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 25, 2004
----------------
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 Exchange Act: NONE
----
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.01 Par Value
----------------------------
(Title of Class)
Check whether the issuer [1] filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 90 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 25, 2004 totaled $22,283,169.
On March 30, 2004, the aggregate market value of the voting stock of the issuer
(consisting of Common Stock, $.01 par value) held by non-affiliates was
approximately $3,285,000 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 3,926,116 shares of the issuer's Common Stock issued and
outstanding.
Transitional Small Business Disclosure Format (check one)
YES NO X
--- ---
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 ten restaurants on a year-round basis, eight of
which are free-standing seafood restaurants in New Jersey (four) and Florida
(four); one of which is a free-standing Mexican theme restaurant located in
Freehold, New Jersey, and one of which is a free-standing restaurant also
located in Freehold, New Jersey featuring an eclectic American food menu. Six of
the seafood restaurants are operated under the name "Jack Baker's Lobster
Shanty, " one under the name "Baker's Wharfside" and one under the name "Mr.
Manatee's Casual Grille. " The Mexican theme restaurant is operated under the
name "Escondido's Mexican Restaurant. " The eclectic American food restaurant is
operated under the name "Moore's Tavern and Restaurant. " The Company opened its
first seafood restaurant in November 1978, its Mexican theme restaurant in
January 2002 and "Moore's Tavern and Restaurant" in February 2000. (As used
herein, the term the "Company" may at times include Chefs and its various
subsidiaries.) See "Development Since the Beginning of the Last Fiscal Year" as
to the Company's closing in June 2003 of its Mexican theme restaurant located at
the Monmouth Mall, in Eatontown, New Jersey and its planned closing during the
late spring or summer of calendar year 2004 of one of its Florida seafood
restaurants.
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 CLOSINGS
In June 2003, as a result of continuing operating losses at its
Monmouth Mall Mexican theme restaurant, the Company closed this restaurant. In
connection with the closing, the Company wrote off approximately $230,000
attributable to leasehold improvements and equipment at the restaurant and
executed a Surrender Agreement with the Mall owner. Pursuant to the Surrender
Agreement, the Company agreed to pay $180,000 in consideration for early
cancellation of the restaurant lease. The Company recorded a loss on its
financial statements attributable to the closing of this restaurant of $410,024.
The Company is attempting to sell the liquor license which it had utilized at
this restaurant and which can be used within the Borough of Eatontown in New
Jersey. See Note 11 of Notes to the Consolidated Financial Statements included
in this Report.
In the first quarter of calendar year 2004, management decided to sell
the Company's Jensen Beach, Florida Lobster Shanty restaurant due to declining
sales and a lack of profitability. The Company has executed a contract to sell
this restaurant for $900,000. The closing is expected to take place in the
second quarter of calendar year 2004. The Company anticipates that it will
recognize a gain of approximately $400,000 from this sale. See Note 16 of Notes
to the Consolidated Financial Statements.
PROPOSED "GOING PRIVATE" TRANSACTION
On November 21, 2003, the Company announced that it had received a
proposal from the Lombardi Restaurant Group, Incorporated, a newly organized
entity owned by Robert M. Lombardi; Anthony M. Lombardi; Joseph S. Lombardi;
Michael F. Lombardi and Stephen Lombardi (the "Lombardi Brothers") and their
affiliates (collectively the "Lombardi Group") to acquire all of the outstanding
shares of Chefs common stock not owned by the Lombardi Group, for a cash
purchase price of $1.75 per share. The proposal contemplated that the
acquisition would be effected through a merger pursuant to which a newly formed
acquisition corporation owned by the Lombardi Group would be merged with the
Company and the Company's
2
stockholders other than the members of the Lombardi Group would be paid $1.75 in
cash for each share they owned of Chefs common stock.
The five Lombardi Brothers hold five of the eight seats on the
Company's board of directors and Robert M. Lombardi is also chairman of the
board. The members of the Lombardi Group collectively own approximately 61% of
Chefs' outstanding common stock.
The proposal was subject to various conditions including the
requirement that the Company's board of directors determines and recommends the
proposed acquisition price to be fair to the Company's minority stockholders.
The board of directors appointed a Special Committee consisting of the three
non-Lombardi Brother directors, Nicholas B. Boxter, Kenneth Cubelli and Raymond
L. Dademo, to review and analyze the proposal and to determine whether in their
judgment, they deem the proposed acquisition price to be fair to the Company's
minority stockholders.
On January 30, 2004, the Company announced that the Special Committee
had retained the investment banking firm of Houlihan Lokey Howard & Zukin
Financial Advisors, Inc. to render an opinion to the Committee as to the
fairness, from a financial point of view, to the Company's minority
stockholders, of the consideration offered by the Lombardi Group.
On March 8, 2004, the Company announced that the Special Committee,
after review with its financial and legal advisors, had voted unanimously to
reject the $1.75 per share offer made by the Lombardi Group, concluding that the
offer price did not adequately reflect the Company's value.
On March 15, 2004, the Company announced that the Lombardi Group had
increased its purchase offer to $2.50 per share and that the Special Committee,
with the assistance of its financial and legal advisors, was in the process of
analyzing the new proposal to determine whether in its judgment, the proposed
increased purchase price was fair to the Company's minority stockholders.
On April 19, 2004, the Company announced that the Special Committee,
after review with its financial and legal advisors, had voted unanimously to
reject this increased offer of $2.50 per share, concluding that the new offer
price still did not adequately reflect the Company's value.
On April 21, 2004, the Company announced that the Lombardi Group had
once again increased its purchase offer, this time to $3.00 per share, and that
this new proposal was being analyzed by the Special Committee with the
assistance of its financial and legal advisors to determine whether in its
judgment, the proposed $3.00 purchase price was fair to the Company's minority
stockholders.
RESIGNATION OF PRESIDENT, TREASURER, PRINCIPAL EXECUTIVE AND PRINCIPAL FINANCIAL
OFFICER
In April 2004, Anthony C. Papalia, the Company's president, treasurer,
principal executive and principal financial officer requested of the board that
he be released from his employment contract (due to expire in March 2005)
effective at the close of business on June 28, 2004 "...in order to pursue
personal interests...." The board agreed to release Mr. Papalia from his
employment contract at said date and he agreed to a one year non-competition
agreement with the Company. No decision has been made as to who will succeed Mr.
Papalia as president and principal executive officer but it is anticipated that
Martin Fletcher, the Company's controller, will succeed Mr. Papalia as the
Company's treasurer and chief financial officer.
SHARE REPURCHASE PROGRAM
On January 21, 2003, the Company announced a Share Repurchase Program
to purchase up to 100,000 shares of Chefs Common Stock over the next twelve
months. At the conclusion of the Program, the Company had repurchased an
aggregate 40,000 shares
3
of Chefs' Common Stock in the over-the-counter market at a repurchase price of
$1.48 per share.
The Company's Board of Directors believed that Chefs common stock was
undervalued in the public market and that the Repurchase Program would
constitute an appropriate investment to the benefit of the Company's
stockholders. All repurchases were effected at prices per share substantially
below the Company's per share book value. The Company utilized available cash
reserves to effect each of its stock repurchases.
BANK LOANS
At January 26, 2003, the Company had a $500,000 revolving line of
credit ("L/C line") from First Union Bank (subsequently acquired by Wachovia
Bank), expiring on June 30, 2003 and secured by a first mortgage on its Toms
River, New Jersey Lobster Shanty restaurant. No borrowings had been made under
the L/C line at said date. The L/C line was renewed in June 2003 and extended to
June 30, 2005. During fiscal year 2004 through January 25, 2004, no borrowings
were made under the L/C line. All subsequent references to Wachovia Bank shall
refer to Wachovia Bank as well as to First Union Bank prior to its acquisition
by Wachovia Bank.
The Company is indebted to Wachovia Bank under a $500,000 Term Loan
made in May 2002, the proceeds of which were applied to the repayment of the
balance under an outstanding L/C line. Principal payments under the Term Loan
are due in amounts varying from $5,000 to $25,000 in the months of March through
November through 2007 together with interest at the LIBOR Market Index Rate plus
2%. Indebtedness under the Term Loan is secured by a mortgage on the Company's
Toms River, New Jersey Lobster Shanty restaurant. At January 25, 2004, the
outstanding principal balance under this Term Loan was approximately $315,000.
In September 2001, the Company borrowed $600,000 from Wachovia Bank
secured by a first mortgage on its Baker's Wharfside restaurant in Point
Pleasant Beach, New Jersey and borrowed an additional $600,000 from the Bank
secured by a first mortgage on its Jack Baker's Lobster Shanty restaurant in
Point Pleasant Beach. Each of these two loans have a ten year maturity providing
for annual principal payments of approximately $60,000 commencing in fiscal 2003
together with interest on the unpaid balance at an annual rate of 7.57%. At
January 25, 2004, the outstanding principal balance of each of these loans was
$477,500.
The Company applied the $1,200,000 of loan proceeds as part of the
$1,300,000 it utilized to renovate, decorate and equip (kitchen, bar, furniture,
fixtures) its Escondido's Mexican Restaurant in Freehold, New Jersey which
opened in January 2002.
In May 1998, the Company borrowed $124,000 from Wachovia Bank to
partially fund the purchase of property adjoining its Toms River, New Jersey
Lobster Shanty restaurant. The loan was repayable in monthly installments of
principal with interest at LIBOR plus 2 1/4% through May 2003 and was secured by
a first mortgage on the property. At January 26, 2003, approximately $8,300 was
outstanding under this loan. This loan was repaid in full during fiscal 2004.
In October 1998, the Company borrowed $880,000 from Wachovia Bank 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 25, 2004, approximately
$690,400 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.
4
Pursuant to its principal Loan Agreements, the Company has agreed to
certain affirmative and negative covenants, violation of which without Wachovia
Bank's waiver would constitute a default under the Loan Agreements. Included are
affirmative covenants by the Company to maintain its properties in good
condition and repair; maintain adequate insurance coverage; conduct its business
in the manner and at the locations where it is currently being conducted;
maintain a Funds Flow Coverage of not less than 1.20 to 1.00; maintain a
Tangible Net Worth at fiscal 2004 year end of not less than $12,600,000
increasing by not less than $50,000 in each subsequent year; maintain a ratio of
Senior Liabilities to Effective Tangible Net Worth of not more than .50 to 1.00
measured semi-annually; and maintain liquid assets (cash, time deposits,
marketable securities) of not less than $500,000. Also included are negative
covenants of the Company not to permit or effect a material change in ownership
or in management; not to create or permit certain liens or encumbrances on its
assets; not to guarantee third party obligations; and not to retire or otherwise
acquire any of its capital stock (without receiving a waiver from the Bank.) The
Company received waivers from the Bank for its stock repurchases effected in
fiscal years 2001-2003 as well as for its repurchases pursuant to its January
2003 Stock Repurchase Program described above. The Company was in compliance
with all material covenants under the Loan Agreements at January 25, 2004. The
Company subsequently received a waiver from Wachovia Bank of any claim that the
resignation and departure of Anthony C. Papalia at June 28, 2004 as the
Company's principal executive and principal financial officer might be deemed a
violation of the covenant regarding material change in management.
(b) BUSINESS OF ISSUER - The Company is engaged in one business; the
operation of ten restaurants in New Jersey and Florida on a year-round basis but
has decided to close one of the Florida seafood restaurants in the second
quarter of calendar 2004.
RESTAURANT OPERATIONS
The Company currently operates ten restaurants on a year-round basis,
eight of which are free-standing seafood restaurants in New Jersey (four) and
Florida (four); one of which is a free-standing Mexican theme restaurant located
in Freehold, New Jersey, and one of which is a free-standing restaurant also
located in Freehold, New Jersey featuring an eclectic American food menu. Six of
the seafood restaurants are operated under the name "Jack Baker's Lobster
Shanty," one under the name "Baker's Wharfside" and one under the name "Mr.
Manatee's Casual Grille." The Mexican theme restaurant is operated under the
name "Escondido's Mexican Restaurant." The eclectic American food restaurant is
operated under the name "Moore's Tavern and Restaurant." The Company opened its
first seafood restaurant in November 1978, its Mexican theme restaurant in
January 2002 and "Moore's Tavern and Restaurant" in February 2000. See
"Developments Since the Beginning of the Last Fiscal Year" as to the Company's
closing in June 2003 of its Mexican theme restaurant located at The Monmouth
Mall in Eatontown, New Jersey and its planned closing during the second quarter
of calendar 2004 of one of its Florida seafood restaurants. 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
-------------------
Jack Baker's 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
5
Baker's Wharfside
-----------------
Pt. Pleasant Beach, New Jersey October 1980
Mr. Manatee's Casual Grille Restaurant
--------------------------------------
Vero Beach, Florida April 2002
ESCONDIDO'S MEXICAN RESTAURANT
------------------------------
Freehold, New Jersey January 2002
MOORE'S TAVERN AND RESTAURANT
-----------------------------
Freehold, New Jersey February 2000
----------------
* The Company plans to close on its sale of this restaurant during the second
quarter of calendar year 2004.
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.
JACK BAKER'S 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 a partnership, the principal partner of which was 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 the partnership. 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, 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.
During fiscal 2002, the Company was assessed and paid $62,674 as its
share for the development by the City of Vero Beach of the Royal Palm Pointe
project. This project is a city park development contiguous to the Company's
Jack Baker's Lobster Shanty and its Mr. Manatee's restaurants. Among other
amenities, it provides municipal parking which the Company believes has enhanced
its restaurant business at those locations.
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
6
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.
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 permits and variances necessary for it
to develop an outdoor patio dining area with seating for 125 on this site but
delayed construction pending resolution of a lawsuit initiated by a neighboring
landowner attempting to prevent construction. The landowner's time to appeal
from the granting of the permits and variances to the Company has expired.
Management assumes there will be no further objection to the Company's
construction of the planned patio dining area. As a result of the delay, the
board of directors has deferred its decision on whether to proceed with the
construction of the patio. If the board determines to proceed in the next
several months, the Company estimates the total cost of construction and
outfitting at approximately $350,000 for an opening which could take place in
fiscal 2006.
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. See
"Developments Since the Beginning of the Last Fiscal Year" herein as to the
planned closing of the Company's sale of this restaurant in the second quarter
of calendar year 2004.
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 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
7
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.
MR. MANATEE'S CASUAL GRILLE RESTAURANT
VERO BEACH, FLORIDA - This restaurant, consisting of approximately
4,000 square feet, is free standing at 30 Royal Palm Pointe in Vero Beach and
seats approximately 165. It has parking for approximately 40 automobiles but
there are additional municipal parking spaces available at the contiguous Royal
Palm Pointe municipal park. Pursuant to a January 2002 asset purchase agreement,
the Company purchased the furnishings, fixtures and equipment, liquor license,
goodwill, right to the name and the business of Mr. Manatee's from an
unaffiliated third party for $800,000. The Company paid $300,000 of the purchase
price from its available cash reserves and borrowed the $500,000 balance (which
it repaid in fiscal 2003) under its available Line of Credit. See Note 5 of
Notes to the Company's Consolidated Financial Statements as to the write down of
the goodwill associated with Mr. Manatee's in the amount of $583,922 as a result
of the aggregate capitalization of the Company being less than its book value.
This amount is included as an operating expense in the Company's Consolidated
Statement of Operations for fiscal 2003. On April 1, 2002, the Company entered
into a five year lease of the restaurant property at a monthly rental of $8,000
under a triple "net-net" Lease. The Lease provides the Company with an option to
renew the lease for up to three additional five year terms with the rental
increasing by ten percent for each additional five-year renewal term. The Lease
also provides the Company with the right to purchase the Property for $1,075,000
at the expiration of the initial five year term of the Lease.
Mr. Manatee's Casual Grille opened under the Company's management on
April 1, 2002. It is a casual theme restaurant primarily featuring seafood
items, serving lunch meals, dinner meals and sandwiches. To date, the average
check at Mr. Manatee's has been approximately 15% to 20% lower than the check
average at the Company's other seafood restaurants.
MEXICAN THEME RESTAURANTS
At January 26, 2003, the Company was operating two Mexican theme
restaurants, each under the name "Escondido's Mexican Restaurant." One was a
free-standing restaurant located in Freehold, New Jersey. The other was located
at The Monmouth Shopping Mall in Eatontown, New Jersey. See "Developments Since
the Beginning of the Last Fiscal Year" as to the Company's closing in June 2003
8
of its Escondido's Mexican Restaurant at The Monmouth Shopping Mall. At January
25, 2004, the Company was operating only one Mexican theme restaurant; its
free-standing "Escondido's Mexican Restaurant" in Freehold, New Jersey.
The Company's Mexican theme restaurant features Mexican cuisine
including fajitas, tortillas, burritos and enchiladas with cheese, beef,
chicken, pork and seafood fillings. The menus also include 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.
FREEHOLD, NEW JERSEY - The Company opened its Freehold, New Jersey
"Escondido's Mexican Restaurant" located on West Main Street (Route 537) in
January 2002. This free-standing restaurant, consisting of approximately 5,000
square feet of leased space, is decorated in a bright multi-colored Mexican
motif. The restaurant has a bar and tables and booths which can accommodate
approximately 225 patrons and shares parking facilities with the adjoining
Moore's Tavern and Restaurant. It 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 Company leased the facility ("Building B") from Moore's Realty
(whose partners are members of the controlling Lombardi Group and other members
of the Lombardi family). The lease is a "triple-net" lease pursuant to which the
Company is required to pay real estate taxes, insurance and heating and air
conditioning costs. The lease is for a five-year term through January 2007 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 applicable term that it does not
intend that such option be exercised. The Company has the right to terminate the
lease upon six months' written notice during the initial lease term provided
that such notice cannot be given until 18 months after the commencement of the
initial lease term and upon twelve months written notice during any renewal
term.
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. The Company paid the minimum annual rental with respect to fiscal
2004. Moore's Realty has the right to terminate the lease upon twelve months'
prior written notice if, for the preceding lease year, the gross annual rental
did not exceed the minimum annual rental for that year.
The Company expended approximately $1,300,000 to renovate, decorate and
equip (kitchen, bar, furniture, fixtures) its Escondido's Mexican Restaurant in
Freehold, New Jersey. The bulk of the costs were paid from the proceeds of two
bank loans from Wachovia Bank aggregating $1,200,000. See "Developments Since
the Beginning of the Last Fiscal Year - Bank Loans" in this Item 1. During the
renovation of this restaurant, the Company paid an aggregate $15,000 in rents to
Moore's Realty with respect to Building B. The Company had no additional cost
for the liquor license for these premises, the license being permitted as an
expansion of the license on the adjoining "Moore's Tavern and Restaurant."
See "Moore's Tavern and Restaurant" herein as to the Company's lease of
the Building C pad site to provide additional parking for both this restaurant
and Moore's Tavern and Restaurant.
9
MOORE'S TAVERN AND RESTAURANT
In February 2000, the Company executed a lease with Moore's Realty
(whose partners are members of the controlling Lombardi Group and other members
of the Lombardi family). The lease was of premises on West Main Street (Route
537) in Freehold, New Jersey (Building A), 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 from January 3, 2000 until February 23, 2000 when it
executed the following described lease and purchase agreements and commenced to
operate the facility under the name "Moore's Tavern and Restaurant."
The lease was 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 "triple-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
fiscal year ended January 25, 2004, the gross rental aggregated $149,763.
Moore's Realty has the right to terminate the lease upon twelve months' prior
written notice if, for the preceding lease 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 Tavern and Restaurant.
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 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 therein 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.
10
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. See "Mexican
Theme Restaurants" herein as to the Company's lease of Building B from Moore's
Realty in fiscal 2002, renovation of the facility and opening of an "Escondido's
Mexican Restaurant" at the facility in January 2002. At the time of the
Company's leasing of Building B, the Company and Moore's Realty executed an
amendment to their January 21, 2000 lease agreement extending the initial term
of the earlier lease to the termination date provided for in the later lease and
similarly extending the renewal periods of the earlier lease to coincide with
the renewal periods of the Building B lease.
The Moore's Tavern and 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 (now operated by the Company
as an Escondido's Mexican Restaurant), and proposed Building C. See "Building
Pad C Parking Lot" as to the Company's leasing of the Building C pad site to
provide additional parking for patrons of its two Freehold, New Jersey
restaurants. 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.
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.
BUILDING PAD C PARKING LOT
In connection with the February 2000 execution of the lease of Moore's
Inn to the Company, Moore's Realty agreed not to sell or lease a building
("Building B") adjacent to Moore's Inn or the nearby pad site for a proposed
building ("Building C") to a third party for a period of one year. Moore's
Realty also agreed that if during the initial one-year period, the Company
entered into an agreement to purchase or lease Building B, it would not sell or
lease the Building C pad site to anyone other than the Company for an additional
one-year period. In October 2001, the Company leased Building B from Moore's
Realty and in January 2002, opened its Mexican theme restaurant in Building B
under the name "Escondido's Mexican Restaurant."
In September 2002, the Company leased the Building C pad site from
Moore's Realty for use as a parking lot for its Freehold, New Jersey Moore's
Tavern and Restaurant and its Escondido's Mexican Restaurant. The lease is for a
five-year term through January 2007 and contains provisions for three
consecutive five-year renewals at the Company's option. Either party has the
right to terminate the lease upon twelve (12) months written notice after
conclusion of the initial five (5) year term provided that if the Landlord
elects to terminate the lease, it must offer the Tenant the right to lease an
adjoining paved parking area sufficient to park at least fifty (50) automobiles
on terms and conditions similar to those contained in the lease. The lease also
provides that if the Company is leasing either Building A (Moore's Tavern and
Restaurant) or Building B (Escondido's Mexican Restaurant) at the time of
termination by Moore's Realty, Moore's Realty will not permit a restaurant to be
developed on the Building C pad site.
The lease is a "triple-net" lease pursuant to which the Company pays
real estate taxes, insurance, electricity charges, snow and ice removal,
cleaning and
11
maintenance. The lease provides for a minimum rent at an annual rate of $40,000
during each year of the initial five-year term, $44,000 during each year of the
first five-year renewal period; $50,000 during each year of the second five-year
renewal period and $55,000 during each year of the third five-year renewal
period. In addition to the minimum annual rent, the Company is required to pay
an amount to Moore's Realty equal to (i) 1% of the total gross sales of the food
and beverages etc. at the Moore's Tavern and Restaurant and at the Escondido's
Mexican restaurant in each year (excluding taxes and gratuities) (the "gross
annual rent"), less (ii) the minimum annual rent for such year. During fiscal
2003, the Company installed curbing, paving and other improvements to the site
at a cost of approximately $134,000. The site now provides parking for
approximately 65 automobiles for patrons of the two Freehold restaurants.
Moore's Realty has agreed to reimburse the Company's costs. Moore's Realty
reimbursement obligation will be applied as a credit against the minimum rent
and the gross annual rent, if any, due under the lease.
The lease for the Building C pad site cannot be deemed as an "arm's
length" transaction due to the interest therein of the Lombardi Group and other
members of the Lombardi family. The lease was negotiated for the Company by
Anthony C. Papalia, its president and chief executive officer. Mr. Papalia and
the non-interested directors concluded that the terms of the transactions were
fair and in the best interests of the Company.
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 Escondido's Mexican
Restaurant are readily available from a variety of sources including national
distributors and local sources on an order basis when needed.
SEASONAL ASPECTS
The Company's New Jersey seafood restaurants experience a significant
portion of their sales from May through September whereas its Florida seafood
restaurants experience a significant portion of their sales from January through
April. Moore's Tavern and Restaurant and the Freehold Escondido's Mexican
Restaurant have experienced a seasonality factor similar to but not as dramatic
as the seasonality factor of the Company's New Jersey seafood restaurants. Mr.
Manatee's Casual Grille follows the seasonality pattern of the Company's Florida
restaurants.
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" registered for a 20
year period with the U.S. Patent and Trademark Office in February, 1989, and its
rights to use of the names "Moore's Inn" and "Moore's Tavern" as described
above. The Company also believes its use of the service mark "Escondido's
Mexican Restaurant" is material to its restaurant business. The Company applied
to the United States Commissioner of Trademarks and effective September 2002,
obtained registration of the service mark "Escondido's Mexican Restaurant."
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 vicinity of the location where the Company is
12
now operating its Escondido's Mexican Restaurant, all of which supply
competition to the Company's Mexican theme restaurant. In addition, there are
other Mexican style restaurants including an outlet of Chevy's, a national
chain, in the area. 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. Typical "chain" competitors to all of the
Company's restaurants, which are affiliated with better established and more
prominent national chains, are Ruby Tuesdays and TGI Fridays. 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. 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
costs.
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 Escondido's Mexican Restaurant in Freehold, New
Jersey employs between 30 and 60 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 25, 2004, the Company had approximately 550 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.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceeding.
13
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 25, 2004.
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 26, 2002 $ 2.10 $ 1.42
July 26, 2002 1.72 1.42
October 25, 2002 1.46 1.33
January 24, 2003 1.50 1.35
April 27, 2003 1.42 1.35
July 27, 2003 1.38 1.35
October 26, 2003 1.40 1.38
January 25, 2004 1.85 1.40
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 January 25, 2004, the number of record holders of the Common Stock
was 6,345. Such number of record holders 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.
14
The Company did not sell any of its equity securities during the fiscal
year ended January 25, 2004.
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, substantial
increases in insurance costs, the impact of competition to the Company's
restaurants, pricing and acceptance of the Company's food products. In addition,
the Company's performance may be adversely affected if it is unable to find a
satisfactory successor to its president and principal executive officer, Anthony
C. Papalia, who is leaving the Company's employ at the end of June 2004.
FINANCIAL REPORTING
Note 1 to the consolidated financial statements includes a summary of
significant accounting policies and methods used in the preparation of the
Company's consolidated financial statements. However, in the opinion of
management, the Company does not have any individual accounting policy that is
critical to the preparation of its consolidated financial statements. This is
due principally to the nature of the accounting requirements of the Company's
business. The following is a review of the more significant accounting policies
and methods used by the Company.
Depreciation and Amortization: The Company depreciates its property and
equipment and amortizes its definite life intangible assets using straight-line
methods over the estimated useful lives of the assets. As discussed in Note 4 to
the Consolidated Financial Statements, on January 28, 2002 the Company adopted a
new accounting standard. This new standard required an initial impairment
assessment involving a comparison of the fair value of goodwill and other
intangible assets to their current carrying value. Upon adoption, the Company
recorded a loss for the cumulative effect of an accounting change of $430,403.
The loss, attributable to a write-down of goodwill, was based solely on the fact
that the aggregate market capitalization of the Company was less than its book
value. The Company is also required to conduct annual reviews of goodwill and
liquor licenses for potential impairment. The Company's fiscal 2003 annual
impairment test required the Company to write down the goodwill associated with
its April 2002 acquisition of Mr. Manatee's Casual Grille (see Note 5 to the
Consolidated Financial Statements). Again, the write down was solely the result
of the market capitalization of the Company being less than its book value. The
write down of goodwill associated with Mr. Manatee's Casual Grille of $583,922
is included as an operating expense in the fiscal 2003 Statement of Operations.
The Company has also tested for impairment of its other definite and indefinite
life intangible assets and no impairment charges were necessary during fiscal
2003 or fiscal 2004.
Income Taxes: The Company accounts for income taxes in accordance with
statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." Under SFAS No. 109, deferred tax assets and liabilities are
determined based on the difference between book and tax assets and liabilities,
using enacted tax rates in effect for the year in which the differences are
expected to reverse. The recognition of the deferred tax assets is based on
management's best assumptions and estimates of future income. A valuation
allowance is recorded when management determines that it is more likely than not
that some portion of the deferred tax assets will not be realized. These
15
assumptions and estimates will be periodically reviewed and, if needed,
adjustments will be made as required. During fiscal 2004, the Company determined
that sales of certain of its tangible and intangible assets will result in
sufficient taxable income so that a valuation allowance against the deferred tax
assets is no longer warranted.
Hedging Instruments: The Company has interest rate swap agreements
relating to a portion of its variable rate debt. The Company accounts for these
hedging instruments under SFAS No. 133 "Accounting for Derivative Instruments
and Hedging Activities," and its related amendment, SFAS No. 138 "Accounting for
Certain Derivative Instruments and Certain Hedging Activities" (collectively
referred to as "SFAS No. 133"). The interest rate swap agreements are designated
as cash flow hedges and are reflected at fair value in the Consolidated Balance
Sheet and the related losses on these contracts are deferred in shareholders'
equity as a component of accumulated other comprehensive loss.
OVERVIEW
The Company's principal source of revenue is from the operations 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.
The Company currently operates ten restaurants on a year-round basis.
See Item 1, "Developments Since the Beginning of the Last Fiscal Year" as to the
Company's closing of one of its restaurants, its Escondido's Mexican Restaurant
in the Monmouth Mall, in June 2003, and as to the planned sale of its Lobster
Shanty Restaurant in Jensen Beach, Florida during the second quarter of calendar
2004. The Company opened its first seafood restaurant in November 1978 and
currently has seven free-standing seafood restaurants in New Jersey and Florida
operating under the names "Jack Baker's Lobster Shanty" or "Baker's Wharfside."
The Company opened its first Mexican theme restaurant, located in New Jersey, in
April 1996, under the name "Garcia's." 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. On January 29, 2002, the Company commenced
operation of its tenth restaurant, Escondido's Mexican Restaurant ("Freehold"),
a Mexican theme restaurant located in Freehold, New Jersey, adjacent to Moore's.
On February 1, 2002, Garcia's began to operate under the trade name Escondido's
("Monmouth"). On April 1, 2002, the Company acquired the operations of an
eleventh restaurant, Mr. Manatee's Casual Grille ("Manatee's"), a casual theme
restaurant primarily featuring seafood items, located in Vero Beach, Florida
near the Company's Vero Beach, Florida Lobster Shanty. The closing of the
Escondido's (Monmouth) restaurant during the second quarter of calendar year
2003, has reduced the number of restaurants operated by the Company to ten.
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. Moore's experiences a seasonality factor similar to but
not as dramatic as the seasonality factor of the New Jersey seafood restaurants.
The Company's Freehold Escondido's experiences a seasonality factor similar to
Moore's. Manatee's follows the seasonality pattern of the other Florida
restaurants.
The Company operated eleven restaurants during the year ended January
26, 2003.
The statements of operations are comprised of a 52-week period for both
the year ended January 25, 2004 ("fiscal 2004") and the year ended January 26,
2003 ("fiscal 2003").
16
RESULTS OF OPERATIONS
SALES.
Sales for the year ended January 25, 2004 were $22,283,200, a decrease
of $670,700 or 2.9%, as compared to $22,953,900 for the year ended January 26,
2003. Increased sales of $509,000 for the year at Manatee's, which opened on
April 1, 2002 and therefore, was in operation during ten months of last year as
compared to twelve months of operation this year, were offset by decreased sales
of $599,400 at the Monmouth Escondido's which was closed in June 2003. The other
nine restaurants combined had decreased sales of $580,300 or 2.8% versus last
year. The three Florida restaurants that operated during the comparable periods
realized increased sales of $36,100 or .6% versus last year despite the
continued softness in air travel, including a substantial reduction in foreign
visitation and the Columbia Space Shuttle tragedy which negatively impacted the
Cocoa Beach location. The six New Jersey restaurants had lower sales of $616,400
or 4.2% compared to last year primarily due to the dismal winter weather that
included a major snow storm over the Valentine's/Presidents' Day weekend and an
extremely rainy summer, whereby beginning with the Memorial Day holiday, it
rained ten out of eleven weekends. Additionally, traffic at all of the
restaurants was negatively impacted by the slow economy, terrorism concerns post
9/11 and the Iraq war. However, both the Florida and New Jersey restaurants
realized positive sales gains in the third and fourth quarters in fiscal 2004
due to favorable weather and a positive uptick in the national economy. The
number of customers served in the nine restaurants which operated during the
comparable periods, fell by 4.6% while the average check paid per customer
increased by 1.9% versus last year. The check average at Manatee's is less than
at the other nine restaurants and is less than it was last year due to the
introduction of lower priced dinner specials.
GROSS PROFIT; GROSS MARGIN.
Gross profit was $15,248,300 or 68.4% of sales for fiscal 2004 compared
to $15,802,700 or 68.8% for fiscal 2003. The primary reasons for the decline
were the substantial increase in the cost of beef and the closing of the
Monmouth Escondido's restaurant with its lower cost Mexican fare.
OPERATING EXPENSES.
Total operating expenses decreased by 5.9% from $16,286,300 for fiscal
2003 to $15,318,500 for fiscal 2004. Payroll and related expenses were 31.1% of
sales for fiscal 2004 compared to 32.2% of sales for fiscal 2003. The
improvement is directly attributable to productivity improvements at the
restaurants and lower health and worker's compensation insurance costs. Other
operating expenses were 22.2% of sales for fiscal 2004 compared to 22.4% of
sales for fiscal 2003 primarily attributable to higher occupancy costs due to
increases in real estate taxes and rent costs offset by decreases in costs
directly attributable to the closing of the Monmouth Escondido's in June 2003.
Depreciation and amortization expenses in fiscal 2004 were lower by
approximately $76,600 versus last year despite the inclusion for the entire year
of depreciation expenses associated with the purchase of furniture, fixtures and
equipment of Manatee's due to the expiration of fully depreciated assets at the
other restaurants and the closing of Monmouth in fiscal 2004.
General and administrative expenses for fiscal 2004 were lower by
approximately $71,300 versus last year due primarily to reductions in salaries
and payroll taxes, an approximate $10,000 settlement with an insurance carrier
pertaining to a business interruption claim stemming from the closure of the
main access road near the Cocoa Beach, Florida restaurant due to security
concerns at the nearby Air Force base subsequent to 9/11/01, and lower insurance
costs of approximately $32,500. Salaries for fiscal 2004 included $51,000
attributed to the Company's Executive Incentive Bonus Plan ("Bonus Plan") (see
note 8
17
to the Consolidated Financial Statements), while salaries in fiscal 2003
attributed to the Bonus Plan were $32,900.
As a result of continuing operating losses at its Monmouth Mall Mexican
theme restaurant (see Note 11 to the Consolidated Financial Statements),
management decided to close this restaurant. On April 30, 2003, management
executed a Surrender Agreement with the mall landlord to terminate the lease
prior to its expiration date at a total cost of $180,000 and agreed to give the
landlord an option to purchase the restaurant's liquor license at a specified
price until October 31, 2003, subsequently extended to March 15, 2004, after
which the liquor license could be sold to any independent purchaser. On March
15, 2004, the Company paid $120,000 to the mall landlord, representing the
balance due as per the Surrender Agreement and the landlord declined to purchase
the liquor license. Management is currently in the process of marketing the
liquor license to all interested parties. Management believes that the net
proceeds from the sale of the liquor license will exceed the $180,000 paid to
the landlord for the early termination of the lease. However, any gain on the
sale of the liquor license will not be recognized until realized. The Company's
Monmouth Mall Mexican theme restaurant was closed in June 2003 and the Company
recorded a loss of approximately $410,000 on the closing which included the
early termination fee of $180,000 and disposal of unusable assets.
OTHER INCOME AND EXPENSE.
Interest expense was $19,000 lower in fiscal 2004 due to debt reduction
and lower interest rates which reduced the interest expense on the Company's
variable debt. During the second quarter of fiscal 2004, the Company's $500,000
bank line of credit was renewed for two years at a variable interest rate equal
to the monthly LIBOR Market Index Rate plus 2%. The entire $500,000 is currently
available for use through June 2005. Investment income was $45,500 higher in
fiscal 2004 due to an increase of $64,000 in capital gains realized on the sale
of investments (see Note 6 to the Consolidated Financial Statements).
NET INCOME (LOSS).
For the year ended January 25, 2004, the Company realized net income of
$39,000 or $.01 per share compared to a net loss, before a $430,400 charge for a
cumulative effect of accounting change (see Note 4 to the Consolidated Financial
Statements), of $683,900 or $.17 per share for the year ended January 26, 2003.
Net income for the current year includes a charge of $410,000 for the loss on
closing the Monmouth restaurant (see Note 10 to the Consolidated Financial
Statements) and a credit of $57,000 for income taxes (see Note 14 to the
Consolidated Financial Statements). The loss in fiscal 2003 included a $583,900
charge for the write down of the Manatee restaurant's goodwill (see Note 5 to
the Consolidated Financial Statements).
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 2.56:1
at January 25, 2004, compared to 1.98:1 at January 26, 2003. Working capital was
$3,686,800 at the end of fiscal 2004, an increase of $1,595,000 versus the prior
year. During fiscal 2004, there was an increase in cash of $341,000. Net cash
provided from operating activities was $1,402,000. The primary components were
net income, after adjustment for depreciation, deferred income taxes, and a loss
on closing of the Monmouth Escondido's restaurant, of $1,502,300; an increase in
inventories of $111,100 primarily related to bulk purchases of shrimp to take
advantage of market conditions; an increase in prepaid expenses of $90,000
primarily related to a different financing plan for the Company's property and
casualty insurance program; an increase in the current portion of the Company's
deferred tax assets based on the amount expected to be utilized in fiscal 2005;
and an increase of $120,400 in accounts payable due to increased sales in
January and the inventory purchases.
18
Investing activities during fiscal 2004 resulted in a net cash outflow
of $732,300. Capital expenditures were $449,100, including approximately $31,400
to renovate the bar at the Escondido's restaurant in Freehold, and the balance
of approximately $417,700 for routine restaurant improvements. Other investing
activities included the purchase of various investments totaling $534,300 offset
by $453,100 realized from the proceeds of maturing certificates of deposit and
the sale of investments which resulted in a realized gain of $69,200. At January
25, 2004, the fair value of the Company's holdings of available-for-sale
securities resulted in net unrealized gains of $183,800 (see Note 1 to the
Consolidated Financial Statements), primarily due to the resurgent stock market.
The resulting gains are reported in stockholder's equity as a component of
accumulated other comprehensive income.
Financing activities for fiscal 2004 resulted in a net cash outflow of
$328,700 and included debt repayment of $271,500 and treasury stock purchases of
$59,200 (see Note 12 to the Consolidated Financial Statements) to repurchase
40,000 shares of the Company's outstanding stock pursuant to a December 2002
Stock Repurchase Plan authorized by the Board of Directors.
During fiscal 2003, net cash decreased by $338,200. Net cash provided
from operating activities was $1,261,100. The primary components were net
income, after adjustment for depreciation and deferred income taxes, a
cumulative effect of an accounting change and the goodwill impairment loss, of
$1,283,900; an increase in miscellaneous receivables of $117,300 due to the
construction of a paved parking area for the two Freehold, New Jersey
restaurants (see Note 10 to the Consolidated Financial Statements); an increase
of $90,000 in accrued expenses and other liabilities resulting from an increase
of $50,300 in the amount of unredeemed gift certificates and an increase of
$30,300 in accrued health insurance costs. Investing activities for fiscal 2003
resulted in a net outflow of $1,736,600. Capital expenditures were $1,916,200
with the major components including $417,100 associated with the renovation at
the Escondido's restaurant in Freehold, $893,500 for the purchase of assets for
the Manatee's restaurant, and $605,600 for restaurant improvements and Company
vehicles. Other investing activities included the purchase of various
investments totaling $244,100 offset by $409,800 primarily from the proceeds
from maturing certificates of deposit. Financing activities in fiscal 2003
generated a net cash flow of $137,300 and included debt repayment of $362,700
and bank loan proceeds of $500,000 which were used to partially finance the
purchase of assets for the Manatee's restaurant.
At the end of fiscal 2004, the Company was in compliance with all of
the financial covenants under its loan agreements with its primary bank,
Wachovia Bank, National Association. The Company was also in full compliance at
the year ended January 26, 2003.
RECENT DEVELOPMENTS
In February 2004, the Company entered into a contract to sell the
restaurant and property located in Jensen Beach, Florida for $900,000 to an
unrelated party. The closing is anticipated to occur during the second quarter
of fiscal 2005 and should result in a gain of approximately $400,000.
In March 2004, the Company paid $120,000 to the Monmouth Mall ("Mall")
representing the balance due as per terms of the Lease Surrender Agreement the
Company executed in April 2003 to terminate its lease with the Mall associated
with the operations of the Escondido's Monmouth restaurant which was closed in
June 2003. The Mall declined to exercise its right to purchase the Escondido's
liquor license and the Company is currently marketing the license for sale to
all interested parties.
In April 2004, management negotiated the annual renewals for group
health ("health") and property and casualty ("property") insurance coverages.
The
19
health plan was renewed at an increase of approximately 8.5% versus the prior
year. The property plan coverage was renewed at an overall decrease of
approximately 6 % reflecting a softening in the insurance market.
Management anticipates that funds from operations will be sufficient to
meet the Company's obligations in fiscal 2005, including projected capital
expenditures of $485,000.
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. In
general, the Company is able to increase menu prices to counteract the majority
of the inflationary effects of increasing costs with the exception of the
substantial increase in insurance costs that the Company has had to absorb over
the last several years.
ITEM 7. FINANCIAL STATEMENTS
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
Financial Report
January 25, 2004
CONTENTS
--------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT F-1
--------------------------------------------------------------------------------
Financial Statements:
Consolidated Balance Sheet F-2-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7-19
--------------------------------------------------------------------------------
[LETTERHEAD OF MCGLADREY & PULLEN]
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 25, 2004, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two fiscal years in the period ended January 25, 2004. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Chefs International,
Inc. and subsidiaries as of January 25, 2004, and the results of their
operations and their cash flows for each of the two fiscal years in the period
ended January 25, 2004 in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 142 "Goodwill and
Other Intangible Assets," effective January 28, 2002.
/s/ MCGLADREY & PULLEN, LLP
New York, New York
March 25, 2004
McGladrey & Pullen, LLP is an
independent member firm of RSM
International, an affiliation of
independent accounting and
consulting firms.
F-1
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JANUARY 25, 2004
--------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,410,899
Available-for-sale securities 2,435,090
Miscellaneous receivables 79,076
Receivable -- related party 40,000
Inventories 1,240,054
Deferred income taxes 654,000
Prepaid expenses and other 197,976
------------
TOTAL CURRENT ASSETS 6,057,095
------------
Property and Equipment, at cost 20,076,717
Less: Accumulated depreciation 8,714,945
------------
PROPERTY AND EQUIPMENT, NET 11,361,772
------------
Other Assets:
Asset held for sale 50,181
Receivable -- related party 38,523
Intangibles 879,712
Equity in life insurance policies 641,024
Deferred income taxes 370,000
Other 138,656
------------
TOTAL OTHER ASSETS 2,118,096
------------
$ 19,536,963
============
See notes to consolidated financial statements.
F-2
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (CONTINUED)
JANUARY 25, 2004
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes and mortgages payable, current maturities $ 266,346
Accounts payable 822,590
Accrued payroll 124,293
Accrued expenses 633,863
Gift certificates 523,167
------------
TOTAL CURRENT LIABILITIES 2,370,259
------------
Notes and Mortgages Payable 1,694,092
------------
Other Liabilities:
Accrued retirement 589,720
Interest rate swap agreements 149,602
------------
OTHER LIABILITIES 739,322
------------
Stockholders' Equity:
Capital stock -- common $.01 par value,
Authorized 15,000,000 shares,
Issued and outstanding 3,926,116 39,261
Additional paid-in capital 31,488,831
Accumulated deficit (16,815,013)
Accumulated other comprehensive income 20,211
------------
TOTAL STOCKHOLDERS' EQUITY 14,733,290
------------
$ 19,536,963
============
See notes to consolidated financial statements.
F-3
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 25, 2004 AND JANUARY 26, 2003
2004 2003
---------------------------------------------------------------------------------------------------------------
Sales $ 22,283,169 $ 22,953,925
Cost of Goods Sold 7,034,878 7,151,181
---------------- ----------------
GROSS PROFIT 15,248,291 15,802,744
---------------- ----------------
Operating Expenses:
Payroll and related expenses 6,924,219 7,390,019
Other operating expenses 4,956,505 5,136,653
Depreciation and amortization 1,116,291 1,192,910
General and administrative expenses 1,911,472 1,982,785
Loss on closing restaurant 410,024 --
Goodwill impairment loss -- 583,922
---------------- ----------------
TOTAL OPERATING EXPENSES 15,318,511 16,286,289
---------------- ----------------
(LOSS) FROM OPERATIONS (70,220) (483,545)
---------------- ----------------
Other Income (Expense):
Interest expense (159,042) (178,041)
Investment income 211,259 165,719
---------------- ----------------
OTHER INCOME (EXPENSE), NET 52,217 (12,322)
---------------- ----------------
(LOSS) FROM OPERATIONS BEFORE INCOME TAXES (18,003) (495,867)
Provision (Credit) for Income Taxes (57,000) 188,082
---------------- ----------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE 38,997 (683,949)
Cumulative Effect of an Accounting Change -- Goodwill
Accounting Method -- (430,403)
---------------- ----------------
NET INCOME (LOSS) $ 38,997 $ (1,114,352)
================ ================
Income (Loss) Per Common Share Before Cumulative Effect
of an Accounting Change $ 0.01 $ (0.17)
Cumulative Effect of an Accounting Change -- Goodwill
Accounting Method -- (0.11)
---------------- ----------------
Basic and Diluted Income (Loss) Per Common Share $ 0.01 $ (0.28)
================ ================
See notes to consolidated financial statements.
F-4
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 25, 2004 AND JANUARY 26, 2003
------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Capital Additional Other Total
Number Stock Paid-in Accumulated Comprehensive Treasury Stockholders'
of Shares Par Value Capital Deficit Income (Loss) Stock Equity
------------ ---------- -------------- ------------- ------------- -------- --------------
Balance at January 28, 2002 3,969,508 $ 39,695 $ 31,549,492 $(15,739,658) $ (89,199) $(3,885) $ 15,756,445
------------
Comprehensive (Loss):
Net loss -- -- -- (1,114,352) -- -- (1,114,352)
Net unrealized (loss) on available-for-
sale securities arising during period,
net of $58,000 of taxes -- -- -- -- (186,273) -- (186,273)
Reclassification adjustment for gains
realized on available-for-sale
securities -- -- -- -- (3,244) -- (3,244)
Change in fair value of derivatives
accounted for as hedges, net of
$31,000 of taxes -- -- -- -- (100,556) -- (100,556)
------------
TOTAL COMPREHENSIVE LOSS -- -- -- -- -- -- (1,404,425)
------------
Fractional shares conversion 32 -- -- -- -- -- --
---------- -------- ------------ ------------ --------- ------- ------------
BALANCE AT JANUARY 26, 2003 3,969,540 39,695 31,549,492 (16,854,010) (379,272) (3,885) 14,352,020
------------
Comprehensive Income:
Net income -- -- -- 38,997 -- -- 38,997
Net unrealized gains on available-for-
sale securities arising during period,
net of $109,000 of taxes -- -- -- -- 425,282 -- 425,282
Reclassification adjustment for gains
realized on available-for-sale
securities, net of $14,000 of taxes -- -- -- -- (55,175) -- (55,175)
Change in fair value of derivatives
accounted for as hedges, net of
$8,000 of taxes -- -- -- -- 29,376 -- 29,376
------------
TOTAL COMPREHENSIVE INCOME -- -- -- -- -- -- 438,480
------------
Stock repurchase program (40,000) (400) (58,800) -- -- -- (59,200)
------------
Retirement of treasury stock (3,550) (36) (3,849) -- -- 3,885 --
------------
Fractional shares conversion and other 126 2 1,988 -- -- -- 1,990
---------- -------- ------------ ------------ --------- ------- ------------
BALANCE AT JANUARY 25, 2004 3,926,116 $ 39,261 $ 31,488,831 $(16,815,013) $ 20,211 $ -- $ 14,733,290
========== ======== ============ ============ ========= ======= ============
See notes to consolidated financial statements.
F-5
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 25, 2004 AND JANUARY 26, 2003
2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income (loss) $ 38,997 $(1,114,352)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 1,116,291 1,192,910
Deferred income taxes (63,000) 191,000
Gain on sale of investments (69,175) (5,154)
Loss on closing of restaurant 410,024 --
Cumulative effect of an accounting change -- 430,403
Goodwill impairment loss -- 583,922
Changes in assets and liabilities:
(Increase) decrease in:
Miscellaneous receivables 22,137 (117,268)
Inventories (111,062) 39,672
Prepaid expenses (89,988) 73,471
Increase (decrease) in:
Accounts payable 120,357 (53,109)
Accrued expenses and other liabilities 27,421 90,041
Income taxes payable -- (50,394)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,402,002 1,261,142
----------- -----------
Cash Flows From Investing Activities:
Purchase of property and equipment (449,129) (1,022,694)
Closing of restaurant (60,000) --
Acquisition of restaurant assets -- (893,536)
Sale and redemption of investments 453,066 409,820
Purchase of investments (534,343) (244,087)
Equity in life insurance policies (38,202) (12,960)
Other (103,652) 26,856
----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES (732,260) (1,736,601)
----------- -----------
Cash Flows From Financing Activities:
Proceeds from debt -- 500,000
Repayment of debt (271,490) (362,746)
Purchase and retirement of treasury stock (59,200) --
Other 1,990 --
----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (328,700) 137,254
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 341,042 (338,205)
Cash and Cash Equivalents:
Beginning 1,069,857 1,408,062
----------- -----------
Ending $ 1,410,899 $ 1,069,857
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash payment for:
Interest $ 160,453 $ 178,753
=========== ===========
Income taxes $ 4,000 $ 34,273
=========== ===========
Noncash Transactions:
Increase (decrease) in fair value of securities available for sale $ 465,107 $ (247,517)
=========== ===========
Change in fair value of derivatives accounted for as hedges $ 29,576 $ (100,556)
=========== ===========
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
ten restaurants. Seven of these restaurants are seafood restaurants,
located in New Jersey and Florida, generally under the trade name,
"Lobster Shanty". The Company also operates Escondido's Mexican
Restaurant, Moore's Tavern and Restaurant, an eclectic American
restaurant, and Mr. Manatee's Casual Grille, a casual theme restaurant
primarily featuring seafood items. Escondido's and Moore's Tavern are
located in New Jersey; Mr. Manatee's is located in Florida. 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 at January 25, 2004 totaled
approximately $1,293,000.
Cash and Cash Equivalents:
Cash equivalents are comprised of certain highly liquid investments
with a maturity of three months or less when purchased.
Available-for-Sale Securities:
At January 25, 2004, 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.
Revenue Recognition:
Sales from restaurants are recognized as revenue at the point of the
delivery of meals and services. Gift certificates are sold in the
ordinary course of business. Proceeds from gift certificate sales are
recorded as deferred revenue at the time a gift certificate is sold and
are not recognized as revenue until a gift certificate is redeemed.
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.
F-7
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Property and Equipment and Depreciation:
Property and equipment are carried at cost. Depreciation is computed
over the estimated useful lives of the assets using the straight-line
method. The estimated useful lives range from 5 to 40 years for
buildings and improvements, including leaseholds, and 5 to 10 years for
furniture and equipment.
Goodwill and Other Intangible Assets:
Beginning January 1, 2002, goodwill and indefinite life intangible
assets are not amortized but are tested annually for impairment, or
more frequently if events or changes in circumstances indicate that the
asset might be impaired. In assessing the recoverability of goodwill
and indefinite life intangible assets, the Company must make
assumptions about the estimated future cash flows and other factors to
determine the fair value of these assets.
For goodwill, the impairment evaluation includes a comparison of the
carrying value of the reporting unit (including goodwill) to the
reporting unit's fair value. If the reporting unit's estimated fair
value exceeds the reporting unit's carrying value, no impairment of
goodwill exists. If the fair value of the reporting unit does not
exceed the unit's carrying value, then an additional analysis is
performed to allocate the fair value of the reporting unit to all of
the assets and liabilities of the reporting unit. If the excess of the
fair value of the reporting unit over the fair value of the
identifiable assets and liabilities is less than the carrying value of
the unit's goodwill, an impairment charge is recorded.
Similarly, the impairment evaluation for indefinite life intangible
assets includes the comparison of the asset's carrying value to the
asset's fair value. When the carrying value exceeds the fair value an
impairment charge is recorded for the amount of the difference. An
intangible asset is determined to have an indefinite useful life when
there are no legal, regulatory, contractual, competitive, economic or
any other factors that may limit the period over which the asset is
expected to contribute directly or indirectly to the future cash flows
of the Company. In each reporting period, the Company also evaluates
the remaining useful life of an intangible asset that is not being
amortized to determine whether events and circumstances continue to
support an indefinite useful life. If an intangible asset that is not
being amortized is determined to have a finite useful life, the asset
will be amortized prospectively over the estimated remaining useful
life and accounted for in the same manner as intangible assets subject
to amortization.
The Company has determined that the Company's liquor licenses have an
indefinite life and these assets are no longer being amortized
effective January 28, 2002.
Intangible assets subject to amortization are amortized on a
straight-line method over their estimated useful lives.
Impairment of Long-Lived Assets:
Effective January 28, 2002, the Company adopted SFAS No.144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS
No. 144 provides updated guidance concerning the recognition and
measurement of an impairment loss for certain types of long-lived
assets. The adoption of this new standard did not have a material
impact on the consolidated financial statements.
F-8
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Impairment of Long-Lived Assets: (Continued)
The Company reviews long-lived assets for impairment whenever events or
changes in business circumstances indicate that the carrying amount of
the assets may not be fully recoverable. The Company performs
undiscounted operating cash flow analyses to determine if impairment
exists. If impairment exists, any related impairment loss is calculated
based on fair value. Impairment losses on assets to be disposed of, if
any, are based on the estimated proceeds to be received less costs of
disposal.
Income Taxes:
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets
and liabilities and their tax bases. Deferred tax assets are reduced by
a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted
for the effects of changes in tax laws and rates on the date of
enactment.
Derivative Financial Instruments:
The Company's interest rate swap agreements are recognized on the
balance sheet at their value. On the date the derivative contract is
entered into, the Company designates the derivative as a hedge of a
forecasted transaction or of the variability of cash flows to be
received or paid related to a recognized asset or liability "cash flow"
hedge. Changes in the fair value of a derivative that is highly
effective as - and that is designated and qualifies as - a cash-flow
hedge are recorded in other comprehensive income, until earnings are
affected by the variability of cash flows (e.g., when periodic
settlements on a variable-rate asset or liability are recorded in
earnings).
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective
and strategy for undertaking various hedged transactions. This process
includes linking all derivatives that are designated as cash-flow
hedges to specific assets and liabilities on the balance sheet or
forecasted transactions. The Company also formally assesses, both at
the hedge's inception and on an ongoing basis, whether the derivatives
that are used in hedging transactions are highly effective in
offsetting changes in cash flows of hedged items. When it is determined
that a derivative is not highly effective as a hedge or that it has
ceased to be a highly effective hedge, the Company discontinues hedge
accounting prospectively, as discussed below.
The Company discontinues hedge accounting prospectively when (1) it is
determined that the derivative is no longer effective in offsetting
changes in the cash flows of a hedged item (including forecasted
transactions); (2) the derivative expires or is sold, terminated, or
exercised; (3) the derivative is designated as a hedge instrument,
because it is unlikely that a forecasted transaction will occur; or (4)
management determines that designation of the derivative as a hedge
instrument is no longer appropriate.
F-9
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Derivative Financial Instruments (Continued):
When hedge accounting is discontinued because it is probable that a
forecasted transaction will not occur, the derivative will continue to
be carried on the balance sheet at its fair value, and gains and losses
that were accumulated in other comprehensive income will be recognized
immediately in earnings. In all other situations in which hedge
accounting is discontinued, the derivative will be carried at its fair
value on the balance sheet, with subsequent changes in its fair value
recognized in current-period earnings.
Advertising:
The Company expenses advertising costs as incurred. Advertising costs
for fiscal 2004 and 2003 were $516,679 and $593,055, respectively.
Use of Estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
Accounting for Consolidation of Variable Interest Entities:
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51." FIN 46 was subject
to significant interpretation by the FASB, and was revised and reissued
in December 2003 ("FIN 46R"). FIN 46R states that if an entity has a
controlling financial interest in a variable interest entity, the
assets, the liabilities and results of activities of the variable
interest entity should be included in the consolidated financial
statements to the entity. The provisions of FIN 46 and FIN 46R are
applicable for small business issuers that have variable interest
entities (VIE) by the end of the first reporting period ending after
December 15, 2004. The adoption of FIN 46 and FIN 46R did not have any
effect on the Company's consolidated financial statements, as the
Company does not have any VIEs.
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 2004 and
2003.
F-10
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
2. AVAILABLE-FOR-SALE SECURITIES
Details as to available-for-sale securities at January 25, 2004 are as
follows:
Fair Value of
Gross Gross Securities with
Unrealized Unrealized Unrealized
Gross Cost Gains (Losses) Fair Value (Losses)
---------------- ------------- ---------------- ---------------- ---------------
Convertible bonds $ 30,680 $ 18,930 $ -- $ 49,610 $ --
Mutual funds 1,558,036 94,717 (94,040) 1,558,713 489,053
Equity securities 662,561 212,794 (48,588) 826,767 65,566
---------- --------- ----------- ---------- --------
$2,251,277 $ 326,441 $ (142,628) $2,435,090 $554,619
========== ========= =========== ========== ========
All of the investments with unrealized losses have been in a continuous
unrealized loss position for more than one year. The severity of the
impairments in relation to the carrying amounts of the individual
investments (fair value average approximately 24% less than cost) is
consistent with current market conditions. The Company evaluated the
near-term prospects of the issuers in relation to the severity and
duration of the impairment. Based on that evaluation and the Company's
ability and intent to hold these investments for a reasonable period of
time sufficient for a forecasted recovery of fair value, the Company
does not consider these investments to be other-than-temporarily
impaired at January 25, 2004.
3. INVENTORIES
Inventories consist of the following:
Food $ 644,547
Beverages 149,243
Supplies 446,264
------------
$ 1,240,054
============
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Land $ 3,270,041
Buildings and improvements, including leaseholds 14,420,620
Furniture and equipment 2,154,760
Construction in progress 134,295
China, glassware and utensils (a) 97,001
------------
$ 20,076,717
============
F-11
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
4. PROPERTY AND EQUIPMENT (Continued)
(a) Carried at original cost for each restaurant. All replacement
purchases are charged to expense as incurred.
Depreciation expense was $1,103,666 and $1,182,389 for fiscal 2004 and
2003, respectively.
5. INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No.'s 141 and 142, "Business Combinations" and "Goodwill and Other
Intangible Assets." Under the new rules, goodwill and other intangible
assets deemed to have indefinite useful lives are no longer amortized
but are subject to impairment tests at least annually, or more
frequently if circumstances occur that indicate impairment may have
occurred. Management has determined that the Company's liquor licenses
have an indefinite life and these assets are no longer being amortized.
During the required transitional impairment testing of goodwill
required by SFAS 142, the Company determined that the carrying value of
the Company's reporting unit was less than the fair value of the
identifiable assets (including goodwill) and liabilities. The
determination of the fair value was based on the aggregate market
capitalization of the Company as compared to book value. As a result of
the Company's market capitalization being less that its book value, the
Company reduced the carrying value of goodwill by $430,403, which is
reflected as a cumulative effect of an accounting change in the
accompanying consolidated statement of operations for the year ended
January 26, 2003. The Company's transitional testing of impairment of
the liquor license intangible asset resulted in no impairment upon
adoption.
The Company completed its required annual impairment assessment of
goodwill and liquor licenses for potential impairment as of October 28,
2002. As a result of this review, a write down of the goodwill
associated with the April 2002 acquisition of Mr. Manatee's Casual
Grille resulted. Again, the write down resulted from the aggregate
market capitalization of the Company being less than its book value.
The charge for the write down of goodwill associated with Mr. Manatee's
of $583,922 is included as an operating expense in the accompanying
consolidated statement of operations for the year ended January 26,
2003. The Company's annual impairment test of the liquor license
intangible asset resulted in no impairment during the year ended
January 25, 2004.
Intangible assets at January 25, 2004 consist of:
Liquor Covenant Not
Licenses to Compete
------------- ---------------
Cost $ 1,175,998 $ 63,126
Accumulated amortization (336,266) (23,146)
------------- ---------------
$ 839,732 $ 39,980
============= ===============
In connection with the acquisition of Mr. Manatee's Casual Grille, the
Company entered into a non-compete agreement with the prior owner of
the restaurant.
Amortization expense was $12,625 and $10,521 for fiscal 2004 and 2003,
respectively.
F-12
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
5. INTANGIBLE ASSETS (Continued)
The estimated aggregate amortization expense for the covenant not to
compete for each of the next four years is as follows: $12,625 annually
for the fiscal years 2005 through 2007 and $2,105 for 2008.
Amortization of liquor licenses is no longer required (see Note 1).
6. NOTES AND MORTGAGES PAYABLE
Mortgages payable in various monthly installments to amortize the
mortgages at the rate of $120,000 annually, through September 2011 with
interest at LIBOR plus 2.00%, collateralized by real estate located in
Point Pleasant Beach, New Jersey $ 955,000
Mortgage payable in monthly installments of $8,319, inclusive of
interest at LIBOR plus 2.00%, through November 2008, collateralized by
real estate located in Vero Beach, Florida 690,438
Mortgage payable in various monthly installments to amortize the
mortgage at the rate of $100,000 annually, through May 2007 with
interest at LIBOR plus 2.00%, collateralized by real estate located in
Toms River, New Jersey 315,000
-----------
1,960,438
Less: Current maturities 266,346
-----------
$ 1,694,092
===========
Annual maturities for fiscal years 2006 through 2009 are $270,771,
$274,909, $194,283 and $599,130, respectively.
At January 25, 2004, the Company has a $500,000 line of credit which is
collateralized by real estate located in Toms River, New Jersey. The
line is due June 30, 2005 and bears interest at LIBOR plus 2.00%. At
January 25, 2004, there were no amounts used under the line of credit.
LIBOR was 1.1% at January 25, 2004.
The Company maintains an interest rate risk-management strategy that
uses derivative financial instruments to minimize unanticipated
earnings fluctuations caused by interest rate volatility. The Company's
specific goal is to lower (where possible) the cost of its borrowed
funds.
F-13
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
6. NOTES AND MORTGAGES PAYABLE (CONTINUED)
As of January 25, 2004, the Company had interest rate swap agreements
relating to a portion of the Company's variable rate debt. Unrealized
net losses under the interest rate swap agreements totaled
approximately $149,600 at January 25, 2004. These unrealized net losses
are recorded in Accumulated Other Comprehensive Income in the
consolidated balance sheet. Since the Company does not intend to
terminate the swap agreements during the upcoming year, the Company
does not anticipate that any of these unrealized losses will be
reclassified into earnings in the next twelve months, except for the
amounts that will be realized when periodic settlements of the variable
interest liability are recorded in earnings. No gain or loss was
recognized in earnings during the year ended January 25, 2004 as a
result of hedge ineffectiveness.
All of the Company's mortgages and loans are with the same financial
institution. The loan covenants governing the borrowings include, among
other items, requirements relating to tangible net worth, capital
expenditures and working capital components.
7. INVESTMENT INCOME
The components of investment income are summarized as follows:
2004 2003
--------- ---------
Interest income $ 13,603 $ 23,697
Dividends 128,481 136,868
Realized gain on sales of
available-for-sale securities 69,175 5,154
--------- ---------
$211,259 $165,719
========= =========
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. 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 $49,685 and $34,577 for
fiscal 2004 and 2003, respectively.
F-14
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
9. EXECUTIVE INCENTIVE BONUS PLAN
The Company has 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 2004 and 2003 was $51,000 and $32,867, respectively.
10. TRANSACTIONS WITH RELATED PARTIES
The Company has a lease for Moore's Inn ("Moore's") restaurant property
with Moore's Realty Associates ("Moore's Realty"), 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.
The Company also has a five-year lease for the property adjacent to
Moore's for the Company's Escondido's Mexican Restaurant (Escondido's).
The terms of this lease are the same as the lease for Moore's.
Additionally, the Company has a lease with Moore's Realty for an
additional parking lot for Moore's and Escondido's. The initial term of
the lease expires January 25, 2007, the same expiration date as Moore's
and Escondido's. The lease also contains three five-year renewal
options. During the initial term of the lease, minimum annual rentals
are $40,000, plus percentage rent of 1% of the combined annual sales of
Moore's and Escondido's exceeding $4million. The lease also contains a
provision whereby Moore's Realty agreed to reimburse the Company for
improvements made to the parking lot up to $150,000. During fiscal
2003, the Company made improvements of approximately $135,000, which is
being reimbursed by an offset to the monthly rent payment. Included in
the accompanying balance sheet is a current receivable of $40,000, with
the remaining of $38,523 classified as a long-term receivable.
Rent expense paid pursuant to these leases for fiscal 2004 and 2003 was
$279,763 and $248,629, respectively, which included percentage rent of
$59,763 and $51,963, respectively.
Moores Realty is not considered a variable interest entity as there is
sufficient equity investment by the partners and the partners have a
controlling financial interest in the partnership. Additionally, as of
January 25, 2004 there was no debt on the partnership.
The Company has a retirement agreement with a former director/employee
(see Note 8).
11. RESTAURANT CLOSING
In June 2003, the Company closed one of its Mexican theme restaurants.
In connection with the closing, the Company wrote off leasehold
improvements and other equipment of $230,024 and entered into a
Surrender Agreement with the restaurant's landlord which required the
Company to pay $180,000. The loss of $410,024 is shown as "Loss on
closing restaurant" in the accompanying Consolidated Statement of
Operations for the year ended January 25, 2004.
In connection with the closing of the restaurant, the Company is
attempting to sell the liquor license used in that location. The liquor
license has been classified as an "Asset held for sale" in the
accompanying balance sheet as of January 25, 2004.
F-15
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
12. COMMITMENTS AND CONTINGENCIES
Leases:
The Company leases restaurants, parking lots and equipment under
operating leases expiring at various times through fiscal 2009.
Minimum future rental payments under noncancelable operating leases as
of January 25, 2004 are as follows:
2005 $ 365,312
2006 367,492
2007 364,661
2008 53,226
2009 13,780
-----------
$ 1,164,471
===========
Total rent expense, including rent paid to related parties, was
$497,615 and $541,588 for fiscal 2004 and 2003, respectively.
Employment Agreements:
The Company has employment agreements through March 2005 with two
employees for annual amounts ranging from $104,400 to $180,000. The
agreements provide for annual adjustments based on the increase in the
consumer price index. These agreements also 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 December 24, 2002, the Board of Directors authorized the Company to
repurchase over a 13-month period up to 100,000 shares of its
outstanding stock at market price. Through January 25, 2004, the
Company purchased 40,000 shares for $59,200, all of which have been
subsequently retired.
13. EARNINGS PER SHARE
The weighted average number of shares outstanding used to compute basic
and diluted earnings per share for fiscal 2004 and 2003 was 3,926,116
and 3,969,540, respectively.
F-16
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
14. INCOME TAXES
The provision (credit) for income taxes charged to operations consist
of the following:
2004 2003
------------ ------------
Current -- Federal $ -- $ (27,918)
-- State 6,000 25,000
Deferred (63,000) 191,000
------------ ------------
$ (57,000) $ 188,082
============ ============
The significant components of deferred tax assets and liabilities as of
January 25, 2004 are as follows:
Deferred Tax Assets:
Tax loss carryforwards $ 657,000
Depreciation and amortization 360,000
Other 41,000
------------
TOTAL DEFERRED TAX ASSETS 1,058,000
------------
Deferred Tax Liability:
Other comprehensive income 14,000
Other 20,000
------------
TOTAL DEFERRED TAX LIABILITY 34,000
------------
NET DEFERRED TAX ASSETS $ 1,024,000
============
Prior to the fiscal year ended January 25, 2004, the Company provided
valuation allowances because, in the opinion of management, it was more
likely than not that some portion of the deferred tax assets would not
be realized. For the fiscal year ended January 25, 2004, no valuation
allowance was required. The net change in the valuation allowance for
fiscal 2004 was a reduction of $1,098,000. The reduction for fiscal
2004 was principally due to the expiration of tax loss carryforwards.
F-17
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
14. INCOME TAXES (Continued)
The Company has available at January 25, 2004, operating loss
carryforwards as follows:
Year of Expiration
------------------
2005 $ 472,000
2006 221,000
2007 215,000
2008 197,000
2009 155,000
2010 104,000
2011 145,000
2012 88,000
2024 166,000
------------
$ 1,763,000
============
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 25,
2004 and January 26, 2003 are as follows:
2004 2003
-------------------------- ----------------------------
AMOUNT % Amount %
------------ -------- ------------ ------
Federal statutory rate $ (6,100) (34.0) $ (169,000) (34.0)
State taxes net of Federal benefit (900) (5.0) (24,800) (5.0)
Valuation allowance change (1,098,000) (6,099.0) 36,800 7.4
Non taxable income (42,000) (233.1) (29,918) (6.1)
Expiration of operating loss carryforwards 1,090,000 6,054.5 375,000 75.6
------------ -------- ------------ ------
EFFECTIVE RATE $ (57,000) (316.6) $ 188,082 37.9
============ ======== ============ ======
15. FINANCIAL INSTRUMENTS
The carrying amounts reflected in the consolidated balance sheet for
cash and cash equivalents, investments, receivables and notes and
mortgages payable approximate their respective fair values. Fair values
are based primarily on quoted prices for those or similar instruments.
F-18
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
16. SUBSEQUENT EVENT
Subsequent to year-end, the Company entered into a contract to sell the
restaurant and property located in Jensen Beach, Florida. The selling
price is $900,000, which will result in the Company recognizing a gain
of approximately $400,000.
17. OTHER
On November 21, 2003, the Company announced that it had received an
offer from the principal shareholders of the Company, who own
approximate 61% of the Company's outstanding common stock, of their
intent to acquire all of the remaining outstanding shares of common
stock for a cash purchase price of $1.75 per share. The Company's Board
of Directors has appointed a Special Committee, consisting of the three
directors independent of the principal shareholders, to review and
analyze the proposal. The initial purchase price of $1.75 was rejected
by the Special Committee. A subsequent after $2.50 per share is
currently being reviewed by the Special Committee.
F-19
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
ITEM 8A CONTROLS AND PROCEDURES
(a) EXPLANATION OF DISCLOSURE CONTROLS AND PROCEDURES. Anthony C.
Papalia, the Company's principal executive officer and principal financial
officer, after evaluating the effectiveness of the Company's disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14(c)) and 15-d 14(c) as of
a date within 90 days of the filing date of this Annual Report (the "Evaluation
Date") has concluded that as of the Evaluation Date, the Company's disclosure
controls and procedures were adequate and effective to ensure that material
information relating to the Company and its consolidated subsidiaries would be
made known to him by others within those entities, particularly during the
period in which this Annual Report was being prepared.
(b) CHANGES IN INTERNAL CONTROLS. There were no significant changes
in the Company's internal controls or in other factors that could significantly
affect the Company's disclosure controls and procedures subsequent to the
Evaluation Date, nor any significant deficiencies or material weaknesses in such
disclosure controls and procedures requiring corrective action. As a result,
no corrective actions were taken.
20
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) 52 the Board May 1999
Nicholas B. Boxter 56 Director December 1999
Kenneth Cubelli 50 Director December 1999
Raymond L. Dademo 46 Director December 1999
Anthony M. Lombardi(a) 48 Director July 1999
Joseph S. Lombardi(a) 53 Director July 1999
Michael F. Lombardi(a) 55 Director July 1999
Stephen F. Lombardi(a) 48 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 46 President, Treasurer, Principal
Executive Officer, Principal Financial
Officer*
Martin W. Fletcher 51 Secretary
-------------------
* See Item 1 -- "Developments Since the Beginning of the Last Fiscal Year"
herein as to Mr. Papalia's resignation, effective June 28, 2004, as president,
treasurer, principal executive officer and principal financial officer of the
Company.
The Company does not have an Executive Committee or a separate Audit
Committee. The entire Board of Directors serves as the Company's Audit
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.
The Board of Directors intends to formally adopt a code of ethics
applicable to the Company's principal executive, principal financial and
principal accounting officer during the second quarter of fiscal 2005.
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 orthopedic surgeon with the
Edison-Metuchen Orthopedic 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.
21
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 orthopedic surgeon with the Morris
County Orthopedic 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 orthopedic surgeon with the
Edison-Metuchen Orthopedic 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 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. See Item 1 - "Developments Since the Beginning of the Last
Fiscal Year" herein as to Mr. Papalia's resignation, effective June 28, 2004, as
president, treasurer, principal executive officer and principal financial
officer of the Company.
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, 4 and 5, the Company believes
that with respect to fiscal 2004, 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.
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 25,
2004 to its Principal Executive Officer as well as to any other executive
officer of the Company or a subsidiary who earned at least $100,000 during
fiscal 2004. During
22
the three-year period ended January 25, 2004, the Company did not grant any
restricted stock awards or have any long-term incentive plan in 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, the
father of Martin W. 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. To date, the Company has made annual payments over a seven year
period pursuant to this agreement.
SUMMARY COMPENSATION TABLE
Annual Compensation
-------------------
Name and Fiscal Other Annual
Principal Position Year Salary Bonus(a) Compensation(b)
------------------ ------ ------ ----- ------------
Anthony Papalia 2004 $179,162 $7,500 $2,088
President and 2003 $174,630 $4,500 $2,088
Principal Executive 2002 $169,497 $8,429 $2,088
Martin Fletcher 2004 $103,915 $9,100 $2,902
Controller and 2003 $101,255 $5,367 $2,902
Secretary 2002 $98,308 $8,500 $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 items are excluded for purposes of the computation. The bonus pool
for fiscal 2004 aggregated $51,100 and was distributed to seven employees
including Anthony Papalia who received $7,500 and Martin Fletcher who received
$9,100.
(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 principal executive officer and principal 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. If
the employment of either individual was terminated other than for cause, he
would 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.
Amendments to each employment contract executed in June 1999 and 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
23
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. In November 2001, each employment contract was further
amended to renew the term through March 31, 2005. The amendments retained the
automatic salary increase provision based on increases in the Consumer Price
Index and provided for an automatic one year renewal in the absence of prior
notice not to renew. As a result, with respect to fiscal 2004, Mr. Papalia's
annual salary was increased to $179,162 and Mr. Fletcher's annual salary was
increased to $103,915.
See Item 1 -- "Developments Since the Beginning of the Last Fiscal
Year" herein as to the release of Mr. Papalia from his obligations under his
employment contract effective at the close of business on June 28, 2004 and his
resignation, effective at such date, as president, treasurer, principal
executive officer and principal financial officer of the Company.
STOCK OPTIONS
At January 26, 2003 and at January 25, 2004 there were no outstanding
employee or non-employee stock options exercisable to purchase shares of Chefs'
Common Stock.
DIRECTORS' COMPENSATION
During fiscal 2004, 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 31, 2004 with
respect to their ownership of Chefs' common stock by (i) 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
Beneficial Owner Shares of Common Stock Percentage
Directors* Beneficially Owned Ownership
---------- ------------------ ---------
Robert M. Lombardi 1,335,825(1) 34%
Nicholas B. Boxter -- --
Kenneth Cubelli 100,000 3%
Raymond L. Dademo 2,000 --
Anthony M. Lombardi 111,001(1) 3%
Joseph S. Lombardi 598,633(1) 15%
Michael F. Lombardi 332,069(1)(2)(3) 8%
Stephen F. Lombardi 191,669(1)(2)(3) 5%
Executive Officer*
------------------
Anthony C. Papalia 5,000 --
All executive officers and
directors as a group
(ten persons) 2,515,528(1)(2)(3) 64%
-------------------
* The address of each director and executive officer is c/o the Company, 62
Broadway, Point Pleasant Beach, New Jersey 08742.
24
(1) Robert M. Lombardi, Anthony M. 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 but subsequently filed amendments to the Schedule
13D indicating that they are acting 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." See Item 1 -- "Developments Since the Beginning of
the Last Fiscal Year" as to the proposal by the Lombardi Group to acquire all of
the outstanding shares of Chefs common stock not owned by the Lombardi Group.
(2) Includes 111,668 shares owned by the Lombardi & Lombardi, P.A.
Defined Benefit Pension Plan. Michael F. Lombardi and Stephen F. Lombardi each
have voting and dispositive power with respect to all 111,668 shares.
(3) Includes 49,000 shares owned by Lombardi & Lombardi, P.A. Michael
F. Lombardi and Stephen Lombardi each have voting and dispositive power with
respect to all 49,000 of such shares.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 1 -- "Restaurant Operations - Mexican Theme Restaurants -
Moore's Tavern and Restaurant" as to rentals paid in fiscal 2004 by the Company
with respect to its two Freehold, New Jersey restaurants and the "Building Pad C
Parking Lot" to Moore's Realty (whose partners are members of the Lombardi Group
and other members of the Lombardi family).
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)
10.2 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 ("First Union")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)
10.4.1 Loan Agreement dated September 7, 2001 between the Company and
First Union containing the Company's affirmative and negative
covenants(G).
10.5 Lease Agreement executed in January 2000 for Moore's Inn
facility, between Moore's Realty Associates ("Moore's Realty")
as Landlord and the Company as Tenant(B)
10.5.1 Lease Agreement dated October 1, 2001 for Building B in
Freehold, New Jersey between Moore's Realty as Landlord and
the Company as Tenant (opened as Escondido's Mexican
Restaurant)(G).
10.5.2 Lease Agreement dated September 1,2002 for the Building C pad
site between Moore's Realty and the Company.
25
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)
10.9 Chefs International Executive Incentive Bonus Plan(G)
10.10 Asset Purchase Agreement dated January 25, 2002 for personal
property, furnishings, fixtures and equipment, liquor license,
tradename and goodwill of Mr. Manatee's restaurant in Vero
Beach, Florida between Causeway Foods, Inc. and Mr. Manatee's
Franchise Corporation as Sellers and the Company as Buyer. (g)
10.11 Commercial Lease Option dated April 1, 2002 between Stephen
Craig Long as Lessor and the Company as Lessee for the Mr.
Manatee's facility.(h)
21 Subsidiaries
31.1 Certification of Principal Executive and Principal Financial
Officer
32.1 Certification of Principal Executive and Principal Financial
Officer of the Company pursuant to 18 United States Code
Section 1350.
-------------------
(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).
(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.
(G) Incorporated by reference to exhibit filed with the Company's
annual report on Form 10-KSB for the fiscal year ended January 27, 2002
(H) Incorporated by reference to exhibit filed with the Company's
annual report on Form 10-KSB for the fiscal year ended January 26, 2003.
26
(b) REPORTS ON FORM 8-K
During the last quarter of its fiscal year ended January 25, 2004, the
Company filed one current report on Form 8-K. This report, for November 21,
2003, under Item 5, reported that the Company had issued a press release
announcing the offer of the Lombardi Group to purchase the shares of Chefs
common stock owned by the Company's minority stockholders (at $1.75 per share)
and attached a copy of the press release as an exhibit pursuant to Item 7.
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
The firm of McGladrey & Pullen, LLP ("McGladrey Pullen"), certified
public accountants, audited the accounts of Chefs and its subsidiaries
(collectively the "Company") for the fiscal years ended January 25, 2004 and
January 26, 2003.
(1) AUDIT FEES. McGladrey Pullen billed the Company approximately
$70,000 for professional services rendered for the audit of the Company's annual
consolidated financial statements for its 2004 fiscal year and to review the
financial statements included in its quarterly reports on Form 10-QSB filed with
respect to quarterly periods in such fiscal year as compared to approximately
$58,600 for such services with respect to the Company's 2003 fiscal year.
(2) AUDIT-RELATED FEES. None.
(3) TAX FEES. McGladrey Pullen billed the Company approximately $10,000
for tax services for fiscal 2004 and approximately $15,600 for tax services for
fiscal 2003. The fees were billed for tax return preparation.
(4) ALL OTHER FEES. No other fees were billed to the Company by
McGladrey Pullen with respect to fiscal 2004 and approximately $1,400 was billed
by said firm to the Company for miscellaneous professional services rendered
with respect to fiscal 2003.
(5) PRE-APPROVAL AND PROCEDURES. The engagement of McGladrey Pullen to
render the above audit and tax services was approved by the Company's Board of
Directors.
27
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 26, 2004
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. Lombardi By: /s/ Michael F. Lombardi
------------------------------- -------------------------------
Robert M. Lombardi, Chairman Michael F. Lombardi,
Of the Board of Directors Director
Date: April 26, 2004 Date: April 26, 2004
By: /s/ Anthony Lombardi By: /s/ Stephen F. Lombardi
------------------------------- -------------------------------
Anthony Lombardi, Director Stephen F. Lombardi,
Director
Date: April 26, 2004 Date: April 26, 2004
By: /s/ Joseph S. Lombardi
---------------------------------
Joseph S. Lombardi, Director
Date: April 26, 2004
28