SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended JANUARY 28, 2001
----------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from_________________to________________
Commission File Number 0-8513
------
CHEFS INTERNATIONAL, INC.
-------------------------
[Name of small business issuer in its charter]
DELAWARE 22-2058515
---------------------------------------- ----------------------
[State or other jurisdiction of [IRS Employer
incorporation or organization] Identification Number]
62 Broadway, P.O. Box 1332
PT. PLEASANT BEACH, NEW JERSEY 08742
---------------------------------------- ----------------------
[Address of principal executive offices] [Zip Code]
Issuer's telephone number, including area code: (732) 295-0350
----------------------
Securities registered pursuant to Section 12(b) of the Act: NONE
----
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
----------------------------
(Title of Class)
Indicate by check mark whether the issuer [1] has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months [or for such shorter period that the issuer was required
to file such reports], and [2] has been subject to such filing requirements for
the past ninety days. YES _X_ NO___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
[ ]
The issuer's revenues for the year ended January 28, 2001 totaled $20,156,890.
On March 30, 2001, the aggregate market value of the voting stock of the issuer
(consisting of Common Stock, $.01 par value) held by non-affiliates was
approximately $1,435,000 based upon the last sale price for such Common Stock on
said date in the over-the-counter market as reported by the Pink Sheets LLC. On
such date, there were 4,245,515 shares of the issuer's Common Stock issued and
outstanding.
CHEFS INTERNATIONAL, INC.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
(A) BUSINESS DEVELOPMENT - Chefs International, Inc. ("Chefs" or the
"Company") was organized under the laws of the State of Delaware in March 1975.
The Company currently operates nine restaurants on a year-round basis, seven of
which are free-standing seafood restaurants in New Jersey (four) and Florida
(three); one of which is a Mexican theme restaurant operated under the name
"Garcia's", located in a shopping mall in New Jersey and one of which is a
free-standing restaurant in Freehold, New Jersey, which the Company commenced to
operate in February 2000 under the name "Moore's Tavern and Restaurant". Six of
the seafood restaurants are operated under the name "Lobster Shanty" and one
under the name "Baker's Wharfside". The Company opened its first seafood
restaurant in November 1978 and opened its Garcia's restaurant in April 1996.
(As used herein, the term the "Company" may also at times include Chefs and its
various subsidiaries.)
The Company's executive offices are located at 62 Broadway, Point Pleasant
Beach, New Jersey 08742. Its telephone number is (732) 295-0350.
DEVELOPMENTS SINCE THE BEGINNING OF THE LAST FISCAL YEAR
RESTAURANT OPENING
In February 2000, the Company executed a lease with Moore's Realty
Associates, a New Jersey partnership ("Moore's Realty") whose partners are
members of the Lombardi Group and other members of the Lombardi family. (The
Lombardi Group, consisting of various members of the Lombardi Family and their
affiliates, purchased a substantial number of shares of Chefs' Common Stock in
May 1999 resulting in their ownership in May 1999 of in excess of 50% of the
issued and outstanding shares of Chefs' Common Stock, and as a result, in
ownership of voting control of the Company.) The lease was of premises on West
Main Street (Route 537) in Freehold, New Jersey where an entity affiliated with
Moore's Realty, Moore's Inn, Inc. was operating a restaurant and tavern under
the name "Moore's Inn". The Company provided consulting services to the
operators of Moore's Inn for a weekly consulting fee of $1,800 from January 3,
2000 until February 23, 2000 when it executed the lease and the purchase
agreements hereinafter described.
2
The Company commenced to operate the facility under the name "Moore's
Tavern and Restaurant" on February 23, 2000 at which time the consulting
agreement was terminated. The lease is for a five-year term through February 22,
2005 and contains provisions for three consecutive five-year renewals at the
Company's option which are automatically effective unless the Company gives
written notice at least six months before the end of the initial term or at
least six months before the end of the applicable renewal period that it does
not intend that such option be exercised. After 18 months, the Company can
terminate the lease upon six months' written notice provided that during each of
the five-year renewal periods, the Company must provide at least twelve months'
prior written notice to terminate.
The lease is a "net net" lease pursuant to which the Company will pay real
estate taxes, insurance and heating and air conditioning costs. The lease
provides for a minimum annual rental of $90,000 during each year of the initial
five-year term, $100,000 during each year of the first five-year renewal period,
$112,500 during each year of the second five-year renewal period and $125,500
during each year of the third five-year renewal period. In addition to the
minimum annual rental, the Company is also required to pay an amount to Moore's
Realty equal to (i) 6% of the total gross sales of food and beverages etc. at
the facility in each year (excluding taxes and gratuities) (the "gross annual
rental") less (ii) the minimum annual rental for that year. For the period from
the opening of the restaurant through January 28, 2001, the gross rental
aggregated $114,497. Moore's Realty has the right to terminate the lease upon
twelve months' prior written notice if, for the preceding year, the gross annual
rental did not exceed the minimum annual rental for that year.
During the lease term, the Company has been granted the exclusive right to
the use of the names "Moore's Inn" and "Moore's Tavern" within the State of New
Jersey. Moore's Realty has agreed not to operate, lease, rent or permit to be
operated as a restaurant or tavern during the lease term, any premises owned,
leased or occupied by it or members of the Lombardi family (not presently
occupied as such), located within ten miles of Moore's Inn.
In connection with the lease, the Company purchased a New Jersey liquor
license from Moore's Inn, Inc. for $350,000 and agreed to sell the license back
to the Seller or to Moore's Realty at the termination of the lease for the same
$350,000. In addition, the Company purchased existing furniture, fixtures and
equipment at Moore's Inn from Moore's Inn, Inc. for $250,000 agreeing to leave
all of the furniture, fixtures and equipment at the premises "...in
3
good working condition, reasonable wear and tear excepted..." upon termination
of the lease.
The lease of the Moore's Inn and the purchase of the liquor license and the
furniture, fixtures and equipment cannot be deemed "arm's length" transactions
due to the interest of the Lombardi Group and other members of the Lombardi
family. The transactions were negotiated for the Company by Anthony C. Papalia,
its president and chief executive officer. In negotiating the transactions, Mr.
Papalia took into account his experience in similar restaurant leases, the
prices at which liquor licenses were sold in neighboring areas (finding such
prices to be comparable to the liquor license purchase price paid by the
Company) and the condition of the furniture, fixtures and equipment. The bulk of
the furniture, fixtures and equipment had been purchased by the Seller during
the twelve months ended June 30, 1999 at a price of $621,893. Mr. Papalia and
the non-interested directors concluded that the terms of the transaction were
fair and in the best interests of the Company.
At the time of execution of the lease, Moore's Realty agreed not to sell or
lease a building ("Building B") adjacent to the Moore's Inn or the nearby pad
site for a proposed building ("Building C") for a period of one year. If during
the first year, the Company entered into an agreement to purchase or lease
Building B, Moore's Realty agreed not to sell or lease the pad site to anyone
other than the Company for an additional one-year period. The Company has agreed
in principle with Moore's Realty to lease Building B and currently expects to
open a Mexican theme type restaurant on the site in the last quarter of calendar
2001 utilizing the same liquor license used by Moore's Inn Tavern and
Restaurant. As a result, Moore's Realty has extended its agreements not to sell
or lease Building B or Building C to third parties for an additional year. The
proposed lease has not been finalized and no assurance can be given that the
Company will be able to open a restaurant in Building B within the anticipated
time period. If the Company fails to lease or purchase Building B, Moore's
Realty is permitted to lease Building B to a restaurant that offers a menu line
significantly different from that of Moore's Tavern and Restaurant and that does
not serve alcoholic beverages.
SALE OF BALANCE OF MISTER COOKIE FACE
On February 20, 1997, the Company sold 95% of the common stock of Mister
Cookie Face ("MCF"), its ice cream production segment, to a former director for
an aggregate purchase price of $1,600,000, consisting of a $500,000 cash payment
and three notes totaling $1,100,000. The first note (Note A) for $100,000 was
due on or
4
before March 24, 1997 and was paid in full on a timely basis. The second note
(Note B) for $500,000 was due in installments through July 1, 2000, and the
third note (Note C) for $500,000 was due on or before February 20, 2004, with
mandatory prepayments based on MCF's cash flow. The notes were secured by a
first lien on all of MCF's assets. However, the Company agreed to subordinate
the notes to up to $1,750,000 of additional financing for MCF. Based on the
estimated present value of the payments, management recorded a valuation
allowance of $601,050 against the second and third notes. The 5% of MCF capital
stock retained by the Company was valued at $35,000. During fiscal 1999, MCF
requested a restructuring of the terms of the second and third notes. During the
quarter ended October 31, 1999, the Company's Board of Directors (the "Board")
was advised by MCF that MCF had achieved a positive cash flow during its second
quarter and pursuant to the requirements of Note C, owed the Company
approximately $41,800 in interest. The Board agreed to allow MCF to make monthly
payments of the said Note C interest amount with the final payment due June 1,
2000. Additionally, the Company's Board of Directors (the "Board") agreed to
allow MCF to continue making monthly partial payments on Note B. During the
quarter ended July 30, 2000, the Note C interest was paid as per the agreed
payment schedule.
In May 2000, the Board authorized management to negotiate and execute an
agreement to settle and satisfy the debt owed by MCF to the Company. On June 30,
2000, the Company sold both Notes B and C and its 5% holding of MCF capital
stock to MCF for a cash payment of $379,836 and the return of 233,334 shares of
Chefs' Common Stock owned by the president of MCF. The Company subsequently
cancelled these shares. The Company has recognized a gain from discontinued
operations of approximately $322,000 in its financial statements for the year
ended January 28, 2001. The gain represents partial recoveries of the valuation
allowance provided for against Notes B and C.
CHANGE IN CERTIFYING ACCOUNTANT
As reported in the Company's current report on Form 8-K for October 6,
2000, its certifying accountant for fiscal 1999 and 2000, Edward Isaacs &
Company LLP, had merged with McGladrey & Pullen, LLP and McGladrey & Pullen, LLP
had been appointed as the Company's auditor. The Company stated (and Edward
Isaacs & Company LLP concurred) that the auditor's reports from Edward Isaacs &
Company LLP for the Company's past two fiscal years (fiscal 1999 and 2000) did
not contain an adverse opinion or a disclaimer of opinion, and were not
qualified or modified as to uncertainty, audit scope, or accounting principles,
and that during said two fiscal years and the subsequent interim period
preceding the change
5
of accountants, there were no disagreements between the Company and Edward
Isaacs & Company LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure.
SHARE REPURCHASE PROGRAM
On June 8, 2000, the Company announced that it had decided to repurchase up
to 400,000 shares of Chefs' Common Stock over the following 24 months. In its
press release, the Company stated that the Board believed that Chefs' Common
Stock was undervalued and that the Repurchase Program, if effected at current
prices, could constitute an appropriate investment to the benefit of the
Company's stockholders. Through April 6, 2001, the Company has repurchased an
aggregate 16,050 shares of Chefs' Common Stock in the over-the-counter market at
prices ranging from $.73 to $.97 per share. To date, an aggregate 11,250 of such
repurchased shares have been cancelled.
BANK LOANS
At January 31, 2000, the Company's principal bank financing was provided
pursuant to two term loans, one originally in the amount of $1,000,000 ("Term
Loan A") and the other, originally in the amount of $525,000 ("Term Loan B")
from First Union National Bank ("First Union") as well as a $500,000 revolving
line of credit ("L/C line") from First Union. At said date, approximately
$200,000 was outstanding under Term Loan A, payable in installments of principal
with interest at an annual rate of 7.51% through November 2000; approximately
$315,000 was outstanding under Term Loan B payable in monthly installments of
principal with interest at an annual rate of 9 1/4% through December 2002 and no
amounts were outstanding under the L/C line. Term Loan A and the L/C line were
secured by first mortgages on the Company's two Point Pleasant Beach, New Jersey
seafood restaurants and Term Loan B was secured by a first mortgage on the Toms
River, New Jersey seafood restaurant.
During fiscal 2001, the Company retired the entire balance of Term Loan A
and reduced the outstanding principal balance of Term Loan B to approximately
$204,000. At June 23, 2000, the L/C line was renewed for the seventh consecutive
time for an additional two year term repayable with interest at LIBOR plus 2%.
There were no outstanding borrowings under the L/C line at January 28, 2001.
In May 1998, the Company borrowed $124,000 from First Union to partially
fund the purchase of property adjoining its Toms River, New Jersey seafood
restaurant. The loan is repayable in monthly
6
installments of principal with interest at LIBOR plus 2 1/4% through May 2003
and is secured by a first mortgage on the property. At January 28, 2001,
approximately $58,000 was outstanding under this loan.
In October 1998, the Company borrowed $880,000 from First Union to fund the
$1,100,000 purchase of its Vero Beach, Florida seafood restaurant. This loan is
repayable in monthly installments of $8,319 comprised of principal and interest
at an annual rate of 7.82% through November 2008 and is secured by a first
mortgage on the Vero Beach property. At January 28, 2001, approximately $810,000
was outstanding under this loan (which provides for a $431,429 "balloon" payment
in November 2008).
Repayment of the Company's term loans and of borrowings under its line of
credit is guaranteed by each of the Company's subsidiaries.
Pursuant to its principal Loan Agreements, the Company has made certain
affirmative and negative covenants to First Union. The covenants contained in
the prior loan agreements were superseded by the covenants contained in the Vero
Beach Loan Agreement. Included in the Vero Beach Loan Agreement are covenants
not to pay dividends, effect stock redemptions, sell or issue shares of its
stock, make a material change of ownership that changes control of the Company
or its management structure, create certain liens or encumbrances, enter into
sale-leaseback transactions, sell assets not in the ordinary course of business,
merge with or acquire another entity, or enter into certain other transactions
without First Union's written consent, and to maintain on a consolidated basis,
tangible net worth of at least $11,650,000 increasing by $50,000 at each
subsequent fiscal year-end commencing with fiscal 1999; a debt to Tangible Net
Worth ratio of no greater than .50:1.00; a net income, depreciation and
amortization less Maintenance Capital Expenditures (defined as those
expenditures required on an annual basis to maintain existing restaurant
locations) to the current portion of long term debt and capital leases ratio of
not less than 1.20:1.0; and cash and cash equivalents of not less than $750,000.
A failure by the Company to satisfy any such covenant would constitute an event
of default under the Loan Agreement enabling First Union to accelerate payment
of all outstanding indebtedness. In May 2000, the Company received a waiver from
First Union permitting it to effect the Stock Repurchase Program previously
described. The Company was in compliance with all applicable covenants under its
Loan Agreements at January 31, 2000 and at January 28, 2001.
7
(b) BUSINESS OF ISSUER - The Company is engaged in one business; the
operation of nine restaurants in New Jersey and Florida on a year-round basis.
RESTAURANT OPERATIONS
The Company is principally engaged in the operation of nine restaurants on
a year-round basis, seven of which are free-standing seafood restaurants in New
Jersey (four) and Florida (three); one of which is a Mexican theme restaurant
operated under the name "Garcia's", located in a shopping mall in New Jersey and
one of which is a free-standing restaurant in Freehold, New Jersey, which the
Company commenced to operate in February 2000 under the name "Moore's Tavern and
Restaurant". Six of the seafood restaurants are operated under the name "Lobster
Shanty" and one under the name "Baker's Wharfside". The Company opened its first
seafood restaurant in November 1978 and opened its sole Garcia's restaurant in
April 1996. The Company's restaurants, all of which are operated on a year-round
basis, are as follows:
DATE OF OPENING UNDER
LOCATION THE COMPANY'S MANAGEMENT
-------- ------------------------
SEAFOOD RESTAURANTS
LOBSTER SHANTY
Vero Beach, Florida December 1979
Pt. Pleasant Beach, New Jersey October 1980
Toms River, New Jersey October 1980
Jensen Beach, Florida December 1980
Cocoa Beach, Florida September 1981
Hightstown, New Jersey December 1981
BAKER'S WHARFSIDE
Pt. Pleasant Beach, New Jersey October 1980
GARCIA'S RESTAURANT
Monmouth Mall, Eatontown,
New Jersey April 1996
MOORE'S TAVERN AND RESTAURANT
Freehold, New Jersey February 2000
8
SEAFOOD RESTAURANTS
The Company's seafood restaurants provide a variety of seafood dishes
including shellfish such as lobster, scallops, shrimp, oysters and clams, and
other fish including red snapper, bluefish, grouper and other varieties. A
limited selection of non-seafood entrees is also offered including steak and
chicken as well as a dessert selection. Most of the Company's seafood
restaurants have a nautical decor.
LOBSTER SHANTY RESTAURANTS
VERO BEACH, FLORIDA - This restaurant, consisting of approximately 6,900
square feet, is free standing in Vero Beach, Florida on the intracoastal
waterway, and seats approximately 200. It opened in December, 1979 pursuant to a
lease from Gourmet Associates ("Gourmet") owned by the Company's then principal
stockholder. During fiscal 1998, the Company constructed an outdoor deck with a
bar and dining facilities at this restaurant at a cost of approximately
$125,000. At August 31, 1998, the Company was continuing to lease this
restaurant on a month-to-month "net" basis at a monthly rental of $10,000 with
the Company also paying personal property taxes and insurance thereunder. On
that date, the United States Bankruptcy Court for the District of New Jersey
ordered the acceptance of the Company's bid of $1,100,000 to purchase the Vero
Beach restaurant property from Gourmet. On October 30, 1998, the Company
completed the purchase of the property for $1,100,000. To fund the purchase, the
Company obtained an $880,000 first mortgage loan from its principal lending
bank, First Union National Bank, and paid the balance of the purchase price from
working capital. The Company's successful bid was based upon an independent
appraisal of the property and was equal to the appraised value. See "Bank Loans"
herein as to the repayment terms of this loan.
PT. PLEASANT BEACH, NEW JERSEY - This restaurant, consisting of
approximately 17,000 square feet, is free standing with a waterfront location on
Channel Drive in Pt. Pleasant Beach, New Jersey and seats approximately 750. It
shares parking with the Baker's Wharfside restaurant in Pt. Pleasant Beach with
space for approximately 250 automobiles. The Company purchased this restaurant
and three others (including the land, buildings, improvements and businesses
including personal property and fixtures, liquor licenses and all of the
outstanding stock of the four corporations operating these restaurants) from its
then principal stockholder, and from three partnerships owned by him, in
9
October, 1980 for an aggregate $7,750,000 less a subsequent $250,000 prepayment
discount.
TOMS RIVER, NEW JERSEY - This restaurant, consisting of approximately
10,750 square feet, is free standing on Robbins Parkway with a waterfront
location on the Toms River in Toms River, New Jersey and seats approximately
375. Municipal parking facilities are available nearby. The Company purchased
this restaurant and three others (including the land, buildings, improvements,
and businesses including personal property and fixtures, liquor licenses and all
of the outstanding stock of the four corporations operating these restaurants)
from its then principal stockholder, and from three partnerships owned by him,
in October 1980 for an aggregate $7,750,000 less a subsequent $250,000
prepayment discount. During fiscal 1998, the Company commenced an interior
renovation of this restaurant, the bulk of which was completed in fiscal 1998
with the balance completed early in fiscal 1999. The total cost of this
renovation was approximately $338,000. In fiscal 1999, the Company constructed
an outdoor deck with a bar and dining facilities at this restaurant adding
approximately 125 seats at a cost of approximately $188,000.
In May 1998, the Company spent $166,000 to purchase a lot and building with
a waterfront location adjacent to the Toms River Lobster Shanty. The Company
partially funded the purchase price with the bank loan previously described. The
Company has obtained the variances necessary for it to develop an outdoor patio
dining area with seating for 125 on this site but has delayed construction
pending resolution of a lawsuit initiated by a neighboring landowner attempting
to prevent construction. If it is successful in resolving this lawsuit, the
Company estimates the total costs of construction and outfitting at
approximately $350,000 for an opening anticipated in fiscal 2003.
JENSEN BEACH, FLORIDA - This 200 seat restaurant, consisting of
approximately 4,500 square feet, is located in a free standing building on the
intracoastal waterway in Jensen Beach, Martin County, approximately 50 miles
north of Palm Beach. The restaurant has parking for 100 automobiles. Acquired in
October 1980 were two lots, the restaurant with furnishings and a liquor license
from an unaffiliated party for $975,000. The Company made a $295,000 down
payment and paid the balance over a ten year period through September, 1990.
COCOA BEACH, FLORIDA - This approximately 240 seat restaurant, consisting
of approximately 9,600 square feet, is located in a free standing building on
Highway A1A in Cocoa Beach and has parking for
10
approximately 90 cars. The Company acquired this restaurant as well as a seafood
restaurant in Titusville, Florida in September 1981 through the purchase from
two unaffiliated individuals of the outstanding capital stock of two
corporations engaged in the ownership and operation of a Florida seafood
restaurant at each of the two sites. The corporations owned the land on which
the restaurants were located, the restaurant buildings, the restaurant
businesses including personal property and fixtures and liquor licenses for each
restaurant, all of which were included in the sale. The purchase price paid by
the Company for the stock of the two corporations (prior to closing adjustments)
was $3,370,000, the bulk of which was represented by 20-year promissory notes
payable monthly and secured by mortgages on the restaurants. The Company sold
the Titusville restaurant to an unaffiliated third party in January 1988
realizing a loss of approximately $942,000. The Company prepaid the balance of
the remaining indebtedness under the notes in July 1993 using the net proceeds
from the sale in June 1993 of another Florida restaurant property.
HIGHTSTOWN, NEW JERSEY - This restaurant, consisting of approximately 4,600
square feet, is free standing on State Highway 33 approximately two miles east
of Hightstown and seats approximately 175. The restaurant has parking for
approximately 100 automobiles. The Company purchased this restaurant and three
others (including the land, buildings, improvements and businesses including
personal property and fixtures, liquor licenses and all of the outstanding stock
of the four corporations operating these restaurants) from its then principal
stockholder and from three partnerships owned by him, in October 1980 for an
aggregate $7,750,000 less a subsequent $250,000 prepayment discount.
BAKER'S WHARFSIDE RESTAURANT
PT. PLEASANT BEACH, NEW JERSEY - This restaurant, consisting of
approximately 7,500 square feet, is free standing with a waterfront location on
Channel Drive in Pt. Pleasant Beach, New Jersey and seats approximately 500. It
shares parking with the Lobster Shanty restaurant in Pt. Pleasant Beach with
space for approximately 250 automobiles. The Company purchased this restaurant
and three others (including the land, buildings, improvements and businesses
including personal property and fixtures, liquor licenses and all of the
outstanding stock of the four corporations operating these restaurants) from its
then principal stockholder, and from three partnerships owned by him, in
October, 1980 for an aggregate $7,750,000 less a subsequent $250,000 prepayment
discount.
11
GARCIA'S RESTAURANT
In November 1995, the Company entered into an agreement (the "Agreement")
with Garcimex of New Jersey, Inc. ("Garcimex"), the exclusive owner of the
"Garcia's" trademark, service mark and trade name along with the goodwill and
recipes of a Mexican restaurant business associated with the marks. Pursuant to
the Agreement, the Company was granted the exclusive right to establish and open
Mexican restaurants using the marks, goodwill and recipes in six New Jersey
counties, Hunterdon, Mercer, Middlesex, Monmouth, Ocean and Somerset (the
"Territory"). The Company was granted the right but not the obligation to open a
restaurant utilizing the marks and goodwill in each of the first five 12-month
periods, in the Territory, with a six-month grace period with respect to each
such 12-month period. If the Company did not open a Garcia's restaurant in each
of the first five 12-month periods (including the grace period), the Agreement
provided that the Company would lose the right to develop additional restaurants
within the Territory. The Company did not open an additional Garcia's restaurant
within the prescribed time period after the April 1996 opening of its initial
Garcia's restaurant. The Company retains the right to utilize the marks,
goodwill and recipes at its Garcia's restaurant and Garcimex has agreed not to
open another Mexican restaurant within an 18-mile radius of any Company operated
Garcia's restaurant.
The Agreement is for an initial term of 20 years with additional automatic
ten-year renewal periods unless the Company elects not to renew the Agreement.
During the period that the Agreement is in effect, the Company is required to
pay a royalty equal to 3% of the gross annual sales from each Garcia's
restaurant which it operates in the Territory, to Garcimex on a quarterly basis.
Garcimex agreed with the Company to reduce this percentage to 1.5% with respect
to the twelve-month period commencing February 1, 2000, after which it reverted
back to 3%. The Company has also been accorded a right of first refusal with
respect to offers received by Garcimex from third parties seeking to obtain
rights in the marks, goodwill and recipes for restaurants to be opened outside
of the Territory. Furthermore, the Agreement also provides the Company with
certain rights to open Mexican restaurants in New Jersey outside the Territory.
To date, the Company has opened one Garcia's restaurant which opened at the
Monmouth Mall on April 29, 1996.
The Company is currently in negotiations with Garcimex and has reached an
agreement in principle to amend the Agreement. Pursuant to the proposed
amendment, the Company would purchase the exclusive right to the use of the name
"Garcia's" for the State of New Jersey
12
as well as the exclusive right to open Garcia's restaurants within New Jersey.
In addition, the 3% royalty would be eliminated. If the amendment is
effectuated, the Company intends to open a Garcia's restaurant in Building B
adjacent to its Moore's Tavern and Restaurant in Freehold, New Jersey during the
fourth quarter of calendar 2001. (If the amendment is not effectuated, the
Mexican theme restaurant expected to be opened in Building B will be operated
under another name still to be determined.)
MONMOUTH MALL, EATONTOWN, MONMOUTH COUNTY, NEW JERSEY - The Company's
Garcia's restaurant at the Monmouth Mall consists of 4,371 square feet of leased
space and is decorated in a bright, multi-color Mexican motif. The restaurant
has a bar and tables and booths which can accommodate approximately 130 patrons.
The Company has a liquor license permitting the consumption of wine and
alcoholic beverages on the premises. The restaurant is open for lunch and dinner
seven days per week.
The restaurant features Mexican cuisine including fajitas, tortillas,
burritos and enchiladas with cheese, beef, chicken, pork and seafood fillings.
The menu also includes appetizers, soups and salads and a limited number of
American style offerings such as steaks and burgers. Alcoholic offerings such as
margaritas and tequilas complement fruit drinks and other soft drinks.
The Company's lease for this restaurant is for a twelve-year term providing
for a minimum annual rental of $109,275 during each of the first five years and
a minimum annual rental of $118,017 per annum thereafter. The Mall Landlord
agreed to reduce the minimum annual rental to $102,675 with respect to the
twelve-month period ending January 31, 2001, after which the minimum annual
rental reverted to the annual rentals provided for in the lease. The Company was
granted a $24,000 per year Construction Allowance for the five-year period
commencing January 1, 1997 which is being applied on a monthly basis in
reduction of the said minimum annual rental through December 2001. The Company
is also required to pay additional rent equal to 5% of the restaurant's annual
gross revenues in excess of $2,185,000 in each of the first five years and in
excess of $2,360,340 in each subsequent year. The Company is also required to
pay a proportionate share of the Mall's real estate taxes, utility charges and
the Landlord's operating costs as well as certain other charges.
The restaurant is on the site of the Company's La Crepe restaurant which
closed in December 1995. The Company has spent approximately $720,000 to
construct its Garcia's restaurant on this site.
13
The Monmouth Mall has been in operation for approximately 20 years.
Macy's and J.C. Penny are major department stores in the Mall. The Mall is a
large shopping center with 1,500,000 square feet of shopping area on 105 acres
with parking for 7,200 cars.
MOORE'S TAVERN AND RESTAURANT
This restaurant, consisting of approximately 7,700 square feet, is free
standing and is located on West Main Street (Route 537) in Freehold, New Jersey.
The restaurant seats approximately 260 (with an outdoor patio for warm weather
use that can seat an additional approximately 40 persons) and accommodates
parking for approximately 200 automobiles (the parking to be shared with any
businesses operated from Building B and proposed Building C). The tavern portion
of this restaurant is of an historic nature having been initially constructed in
the late 18th century and owned by an officer in the American Revolutionary
Army. The entire restaurant is decorated in a revolutionary period decor. See
"Developments Since the Beginning of the Last Fiscal Year" herein as to the
Company's lease of this restaurant and purchase of the liquor license and
furniture, fixtures and equipment to be used in its operation of the restaurant
from affiliates of the Lombardi Group.
The Moore's Tavern and Restaurant is open for lunch and dinner on a
year-round basis. It features an eclectic American food menu offering
sandwiches, burgers, steak and other meats, chicken and fish, potatoes,
vegetables and desserts, and alcoholic beverages.
SOURCES OF FOOD PRODUCTS
The food products used by the Company in the operation of its seafood
restaurants, its Moore's Tavern and Restaurant and its Garcia's restaurant are
readily available from a variety of sources including national distributors and
local sources on an order basis when needed.
SEASONAL ASPECTS
To date, the Company's New Jersey seafood restaurants have experienced a
significant portion of their sales from May through September whereas its
Florida seafood restaurants have experienced a significant portion of their
sales from January through April. During the first year of operation by the
Company, Moore's Tavern and Restaurant experienced a seasonality factor similar
to but not as dramatic as the seasonality factor of the Company's New Jersey
seafood restaurants. The Company's Garcia's restaurant has
14
experienced its greatest sales volume during the Thanksgiving through Christmas
period.
TRADEMARKS
The Company has no patents, trademarks, licenses, franchises or concessions
which it regards as material to its restaurant business with the exception of
the service mark "Jack Baker's Lobster Shanty"R" registered for a 20 year period
with the U.S. Patent and Trademark Office in February, 1989, the rights
purchased from Garcimex as described above to use of the trade mark, service
mark and trade name "Garcia's" and its rights to use of the names "Moore's Inn"
and "Moore's Tavern" as described above.
COMPETITION
The restaurant business is highly competitive and the success of any
restaurant depends to a great extent upon the services it supplies and its
location. The Company's seafood restaurants compete primarily with other local
seafood restaurants and to a lesser extent, with local restaurants serving a
more general fare. The principal national competition to the Company's seafood
restaurants is the Red Lobster restaurant chain. This chain has substantially
greater resources than the Company. The Company's Florida seafood restaurants
also face competition from Shells seafood restaurants operating in their area.
There are other restaurants in the mall and in the vicinity of the mall where
the Company is now operating a Garcia's restaurant, all of which supply
competition to the Company's Garcia's unit. Although there are no Mexican style
restaurants in the mall, there are other Mexican style restaurants in the area.
Typical "chain" competitors, all of which are affiliated with better established
and more prominent national chains, are the Friendly Ice Cream chain, Ruby
Tuesdays and TGI Fridays. The Moore's Tavern and Restaurant faces competition
from local restaurants as well as from national chains including TGI Fridays and
Chili's restaurants in the area. There can be no assurance that the Company's
units will be able to successfully compete with any of such other restaurants.
GOVERNMENT REGULATION
The Company is subject to various Federal, state and local laws affecting
the operation of its restaurants, including licensing and regulation by health,
sanitation, safety and fire departments and alcoholic beverage control
authorities. The Company is also subject to the Fair Labor Standards Act, which
governs such matters as minimum wages, overtime and other working conditions.
15
While such regulations have not had a material negative impact on the Company's
operations to date, difficulties in obtaining necessary licenses or permits
could result in delays or cancellations in the opening of new restaurants and
increases in the minimum wage could increase the Company's labor cost.
Each of the Company's New Jersey and Florida restaurants holds a state
liquor license and is subject to the liquor licensing laws of New Jersey or
Florida (depending on location). Management regards the aggregate and per claim
liability insurance which it carries to be adequate for the nature of its
operations taking into account the fact that it serves liquor at each location.
EMPLOYEES
The Company maintains its administrative employees at its executive offices
including its principal officers (see "Item 9 - Directors, Executive Officers,
Promoters and Control Persons; Compliance with Section 16(a) of the Exchange
Act"), secretarial and bookkeeping personnel. Each of the Company's seafood
restaurant units employs a general manager, two assistant managers and between
40 and 130 other employees to serve as waitresses, waiters, busboys, bartenders,
cooks, dishwashers, kitchen help, hostesses and cashiers (some on a part-time
basis). The Company's Garcia's restaurant employs approximately 40 employees and
its Moore's Tavern and Restaurant employs approximately 60 employees, in each
case serving similar functions. The Company also presently employs three area
supervisors, each responsible for certain of the Company's restaurants.
Managerial candidates are recruited for the Company's restaurants from hotel and
restaurant management schools, restaurant recruiting agencies, through
advertising in restaurant management magazines and by promotion from within the
Company's own organization. At January 28, 2001, the Company had approximately
430 employees (including part-time workers). The Company is not a party to any
collective bargaining agreements and has enjoyed satisfactory employee relations
since inception.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's executive and administrative offices are located in an
approximately 4,000 square foot two story Company owned building of cinder block
construction at 62 Broadway, Point Pleasant Beach, New Jersey.
See Item 1 herein for a description of the Company's operating restaurants.
16
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the quarter ended January 28, 2001.
17
CHEFS INTERNATIONAL, INC.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Common Stock was listed on the NASDAQ Stock Market Small Cap System
under the symbol "CHEF" until the close of business on December 16, 1998 when it
was delisted because of the failure of the Common Stock to maintain a closing
bid price at or above $1.00 per share. Commencing December 17, 1998, the Common
Stock has been traded in the over-the-counter market under the symbol "CHEF."
The following chart sets forth the range of high and low closing bid prices for
the Common Stock in the over-the-counter market for the periods indicated as
obtained from the Pink Sheets LLC.
Bid Prices
Quarter ---------------------
Ended High Low
----- ------- ------
April 30, 1999 $ .9375 $.5625
July 30, 1999 1.5625 .875
October 29, 1999 1.07 .6875
January 30, 2000 .80 .75
April 28, 2000 $1.07 $.68
July 28, 2000 .72 .60
October 27, 2000 .75 .63
January 26, 2000 .85 .71875
The above quotations represent prices between dealers and do not include
retail mark-ups, mark-downs or commissions. They do not necessarily represent
actual transactions.
At March 30, 2001, the number of record holders of the Common Stock was
6,689. Such number of record owners was determined from the Company's
shareholder records and does not include beneficial owners whose shares are held
in nominee accounts with brokers, dealers, banks and clearing agencies.
The Company did not sell any of its equity securities during the fiscal
year ended January 28, 2001. Pursuant to the Company's Term Loan Agreement with
First Union National Bank, the Company is
18
restricted during the period any loans are outstanding under such agreement from
paying dividends on any of its outstanding stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements regarding future performance in this Annual Report
on Form 10-KSB constitute forward-looking statements under the Private
Securities Litigation Reform Act of 1995. No assurance can be given that the
future results covered by the forward-looking statements will be achieved. The
Company cautions readers that important factors may affect the Company's actual
results and could cause those results to differ materially from the
forward-looking statements. Such factors include, but are not limited to,
changing market conditions, weather, the state of the economy, the impact of
competition to the Company's restaurants, pricing, acceptance of the Company's
food products and the Company's ability to amend its agreement with Garcimex.
OVERVIEW
The Company's principal source of revenue is from the operation of its
restaurants. The Company's cost of sales includes food and liquor costs.
Operating expenses include labor costs, supplies and occupancy costs (rent and
utilities), marketing and maintenance costs. General and administrative expenses
include costs incurred for corporate support and administration, including the
salaries and related expenses of personnel and the costs of operating the
corporate office at the Company's headquarters in Point Pleasant Beach, New
Jersey.
At January 28, 2001 the Company was operating nine restaurants on a
year-round basis. Seven of the restaurants are free-standing seafood restaurants
in New Jersey and Florida and are operated under the names "Lobster Shanty" or
"Baker's Wharfside." The Company also operates a Mexican theme restaurant in New
Jersey under the name "Garcia's." The Company opened its first seafood
restaurant in November 1978 and opened its Garcia's restaurant in Apri1 1996. In
February 2000, the Company commenced the operation of the ninth restaurant,
Moore's Tavern and Restaurant ("Moore's"), a free-standing restaurant in
Freehold, New Jersey serving an eclectic American food type menu.
19
Generally, the Company's New Jersey seafood restaurants derive a
significant portion of their sales from May through September. The Company's
Florida seafood restaurants derive a significant portion of their sales from
January through April. The Company's Garcia's restaurant derives a significant
portion of its sales during the holiday season from Thanksgiving through
Christmas. Moore's experiences a seasonality factor similar to but not as
dramatic as the seasonality factor of the New Jersey seafood restaurants.
The Company operated eight restaurants during the year ended January 30,
2000.
The statements of operations are comprised of a 52-week period for both the
year ended January 28, 2001 ("fiscal 2001") and the year ended January 30, 2000
("fiscal 2000").
RESULTS OF OPERATIONS
SALES
Sales for the year ended January 28, 2001 were $20,156,900, an increase of
$2,160,300 or 12%, as compared to $17,996,600 for the year ended January 30,
2000. The increase includes sales of $1,908,300 at Moore's which opened during
the first quarter of fiscal 2001. Sales for the eight restaurants that operated
during both years increased $252,000 or 1.4% despite a decrease of $107,100
during the fourth quarter due to the severe winter weather in the Northeast. The
number of customers served during fiscal 2001 in the eight restaurants operated
in both fiscal 2001 and fiscal 2000 decreased by 2.1% in fiscal 2001 versus the
prior year while the average check paid per customer increased by 3.5%.
GROSS PROFIT; GROSS MARGIN.
Gross profit was 67.8% of sales for fiscal 2001 as compared to 67.6% of
sales for fiscal 2000. Moore's had a lower gross profit for the year than the
other eight restaurants but showed steady improvement since opening in February
2000. The overall improvement in fiscal 2001 can be attributed primarily to new
menus inserted in the New Jersey restaurants, including Moore's, in May 2000
which included price increases and continued to highlight lower cost menu items,
as well as lower liquor costs in the Florida restaurants due to a reduction in
state liquor taxes.
20
OPERATING EXPENSES.
Total operating expenses increased by 12.4% from $11,608,500 for fiscal
2000 to $13,053,500 for fiscal 2001. Payroll and related expenses were 29.8% of
gross sales for fiscal 2001 compared to 29.5% of sales for fiscal 2000. The
primary reasons for the increase were higher health insurance costs and the
overall higher payroll costs at Moore's. Historically, new restaurants have
higher operating expenses during the first few months of operation. The payroll
cost percentage for the eight stores that operated during both years was
slightly lower in fiscal 2001. Other operating expenses increased to 20.5% of
sales for fiscal 2001 versus 19.7% in 2000. Higher operating expenses at Moore's
account for the increase.
Depreciation and amortization expenses increased by $90,800 during fiscal
2001 versus the prior year. The increase is comprised of $51,500 in depreciation
and amortization costs associated with the February 2000 purchase of the liquor
license and furniture, fixtures and equipment of Moore's and $39,300 in
increased depreciation costs resulting from capital expenditures at the other
eight restaurants.
General and administrative expenses were $31,100 higher in fiscal 2001
versus 2000. The major components of the increase included higher salaries of
$79,900 due to the Company's Executive Incentive Bonus Plan (see "Notes" to
Consolidated Financial Statements - Note 9), an increase of $24,500 in employee
and customer relations costs and additional computer service expenses of $17,500
which were partially offset by a $48,400 reduction in legal fees, $20,100 less
in training and recruiting costs, and a reduction of $16,500 in director fees.
The $2,100 gain on disposal of assets in fiscal 2001 was realized on the
disposal of a Company vehicle. The primary component of fiscal 2000's gain on
disposal resulted from the sale of a liquor license of a restaurant closed
during fiscal 1999.
OTHER INCOME AND EXPENSE.
Interest expense was $34,600 lower in fiscal 2001 because of debt
reduction. Investment income increased by approximately $41,700 due primarily to
dividend income received on investments (see Notes 1 and 7).
21
NET INCOME.
For the year ended January 28, 2001, income from continuing operations was
$632,600 or $.15 per share and net income was $954,800 or $.22 per share which
included a gain of $322,200 realized on the disposal of a discontinued business
(see Note 12). Net income was $502,600 or $.11 per share for fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES.
The Company has financed its operations primarily from revenues derived
from its restaurants.
The Company's ratio of current assets to current liabilities was 2.15:1 at
January 28, 2001, compared to 1.74:1 at January 30, 2000. Working capital was
$2,109,000 at the end of fiscal 2001, an increase of $747,300 over the prior
year. During fiscal 2001, net cash decreased by $154,700. Net cash provided from
operating activities was $1,697,000. The primary changes in assets and
liabilities included an increase in inventories of $165,100 due to the addition
of Moore's and corporate bulk seafood purchases incurred to take advantage of
market prices, and an increase in accrued expenses and other liabilities of
$268,100 resulting primarily from an increase of $98,200 in accrued payroll
expenses, including the incentive bonus plan charge, additional rent of $30,200
due to the percentage rent requirements of the Moore's lease (see Note 10), and
an increase of $27,200 in accrued liabilities associated with the Company's
health insurance plan.
Investing activities during fiscal 2001 resulted in a net cash outflow of
$1,304,600. Capital expenditures were $949,300 with the major components
including $339,500 for the acquisition of furniture, fixtures and equipment and
improvements at Moore's (see Note 2), $106,600 for significant Florida
improvements including a restaurant point of sale system ("POS") and septic
system and kitchen upgrades, $93,100 for kitchen and dining room improvements at
the Hightstown, New Jersey restaurant and $40,500 for Company vehicles. The
balance of $369,600 was spent on routine restaurant improvements. Additionally,
Moore's liquor license was purchased for $357,900. Other investing activities
included payments of $570,300 received from MCF on notes receivable (see Note
12) and the purchase of various investments totaling $947,900 (see Note 1)
offset by $459,500 for the sale of investments and proceeds from maturing
certificates of deposit.
22
Financing activities in fiscal 2001 resulted in a net cash outflow of
$547,100 and included debt repayment of $370,100, the purchase of 233,334 shares
of Chefs' Common Stock from the president of MCF for $168,000 (see Note 12) and
approximately $9,000 paid by the Company to repurchase 10,275 shares of Chefs'
outstanding stock pursuant to a Stock Repurchase Plan authorized by the
Company's Board of Directors in May, 2000 (see Note 11). During the second
quarter of fiscal 2001, the Company's $500,000 bank line of credit was renewed
for two years at a variable rate, equal to the monthly LIBOR Market Index Rate
plus 2.00%. At the year ended January 28, 2001 the entire $500,000 was available
for use.
During fiscal 2000, net cash increased by $442,300. Net cash provided from
operating activities was $1,603,800. The primary changes in assets and
liabilities were a reduction in accounts payable of $58,300 and an increase of
$77,600 in accrued expenses associated with the Company's health insurance plan.
Investing activities during fiscal 2000 resulted in a net outflow of $575,200.
Capital expenditures were $510,900 with the major components including $78,800
for "Year 2000" (Y2K) computer software and hardware system upgrades, $42,000
for a restaurant POS and $34,600 for Y2K phone system upgrades at the corporate
office and the restaurants. The balance of $355,500 was spent on routine
restaurant improvements. Investing inflows included $149,500 from the sale of a
liquor license and payments of $66,400 by MCF on notes receivable. Financing
activities in fiscal 2000 resulted in a net cash outflow of $586,300 for debt
repayment.
At the end of fiscal 2001, the Company was in compliance with all of the
covenants under its Loan Agreements with its primary bank, First Union. The
Company was also in full compliance at the year ended January 30, 2000.
Subsequent to the year ended January 28, 2001, the Company purchased an
additional 5,775 shares of Chefs' Common Stock pursuant to the Stock Repurchase
Plan and to date, has cancelled a total of 11,250 of the repurchased shares.
Management anticipates that funds from operations and the bank line of
credit will be sufficient to meet obligations in fiscal 2002, including
projected capital expenditures of approximately $529,300 for routine restaurant
improvements. A majority of the capital expenditures are expected to occur
during the first and second quarters of fiscal 2002.
23
INFLATION
It is not possible for the Company to predict with any accuracy the effect
of inflation upon the results of its operations in future years. The price of
food is extremely volatile and projections as to its performance in the future
vary and are dependent upon a complex set of factors. There is a proposal before
Congress to raise the minimum wage by $1.00 to $6.15 per hour. However,
management believes that any such increase would have a minimal impact on
payroll costs because the proposed increase would not change the cash wages of
the Company's tipped employees and a majority of the non-tipped employees
already receive in excess of $6.15 per hour.
ITEM 7. FINANCIAL STATEMENTS
Attached.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
See Item 1, "Developments Since the Beginning of the Last Fiscal Year" as
to the replacement of Edward Isaacs & Company LLP ("Isaacs") as the Company
independent accountants for the audit of its financial statements for the fiscal
year ended January 28, 2001 with the certified public accounting firm of
McGladrey & Pullen, LLP ("M&P") due to the merger of Isaacs into M&P.
24
CHEFS INTERNATIONAL, INC.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth certain information with respect to each of
the current directors of the Company:
Date First
Name Age Position Elected a Director
---- --- -------- ------------------
Chairman of
Robert M. Lombardi(a) 49 the Board May 1999
Nicholas B. Boxter 53 Director December 1999
Kenneth Cubelli 47 Director December 1999
Raymond L. Dademo 43 Director December 1999
Anthony M. Lombardi(a) 45 Director July 1999
Joseph S. Lombardi(a) 50 Director July 1999
Michael F. Lombardi(a) 52 Director July 1999
Stephen F. Lombardi(a) 44 Director July 1999
----------
(a) The five Lombardis who serve as directors are brothers.
The following table sets forth certain information regarding the executive
officers of the Company.
Name Age Office
---- --- ------
Anthony C. Papalia 43 President, Treasurer, Chief
Executive Officer, Chief Financial
Officer and Director
Martin W. Fletcher 48 Secretary
The Company does not have an Executive Committee. The term of office of
each director and executive officer expires when his successor is elected and
qualified. Executive officers are elected by and hold office at the discretion
of the Board of Directors.
25
The following is a brief account of the business experience of each director and
executive officer of the Company during the past five years.
DIRECTORS
Robert M. Lombardi, M.D. is, and for more than the past five years has been
principally engaged as a physician and orthopaedic surgeon with the
Edison-Metuchen Orthopaedic Group, a medical practice group located in Edison,
New Jersey, where he also serves as a senior officer. He is also an officer of
Moore's Inn, Inc. and a partner in Moore's Realty. See "Developments Since the
Beginning of the Last Fiscal Year."
Nicholas B. Boxter, C.P.A. is, and for more than the past five years has
been principally engaged in the practice of accountancy with his own firm in
Whitehouse, New Jersey.
Kenneth Cubelli, M.D. is, and for more than the past five years has been
principally engaged as a physician and orthopaedic surgeon with the Morris
County Orthopaedic Group in Denville, New Jersey.
Raymond L. Dademo, Esq. is, and for more than the past five years has been
principally engaged as a practicing attorney with his own law firm in Brick, New
Jersey.
Anthony M. Lombardi, D.D.S. is, and for more than the past five years has
been principally engaged in the practice of dentistry in Edison, New Jersey. He
is also an officer of Moore's Inn, Inc.
Joseph S. Lombardi, M.D. is, and for more than the past five years has been
principally engaged as a physician and orthopaedic surgeon with the
Edison-Metuchen Orthopaedic Group, where he is a senior officer. He is also an
officer of Moore's Inn, Inc. and a partner in Moore's Realty.
Michael F. Lombardi, Esq. is, and for more than the past five years has
been principally engaged as a practicing attorney and a senior officer of
Lombardi & Lombardi, P.A., an Edison, New Jersey law firm. He is also an officer
of Moore's Inn, Inc. and a partner in Moore's Realty.
Stephen F. Lombardi, Esq. is, and for more than the past five years has
been principally engaged as a practicing attorney and
26
a senior officer of Lombardi & Lombardi, P.A., an Edison, New Jersey law firm.
He is also an officer of Moore's Inn, Inc. and a partner in Moore's Realty.
EXECUTIVE OFFICERS
Anthony C. Papalia has been continuously employed by the Company for the
preceding five years. He has served as a manager of various New Jersey Lobster
Shanty restaurants and as an area supervisor. Mr. Papalia, who was elected
senior vice president and a director of the Company in September 1985 and
president and treasurer in March 1988, is currently devoting all of his working
time to the business of the Company. He resigned as a director of the Company in
July 1999.
Martin W. Fletcher has been continuously employed by the Company for the
preceding five years in various capacities. He has served as general manager of
the Company's Toms River, New Jersey Lobster Shanty, as area supervisor for its
Florida west coast restaurants, as assistant controller, since September 1987 as
controller and since March 1988 as secretary and a director of the Company. He
resigned as a director of the Company in July 1999. He is currently devoting all
of his working time to the business of the Company.
COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT
Based solely upon a review of Forms 3 and 4, the Company believes that with
respect to fiscal 2001, all Section 16(a) filing requirements applicable to its
officers, directors and beneficial owners of more than 10% of its equity
securities were timely complied with except for a corrective filing to his July
1999 Form 4 and a filing made in February 2001 regarding December 2000
transactions by Michael F. Lombardi and a late filing made by Joseph S. Lombardi
regarding his December 2000 purchase of 2,300 shares.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid or
accrued by the Company during the three fiscal years ended January 28, 2001 to
its Chief Executive Officer as well as to any other executive officer of the
Company or a subsidiary who earned at least $100,000 during fiscal 2001. During
the three-year period ended January 28, 2001, the Company did not grant any
restricted stock awards or have any long-term incentive plan in
27
effect. The Company maintains a non-qualified Supplemental Employee Benefit
Program for its officers, supervisors, restaurant managers and assistant
managers paying annual contributions ranging from $1,000 to approximately $3,000
per individual. The Program provides life insurance death benefits, disability
income benefits and retirement income benefits. A former officer and director,
James Fletcher is not covered under this Program but the Company agreed that if
he remained in its employ until age 65 and left such employ at any time
thereafter, the Company would pay him $20,000 annually for the ten year period
following such termination of employment or until his death, if he dies prior
thereto.
SUMMARY COMPENSATION TABLE
Annual Compensation
-----------------------------------------------
Name and Fiscal Other Annual
Principal Position Year Salary Bonus(a) Compensation(b)
------------------ ------ -------- ------- ------------
Anthony Papilia 2001 $164,557 $14,000 $2,088
President and 2000 $159,975 $-0- $2,088
Chief Executive 1999 $150,000 $-0- $2,088
Martin Fletcher 2001 $95,398 $10,910 $2,902
Controller and 2000 $92,674 $-0- $2,902
Secretary 1999 $86,925 $-0- $2,902
----------
(a) In May 2000, the Company's Board of Directors adopted an executive
incentive bonus plan providing for an annual cash bonus to be paid to Company
employees performing executive type functions with respect to each fiscal year
(commencing with fiscal 2001) in which the Company achieved certain specified
levels of earnings before deducting interest, income taxes, depreciation and
amortization. Extraordinary terms are excluded for purposes of the computation.
The bonus pool for fiscal 2001 aggregated $79,910 and was distributed to seven
employees including Anthony Papalia who received $14,000 and Martin Fletcher who
received $10,910.
(b) Represents contributions under the Supplemental Employee Benefit Program.
EMPLOYMENT AGREEMENTS
At the annual meeting of the Company's stockholders held on December 19,
1995, stockholders ratified employment contracts between the Company and Anthony
Papalia as chief executive officer
28
and chief financial officer and between the Company and Martin Fletcher as
controller. Each contract expired at the conclusion of the Company's 1999 fiscal
year and was automatically renewed on a year by year basis for up to five
consecutive additional one-year terms unless either party gave at least six
months' prior notice that he or it did not desire such renewal. As no such
notice was given during fiscal 1999, each contract was extended for a first
renewal year. Mr. Papalia's annual salary under the contract was $150,000 and
Mr. Fletcher's annual salary under the contract was $87,000 but each
individual's salary was made subject to automatic increase in each Renewal Year
based on increases in the Consumer Price Index. As a result, during fiscal 2001,
Mr. Papalia's annual salary was increased to $164,557 and Mr. Fletcher's annual
salary was increased to $95,398. If the employment of either individual is
terminated other than for cause, he will become entitled to a Severance Payment
equal to the amount of his compensation over the balance of the contract term.
Each individual is also entitled to terminate his employment and receive a
Severance Payment equal to six months' salary in the event of a "change of
control" of the Company. An amendment to each employment contract executed in
August 1999 extended the first renewal year through March 31, 2000, renewed each
contract for a second renewal year through March 31, 2001 and recast each
renewal year so as to commence on April 1 of each year and to expire on March 31
of the following year. Notice of intention not to renew must now be given no
later than September 30 of the year preceding the year in which the renewal term
commences.
STOCK OPTIONS
At January 30, 2000 and at January 28, 2001 there were no outstanding
employee or non-employee stock options exercisable to purchase shares of Chefs'
Common Stock.
DIRECTORS' COMPENSATION
During fiscal 2001, no compensation was paid to any of the Company's
directors for serving in such capacity. Furthermore, no method of compensation
has been established at this date for the current directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 30, 2001 with
respect to their ownership of Chefs' Common Stock by (i)
29
each person known by the Company to be the beneficial owner of more than 5% of
Chefs' outstanding Common Stock, (ii) each director of the Company, (iii) each
executive officer of the Company, and (iv) all directors and executive officers
as a group.
Name and Address of Shares of Common Stock Percentage
Beneficial Owner Beneficially Owned Ownership
------------------- ---------------------- ----------
DIRECTORS*
Robert M. Lombardi 1,301,256(1) 31%
Nicholas B. Boxter -- --
Kenneth Cubelli -- --
Raymond L. Dademo 1,000 --
Anthony Lombardi 113,001 3%
Joseph S. Lombardi 670,633 16%
Michael F. Lombardi 282,393(1)(2)(3) 7%
Stephen F. Lombardi 34,500(1)(2) --
EXECUTIVE OFFICER*
Anthony C. Papalia 5,000 --
All executive officers and
directors as a group
(ten persons) 2,407,783(1)(2)(3) 57%
----------
* The address of each director and executive officer is c/o the Company, 62
Broadway, Point Pleasant Beach, New Jersey 08742.
(1) Robert M. Lombardi, Anthony Lombardi, Joseph S. Lombardi, Michael F.
Lombardi and Stephen F. Lombardi, Lombardi & Lombardi, P.A. and the Lombardi &
Lombardi, P.A. Defined Benefit Pension Plan previously filed a report on
Schedule 13D and amendments thereto indicating that they were acting separately
and not as a group. The five individual Lombardis are brothers and for purposes
of this report, they and the above entities are deemed the "Lombardi Group."
(2) Includes 24,500 shares comprising one-half of the 49,000 shares owned
by Lombardi & Lombardi, P.A., of which Michael F. Lombardi and Stephen F.
Lombardi are each senior officers.
(3) Includes 111,668 shares owned by the Lombardi & Lombardi, P.A. Defined
Benefit Pension Plan. Michael F. Lombardi has voting and dispositive power with
respect to these shares.
30
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 1 herein, "Developments Since the Beginning of the Last Fiscal
Year" as to the leasing by the Company of a restaurant in Freehold, New Jersey
and the purchase by it of a liquor license and furniture, fixtures and equipment
from affiliates of the Lombardi Group.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3.1 Restated Certificate of Incorporation of the Company(A)
3.2 By-Laws of the Company, as amended(B)
4.1 Specimen Common Stock Certificate(C)
10.1 Monmouth Mall Shopping Center Lease for Garcia's restaurant(D)
10.2 Employment Agreement dated as of December 19, 1995 between Chefs and
Anthony Papalia(D)
10.3 Employment Agreement dated as of December 19, 1995 between Chefs and
Martin Fletcher(D)
10.4 Loan Agreement dated October 30, 1998 between the Company and First
Union National Bank and the Company's $880,000 Promissory Note issued
pursuant thereto for funding utilized by the Company to purchase the
Vero Beach, Florida Lobster Shanty Restaurant(A)
10.5 Lease Agreement executed in January 2000 for Moore's Inn facility,
between Moore's Realty Associates as Landlord and the Company as
Tenant(B)
10.6 Liquor License Sale/Purchase Agreement executed in January 2000
between Moore's Inn, Inc. as Transferor and the Company as
Transferee(B)
10.7 Sale/Purchase Agreement for Furniture, Fixtures and Equipment executed
in January 2000 between Moore's Inn, Inc. as Seller and the Company as
Purchaser(B)
31
10.8 Stock and Note Purchase/Sale Agreement as of June 29, 2000 by and
among Chefs, Mister Cookie Face, Inc. and Frank Koenemund
10.9 Chefs International Executive Incentive Bonus Plan
16.1 Letter of the Company's former auditors, Moore Stephens, P.C. dated
April 6, 1999 as required by Item 304(a)(3) of Regulation S-B(E)
16.2 Letter of the Company's former auditors, Edward Isaacs & Company LLP
dated October 6, 2000 as required by Item 304 (a) (3) of Regulation
S-B(F)
16.3 Independent auditor's report of Edwards Isaacs & Company LLP dated
March 27, 2000 with respect to the financial statements for the year
ended January 30, 2000
21 Subsidiaries - The following table indicates the wholly owned
subsidiaries of the Company, their respective states of incorporation
and the restaurants operated by each
State of
Name Incorporation Restaurants
-------------------- ------------- ------------------------
Chefs International Florida Lobster Shantys
Palm Beach, Inc. Vero Beach and Jensen
Beach, Florida
Robbins Parkway New Jersey Lobster Shanty
Realty Co., Inc. Toms River,New Jersey
Hightstown REB, Inc. New Jersey Lobster Shantys
Pt. Pleasant Beach and
Hightstown, New Jersey
(A) Incorporated by reference to exhibit filed with the Company's annual
report on Form 10-KSB for the fiscal year ended January 31, 1999.
(B) Incorporated by reference to exhibit filed with the Company's annual
report on Form 10-KSB for the fiscal year ended January 30, 2000.
(C) Incorporated by reference to exhibit filed with the Company's
Registration Statement on Form SB-2 (File No. 33-66936).
32
(D) Incorporated by reference to exhibit filed with the Company's annual
report on Form 10-K for the fiscal year ended January 28, 1996.
(E) Incorporated by reference to exhibit filed with Amendment No. 1 to the
Company's current report on Form 8-K/A for April 1, 1999.
(F) Incorporated by reference to exhibit filed with the Company's current
report on Form 8-K for October 6, 2000.
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the last quarter of
the fiscal year ended January 28, 2001.
33
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
(Registrant) CHEFS INTERNATIONAL, INC.
By s/ ANTHONY C. PAPALIA
----------------------------------
Anthony C. Papalia, President,
Principal Executive, Financial
and accounting officer
Date: April 27 , 2001
--------------
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the date indicated.
By s/ ROBERT M. LOBARDI By s/ MICHAEL LOMBARDI
------------------------------- --------------------------------
Robert M. Lombardi, Chairman Michael F. Lombardi,
Of the Board of Directors Director
Date: April 27 , 2001 Date: April 27 , 2001
-------------- --------------
By ANTHONY LOMBARDI By STEPHEN F. LOMBARDI
------------------------------- --------------------------------
Anthony Lombardi, Director Stephen F. Lombardi,
Director
Date: April 27 , 2001 Date: April 27 , 2001
-------------- --------------
By JOSEPH S. LOMBARDI
-------------------------------
Joseph S. Lombardi, Director
Date: April 27 , 2001
--------------
34
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
FINANCIAL REPORT
JANUARY 28, 2001
CONTENTS
--------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT F-1
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS:
Consolidated Balance Sheet F-2-3
Consolidated Statements of Income F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7-17
--------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Chefs International, Inc. and Subsidiaries
Point Pleasant, New Jersey
We have audited the accompanying consolidated balance sheet of Chefs
International, Inc. and subsidiaries as of January 28, 2001, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of Chefs
International, Inc. as of and for the year ended January 30, 2000 were audited
by Edward Isaacs & Company LLP, independent accountants, the majority of whose
partners merged with McGladrey & Pullen, LLP on October 2, 2000. Edward Isaacs &
Company LLP's report dated March 27, 2000 expressed an unqualified opinion on
those statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Chefs International, Inc. and
subsidiaries as of January 28, 2001, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
/S/ McGLADREY & PULLEN, LLP
New York, New York
March 27, 2001
F-1
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JANUARY 28, 2001
ASSETS
--------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 1,159,580
Investments 385,711
Available-for-sale securities 978,652
Miscellaneous receivables 109,492
Inventories 1,129,260
Prepaid expenses 176,187
-----------
TOTAL CURRENT ASSETS 3,938,882
-----------
Property, Plant and Equipment, at cost 20,045,070
Less: Accumulated depreciation 8,182,351
-----------
PROPERTY, PLANT AND EQUIPMENT, NET 11,862,719
-----------
Other Assets:
Investments 301,000
Goodwill - net 454,462
Liquor licenses - net 851,472
Equity in life insurance policies 545,115
Other 72,949
-----------
TOTAL OTHER ASSETS 2,224,998
-----------
$18,026,599
===========
See notes to consolidated financial statements.
F-2
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (CONTINUED)
JANUARY 28, 2001
LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
Current Liabilities:
Notes and mortgages payable $ 166,707
Accounts payable 582,276
Accrued payroll 186,687
Accrued expenses 477,825
Gift certificates 416,430
-----------
TOTAL CURRENT LIABILITIES 1,829,925
-----------
Notes and Mortgages Payable 905,675
-----------
Other Liabilities 534,234
-----------
Stockholders' Equity:
Capital stock - common $.01 par value,
Authorized 15,000,000 shares,
Issued 4,257,085 42,571
Additional paid-in capital 32,138,798
Accumulated deficit (17,466,667)
Accumulated other comprehensive income 51,043
Treasury stock (8,980)
-----------
TOTAL STOCKHOLDERS' EQUITY 14,756,765
-----------
$18,026,599
===========
See notes to consolidated financial statements.
F-3
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JANUARY 28, 2001 AND JANUARY 30, 2000
2001 2000
--------------------------------------------------------------------------------
Sales $ 20,156,890 $ 17,996,559
Cost of Goods Sold 6,487,675 5,830,757
------------ ------------
GROSS PROFIT 13,669,215 12,165,802
------------ ------------
Operating Expenses:
Payroll and related expenses 6,016,792 5,302,533
Other operating expenses 4,142,225 3,541,566
Depreciation and amortization 1,104,254 1,013,416
General and administrative expenses 1,792,320 1,761,244
(Gain) on disposal of assets (2,089) (10,284)
------------ ------------
TOTAL OPERATING EXPENSES 13,053,502 11,608,475
------------ ------------
INCOME FROM OPERATIONS 615,713 557,327
------------ ------------
Other Income (Expense):
Interest expense (105,958) (140,552)
Investment income 208,097 166,424
------------ ------------
OTHER INCOME, NET 102,139 25,872
------------ ------------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES 717,852 583,199
Provision for Income Taxes 85,243 80,635
------------ ------------
Income from continuing operations 632,609 502,564
Gain on Disposal of Discontinued
Ice Cream Business 322,212 --
------------ ------------
NET INCOME $ 954,821 $ 502,564
============ ============
Income Per Common Share From
Continuing Operations $ 0.15 $ 0.11
============ ============
Basic Income Per Common Share $ 0.22 $ 0.11
============ ============
See notes to consolidated financial statements.
F-4
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 28, 2001 AND JANUARY 30, 2000
------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Capital Additional Other Total
Number Stock Paid-in Accumulated Comprehensive Treasury Stockholders'
of Shares Par Value Capital Deficit Income Stock Equity
--------- ----------- ----------- ------------ ----------- ----------- -----------
Balance at January 31, 1999 4,488,369 $ 44,884 $32,304,485 $(18,924,052) $ -- $ -- $13,425,317
Comprehensive Income:
Net income -- -- -- 502,564 -- -- 502,564
Fractional shares conversion (207) (2) 2 -- -- -- --
--------- ----------- ----------- ------------ ----------- ----------- -----------
Balance at January 30, 2000 4,488,162 44,882 32,304,487 (18,421,488) -- -- 13,927,881
-----------
Comprehensive Income:
Net income -- -- -- 954,821 -- -- 954,821
Net Unrealized Gains on
available-for-sale securities -- -- -- -- 51,043 -- 51,043
-----------
TOTAL COMPREHENSIVE INCOME -- -- -- -- -- -- 1,005,864
-----------
Repurchase and Retirement of
Common Stock (233,334) (2,333) (165,667) -- -- -- (168,000)
-----------
Stock Repurchase Program -- -- -- -- -- (8,980) (8,980)
-----------
Fractional Shares Conversion 2,257 22 (22) -- -- -- --
--------- ----------- ----------- ------------ ----------- ----------- -----------
Balance at January 28, 2001 4,257,085 $ 42,571 $32,138,798 $(17,466,667) $ 51,043 $ (8,980) $14,756,765
========= =========== =========== ============ =========== =========== ===========
See notes to consolidated financial statements.
F-5
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 28, 2001 AND JANUARY 30, 2000
2001 2000
--------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income $ 954,821 $ 502,564
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,104,254 1,013,416
Gain on sale of assets (2,089) (10,284)
Gain on disposal of discontinued business (322,212) --
----------- -----------
CASH PROVIDED BY OPERATIONS 1,734,774 1,505,696
Increase (decrease) in cash attributable
to changes in assets and liabilities:
Miscellaneous receivables (46,455) 8,241
Inventories (165,126) 31,513
Prepaid expenses (23,171) 4,456
Accounts payable (16,826) (58,261)
Accrued expenses and other liabilities 268,082 77,551
Income taxes payable (54,300) 34,600
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,696,978 1,603,796
----------- -----------
Cash Flows (Used In) Investing Activities:
Capital expenditures (949,340) (510,948)
Liquor license purchase (357,873) --
Net proceeds from sale of assets 2,089 149,497
Sale or redemption of investments 459,500 481,400
Purchase of investments (947,920) (708,300)
Due on sale of discontinued operations - payments 570,330 66,386
Equity in life insurance policies (39,511) (8,529)
Other assets (41,853) (44,662)
----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES (1,304,578) (575,156)
----------- -----------
Cash Flows (Used In) Financing Activities:
Repayment of debt (370,087) (586,343)
Purchase of common stock (168,000) --
Purchase of treasury stock (8,980) --
----------- -----------
NET CASH (USED IN) FINANCING ACTIVITIES (547,067) (586,343)
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (154,667) 442,297
Cash and Cash Equivalents:
Beginning 1,314,247 871,950
----------- -----------
Ending $ 1,159,580 $ 1,314,247
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash payment for:
Interest $ 107,522 $ 144,164
=========== ===========
Income taxes $ 136,826 $ 46,166
=========== ===========
Noncash Transactions:
Increase in fair value of securities
available for sale $ 51,043 $ --
=========== ===========
See notes to consolidated financial statements.
F-6
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business:
Chefs International, Inc. and its subsidiaries (the "Company") operate
seven seafood restaurants, located in New Jersey and Florida, generally
under the trade name, "Lobster Shanty". The Company also operates Garcia's,
a franchised Mexican restaurant, and Moore's Tavern and Restaurant, an
eclectic American restaurant. Garcia's and Moore's Tavern are both located
in New Jersey. Segment information is not presented since all of the
Company's revenue is attributable to a single reportable segment.
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of
the Company and all of its wholly-owned subsidiaries. Intercompany
transactions and balances have been eliminated in consolidation.
Concentrations of Credit Risk:
The Company maintains cash balances at several financial institutions in
New Jersey and Florida. The balances are insured by the Federal Deposit
Insurance Corporation up to $100,000 at each financial institution.
Uninsured cash balances totaled approximately $973,000.
Cash and Cash Equivalents:
Cash equivalents are comprised of certain highly liquid investments with a
maturity of three months or less when purchased.
Investments:
Investments consist of certificates of deposit and are classified as
current or long-term based on their maturities at the balance sheet date.
Available-for-Sale Securities:
At January 28, 2001, available-for-sale securities consist of convertible
bonds, mutual funds, and equity securities. Available-for-sale securities
are carried at fair value with unrealized gains or losses reported in a
separate component of stockholders' equity. Realized gains or losses are
determined based on the specific identification method.
F-7
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Available-for-Sale Securities (Continued):
Details as to available-for-sale securities at January 28, 2001 are as
follows:
Unrealized
Gross Cost Fair Value Gain
---------- ---------- ----------
Debt securities $ 17,250 $ 23,250 $ 6,000
Mutual funds 574,013 577,792 3,779
Equity securities 336,346 377,610 41,264
-------- -------- -------
$927,609 $978,652 $51,043
======== ======== =======
Inventories:
Inventories consist of food, beverages and supplies. Inventories are stated
at the lower of cost (determined by the first-in, first-out method) or
market.
Property, Plant and Equipment and Depreciation:
Property, plant and equipment are carried at cost. Depreciation is computed
over the estimated useful lives of the assets using the straight-line
method ranging from 3 to 40 years.
Goodwill:
Goodwill represents cost in excess of fair value of businesses acquired and
is being amortized over an estimated useful life of 40 years under the
straight-line method.
Impairment:
Certain long-term assets of the Company, including goodwill, liquor
licenses and property, plant and equipment, are reviewed on a restaurant by
restaurant basis at least annually as to whether their carrying value has
become impaired. This evaluation is done by comparing the carrying value of
the asset to the value of the projected undiscounted 10 year estimate of
net cash flow from related operations. Impairment, if any, is measured by
the amount that the carrying value of the asset exceeds the fair value
usually measured by projected undiscounted net cash flow.
Management also re-evaluates annually the periods of amortization to
determine whether subsequent events and circumstances warrant revised
estimates of useful lives. As of January 28, 2001, management expects these
assets to be fully recoverable.
F-8
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Liquor Licenses:
Liquor licenses are amortized over 40 years under the straight-line method.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Income Taxes:
The Company uses the asset and liability method in accounting for income
taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to reverse.
Advertising:
The Company expenses advertising costs as incurred. Advertising costs for
fiscal 2001 and 2000 were $500,932 and $494,002, respectively.
2. ACQUISITION
On February 23, 2000, the Company acquired for approximately $634,000 the
furniture, fixtures, equipment and a liquor license associated with the
operations of Moore's Inn, a restaurant and tavern, owned by the principal
stockholders of the Company. The assets have been recorded at the principal
stockholders carryover basis. Additionally, the Company entered into a
five-year lease for the restaurant property with a partnership owned by the
principal shareholders of the Company.
3. INVENTORIES
Inventories consist of the following:
Food $ 597,161
Beverages 127,820
Supplies 404,279
----------
Totals $1,129,260
==========
F-9
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
Land $ 3,262,159
Buildings and improvements, including leaseholds 14,537,709
Furniture and equipment 2,038,919
Construction in progress 103,448
China, glassware and utensils (a) 102,835
-----------
$20,045,070
===========
(a) Carried at original cost for each restaurant. All replacement
purchases are charged to expense as incurred.
Depreciation expense was $1,050,495 and $968,423 for fiscal 2001 and 2000,
respectively.
5. INTANGIBLE ASSETS
Intangible assets consist of:
Liquor
Goodwill Licenses
-------- ----------
Cost $949,820 $1,195,180
Less: Accumulated amortization 495,358 343,708
-------- ----------
$454,462 $ 851,472
======== ==========
Amortization expense was $53,759 and $44,993 for fiscal 2001 and 2000,
respectively.
6. NOTES AND MORTGAGES PAYABLE
Mortgage payable in monthly installments of $8,319,
inclusive of interest at 7.82%, through November 2008,
collateralized by real estate located in Vero Beach, Florida $ 810,516
Mortgage payable in various monthly installments to amortize
the mortgage at the rate of $105,000 annually, through
December 2002 with interest at 9.25%, collateralized by real
estate located in Toms River, New Jersey 204,000
Mortgage payable in monthly installments of $2,067 through
May 2003, plus interest at LIBOR plus 2.25%, collateralized
by real estate located in Toms River, New Jersey 57,866
----------
1,072,382
Less: Current maturities 166,707
----------
$ 905,675
==========
F-10
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
6. NOTES AND MORTGAGES PAYABLE (Continued)
Annual maturities for fiscal years 2003 through 2006 are $163,746, $51,492,
$46,346 and $50,770, respectively.
At January 28, 2001, the Company has a $500,000 line of credit which is
collateralized by real estate located in Point Pleasant Beach, New Jersey.
The line is due June 30, 2002 and bears interest at LIBOR plus 2.00%. At
January 28, 2001, there were no amounts used under the line of credit.
At January 28, 2001, LIBOR was 5.90%.
All of the Company's mortgages and loans are with the same financial
institution. The loan covenant governing the borrowings includes, among
other items, requirements relating to tangible net worth, capital
expenditures, working capital components and restrictions on dividends.
7. INVESTMENT INCOME
The components of investment income are summarized as follows:
2001 2000
-------- --------
Interest income $160,624 $166,424
Dividends 45,214 --
Realized gain on sales of investments 2,259 --
-------- --------
$208,097 $166,424
======== ========
8. RETIREMENT PROGRAMS
The Company has a non-qualified supplemental retirement program which
provides life insurance to certain eligible employees. The Company is the
owner of all cash values of the policies. The death benefit is split,
reimbursing the Company for premiums paid with the balance paid to the
beneficiary designated by the employee. Employees vest in the program after
ten years, with the option to take ownership of the policy at that time or
let the Company continue to fund the policy for an additional 5 years. The
Company has recorded, as a long-term asset in the accompanying balance
sheet, its equity in life insurance for premiums advanced and has included
in other long-term liabilities the Company's estimated liability for the
amount of the equity in life insurance which the Company will be required
to turn over to employees.
Additionally, the Company has an agreement with a former director/employee
which provides for the payment of $20,000 per year through 2007. The
discounted present value of this agreement is included in other long-term
liabilities. The amount has been partially insured with a life insurance
contract owned by the Company.
The Company's expense for these plans was $42,840 and $44,638, for fiscal
2001 and 2000, respectively.
F-11
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
9. EXECUTIVE INCENTIVE BONUS PLAN
In Fiscal 2001, the Board of Directors approved an executive incentive
bonus plan which provides eligible employees an annual cash bonus if the
Company achieves certain financial goals. The charge to operations
applicable to the incentive plan for fiscal 2001 was $79,910.
10. TRANSACTIONS WITH RELATED PARTIES
In December 1999, the Company entered into an agreement with a company
controlled by the principal shareholders of the Company. The agreement
called for the Company to provide consulting to the officers and employees
of the company concerning all matters relating to the operation of a
restaurant and tavern known as Moore's Inn. The agreement provided for the
Company to receive fees of $1,800 per week. Consulting income for fiscal
2001 and 2000, pursuant to this agreement, was $6,093 and $7,200,
respectively. The agreement terminated on February 23, 2000, when the
Company acquired the assets of Moore's Inn (see Note 2).
Upon acquiring the assets of Moore's Inn the Company entered into a
five-year lease for the restaurant property with a partnership owned by the
principal shareholders of the Company. The lease requires minimum annual
rentals of $90,000, plus percentage rent of 6% of sales exceeding $1.5
million. The lease contains three five-year renewal options.
Rent expense paid pursuant to this lease for fiscal 2001 was $114,497,
which included percentage rent of $30,187.
The Company has a retirement agreement with a former director/employee (see
Note 8).
11. COMMITMENTS AND CONTINGENCIES
Leases:
The Company leases restaurants, parking lots and equipment under operating
leases expiring at various times through the year 2009.
Minimum future rental payments under noncancelable operating leases as of
January 21, 2001, are as follows:
2002 $ 228,529
2003 235,888
2004 216,577
2005 217,647
2006 134,477
Thereafter 264,719
----------
$1,297,837
==========
Total rent expense, including rent paid to related parties, was $296,926
and $203,490, for fiscal 2001 and 2000, respectively.
F-12
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
11. COMMITMENTS AND CONTINGENCIES (Continued)
Employment Agreements:
The Company has employment agreements terminating March 2001 with two
employees for annual amounts ranging from $95,200 to $164,100. The
agreements are renewed annually. These agreements provide for lump sum
payments in the event of the termination of the employees without cause or
a change in control of the Company, as defined, for a portion of the
unexpired term of the contracts.
Stock Repurchase Plan:
On May 24, 2000 the Board of Directors authorized the Company to repurchase
over a two-year period up to 400,000 shares of its outstanding stock at
market price. At January 28, 2001 the Company had repurchased 10,275 shares
for $8,980.
12. GAIN ON DISPOSAL OF DISCONTINUED ICE CREAM BUSINESS
On February 20, 1997, the Company sold 95% of the common stock of Mister
Cookie Face ("MCF"), its ice cream production segment, to a former director
for an aggregate purchase price of $1,600,000, consisting of a $500,000
cash payment and three notes totaling $1,100,000. The first note for
$100,000 was due on or before March 24, 1997, the second note for $500,000,
was due in installments through July 1, 2000, and the third note for
$500,000 was due on or before February 20, 2004, with mandatory prepayments
based on MCF's cash flow. Based on the estimated present value of the
payments, management recorded a valuation allowance of $601,050 against the
second and third notes. The 5% of MCF common stock retained by the Company
was valued at $35,000.
On June 30, 2000, the Company sold both Notes B and C and its 5% holding of
MCF common stock to MCF for a cash payment of $367,163 and the return of
233,334 shares of the Company's common stock owned by the president of MCF.
These shares were subsequently cancelled by the Company. The Company has
recognized a gain from discontinued operations of approximately $322,000 in
its financial statements for the year ended January 28, 2001, which
represents partial recoveries of the valuation allowance previously
provided for against Notes B and C.
F-13
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
12. GAIN ON DISPOSAL OF DISCONTINUED ICE CREAM BUSINESS (Continued)
Cash received for Notes B and C prior to June 30, 2000 were applied to
principal and interest based on the discounted note payment schedules,
which resulted in an additional $5,848 and $26,548 of interest income being
recognized in fiscal 2001 and 2000, respectively, and was applied as
follows:
2001 2000
---------- ----------
Interest income $ 44,698 $ 63,613
========== ==========
Average recorded investment in loans $ 93,565 $ 243,970
========== ==========
Cash basis interest income $ 46,667 $ 65,559
========== ==========
Valuation allowance $ -- $ 534,502
========== ==========
13. EARNINGS PER SHARE
The weighted average number of shares outstanding used to compute basic
earnings per share for fiscal 2001 and 2000 was 4,350,799 and 4,488,162,
respectively.
14. STOCK OPTIONS
Under its 1982 Incentive Stock Option Plan, the Company was permitted to
grant key executives stock options through June 1992. Under the plan, an
aggregate of 55,556 shares of common stock were reserved for issuance.
Options vested immediately and were exercisable over a period of five or
ten years. On November 1999, 36,559 options outstanding under this plan
expired.
In October 1994 and 1995, the Company's stockholders approved grants of
216,667 and 300,000 non-qualified options to directors of the Company. The
exercise prices for the 1994 and 1995 grants were $3.75 and $3.00,
respectively. The options granted in both years vested immediately and were
exercisable over five years. During fiscal 2000, 162,501 options expired
and 50,000 options were canceled.
F-14
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
14. STOCK OPTIONS (Continued)
Summary of stock option activity is as follows:
2000
----------------------
Weighted
Average
Exercise
Shares Price
-------- --------
Outstanding - beginning of year 249,060 $ 3.19
Canceled during the year (50,000) (3.00)
Expired during the year (199,060) (3.24)
-------- --------
Outstanding - end of year -- $ --
======== ========
Exercisable - end of year -- $ --
======== ========
15. INCOME TAXES
The significant components of deferred tax assets and liabilities as of
January 28, 2001 are as follows:
Deferred Tax Assets:
Tax loss carryforwards $2,818,000
Capital loss carryforwards 192,000
Other 60,000
----------
Totals 3,070,000
----------
Deferred Tax Liabilities:
Depreciation 89,000
Other 9,000
----------
Totals 98,000
----------
Net Deferred Tax Assets 2,972,000
Less: Valuation allowance 2,972,000
----------
$ --
==========
F-15
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
15. INCOME TAXES (Continued)
As of January 28, 2001, the valuation allowance reduces the net deferred
tax asset to zero. The net change in the valuation allowance was a $169,000
reduction for fiscal year 2001. The change in fiscal 2001 was primarily due
to the utilization and expiration of tax loss carryfowards.
The Company used approximately $1,030,000 and $984,000 of operating loss
carryforwards in fiscal 2001 and 2000, respectively. The tax effect was as
follows:
2001 2000
--------- ---------
Federal:
Income tax expense $ 356,000 $ 335,000
Operating loss carryforward (337,000) (323,000)
--------- ---------
Total $ 19,000 $ 12,000
========= =========
State:
Income tax expense $ 87,243 $ 78,235
Operating loss carryforward (21,000) (9,600)
--------- ---------
Total $ 66,243 $ 68,635
========= =========
The Company has available at January 28, 2001, operating loss carryforwards
as follows:
Year of Expiration
------------------
2002 $ 1,509,463
2003 2,072,345
2004 2,942,316
2005 472,062
2006 220,595
2007 215,047
2008 196,704
2009 155,075
2010 103,553
2011 144,559
2012 88,405
------------
Total $ 8,120,124
============
F-16
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
15. INCOME TAXES (Continued)
The difference between the tax provision at the statutory Federal income
tax rate and the tax provision attributable to income from continuing
operations before income tax for the years ended January 28, 2001 and
January 30, 2000 are as follows:
2001 2000
------ ------
Federal statutory rate 34.0% 34.0%
State taxes net of Federal benefit 5.0 5.0
Valuation allowance change 23.5 31.8
Operating loss carryforwards (50.7) (57.0)
------ ------
Effective Rate 11.8% 13.8%
====== ======
16. 52-53 WEEK PERIOD
The Company's year end is the last Sunday in January. The statements of
operations are comprised of a 52-week period both for fiscal 2001 and 2000.
F-17