capitalized Operating
Due in Leases Leases
------ ----------- ---------
($ in thousands)
1999................................................. $ 2,312 $ 32,905
2000................................................. 2,096 32,086
2001................................................. 1,659 31,122
2002................................................. 1,379 28,308
2003................................................. 1,058 25,404
Later years.......................................... 3,336 90,852
-------- --------
Total minimum lease payment.......................... 11,840 $240,677
========
Interest............................................. (3,530)
--------
Present value of minimum lease payments.............. $ 8,310
========
The future lease payments summarized above include commitments for leased
properties included in the Company's divestiture program.
NOTE 6--OTHER ASSETS:
A summary of other assets follows:
1998 1997
-------- --------
($ in thousands)
Liquor licenses.......................................... $ 6,014 $ 5,910
Debt issuance costs...................................... 4,857 4,918
Notes receivable......................................... 7,655 9,898
FRD Notes................................................ 0 3,250
Other.................................................... 972 545
-------- --------
$ 19,498 $ 24,521
======== ========
Debt issuance costs are amortized over the terms of the respective loan
agreements.
NOTE 7--LONG-TERM DEBT, INCLUDING CAPITALIZED LEASE OBLIGATIONS:
Long-term debt, including capitalized lease obligations, is comprised of the
following:
1998 1997
-------- --------
($ in thousands)
9 3/4% Senior Notes..................................... $103,456 $103,456
10 7/8% Senior Subordinated Discount Notes.............. 30,900 30,900
15% Senior Discount Notes............................... 69,111 48,514
14% Senior Secured Discount Notes....................... 22,179 0
Capitalized lease obligations........................... 8,310 14,595
Other................................................... 3,145 1,922
-------- --------
237,101 199,387
Deferred gain on debt exchange.......................... 2,548 3,262
-------- --------
239,649 202,649
Amounts due within one year............................. 2,498 2,694
-------- --------
$237,151 $199,955
======== ========
F-14
KOO KOO ROO ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On January 27, 1994, the Company sold $300 million principal amount of 9
3/4% Senior Notes due in full in 2002 (the "Senior Notes") and $150 million
principal amount ($109 million in proceeds) of 10 7/8% Senior Subordinated
Discount Notes due in full in 2004 (the "Discount Notes" and, together with
the Senior Notes, the "Notes"), and the Company and certain of its
subsidiaries entered into a $150 million senior secured revolving credit
facility with a $100 million sub-limit for standby letters of credit, which
was to be used for general corporate purposes including working capital, debt
service and capital expenditure requirements (the "Old Credit Facility").
On January 10, 1997, the Company entered into a five-year, $35 million
credit facility with Foothill Capital Corporation (the "Foothill Credit
Facility"), which replaced the Old Credit Facility, to provide for the ongoing
working capital needs of the Company. In connection with the Merger, the
Company increased the Foothill Credit Facility to $55 million. The Foothill
Credit Facility now provides for up to $35 million in revolving cash
borrowings and up to $55 million in letters of credit (less the outstanding
amount of revolving cash borrowings). The Foothill Credit Facility is secured
by substantially all of the real and personal property of the Company and
contains restrictive covenants. The Company is in compliance with all
financial ratios at December 27, 1998. Standby letters of credit are issued
under the Foothill Credit Facility primarily to provide security for future
amounts payable by the Company under its workers' compensation insurance
program ($13,131,000 of such letters of credit were outstanding as of December
27, 1998). No revolving cash borrowings were outstanding as of December 27,
1998.
The Senior Notes require semiannual interest payments on February 1 and
August 1 of each year and will mature on February 1, 2002. The Senior Notes
are redeemable at the option of the Company after February 1, 1999. Such notes
may now be redeemed at prices starting at 102.786% and declining ratably to
100% at February 1, 2001. Cash interest payments on the Discount Notes began
on August 1, 1997 and will continue to be paid on February 1 and August 1 of
each year, and such notes will mature on February 1, 2004. The Discount Notes
are redeemable at the option of the Company after February 1, 1999. Such notes
may now be redeemed at prices starting at 104.078% and declining ratably to
100% at February 1, 2002.
On July 3, 1996, the Company repurchased $151 million aggregate principal
amount of the Senior Notes and $108.6 million aggregate principal amount of
the Discount Notes in exchange for (or from the proceeds from the sale of)
$133.5 million aggregate principal amount of the FRD Notes. On December 19,
1996, the Company repurchased $30 million aggregate principal amount of the
Senior Notes for $18.6 million. In separate transactions, the Company
repurchased (i) an additional $8.5 million aggregate principal amount of the
Discount Notes in the third quarter of 1996 and (ii) $2 million aggregate
principal amount of the Discount Notes in the fourth quarter of 1996. The
Company recognized an extraordinary gain of $134.8 million as a result of
these repurchases.
On August 12, 1997, FRI-MRD issued senior discount notes (the "Senior
Discount Notes") in the face amount of $61 million at a price of approximately
75% of par. The Senior Discount Notes are due on January 24, 2002. No cash
interest is payable on the Senior Discount Notes until July 31, 1999, at which
time interest will be payable in cash semi-annually at the rate of 15% per
annum, with the first cash interest payment due on January 31, 2000. The
Senior Discount Notes were issued to certain existing holders of the Company's
Senior Notes in exchange for $15.6 million of Senior Notes plus approximately
$34 million of cash. The gain of $3,548,000 realized on the exchange of Senior
Notes has been deferred and classified as an element of long-term debt in
accordance with the guidelines of Emerging Issues Task Force Issue No. 96-19
because the present value of the cash flows of the Senior Discount Notes was
not at least 10% different from the present value of the cash flows of the
Senior Notes exchanged. The deferred gain is being amortized as a reduction of
interest expense over the life of the Senior Discount Notes. On January 14 and
15, 1998, FRI-MRD issued an additional $14 million aggregate face amount of
the Senior Discount Notes to the same purchasers at a price of 83% of par.
FRI-MRD received approximately $11.6 million in cash as a result of this
subsequent sale. Proceeds from the sales of the Senior Discount Notes have
been and will continue to be used to fund the Company's capital expenditure
programs and for general corporate purposes.
F-15
KOO KOO ROO ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On June 9, 1998, FRI-MRD entered into a Note Agreement pursuant to which
FRI-MRD issued $24 million aggregate face amount of New MRD Notes on October
30, 1998 at a price of approximately 90% of par resulting in net proceeds of
$21.7 million. The New MRD Notes are due on January 24, 2002. No cash interest
is payable on the New MRD Notes until July 31, 1999, at which time interest
will be payable in cash semi-annually at the rate of 14% per annum with the
first cash interest payment due on January 31, 2000. The New MRD Notes are
redeemable by FRI-MRD, in whole or in part, on or before January 23, 2001, at
a price of 105% of the accreted value thereof, or after January 23, 2001, at a
price of 102.5% of the accreted value thereof. Proceeds from the sale of the
New MRD Notes were used exclusively to purchase all of the outstanding shares
of Hamlet, and the New MRD Notes are secured by all of such outstanding shares
of Hamlet.
The Company continues to be highly leveraged and has significant debt
service requirements. In order to continue to fund its capital expenditure
programs, management has begun considering various alternatives to reduce
near-term debt service requirements and extend current maturity dates. There
can be no assurance that the Company will be able to repay or refinance its
Senior Notes and its 10 7/8% Senior Subordinated Discount Notes due 2004, or
that FRI-MRD will be able to repay or refinance the Senior Discount Notes or
the New MRD Notes, at their respective maturities. The Company continues to
consider additional sources of cash, such as sale of non-core assets.
Maturities of long-term debt, including capitalized lease obligations,
during the four years subsequent to December 26, 1999 are as follows:
$2,687,000 in 2000, $2,481,000 in 2001, $204,027,000 in 2002 and $1,142,000 in
2003.
NOTE 8--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The recorded amounts of the Company's cash and cash equivalents,
receivables, accounts payable, self-insurance reserves, other accrued
liabilities and certain financial instruments included in other assets at
December 27, 1998 and December 28, 1997 approximate fair value. The fair value
of the Company's long-term debt, excluding capitalized lease obligations, is
estimated as follows:
1998 1997
---------------- ----------------
Recorded Fair Recorded Fair
Amount Value Amount Value
-------- ------- -------- -------
($ in thousands)
Senior Notes............................ $103,456 $65,177 $103,456 $82,765
Discount Notes.......................... 30,900 18,540 30,900 22,866
Senior Discount Notes................... 69,111 67,781 48,514 50,630
Senior Secured Discount Notes........... 22,179 22,179 0 0
Other................................... 3,145 2,903 1,922 1,692
The fair values of the Senior Notes and Discount Notes are based on an
average market price of these instruments as of the end of fiscal 1998 and
1997. The fair values of the Senior Discount Notes and Senior Secured Discount
Notes as of the end of fiscal 1998 are based on an assessment of the value of
the notes by an investment banking firm which takes into account the accreted
values of the Senior Discount Notes and Senior Secured Discount Notes on such
date, historical sale price information and other relevant pricing
information. The fair value of the Senior Discount Notes as of the end of
fiscal 1997 is based on the issuance of the remaining $14 million in face
value of the Notes at a price of 83% of par on January 14 and 15, 1998. The
fair value of the other debt is estimated using discount rates which the
Company believes would be available to it for debt with similar terms and
average maturities.
The Company has no instruments or transactions subject to the provisions of
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities."
F-16
KOO KOO ROO ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 9--OTHER ACCRUED LIABILITIES:
A summary of other accrued liabilities follows:
1998 1997
------- -------
($ in
thousands)
Wages, salaries and bonuses............................... $17,618 $16,251
Carrying costs of closed properties....................... 12,282 12,407
Reserve for divestitures.................................. 10,611 0
Interest.................................................. 5,689 5,773
Property taxes............................................ 2,744 2,993
Sales tax................................................. 3,443 2,612
Utilities................................................. 3,340 1,996
Accrued rent.............................................. 372 452
Other..................................................... 18,734 16,089
------- -------
$74,833 $58,573
======= =======
Carrying costs of closed properties represent the estimated future costs
associated with the Company's closed and subleased restaurants which consists
primarily of the net present value of lease subsidies which are mainly
comprised of the excess of future lease payments over estimated sublease
revenues.
NOTE 10--INCOME TAXES:
The Company reported a loss for tax purposes in 1998, 1997 and 1996.
Accordingly, the income tax provisions for each year primarily reflect certain
state and local taxes. On a tax return basis, the Federal regular operating
loss carryforwards amounted to approximately $241.4 million ($241.5 million of
alternative minimum tax operating loss carryforwards) and expire in 2003
through 2019. The Company had approximately $711,000 of tax credit
carryforwards which expire in 2003 and 2004.
At December 27, 1998, the Company and its subsidiaries had tax credit
carryforwards of approximately $2.1 million not utilized by W. R. Grace & Co.-
Conn. ("Grace"). In accordance with the 1986 acquisition from Grace, the
Company must reimburse Grace for 75% of the benefit of these tax credits if
they are utilized in future Company tax returns. Further, El Torito
Restaurants, Inc. (a wholly owned subsidiary of the Company) has approximately
$12 million of tax depreciation deductions not claimed in Grace tax returns as
a result of a tax sharing agreement. The Company will also reimburse Grace for
75% of any tax savings generated by these deductions.
As a result of the acquisition of Chi-Chi's, the Company has net operating
loss and credit carryforwards not used by Chi-Chi's of $50.7 million and $6.8
million, respectively. The net operating losses expire beginning in 2004
through 2009 and the credit carryovers expire in various years from 2004
through 2009. The acquisition of Chi-Chi's, as well as the 1992 acquisition of
a previous franchisee by Chi-Chi's, triggered ownership changes for Federal
income tax purposes which result in separate annual limitations on the
availability of these losses and credits.
Further, as a result of the Merger and the Hamlet Acquisition, the Company
has net operating losses not used by KKR of $42.3 million. The net operating
losses expire beginning in 2005 through 2013. The Merger triggered an
ownership change for KKR in 1998 for Federal income tax purposes, which, along
with an ownership change for KKR in 1995, results in separate annual
limitations on the availability of these losses.
The Company does not believe that it underwent an ownership change causing a
limitation on the use of tax attributes as a result of the Merger and the
Hamlet Acquisition. Nevertheless, no assurance can be given that there will
not be other transactions that could cause the Company to undergo such an
ownership change.
F-17
KOO KOO ROO ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of income tax expense to the amount of income tax benefit
that would result from applying the Federal statutory rate (35% for 1998, 1997
and 1996) to loss before income taxes is as follows:
Fiscal Year Ended
----------------------------
Dec. 27, Dec. 28, Dec. 29,
1998 1997 1996
-------- -------- --------
($ in thousands)
Provision (benefit) for income taxes at
statutory rate............................ $(21,956) $(10,879) $ 48,276
State taxes, net of Federal income tax
benefit................................... 242 219 249
Foreign taxes.............................. 0 0 92
Nondeductible goodwill..................... 556 490 1,242
Change in deferred tax asset which is
subject to a full valuation reserve and
other..................................... 21,558 10,679 (48,969)
-------- -------- --------
$ 400 $ 509 $ 890
======== ======== ========
At December 27, 1998 and December 28, 1997, the Company's deferred tax asset
was $165,686,000 and $134,717,000, respectively, and deferred tax liability
was $5,667,000 and $17,456,000, respectively. The major components of the
Company's net deferred taxes of $160,019,000 at December 27, 1998 and
$117,261,000 at December 28, 1997 are as follows:
1998 1997
--------- ---------
($ in thousands)
Depreciation........................................ $ (5,667) $ (17,456)
Net operating loss and credit carryforwards......... 132,257 103,909
Capitalized leases.................................. 852 817
Carrying costs and other reserves................... 8,717 5,120
Self-insurance reserves............................. 9,642 12,915
Straight-line rent.................................. 1,423 1,811
Reorganization costs................................ 6,479 4,700
Other............................................... 6,316 5,445
--------- ---------
160,019 117,261
Valuation allowance................................. (160,019) (117,261)
--------- ---------
$ 0 $ 0
========= =========
The increase in the valuation allowance for 1998 resulted from two primary
factors. First, $21,558,000 of the increase resulted from the normal
occurrence of temporary differences, including the current year tax loss.
Second, the Merger and Hamlet Acquisition resulted in the acquisition of
approximately $21,200,000 of deferred tax assets that were subject to a full
valuation allowance.
NOTE 11--BENEFIT PLANS:
The Company maintains certain incentive compensation and related plans for
executives and key operating personnel, including restaurant and field
management. Expenses for these plans were $4,261,000, $4,062,000 and
$10,374,000 for 1998, 1997 and 1996, respectively.
The Company provides a savings plan pursuant to Section 401(k) of the
Internal Revenue Code, which allows administrative and clerical employees who
have satisfied the service requirements to contribute from 2% to 12% of their
pay on a pre-tax basis. The Company contributes an amount equal to 20% of the
first 4% of compensation that is contributed by the participant. The Company's
contributions under this plan were $151,000, $156,000 and $164,000 in 1998,
1997 and 1996, respectively.
F-18
KOO KOO ROO ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company also maintains an unfunded, non-qualified deferred compensation
plan, which was created in 1994 for key executives and other members of
management who were then excluded from participation in the qualified savings
plan. This plan allows participants to defer up to 50% of their salary on a
pre-tax basis. The Company contributes an amount equal to 20% of the first 4%
contributed by the employee. The Company's contributions under the non-
qualified deferred compensation plan were $70,000, $37,000 and $38,000 in
1998, 1997 and 1996, respectively. In each plan, a participant's right to
Company contributions vests at a rate of 25% per year of service.
NOTE 12--RELATED PARTY TRANSACTIONS:
Foodmaker, Inc. ("Foodmaker") provided distribution services through May
1997 to a portion of the Company's restaurants, principally those operated
under the Chi-Chi's name. No distribution services were provided during 1998.
Distribution sales to those restaurants for the years ended December 28, 1997
and December 29, 1996 aggregated $21,844,000 and $63,785,000, respectively.
Apollo FRI Partners, L.P. ("Apollo") and Green Equity Investors, L.P.
("GEI") charged a combined monthly fee of $100,000 for providing certain
management services to the Company until October 30, 1998. In November 1995,
the management services arrangement with GEI was terminated. In the fourth
quarter of 1998, it was determined that the Company would not be required to
pay $2.5 million of such fees accrued for the benefit of Apollo at December
28, 1997 and any fees charged in 1998. Accordingly, the reversal of such fees
is included as a reduction in 1998 general and administrative expenses. The
Company had total management services fees payable to Apollo and GEI of
$750,000 and $3,250,000 at December 27, 1998 and December 28, 1997,
respectively.
NOTE 13--STOCK OPTIONS:
At December 27, 1998, the Company had three stock option plans. Options to
purchase common stock are generally granted at the fair market value of the
stock on date of grant.
Certain officers and employees of the Company were granted stock options
under the Family Restaurants, Inc. 1994 Incentive Stock Option Plan. As a
result of the Merger, the stock option agreements for these individuals were
amended to convert the number of options and strike prices for the merged
Company's common stock. Additionally, the Company assumed existing stock
option plans of KKR in connection with the Merger, and all options under such
KKR plans are fully vested.
Certain officers, employees and directors of the Company were granted stock
options to purchase approximately 12,703,000 shares under a new stock option
plan, the Koo Koo Roo Enterprises, Inc. 1998 Stock Incentive Plan, which was
approved November 9, 1998 by the Company's board of directors. The stock
options granted to officers and employees vest ratably over a four year period
and have a ten year term. The stock options granted to directors were
immediately vested and have a ten year term. Under the Company's 1998 Stock
Incentive Plan, a maximum of approximately 20,787,000 shares of common stock
are available for stock option grants.
The Family Restaurants, Inc. Value Creation Units Plan was terminated in
connection with the Merger. An expense of $4,223,000 was incurred in
connection with the termination. Such expense consisted of a $4,036,000 cash
payment and $187,000 for the intrinsic value of stock options granted on
December 9, 1998 under the Company's 1998 Stock Incentive Plan to purchase
approximately 6,236,000 shares. Such options have a per share strike price of
$.50, are not exercisable for a period of 90 days after issuance and have a
five year term.
F-19
KOO KOO ROO ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the status of the Company's plans as of December 27, 1998,
December 28, 1997 and December 29, 1996 and changes during the years then
ended is presented below:
Dec. 27, 1998 Dec. 28, 1997 Dec. 29, 1996
-------------------------- ------------------------ --------------------------
Weighted- Weighted- Weighted-
Number of Average Number of Average Number of Average
Options Exercise Price Options Exercise Price Options Exercise Price
---------- -------------- --------- -------------- ---------- --------------
Outstanding at beginning
of year................ 934,652 $ .89 934,652 $.89 6,467,664 $.89
Granted................. 18,939,232 .75 0 0 0 0
Impact of Merger-KKR
plans.................. 6,473,385 2.65 0 0 0 0
Cancelled............... (6,500) 1.56 0 0 (5,533,012) .89
---------- ------- ----------
Outstanding at end of
year................... 26,340,769 $1.22 934,652 $.89 934,652 $.89
========== ===== ======= ==== ========== ====
Options exercisable at
end of year............ 7,851,537 700,989 467,326
========== ======= ==========
Options granted during 1998 were approximately 14% of the weighted average
common shares outstanding representing approximately 500 employees. There were
no options exercised during the periods presented.
Options Outstanding Options Exercisable
December 27, 1998 December 27, 1998
-------------------------------------------- --------------------------
Weighted-Average
Number of Remaining Weighted-Average Number of Weighted-Average
Range of Exercise Prices Options Life (Years) Exercise Price Options Exercise Price
------------------------ ---------- ---------------- ---------------- --------- ----------------
$.33 to $.50............ 6,525,293 5.17 $ .49 289,061 $ .33
$.51 to $1.00........... 13,257,172 9.73 .87 1,004,172 .79
$1.01 to $3.00.......... 4,666,387 5.51 1.58 4,666,387 1.58
$3.01 to $8.75.......... 1,891,917 4.92 5.36 1,891,917 5.36
---------- ---- ----- --------- -----
$.33 to $8.75........... 26,340,769 7.51 $1.22 7,851,537 $2.28
========== ==== ===== ========= =====
Pro forma net income (loss) and net income (loss) per common share were
determined if the Company had accounted for its employee stock options under
the fair value method of SFAS 123 and are presented in the table below ($ in
thousands, except per share amounts):
Dec. 27, 1998
-------------
Net loss--pro forma......................................... $(63,847)
Net loss per common share--pro forma--basic and diluted..... $ (.49)
Weighted average fair value of options granted.............. $ .26
For pro forma disclosures, the options' estimated fair value was amortized
over their expected life of ten years. These pro forma disclosures do not
apply to 1997 and 1996 nor are they necessarily indicative of anticipated
future disclosures because there were no options granted in 1997, 1996 and
1995, and SFAS 123 does not apply to grants before 1995. The fair value for
these options was estimated at the date of grant using an options pricing
model. The model was designed to estimate the fair value of exchange traded
options which, unlike employee stock options, can be traded at any time and
are fully transferable. In addition, such models require the input of highly
subjective assumptions, including the expected volatility of the stock price.
Therefore, in management's opinion, the existing models do not provide a
reliable single measure of the value of employee stock options. The following
weighted average assumptions were used to estimate the fair value of these
options:
Dec. 27, 1998
-------------
Expected dividend yield...................................... 0%
Expected stock price volatility.............................. 10%
Risk free interest rate...................................... 5.00%
Expected life of options (in years).......................... 10
F-20
KOO KOO ROO ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 14--SEGMENT INFORMATION:
The Company operates exclusively in the food-service industry. Substantially
all revenues result from the sale of menu products at restaurants operated by
the Company. The Company's reportable segments are based on restaurant
operating divisions. Operating income (loss) includes the operating results
before interest.
The accounting policies of the segments are the same as those described in
Note 1. The corporate component of operating income (loss) represents
corporate general and administrative expenses. Corporate assets include
corporate cash, investments, receivables and asset portions of financing
instruments.
The divested operations component of sales, operating income (loss) and
capital expenditures includes the operating results of the Family Restaurant
Division which was sold in May 1996 and the traditional dinnerhouse
restaurants that were divested by year-end 1996.
Dec. 27, 1998 Dec. 28, 1997 Dec. 29, 1996
------------- ------------- -------------
($ in thousands)
Sales
El Torito Division............ $214,370 $217,949 $219,466
Chi-Chi's Division............ 243,666 245,775 278,065
Koo Koo Roo Division.......... 14,617 0 0
Divested Operations........... 0 0 226,698
-------- -------- --------
Total Sales.................. $472,653 $463,724 $724,229
======== ======== ========
Depreciation and Amortization
El Torito Division............ $ 9,688 $ 10,779 $ 10,336
Chi-Chi's Division............ 10,610 9,956 10,420
Koo Koo Roo Division.......... 1,087 0 0
Corporate..................... 1,531 1,660 13,046
-------- -------- --------
Total Depreciation and
Amortization................ $ 22,916 $ 22,395 $ 33,802
======== ======== ========
Operating Income (Loss)
El Torito Division............ $ 6,605 $ 3,457 $ (1,406)
Chi-Chi's Division............ (39,699) (12,052) (12,450)
Koo Koo Roo Division.......... (831) 0 0
Corporate..................... (4,149) (3,013) (14,218)
Divested Operations........... 0 0 5,295
-------- -------- --------
Total Operating Loss......... $(38,074) $(11,608) $(22,779)
======== ======== ========
Interest (Income) Expense, net
El Torito Division............ $ 856 $ 995 $ 818
Chi-Chi's Division............ 571 635 210
Koo Koo Roo Division.......... (24) 0 0
Corporate..................... 23,256 17,846 35,697
-------- -------- --------
Total Interest Expense, net.. $ 24,659 $ 19,476 $ 36,725
======== ======== ========
Capital Expenditures
El Torito Division............ $ 10,980 $ 5,684 $ 2,409
Chi-Chi's Division............ 13,395 6,599 4,098
Koo Koo Roo Division.......... 1,450 0 0
Corporate..................... 1,866 1,305 1,523
Divested Operations........... 0 0 1,818
-------- -------- --------
Total Capital Expenditures... $ 27,691 $ 13,588 $ 9,848
======== ======== ========
Total Assets
El Torito Division............ $100,056 $103,210 $107,209
Chi-Chi's Division............ 112,328 134,141 139,166
Koo Koo Roo Division.......... 108,410 0 0
Corporate..................... 27,392 52,417 61,231
-------- -------- --------
Total Assets................. $348,186 $289,768 $307,606
======== ======== ========
F-21
KOO KOO ROO ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 15--CONTINGENCIES:
The Company is involved in various litigation matters incidental to its
business. The Company does not believe that any of the claims or actions filed
against it will have a material adverse effect upon the consolidated financial
position or results of operations of the Company.
F-22
SCHEDULE II
KOO KOO ROO ENTERPRISES, INC.
VALUATION AND QUALIFYING ACCOUNTS
($ in thousands)
Additions
-------------------
Balance at Charged Balance
beginning Charged to to other at end
Description of period costs and accounts Deductions of period
----------- ---------- expenses -------- ---------- ---------
Allowance for
uncollectible
receivables:
For the year 1998..... $1,051 $3,060 $ 0 $(649)(1) $3,462
For the year 1997..... 879 78 300 (206)(1) 1,051
For the year 1996..... 997 0 0 (118)(1) 879
- --------
(1) Represents write-off of uncollectible receivables against allowance and
includes transfers to other accounts.
S-1