Koo Koo Roo, Inc.

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Koo Koo Roo, Inc.

11075 Santa Monica Boulevard, Suite 225
Los Angeles, California 90025
U.S.A.
(310) 479-2080
Fax: (310) 479-8843
Web site: http://www.kookooroo.com

Public Company
Incorporated: 1987
Employees: 3,100
Sales: $68.30 million (1997)
Stock Exchanges: NASDAQ
Ticker Symbols: KKRO
SICs: 5812 Eating Places

Headquartered in Los Angeles, California, Koo Koo Roo, Inc., oversees a restaurant chain specializing in flame-broiled skinless herb chicken, turkey, low-fat sandwiches, and such side dishes as tossed salads, pastas, butternut squash, baked yams, lentil salad, cracked wheat rice, baked goods, and other foods. Doing business as Koo Koo Roo California Kitchens, the company competes with the American Restaurant Group, Boston Market, and Brinker restaurant chains. Seeking to distinguish itself among its competition, Koo Koo Roo restaurants feature a healthy menu of full meals—including a 26-pound turkey dinner with trimmings—and sophisticated decorating schemes. “You walk into a Boston Chicken or a Kenny Rogers Roasters,” observed Koo Koo Roo president Michael Mooslin in the South Florida Business Journal, “and you’re in a chicken place. You walk into a Koo Koo Roo, and you’re in a restaurant.” Koo Koo Roo California Kitchen outlets offer dining in, carry out, and corporate catering services.

Koo Koo Roo maintains several subsidiaries: Arrosto Coffee Company, which sells primarily to Koo Koo Roo outlets; Color Me Mine paint-your-own ceramic studios; and Hamburger Hamlet, a fast-food chain active in California and Washington, D.C.

Origins on the Corner of Beverly Blvd. and Orlando Ave.

The first Koo Koo Roo outlet opened in Los Angeles in 1988. L.A. restaurateur Mike Badalian founded and co-owned the restaurant with his brother Ray. Within two years, the brothers were operating two outlets in Los Angeles—one on the corner of Beverly Boulevard and Orlando Avenue and one in Koreatown—until one Academy Awards night when the Badalians’ chicken caught the attention of Kenneth Berg. Berg saw a long line of people waiting outside Koo Koo Roo to place their orders. “The people in line were raving about how good it was and how healthy,” Berg remembered in Restaurant Business. “It was a little nothing store down on Beverly and Orlando, but it was filled with Beverly Hills people, in suits and ties and dresses, all eating chicken with their hands,” he observed.

Berg, a semi-retired real estate broker from New York, ordered a Koo Koo Roo carry-out dinner to snack on while watching the Academy Awards in his L.A. apartment in 1990 and loved the food. “It was the best chicken I ever had in my life,” Berg told the Los Angeles Business Journal. He became friends with the Badalian brothers and threw his financial support behind the concept. He first invested $2.5 million as a silent partner. Then, wanting more, he took control of Koo Koo Roo, buying out the Badalians and assembling an expert management team to expand the restaurant chain.

Berg visualized something different for the restaurants than the founding brothers had. “I wanted it to be a real dining experience,” Berg explained to Restaurant Business. “I wanted the stores to be quick-service and not fast-food. I wanted all the food made fresh. I wanted no butter to be used and all the vegetables to be steamed. I wanted knives and forks and fresh flowers on all the tables.”

Kenneth Berg Takes Control in the Early 1990s

Berg first went public with Koo Koo Roo in October 1991, offering stock at $5.00 per share. In less than a year, however, the chain’s stock prices reached a low of $0.25 per share, losing $1.9 million in 1991 and $2.5 million during the first part of the following year.

With 15 outlets in 1992, Koo Koo Roo weighed options for its recovery, including consolidation. Less profitable outlets closed in Los Angeles and New York during the year, leaving six stores in operation. Berg then renamed the chain’s outlets Koo Koo Roo California Kitchens. He redecorated the restaurants and introduced new products—a deli counter and turkey dinner bar, for example. Berg then began marketing the restaurant’s fare as “home meal replacement.” “Perhaps the actual original concept wasn’t as good as it could have been,” noted chief financial officer Morton Wall in the Los Angeles Business Journal in 1993. “We all feel we’re going in the right direction now. We’re doing dramatic cost reductions to try to turn the company around,” Wall continued.

Berg cut overhead and provided Koo Koo Roo with $500,000 to aid the company’s recovery. He and Badalian became co-chairmen of the company, and Michael D. Mooslin was named chief operating officer and president in March 1993. Their plan for recovery seemed to be working. Koo Koo Roo outlets that sold $7,000 weekly before Berg’s changes began averaging $44,000 in weekly sales.

Berg next added new items to Koo Koo Roo’s menu. Once in 1993 he sampled some coffee at a single-unit coffee bar in Santa Monica. Impressed, Berg bought 90 percent of Arrosto Coffee and installed the company’s coffee bars in Koo Koo Roo outlets to supplement their sales of baked goods during breakfast hours.

Financial Recovery in 1993

Koo Koo Roo’s stocks recovered slightly in May 1993. Yet the company still lost $2.9 million that year and $3 million the following year. Despite these losses, the company’s unit sales averaged $1.6 million in 1994, an 80 percent increase over the previous year. By 1994, Koo Koo Roo maintained seven restaurants in California, one in New Jersey, and one in Florida—and hoped to expand nationally. Toward the end of the year, the chain’s presence in the southern United States finally began to stretch further. In September, Mel Harris, a Miami insurance executive, purchased the chain’s franchise rights for the state of Florida after lunching at a Koo Koo Roo with his friend and company chairman Ken Berg. “I just loved the food,” Harris told the South Florida Business Journal in 1994. “I thought it was great food at a great price.” Harris financed his Koo Koo Roo franchises himself. It was his first venture as a restaurateur.

Later that year, Michael Milken offered Koo Koo Roo an infusion of capital from a family trust, giving Milken a majority ownership in the company. Milken, a notorious financier, had pleaded guilty to conspiracy and securities fraud charges in 1990 for his involvement with junk bonds at the Drexel Bern-ham Lambert brokerage during the 1980s. He was sentenced to U.S. federal prison on six felony counts and was prohibited from any future involvement in the securities industry, from controlling a public company, or from contributing to the buyouts of other investors. In 1994, an agent for the Milken family trust—Archon Capital Partners—offered $55 million for a 51 percent majority share of Koo Koo Roo through a corporation known as Casual Dining Concepts. Stockbroker Bill Scanlon praised the deal, telling the Los Angeles Business Journal: “Now … [Koo Koo Roo] will have the capital to expand.”

With news of a possible purchase spreading among investors, Koo Koo Roo’s stock doubled from its lowest level. The company’s turn around was short-lived, however, as Milken withdrew his investment offer in October owing to disputed terms. Koo Koo Roo’s stock plummeted once more.

Plans for Expansion in the Mid-1990s

Nevertheless, the company’s expansion plans went on undeterred. In December 1994, the company sold development rights to 23 units in California, with more sites under discussion. Koo Koo Roo also added Arrosto Coffee and Espresso Bars to three more outlets.

Unfortunately, losses also continued—$1.2 million in the quarter ending in September 1995—so expansion for the upcoming year depended on two private placements totaling $18.5 million. Lee lacocca’s lacocca Capital Partners LP provided $14.3 million, and lacocca—renowned former president of Ford Motor Company and past chairman of Chrysler Corporation—joined Koo Koo Roo’s board of directors.

With 16 outlets in operation at the beginning of 1996, Koo Koo Roo was poised to launch 40 stores on the east and west coasts of the United States. “We are not trying to compete with the strategy of putting stores everywhere,” cautioned Koo Koo Roo president John Kaufman in the San Francisco Business Times, “but we are looking for a lot of great sites. We are not doing the Boston Market approach of scattering stores everywhere to blanket a market.” This round of expansion promised to bring the company into a profitable position.

Company Perspectives:

Koo Koo Roo appeals to a wide range of people who look for good tasting, freshly prepared, moderately priced food, and who also appreciate menu items that are wholesome and healthy. The sights and smells of fresh food preparation, such as turkey carving and salad tossing, are displayed in glass-enclosed stations featuring ‘chefs’ in restaurant whites and toques. The restaurants and the food they serve are equally appealing for dining both on and off premise. In the bright, clean dining rooms, guests find fresh flowers at every table, comfortable chairs, and spotless flatware.

Four new Koo Koo Roo outlets opened in 1996, with 30 additional restaurant openings planned for the year in California, Nevada, Arizona, Colorado, New Jersey, New York, Maryland, Virginia, and Washington, D.C. Unlike earlier expansions, these new units were company-owned stores; stores franchised earlier closed, or Koo Koo Roo bought them back, electing to franchise no longer. Now active in several U.S. markets, Koo Koo Roo embarked upon a joint venture agreement to start Koo Koo Roo California Kitchens and Arrosto Coffee establishments in Canada. Berg felt that the additional units heralded profitability for the chain. He told Nation’s Restaurant News that “with the acceleration of the new store openings planned for the third quarter, we expect to achieve a positive net cash flow from operations in the fourth quarter of 1996 or sooner.”

In addition to expanding the number of freestanding stores, Berg purchased Color Me Mine, a chain of three craft stores, as a complementary business to Koo Koo Roo restaurants. Color Me Mine patrons designed their own ceramic tiles, which store personnel then baked in kilns. Targeting a high-profile likeness of ceramic tile enthusiasts and Koo Koo Roo chicken lovers, Berg located Color Me Mine units in or near Koo Koo Roo restaurants. “Because the customer profile is similar for Koo Koo Roo California Kitchen restaurants and Color Me Mine, we believe there will be substantial synergy between the concepts both from a sales and a real-estate standpoint,” Berg told Nation’s Restaurant News. Known Koo Koo Roo patrons included such celebrities as talk-show host Jay Leño, comedian Roseanne, and attorneys Marcia Clark and Robert Shapiro. Entertainers Arnold Schwarzenegger, Demi Moore, and Jamie Lee Curtis numbered among Color Me Mine customers.

The expansion of 1996 was not as profitable for Koo Koo Roo as the company’s executive management expected, however. The chain lost over $12 million in 1996 and about $20 million total since its initial public offering in 1991.

Undeterred, Koo Koo Roo continued its expansion campaign, acquiring Hamburger Hamlet restaurants in California and Washington D.C. in 1997. The company bought the burger chain hoping to integrate its units in Koo Koo Roo outlets. Despite its newest acquisition, Koo Koo Roo lost $32.8 million in 1997.

Then, in 1998, Koo Koo Roo came under the scrutiny of the Center for Science in the Public Interest (CSPI), a Washington, D.C.-based group founded in 1971 that evaluates food and nutrition in North America. The group had previously derided American fast food, Chinese food, and movie theater popcorn, claiming nutritional deficiencies in these food offerings. The CSPI, however, awarded many Koo Koo Roo menu items its “Best Bite” designation, finding the restaurant’s fare better tasting and healthier that its meals-to-go competitors. In its Nutrition Action Healthletter, the CSPI claimed that “Koo Koo Roo’s dishes have less fat and salt—and more pizzazz and flavor—than the others.” Even with this ringing endorsement, the restaurant chain lost money during the year.

Restructuring for the Future

In 1998, Koo Koo Roo adopted a plan for restructuring. The company decided to closed some outlets in the northeastern United States and to exit the Washington, D.C., beltway market, concentrating instead on the California and Nevada markets. In addition, lacocca, who had become the company’s “acting” chairman, assumed responsibility for the sale of Koo Koo Roo’s non-core businesses such as the Arrosto coffee plant and the Color Me Mine outlets. lacocca was also charged with task of reducing staff. His role, according to Koo Koo Roo’s chief executive William Allen in the Los Angeles Business Journal, was “to do what a chairman does. A chairman leads the board to govern the company well. I expect that Lee lacocca will be shoulder to shoulder with management.”

According to the company’s management discussion and analysis of financial conditions for 1997, Koo Koo Roo management remained optimistic, hoping for improved operating results in the late 1990s. Restructuring of the company and an effort to improve operating efficiencies at the stores were integral to recovery. Management noted that “the company has historically incurred net losses, and the company presently anticipates that it will continue to incur operating losses during 1998. However, the company believes that the net operating losses should begin to decrease during the next calendar year both in the aggregate and as a percentage of sales.”