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 26, 2003
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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.
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[Name of small business issuer in its charter]
Delaware 22-2058515
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[State or other jurisdiction of [IRS Employer
incorporation or organization] Identification Number]
62 Broadway, P.O. Box 1332
Pt. Pleasant Beach, New Jersey 08742
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[Address of principal executive offices] [Zip Code]
Issuer's telephone number, including area code: (732) 295-0350
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Securities registered pursuant to Section 12(b) of the Act: NONE
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(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 26, 2003 totaled $22,953,925.
On April 11, 2003, the aggregate market value of the voting stock of the issuer
(consisting of Common Stock, $.01 par value) held by non-affiliates was
approximately $1,950,000 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 3,926,038 shares of the issuer's Common Stock issued and
outstanding (excluding 43,550 Treasury Shares).
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 eleven restaurants on a year-round basis, eight
of which are free-standing seafood restaurants in New Jersey (four) and Florida
(four); two of which are Mexican theme restaurants, one located in the Monmouth
Mall in Eatontown, New Jersey and the other, a free-standing 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 two Mexican theme restaurants are 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 first Mexican theme
restaurant in April 1996 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 planned closing during the second quarter of calendar
year 2003 of its Mexican theme restaurant located at the Monmouth Mall.
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 OPENINGS AND PLANNED CLOSING
In February 2000, the Company executed a lease with Moore's Realty
Associates, a New Jersey partnership ("Moore's Realty") whose partners are
members of the Lombardi Group and other members of the Lombardi family. (The
Lombardi Group, consisting of various members of the Lombardi Family and their
affiliates, purchased a substantial number of shares of Chefs' Common Stock in
May 1999 resulting in their ownership in May 1999 of in excess of 50% of the
issued and outstanding shares of Chefs' Common Stock, and as a result, in
ownership of voting control of the Company. The Lombardi
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Group currently owns approximately 64% of the issued and outstanding shares of
Chefs' Common Stock. Five Lombardi brothers, each of whom is a member of the
Lombardi Group, serve as Chefs' directors.) The lease was of premises on West
Main Street (Route 537) in Freehold, New Jersey where an entity affiliated with
Moore's Realty, Moore's Inn, Inc. was operating a restaurant and tavern under
the name "Moore's Inn." The Company provided consulting services to the
operators of Moore's Inn from January 3, 2000 until February 23, 2000 when it
executed a lease and various purchase agreements and commenced to operate the
facility under the name "Moore's Tavern and Restaurant."
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 a 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 adjacent 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 term which expires in January 2007, 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 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
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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
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 sixty-five (65) automobiles for patrons of the two Freehold
restaurants. Moore's Realty has agreed to reimburse the Company's costs. Moore's
Realty's 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 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.
In April 2002, the Company commenced operation of a free-standing
casual theme restaurant primarily featuring seafood items in a leased facility
in Vero Beach, Florida continuing the operation of the restaurant under the name
"Mr. Manatee's Casual Grille." See "Restaurant Operations" in this Item 1.
PLANNED RESTAURANT CLOSING
During fiscal 2003,the Company operated a second Escondido's Mexican
Restaurant located at the Monmouth Mall in Eatontown, New Jersey. This
restaurant had been opened by the Company in April 1996 and operated under the
name "Garcia's" until the Company changed the name of the restaurant in February
2002. Prior to opening this restaurant as Garcia's, the Company operated a Le
Crepe restaurant at the site. The La Crepe restaurant at the site closed in
December 1995 and the Company then spent approximately $720,000 to construct the
Garcia's restaurant at the site.
The restaurant consists of 4,371 square feet of leased space. It has a
bar and tables and booths which can accommodate approximately 130 patrons. The
Company has a liquor license permitting the
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consumption of wine and alcoholic beverages on the premises. The Company's lease
for the restaurant, due to expire in fiscal 2008, currently provides for a
minimum annual rental of $118,017.
The Company is required to pay additional rent equal to 5% of the
restaurant's annual gross revenues in excess of approximately $2,300,000. The
Company is also required to pay a proportionate share of the Mall's real estate
taxes, utility charges, the Landlord's operating costs and certain other
charges.
As a result of continuing operating losses at its Monmouth Mall Mexican
theme restaurant, management has decided to close this restaurant. The closing
is expected to take place during the second quarter of calendar year 2003. The
Company is currently in negotiation with the Landlord to terminate the lease
prior to its expiration date and is also negotiating to sell its liquor license
for use at the location. Management believes that the proceeds from the sale of
the liquor license will exceed the amount the Company will be required to pay to
obtain early termination of the lease but no assurance can be given that such
will be the case.
SHARE REPURCHASE PROGRAM
On June 8, 2000, the Company announced that it had decided to
repurchase up to 400,000 shares of Chefs' Common Stock over the following 24
months. At the conclusion of this Repurchase Program, the Company had
repurchased an aggregate 28,191 shares of Chefs' Common Stock in the
over-the-counter market at prices ranging from $.73 to $1.20 per share and had
repurchased an aggregate 262,603 shares in a block transaction with a limited
group of unaffiliated stockholders at $2.10 per share.
On January 21, 2003, the Company announced a second Share Repurchase
Program to purchase up to 100,000 shares of Chefs' Common Stock over the next
twelve months. To date, the Company has repurchased an aggregate 40,000 shares
of Chefs' Common Stock in the over-the-counter market at $1.49 per share
pursuant to the second Share Repurchase Program.
The Company's Board of Directors believes that Chefs' Common Stock was
undervalued in the public market and that the Repurchase Programs 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 has utilized available
cash reserves to effect each of its stock repurchases.
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BANK LOANS
At January 27, 2002, the Company owed approximately $93,000 pursuant to
a term loan originally in the amount of $500,000 from First Union National Bank
("First Union"). This loan was payable in monthly installments of principal with
interest at an annual rate of 9 1/4% through December 2002 and was paid in full
during fiscal 2003.
At January 27, 2002, the Company also had a $500,000 revolving line of
credit ("L/C line") from First Union expiring on June 30, 2003 and secured by a
first mortgage on the Toms River restaurant. No borrowings had been made under
the L/C line at said date. In March 2002, the Company borrowed $500,000 under
this L/C line and applied the proceeds towards the purchase of the assets of Mr.
Manatee's. See "Restaurant Operations."
On May 21, 2002, the Company borrowed $500,000 from Wachovia Bank (the
successor by merger to First Union), and applied the proceeds to repayment of
the balance under the L/C line. Principal payments under this Term Loan are due
in amounts varying from $5,000 to $25,000 in the months of March through
November in calendar years 2002 through 2007 together with interest at the LIBOR
Market Index Rate plus 2%. Indebtedness under this Term Loan is secured by a
mortgage on the Company's Toms River, New Jersey seafood restaurant. At January
26, 2003, the outstanding principal balance under this term loan was
approximately $415,000.
In September 2001, the Company borrowed $600,000 from First Union
secured by a first mortgage on its Baker's Wharfside restaurant in Point
Pleasant Beach and borrowed an additional $600,000 from First Union 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 26,
2003, the outstanding principal balance of each of these loans was $537,500.
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 First Union to
partially fund the purchase of property adjoining its Toms River, New Jersey
seafood restaurant. The loan is repayable in monthly
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installments of principal with interest at LIBOR plus 2 1/4% through May 2003
and is secured by a first mortgage on the property. At January 26, 2003,
approximately $8,300 was outstanding under this loan.
In October 1998, the Company borrowed $880,000 from First Union to fund
the $1,100,000 purchase of its Vero Beach, Florida seafood restaurant. This loan
is repayable in monthly installments of $8,319 comprised of principal and
interest at an annual rate of 7.82% through November 2008 and is secured by a
first mortgage on the Vero Beach property. At January 26, 2003, approximately
$733,700 was outstanding under this loan (which provides for a $431,429
"balloon" payment in November 2008).
Repayment of the Company's term loans and of borrowings under its line
of credit is guaranteed by each of the Company's subsidiaries.
Pursuant to its principal Loan Agreements, the Company has agreed to
certain affirmative and negative covenants, violation of which without First
Union'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 2003 year end of not less than $12,550,000
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 (excluding repurchases of up to 400,000 shares
at market prices pursuant to its June 2000 Stock Repurchase Program and the
262,000 share block purchase described above as well as repurchases of up to
100,000 shares at market prices pursuant to its January 2003 Stock Repurchase
Program also described above. The Company received waivers from First Union for
these repurchases). The Company was in compliance with all material covenants
under the Loan Agreements at January 26, 2003.
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(b) BUSINESS OF ISSUER - The Company is engaged in one business; the
operation of eleven restaurants in New Jersey and Florida on a year-round basis
but has decided to close one of the New Jersey restaurants in the second quarter
of calendar 2003.
RESTAURANT OPERATIONS
The Company currently operates eleven restaurants on a year-round
basis, eight of which are free-standing seafood restaurants in New Jersey (four)
and Florida (four); two of which are Mexican theme restaurants, one located in
the Monmouth Mall in Eatontown, New Jersey and the other, a free-standing
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 two Mexican theme restaurants are
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 first Mexican
theme restaurant in April 1996 and "Moore's Tavern and Restaurant" in February
2000. See "Developments Since the Beginning of the Last Fiscal Year" as to the
Company's planned closing during the second quarter of calendar year 2003 of its
Mexican theme restaurant located at the Monmouth Mall. The Company's
restaurants, all of which are operated on a year-round basis, are as follows:
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Date of Opening Under
Location the Company's Management
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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
BAKER'S WHARFSIDE
Pt. Pleasant Beach, New Jersey October 1980
MR. MANATEE'S CASUAL GRILLE
Vero Beach, Florida April 2002
ESCONDIDO'S MEXICAN RESTAURANTS
Monmouth Mall, Eatontown,
New Jersey April 1996*
Freehold, New Jersey January 2002
MOORE'S TAVERN AND RESTAURANT
Freehold, New Jersey February 2000
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* The Company plans to close this restaurant during the second quarter of
calendar year 2003.
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.
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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, First Union National Bank, and paid the balance of the purchase price from
working capital. The Company's successful bid was based upon an independent
appraisal of the property and was equal to the appraised value. See "Bank Loans"
herein as to the repayment terms of this loan.
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 will enhance
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
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.
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TOMS RIVER, NEW JERSEY - This restaurant, consisting of approximately
10,750 square feet, is free standing on Robbins Parkway with a waterfront
location on the Toms River in Toms River, New Jersey and seats approximately
375. Municipal parking facilities are available nearby. The Company purchased
this restaurant and three others (including the land, buildings, improvements,
and businesses including personal property and fixtures, liquor licenses and all
of the outstanding stock of the four corporations operating these restaurants)
from its then principal stockholder, and from three partnerships owned by him,
in October 1980 for an aggregate $7,750,000 less a subsequent $250,000
prepayment discount. During fiscal 1998, the Company commenced an interior
renovation of this restaurant, the bulk of which was completed in fiscal 1998
with the balance completed early in fiscal 1999. The total cost of this
renovation was approximately $338,000. In fiscal 1999, the Company constructed
an outdoor deck with a bar and dining facilities at this restaurant adding
approximately 125 seats at a cost of approximately $188,000.
In May 1998, the Company spent $166,000 to purchase a lot and building
with a waterfront location adjacent to the Toms River Lobster Shanty. The
Company partially funded the purchase price with the bank loan previously
described. The Company has obtained the variances necessary for it to develop an
outdoor patio dining area with seating for 125 on this site. The issuance of the
variances to the Company is subject to appeal. The time for any objecting party
to appeal expires in early May 2003. Assuming there is no appeal, the Company
intends to obtain the necessary permits and to promptly commence construction of
the planned patio dining area. The Company estimates the total costs of
construction and outfitting at approximately $350,000 for an opening now
anticipated in fiscal 2005.
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.
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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 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
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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 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 (i.e. market value of Chefs' outstanding Common Stock) 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 planned
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closing during the second quarter of calendar year 2003 of its Escondido's
Mexican Restaurant at the Monmouth Shopping Mall.
The Company's Mexican theme restaurants feature 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 is a "triple-net" lease pursuant to which the Company pays
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
13
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. 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. For the
fiscal year ended January 26, 2003, the Company was only obligated to pay the
minimum annual rental of $90,000.
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 First Union aggregating $1,200,000. See "Developments Since the
Beginning of the Last Fiscal Year - Bank Loans" in this Item 1. During the
renovation period, 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 "Developments Since the Beginning of its Last Fiscal Year" 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.
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 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
14
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 26, 2003, the gross annual rental aggregated $141,963.
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 Inn.
In connection with the lease, the Company purchased a New Jersey liquor
license from Moore's Inn, Inc. for $350,000 and agreed to sell the license back
to the Seller or to Moore's Realty at the termination of the lease for the same
$350,000. In addition, the Company purchased existing furniture, fixtures and
equipment at Moore's Inn from Moore's Inn, Inc. for $250,000 agreeing to leave
all of the furniture, fixtures and equipment at the premises "...in good working
condition, reasonable wear and tear excepted..." upon termination of the lease.
The lease of the Moore's Inn and the purchase of the liquor license and
the furniture, fixtures and equipment cannot be deemed "arm's length"
transactions due to the interest of the Lombardi Group and other members of the
Lombardi family. The transactions were negotiated for the Company by Anthony C.
Papalia, its president and chief executive officer. In negotiating the
15
transactions, Mr. Papalia took into account his experience in similar restaurant
leases, the prices at which liquor licenses were sold in neighboring areas
(finding such prices to be comparable to the liquor license purchase price paid
by the Company) and the condition of the furniture, fixtures and equipment. The
bulk of the furniture, fixtures and equipment had been purchased by the Seller
during the twelve months ended June 30, 1999 at a price of $621,893. Mr. Papalia
and the non-interested directors concluded that the terms of the transaction
were fair and in the best interests of the Company.
At the time of execution of the lease, Moore's Realty agreed not to
sell or lease a building ("Building B") adjacent to the Moore's Inn or the
nearby pad site for a proposed building ("Building C") for a period of one year.
If during the first year, the Company entered into an agreement to purchase or
lease Building B, Moore's Realty agreed not to sell or lease the pad site to
anyone other than the Company for an additional one-year period. 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. Also see "Developments Since the
Beginning of its Last Fiscal Year" as to the Company's lease of the Building C
pad site to provide additional parking for this restaurant and its Freehold
Escondido's Mexican Restaurant.
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
"Developments Since the Beginning of the Last Fiscal Year" 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.
16
The Moore's Tavern and Restaurant is open for lunch and dinner on a
year-round basis. It features an eclectic American food menu offering
sandwiches, burgers, steak and other meats, chicken and fish, potatoes,
vegetables and desserts, and alcoholic beverages.
SOURCES OF FOOD PRODUCTS
The food products used by the Company in the operation of its seafood
restaurants, its Moore's Tavern and Restaurant and its Escondido's Mexican
Restaurants 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. The Monmouth Mall Escondido's Mexican Restaurant derives a significant
portion of its sales during the holiday season from Thanksgiving through
Christmas. 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"(R) 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"(R) 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."(R)
17
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 locations where the Company
is now operating its Escondido's Mexican Restaurants, all of which supply
competition to the Company's Mexican theme restaurants. In addition, there are
other Mexican style restaurants in the area. Typical "chain" competitors, all of
which are affiliated with better established and more prominent national chains,
are the Friendly Ice Cream chain, Ruby Tuesdays and TGI Fridays. The Moore's
Tavern and Restaurant faces competition from local restaurants as well as from
national chains including TGI Fridays and Chili's restaurants in the area. There
can be no assurance that the Company's units will be able to successfully
compete with any of such other restaurants.
GOVERNMENT REGULATION
The Company is subject to various Federal, state and local laws
affecting the operation of its restaurants, including licensing and regulation
by health, sanitation, safety and fire departments and alcoholic beverage
control authorities. The Company is also subject to the Fair Labor Standards
Act, which governs such matters as minimum wages, overtime and other working
conditions. 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.
18
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 40 employees and its Moore's Tavern and Restaurant
employs approximately 60 employees, in each case serving similar functions. The
Company also presently employs three area supervisors, each responsible for
certain of the Company's restaurants. Managerial candidates are recruited for
the Company's restaurants from hotel and restaurant management schools,
restaurant recruiting agencies, through advertising in restaurant management
magazines and by promotion from within the Company's own organization. At
January 26, 2003, 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.
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 26, 2003.
19
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 27, 2001 $ .90 $ .70
July 27, 2001 1.37 .81
October 26, 2001 1.41 1.07
January 25, 2002 2.15 1.15
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
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 April 11, 2003, the number of record holders of the Common Stock was
6,496. 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.
The Company did not sell any of its equity securities during the fiscal
year ended January 26, 2003.
20
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.
FINANCIAL REPORTING
Financial Reporting Release No. 60, issued by the Securities and
Exchange Commission ("SEC"), requires all registrants to discuss critical
accounting policies or methods used in the preparation of financial statements.
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,
plant 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 5 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 values. 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 on the fact that the aggregate market capitalization of the Company was
less
21
than its book value. The Company was also required to conduct an annual review
of goodwill and liquor licenses for potential impairment. The Company's 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 2 to the
Consolidated Financial Statements). Again, the write down was a 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.
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 asset will not be realized. These
assumptions and estimates will be periodically reviewed and, if needed,
adjustments will be made as required.
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
22
Point Pleasant Beach, New Jersey.
The Company currently operates eleven restaurants on a year-round
basis. See Item 1, "Developments Since the Beginning of the Last Fiscal Year" as
to the Company's planned closing of one of these restaurants, its Escondido's
Mexican Restaurant in the Monmouth Mall, during the second quarter of calendar
year 2003. 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"). The Company plans to close this restaurant during the second
quarter of calendar year 2003. On April 1, 2002, the Company acquired the
operations of its 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.
Generally, the Company's New Jersey seafood restaurants derive a
significant portion of their sales from May through September. The Company's
Florida seafood restaurants derive a significant portion of their sales from
January through April. The Company's Monmouth Escondido's restaurant derives a
significant portion of its sales during the holiday season from Thanksgiving
through Christmas. Moore's experiences a seasonality factor similar to but not
as dramatic as the seasonality factor of the New Jersey seafood restaurants. The
Company'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 nine restaurants during the year ended January 27,
2002.
The statements of operations are comprised of a 52-week period for both
the year ended January 26, 2003 ("fiscal 2003") and the year ended January 27,
2002 ("fiscal 2002").
23
RESULTS OF OPERATIONS
SALES
Sales for the year ended January 26, 2003 were $22,953,900, an increase
of $2,155,600 or 10.4%, as compared to $20,798,300 for the year ended January
27, 2002. The increase includes sales of $1,494,100 at the Freehold Escondido's,
which opened on January 29, 2002, and sales of $1,359,300 at Manatee's, which
opened on April 1, 2002. The other nine restaurants combined had decreased sales
of $697,800 or 3.4% versus last year. The primary reasons for the decline in
sales were the weak tourist and summer seasons in Florida, where sales were off
by $322,400 or 5.1%, due to public concerns about air traffic safety after
9/11/01 (see reduced customer traffic at Disney in Orlando where attendance
plunged by double-digit percentages and has not returned to pre 9/11 levels),
the slow economy and fears of another recession, the continuing bear stock
market which has negatively impacted discretionary spending and consumer
confidence, concerns about the Iraq war, and similar to the Florida tourist
season, a slow summer and third and fourth quarters in New Jersey, where sales
were lower by $375,400 or 2.6%. The New Jersey restaurants were also negatively
impacted by the unusually wet and cold winter weather. The number of customers
served during fiscal 2003 in the nine restaurants decreased by 5.2% while the
average check paid per customer increased by 1.9%. The average check paid per
customer at both Freehold Escondido's and Manatee's was less than at the seven
seafood restaurants and Moore's and higher than at Monmouth Escondido's.
GROSS PROFIT; GROSS MARGIN.
Gross profit was 68.8% of sales for fiscal 2003 as compared to 68.4% of
sales for fiscal 2002. The primary reason for the improvement was lower costs of
high volume seafood items including shrimp, scallops and flounder, which are
primary components of the Company's menus. Additionally, the Company's gross
profit was improved by the addition of both Freehold Escondido's which offers a
lower cost Mexican fare, and Manatee's which offers a lower cost seafood menu.
Operating Expenses.
Total operating expenses increased by 18.3% from $13,766,200 for fiscal
2002 to $16,286,300 for fiscal 2003. Payroll and related expenses were 32.2% of
gross sales for fiscal 2003 compared to 30.1% of gross sales for fiscal 2002.
The primary reasons for the
24
increase were higher health insurance premiums which increased by more than 30%
on April 1, 2002, the substantial decrease in sales in the nine restaurants that
operated during both years, and the overall higher payroll costs at the two new
restaurants. Historically, new restaurants have higher operating expenses during
the first few months of operation. Other operating expenses increased to 22.4%
of sales for fiscal 2003 versus 21% in 2002 primarily due to the addition of the
two new restaurants and higher occupancy costs resulting from higher property
insurance premiums and higher real estate taxes. The Company's property and
casualty insurance coverage was renewed in April 2002 at an overall increase of
26%. The property component of the insurance package, which is included in the
Company's occupancy costs, was renewed with a 56% rate increase.
Depreciation and amortization expenses increased by approximately
$84,400 during fiscal 2003 versus the prior year primarily due to the
depreciation expenses associated with the $1,334,200 renovation of the Freehold
Escondido's and the purchase of the furniture, fixtures and equipment of
Manatee's offset by the reduction in amortization costs due to the Company's
adoption of SFAS No. 142 (see Note 1 to the Consolidated Financial Statements).
General and administrative expenses were $53,900 lower in fiscal 2003
versus the prior year. Despite an increase of approximately $81,400 in insurance
costs in fiscal 2003, total general and administrative expenses were lower
because the total for fiscal 2002 included approximately $61,300 more in
training and recruiting costs primarily associated with the opening of the
Freehold Escondido's, $80,000 to terminate an agreement with Garcimex of New
Jersey and approximately $26,000 in market research and legal costs to develop
the trade name Escondido's Mexican Restaurant. Salaries for fiscal 2003 included
$32,900 attributed to the Company's Executive Incentive Bonus Plan ("Bonus
Plan") (see Note 9 to the Consolidated Financial Statements), while salaries in
fiscal 2002 attributed to the Bonus Plan were $63,900.
GOODWILL IMPAIRMENT LOSS
Pursuant to SFAS No. 142 (see Note 5 to the Consolidated Financial
Statements) the Company's annual review for impairment resulted in a write down
of the goodwill associated with the April 2002 acquisition of Manatee's (see
Notes 2 and 5 to the Consolidated Financial Statements). The charge for the
write down of the Manatee's goodwill of $583,900 is included as an operating
expense for fiscal 2003.
25
OTHER INCOME AND EXPENSE.
Interest expense was $62,700 higher in fiscal 2003 due to interest
expense associated with $1,200,000 in bank loans the Company borrowed from its
primary bank to finance the renovation of the Freehold Escondido's and the
$500,000 bank line of credit ("bank line") which the Company used to partially
finance the acquisition of Manatee's. The $1,200,000 is repayable in various
monthly installments of principal with interest at an annual rate of 7.57%
through September 2011. In June 2002 the Company borrowed $500,000 from the bank
to pay down its $500,000 bank line. The new loan is repayable in various monthly
installments of principal with interest at a variable rate of LIBOR plus 2%
through May 2007. The entire $500,000 bank line is currently available for use
through June 2003. Investment income was $90,300 lower in fiscal 2003 due to
substantially lower rates of interest available for investments and
approximately $50,700 less in capital gains realized on the sale of investments
(see Note 7 to the Consolidated Financial Statements).
NET (LOSS) INCOME.
For the year ended January 26, 2003, the Company realized a net loss,
before the $430,403 charge for a cumulative effect of accounting change (see
Note 5 to the Consolidated Financial Statements), of $683,900 or $.17 per share
compared to net income of $1,727,000 or $.42 per share for the year ended
January 27, 2002. The primary reasons for the loss in fiscal 2003 are the
reduced sales and profits resulting from weak tourist seasons in both Florida
and New Jersey, the higher operating expenses of the two new restaurants, the
substantial increase in insurance costs, the increase in interest expense
associated with the two new bank loans and the $583,900 charge for the write
down of the Manatee's goodwill (see Notes 2 and 5 to the Consolidated Financial
Statements). Net income for the prior year included the recognition of a
deferred tax asset of $1,166,000 related to the Company's net operating loss
carryforwards.
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 1.98:1
at January 26, 2003, compared to 1.90:1 at January 27, 2002. Working capital was
$2,091,800 at the end of fiscal 2003, a decrease of $209,700 versus the prior
year. During fiscal 2003, net
26
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, 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 primarily due to costs associated with the construction
of a paved parking area for the two Freehold, New Jersey restaurants and an
increase of $90,000 in accrued expenses and other liabilities resulting
primarily from an increase of $50,300 in the amount of unredeemed gift
certificates held by restaurant patrons at year end and an increase of
approximately $30,300 in accrued health insurance costs. On September 1, 2002,
the Company entered into a five year agreement with Moore's Realty (a
partnership owned by the principal shareholders of the Company), the landlord of
Moore's and Escondido's, to lease land for use as an enlargement of the two
restaurants' common parking area. The Company is obligated under this lease for
minimum annual rentals of $40,000, payable in monthly installments of $3,333,
during the first five years of the agreement which also includes three (3) five
(5) year extensions. The landlord agreed to reimburse the Company up to a
maximum of $150,000 for costs associated with the construction of the parking
area by providing credit against the monthly rent. During the third quarter, the
Company spent approximately $134,000 to construct the parking area which has
been classified as a receivable on the balance sheet. At January 26, 2003, the
landlord owed the Company approximately $117,600 in future rent credits.
Investing activities during fiscal 2003 resulted in a net cash outflow
of $1,736,600. Capital expenditures were $1,916,200 with the major components
including $417,100 associated with the renovation at Escondido's in Freehold,
$893,500 to acquire the inventory, furniture, fixtures, equipment, liquor
license and franchising rights of Manatee's and approximately $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. At
January 26, 2003, the fair value of the Company's holdings of available-for-sale
securities resulted in net unrealized losses of $281,300 compared to the
investment cost of those securities, primarily due to the continued poor
performance of the US stock markets. The resulting losses are reported in
stockholders' equity as a component of accumulated other comprehensive (loss).
27
Financing activities for 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 of
Manatee's.
During fiscal 2002, net cash increased by $248,500. Net cash provided
from operating activities was $1,882,000. The primary components were net
income, after adjustment for depreciation and deferred income taxes of
$1,669,500, an increase in accounts payable of $173,100 due primarily to
payables associated with the opening of Freehold Escondido's, and an increase in
accrued expenses of $68,800 resulting primarily from an increase of $45,200 in
the amount of unredeemed gift certificates held by restaurant patrons at the
year end. Investing activities for fiscal 2002 resulted in a net outflow of
$2,069,100. Capital expenditures were $1,444,500 which included $883,000 for the
renovation costs at Escondido's in Freehold and $561,600 for new Company
vehicles and routine improvements at the other nine restaurants. Other investing
activities included the purchase of various investments totaling $1,116,900
offset by $525,700 from the sale of investments and proceeds from maturing
certificates of deposit. Financing activities in fiscal 2002 generated a net
cash flow of $435,200 and included debt repayment of $177,700, bank loan
proceeds of $1,200,000 used to finance the construction of Escondido's, and
$569,900 to repurchase a block of an aggregate 262,603 shares of the Company's
outstanding common stock from three shareholders and their affiliates.
Additionally, approximately $17,200 was paid by the Company to repurchase 17,916
shares of the Company's outstanding stock pursuant to a Stock Repurchase Plan
("Stock Plan") authorized by the Board in May 2000 and which terminated on May
24, 2002.
At the end of fiscal 2003, the Company was in compliance with all of
the covenants under its loan agreements with its primary bank, Wachovia Bank,
National Association (formerly First Union National Bank.) The Company was also
in full compliance at the year ended January 27, 2002.
RECENT DEVELOPMENTS
During the month of April 2003, management negotiated the annual
renewals for group health ("health") and property and casualty ("property")
insurance coverages. Prior to the health renewal, in an effort to reduce Company
health costs, management reduced the class of employees who would be offered
coverage effective April 1, 2003. Additionally, dental coverage was discontinued
for the remaining group. As a result, despite an
28
approximate 20% increase in health premium costs for the reduced group of
employees, the overall group health plan was renewed at a decrease of
approximately 25% versus last year. The property coverage was renewed at an
overall decrease of approximately 13%. Factors contributing to the decrease
included a reduction in the amount of coverage, larger deductibles, a slight
softening of the insurance market and, in order to cover all markets available
and ensure competition to the benefit of the Company, the use of two independent
insurance brokers.
On December 24, 2002 the Board of Directors authorized the Company to
repurchase up to 100,000 shares of its Common Stock on or before January 29,
2004. The Company expects to make such purchases from time to time in the
over-the-counter market at prevailing market prices. No shares were repurchased
between December 24, 2002 and the year ended January 26, 2003. Subsequent to
January 26, 2003, the Company purchased 40,000 shares for $59,600.
Management anticipates that funds from operations will be sufficient to
meet obligations in fiscal 2004, including projected capital expenditures of
$430,000 for routine capital expenditures.
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 couple of years.
ITEM 7. FINANCIAL STATEMENTS
Attached.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
29
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
---- --- -------- ------------------
Robert M. Lombardi(a) 51 Chairman of the Board May 1999
Nicholas B. Boxter 55 Director December 1999
Kenneth Cubelli 49 Director December 1999
Raymond L. Dademo 45 Director December 1999
Anthony M. Lombardi(a) 47 Director July 1999
Joseph S. Lombardi(a) 52 Director July 1999
Michael F. Lombardi(a) 54 Director July 1999
Stephen F. Lombardi(a) 47 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 45 President, Treasurer, Chief
Executive Officer, Chief Financial
Officer and Director
Martin W. Fletcher 50 Secretary
The Company does not have an Executive Committee. The term of office of
each director and executive officer expires when his successor is elected and
qualified. Executive officers are elected by and hold office at the discretion
of the Board of Directors.
The following is a brief account of the business experience of each
director and executive officer of the Company during the past five years.
30
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.
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.
31
EXECUTIVE OFFICERS
Anthony C. Papalia has been continuously employed by the Company for
the preceding five years. He has served as a manager of various New Jersey
Lobster Shanty restaurants and as an area supervisor. Mr. Papalia, who was
elected senior vice president and a director of the Company in September 1985
and president and treasurer in March 1988, is currently devoting all of his
working time to the business of the Company. He resigned as a director of the
Company in July 1999.
Martin W. Fletcher has been continuously employed by the Company for
the preceding five years in various capacities. He has served as general manager
of the Company's Toms River, New Jersey Lobster Shanty, as area supervisor for
its Florida west coast restaurants, as assistant controller, since September
1987 as controller and since March 1988 as secretary and a director of the
Company. He resigned as a director of the Company in July 1999. He is currently
devoting all of his working time to the business of the Company.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Based solely upon a review of Forms 3, 4 and 5, the Company believes
that with respect to fiscal 2003, all Section 16(a) filing requirements
applicable to its officers, directors and beneficial owners of more than 10% of
its equity securities were timely complied with except for a late filing made in
April 2002 by Joseph S. Lombardi with respect to his purchase of 900 shares of
Chefs Common Stock on February 25, 2002 and another late filing made by Joseph
S. Lombardi in April 2002 with respect to his purchase of an additional 1,000
shares on March 20, 2002. In addition, Joseph S. Lombardi and Kenneth Cubelli
intend to file Form 4s on or before May 9, 2003 with respect to Joseph S.
Lombardi's agreement on July 23, 2002 to transfer 100,000 shares of Chefs Common
Stock to Kenneth Cubelli.
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 26, 2003 to
its Chief Executive Officer as well as to any other executive officer of the
Company or a subsidiary who earned at least $100,000 during fiscal 2003. During
the three-year period ended January 26, 2003, 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
32
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 six 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 2003 $174,630 $4,500 $2,088
President and 2002 $169,497 $8,429 $2,088
Chief Executive 2001 $164,557 $14,000 $2,088
Martin Fletcher 2003 $101,255 $5,367 $2,902
Controller and 2002 $98,308 $8,500 $2,902
Secretary 2001 $95,398 $10,910 $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 2003 aggregated
$32,867 and was distributed to seven employees including Anthony Papalia
who received $4,500 and Martin Fletcher who received $5,367.
(b) Represents contributions under the Supplemental Employee Benefit Program.
EMPLOYMENT AGREEMENTS
At the annual meeting of the Company's stockholders held on December
19, 1995, stockholders ratified employment contracts between the Company and
Anthony Papalia as chief executive officer and chief financial officer and
between the Company and Martin Fletcher as controller. Each contract expired at
the conclusion of the Company's 1999 fiscal year and was automatically renewed
on a
33
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 is terminated other than for cause, he will
become entitled to a Severance Payment equal to the amount of his compensation
over the balance of the contract term. Each individual is also entitled to
terminate his employment and receive a Severance Payment equal to six months'
salary in the event of a "change of control" of the Company. 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 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. During fiscal 2003, Mr.
Papalia's annual salary increased to $175,546 and Mr. Fletcher's annual salary
was increased to $101,817.
STOCK OPTIONS
At January 27, 2002 and at January 26, 2003 there were no outstanding
employee or non-employee stock options exercisable to purchase shares of Chefs'
Common Stock.
DIRECTORS' COMPENSATION
During fiscal 2003, 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.
34
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of April 11,
2003 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 Shares of Common Stock Percentage
Beneficial Owner Beneficially Owned Ownership
------------------- ---------------------- ----------
DIRECTORS*
Robert M. Lombardi 1,335,825(1) 34%
Nicholas B. Boxter -- --
Kenneth Cubelli 100,000 3%
Raymond L. Dademo 2,000 --
Anthony Lombardi 111,001 3%
Joseph S. Lombardi 598,633 15%
Michael F. Lombardi 246,010(1)(2)(3) 6%
Stephen F. Lombardi 111,335(1)(2)(3) 3%
EXECUTIVE OFFICER*
Anthony C. Papalia 5,000 --
All executive officers and
directors as a group
(ten persons) 2,509,804(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.
(1) Robert M. Lombardi, Anthony Lombardi, Joseph S. Lombardi, Michael F.
Lombardi and Stephen F. Lombardi, Lombardi & Lombardi, P.A. and the
Lombardi & Lombardi, P.A. Defined Benefit Pension Plan previously filed a
report on Schedule 13D and amendments thereto indicating that they were
acting separately and not as a group 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."
35
(2) Includes 24,500 shares comprising one-half of the 49,000 shares owned by
Lombardi & Lombardi, P.A., of which Michael F. Lombardi and Stephen F.
Lombardi are each senior officers.
(3) Includes 55,834 shares comprising one-half of the 111,668 shares owned by
the Lombardi & Lombardi, P.A. Defined Benefit Pension Plan. Michael F.
Lombardi and Stephen Lombardi each have voting and dispositive power with
respect to all 111,668 of such shares.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 1 herein, "Developments Since the Beginning of the Last Fiscal
Year" as to the leasing by the Company from an affiliate of the Lombardi Group
of the Building C pad site in Freehold, New Jersey to provide additional parking
for patrons of its Moore's Tavern and Restaurant and its Escondido's Mexican
Restaurant. See Note 10 of Notes to the Consolidated Financial Statements as to
rents paid by the Company during fiscal 2003 to Moore's Realty with respect to
these two restaurants.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
3.1 Restated Certificate of Incorporation of the Company(A)
3.2 By-Laws of the Company, as amended(B)
4.1 Specimen Common Stock Certificate(C)
10.1 Monmouth Mall Shopping Center Lease for Garcia's restaurant(D)
10.2 Employment Agreement dated as of December 19, 1995 between
Chefs and Anthony Papalia(D)
10.3 Employment Agreement dated as of December 19, 1995 between
Chefs and Martin Fletcher(D)
10.4 Loan Agreement dated October 30, 1998 between the Company and
First Union National Bank ("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)
36
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.
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,
trade name 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
37
21 Subsidiaries - The following table indicates the wholly owned
subsidiaries of the Company, their respective states of
incorporation and the restaurants operated by each:
State of
Name Incorporation Restaurants
---- ------------- -----------
Chefs International Florida Jack Baker's Lobster Shantys
Palm Beach, Inc. Vero Beach and Jensen
Beach, Florida
Hightstown REB, Inc. New Jersey Jack Baker's Lobster Shantys
Pt. Pleasant Beach,
Toms River and
Hightstown, New Jersey
99 Certification of Principal Executive and Principal Financial
Officer of the Company pursuant to 18 United States Code
Section 1530.
----------
(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
38
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the last
quarter of the fiscal year ended January 26, 2003.
ITEM 14. CONTROLS AND PROCEDURES
(a) EXPLANATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company's
principal executive 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 15d-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 quarterly
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 actions. As a result, no
corrective actions were taken.
39
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
FINANCIAL REPORT
JANUARY 26, 2003
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-7-17
--------------------------------------------------------------------------------
McGladrey & Pullen
Certified Public Accountants
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 26, 2003, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two fiscal years in the period ended January 26, 2003. 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 26, 2003, and the results of their
operations and their cash flows for each of the two fiscal years in the period
ended January 26, 2003 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, 2003
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 26, 2003
--------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,069,857
Investments 151,000
Available-for-sale securities 1,668,531
Miscellaneous receivables 62,173
Receivable - related party 40,000
Inventories 1,128,992
Prepaid expenses 107,988
-----------
TOTAL CURRENT ASSETS 4,228,541
-----------
Property and Equipment, at cost 21,411,079
Less: Accumulated depreciation 9,164,376
-----------
PROPERTY AND EQUIPMENT, NET 12,246,703
-----------
Other Assets:
Intangibles 942,518
Receivable - related party 77,563
Equity in life insurance policies 602,822
Deferred income taxes 1,064,000
Other 34,635
-----------
TOTAL OTHER ASSETS 2,721,538
-----------
$19,196,782
===========
See notes to consolidated financial statements.
F-2
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (CONTINUED)
JANUARY 26, 2003
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes and mortgages payable, current maturities $ 271,490
Accounts payable 702,233
Accrued payroll 157,637
Accrued expenses 493,450
Gift certificates 511,955
------------
TOTAL CURRENT LIABILITIES 2,136,765
------------
Notes and Mortgages Payable 1,960,438
------------
Other Liabilities 747,559
------------
Stockholders' Equity:
Capital stock - common $.01 par value,
Authorized 15,000,000 shares,
Issued 3,969,540 39,695
Additional paid-in capital 31,549,492
Accumulated deficit (16,854,010)
Accumulated other comprehensive (loss) (379,272)
Treasury stock - 3,550 shares (3,885)
------------
TOTAL STOCKHOLDERS' EQUITY 14,352,020
------------
$ 19,196,782
============
See notes to consolidated financial statements.
F-3
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 26, 2003 AND JANUARY 27, 2002
2003 2002
-------------------------------------------------------------------------------------------------------------------
Sales $ 22,953,925 $ 20,798,333
Cost of Goods Sold 7,151,181 6,570,094
------------ ------------
GROSS PROFIT 15,802,744 14,228,239
------------ ------------
Operating Expenses:
Payroll and related expenses 7,390,019 6,253,547
Other operating expenses 5,136,653 4,367,445
Depreciation and amortization 1,192,910 1,108,482
General and administrative expenses 1,982,785 2,036,725
Goodwill impairment loss 583,922 --
------------ ------------
TOTAL OPERATING EXPENSES 16,286,289 13,766,199
------------ ------------
(LOSS) INCOME FROM OPERATIONS (483,545) 462,040
------------ ------------
Other Income (Expense):
Interest expense (178,041) (115,378)
Investment income 165,719 256,054
------------ ------------
OTHER (EXPENSE) INCOME, NET (12,322) 140,676
------------ ------------
(LOSS) INCOME FROM OPERATIONS BEFORE INCOME TAXES (495,867) 602,716
Provision (credit) for Income Taxes 188,082 (1,124,293)
------------ ------------
(LOSS) INCOME BEFORE CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE (683,949) 1,727,009
Cumulative Effect of an Accounting Change - Goodwill
Accounting Method (430,403) --
------------ ------------
NET (LOSS) INCOME $ (1,114,352) $ 1,727,009
============ ============
(Loss) Income Per Common Share Before Cumulative Effect
of an Accounting Change $ (0.17) $ 0.42
Cumulative Effect of an Accounting Change - Goodwill
Accounting Method (0.11) --
------------ ------------
Basic and Diluted (Loss) Income Per Common Share $ (0.28) $ 0.42
============ ============
See notes to consolidated financial statements.
F-4
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 26, 2003 AND JANUARY 27, 2002
---------------------------------------------------------------------------------------------------------------------------------
Accumulated
Capital Additional Other
Number Stock Paid-in Accumulated Comprehensive
of Shares Par Value Capital Deficit Income (Loss)
------------ ------------ ------------ ------------ -------------
Balance at January 29, 2001 4,257,085 $ 42,571 $ 32,138,798 $(17,466,667) $ 51,043
Comprehensive Income:
Net income -- -- -- 1,727,009 --
Net unrealized (loss) on
available-for-sale securities arising
during period -- -- -- -- (52,703)
Reclassification adjustment for gains
realized on available-for-sale securities -- -- -- -- (32,117)
Change in fair value of derivatives
accounted for as hedges -- -- -- -- (55,422)
TOTAL COMPREHENSIVE INCOME -- -- -- -- --
Repurchase and retirement of
common stock (262,603) (2,626) (567,270) -- --
Stock repurchase program (24,641) (246) (22,040) -- --
Fractional shares conversion (333) (4) 4 -- --
------------ ------------ ------------ ------------ ------------
BALANCE AT JANUARY 27, 2002 3,969,508 39,695 31,549,492 (15,739,658) (89,199)
Comprehensive (Loss):
Net loss -- -- -- (1,114,352) --
Net unrealized (loss) on
available-for-sale securities arising
during period, net of $58,000 of taxes -- -- -- -- (186,273)
Reclassification adjustment for gains
realized on available-for-sale securities -- -- -- -- (3,244)
Change in fair value of derivatives accounted
for as hedges, net of $31,000 of taxes -- -- -- -- (100,556)
TOTAL COMPREHENSIVE (LOSS) -- -- -- -- --
Fractional shares conversion 32 -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE AT JANUARY 26, 2003 3,969,540 $ 39,695 $ 31,549,492 $(16,854,010) $ (379,272)
============ ============ ============ ============ ============
-------------------------------
Total
Treasury Stockholders'
Stock Equity
------------ ------------
$ (8,980) $ 14,756,765
------------
-- 1,727,009
-- (52,703)
-- (32,117)
-- (55,422)
------------
-- 1,586,767
------------
-- (569,896)
------------
5,095 (17,191)
------------
-- --
------------ ------------
(3,885) 15,756,445
------------
-- (1,114,352)
-- (186,273)
-- (3,244)
-- (100,556)
------------
-- (1,404,425)
------------
-- --
------------ ------------
$ (3,885) $ 14,352,020
============ ============
See notes to consolidated financial statements.
F-5
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 26, 2003 AND JANUARY 27, 2002
2003 2002
-----------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net (loss) income $(1,114,352) $ 1,727,009
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 1,192,910 1,108,482
Deferred income taxes 191,000 (1,166,000)
Gain on sale of investments (5,154) (55,852)
Cumulative effect of an accounting change 430,403 --
Goodwill impairment loss 583,922 --
Changes in assets and liabilities:
(Increase) decrease in:
Miscellaneous receivables (117,268) 47,024
Inventories 39,672 (14,929)
Prepaid expenses 73,471 (5,272)
Increase (decrease) in:
Accounts payable (53,109) 173,066
Accrued expenses and other liabilities 90,041 68,800
Income taxes payable (50,394) --
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,261,142 1,882,328
----------- -----------
Cash Flows From Investing Activities:
Purchase of property and equipment (1,022,694) (1,444,530)
Acquisition of restaurant assets (893,536) --
Sale or redemption of investments 409,820 525,696
Purchase of investments (244,087) (1,116,928)
Equity in life insurance policies (12,960) (44,747)
Other 26,856 11,457
----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES (1,736,601) (2,069,052)
----------- -----------
Cash Flows From Financing Activities:
Proceeds from debt 500,000 1,200,000
Repayment of debt (362,746) (177,707)
Purchase of common stock -- (569,896)
Purchase of treasury stock -- (17,191)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 137,254 435,206
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (338,205) 248,482
Cash and Cash Equivalents:
Beginning 1,408,062 1,159,580
----------- -----------
Ending $ 1,069,857 $ 1,408,062
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash payment for:
Interest $ 178,753 $ 111,629
=========== ===========
Income taxes $ 34,273 $ 58,626
=========== ===========
Noncash Transactions:
(Decrease) in fair value of securities available for sale $ (189,517) $ (84,820)
=========== ===========
Change in fair value of derivatives accounted for as hedges $ (100,556) $ (55,422)
=========== ===========
Accounts payable for purchase of property and equipment $ -- $ 417,100
=========== ===========
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
eleven 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 two 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 26, 2003 totaled
approximately $918,200.
Cash and Cash Equivalents:
Cash equivalents are comprised of certain highly liquid investments
with a maturity of three months or less when purchased.
Investments:
Investments consist of certificates of deposit and are classified as
current or long-term based on their maturities at the balance sheet
date.
Available-for-Sale Securities:
At January 26, 2003, available-for-sale securities consist of
convertible bonds, mutual funds, and equity securities.
Available-for-sale securities are carried at fair value with unrealized
gains or losses reported in a separate component of stockholders'
equity. Realized gains or losses are determined based on the specific
identification method.
F-7
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Available-for-Sale Securities (Continued):
Details as to available-for-sale securities at January 26, 2003 are as
follows:
Gross Gross
Unrealized Unrealized
Gross Cost Gains (Losses) Fair Value
----------- ----------- ----------- -----------
Convertible bonds $ 17,250 $ 13,275 $ -- $ 30,525
Mutual funds 1,362,340 23,183 (300,170) 1,085,353
Equity securities 570,235 61,847 (79,429) 552,653
----------- ----------- ----------- -----------
$ 1,949,825 $ 98,305 $ (379,599) $ 1,668,531
=========== =========== =========== ===========
Inventories:
Inventories consist of food, beverages and supplies. Inventories are
stated at the lower of cost (determined by the first-in, first-out
method) or market.
Property 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, than 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.
F-8
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Goodwill and Other Intangible Assets: (Continued)
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.
Net earnings and diluted earnings per share ("EPS") would have been as
follows had the provisions of the new standards been applied as of
January 29, 2001:
Net income, as previously reported $ 1,727,009
Adjustment for amortization of goodwill and liquor
licenses 53,743
-----------
Net income, as adjusted $ 1,780,752
===========
Basic and diluted EPS, as previously reported $ 0.42
Adjustment for amortization of goodwill and liquor
licenses .01
-----------
Basic and diluted EPS, as adjusted $ 0.43
===========
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.
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.
F-9
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
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.
Advertising:
The Company expenses advertising costs as incurred. Advertising costs
for fiscal 2003 and 2002 were $593,055 and $471,172, 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 Costs Associated With Exit or Disposal Activities:
In July 2002, the FASB issued SFAS No.146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS 146 requires
companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a
commitment to an exit or disposal activity. The adoption of this new
standard did not have a material impact on the consolidated financial
statements.
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 2003 and
2002.
2. ACQUISITION
On April 1, 2002, the Company acquired for $893,536 the inventory,
furniture, fixtures, equipment, liquor license and franchising rights
of a restaurant business located in Florida known as Mr. Manatee's
Casual Grille. Included in the acquisition price was a five-year
non-compete agreement with the prior owner of the restaurant. The
Company also entered into a five-year lease, effective April 1, 2002,
which requires minimum annual rentals of $96,000. The lease contains
three five-year renewal options and includes a Company option to
purchase the property during the first term of the lease for
$1,075,000.
F-10
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
3. INVENTORIES
Inventories consist of the following:
Food $ 512,058
Beverages 152,269
Supplies 464,665
------------
$ 1,128,992
============
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Land $ 3,270,041
Buildings and improvements, including leaseholds 15,582,811
Furniture and equipment 2,348,198
Construction in progress 107,194
China, glassware and utensils (a) 102,835
------------
$ 21,411,079
============
(a) Carried at original cost for each restaurant. All replacement
purchases are charged to expense as incurred.
Depreciation expense was $1,182,389 and $1,054,739 for fiscal 2003 and
2002, 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.
F-11
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
5. INTANGIBLE ASSETS (CONTINUED)
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 (see Note 2). 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 26, 2003.
Intangible assets at January 26, 2003 consist of:
Liquor Covenant Not
Licenses to Compete
----------- -----------
Cost $ 1,263,305 $ 63,126
Accumulated amortization (373,392) (10,521)
----------- -----------
$ 889,913 $ 52,605
=========== ===========
In connection with the acquisition of Mr. Manatee's Casual Grille (Note
2), the Company entered into a non-compete agreement with the prior
owner of the restaurant.
Amortization expense was $10,521 and $53,743 for fiscal 2003 and 2002,
respectively.
The estimated aggregate amortization expense for the covenant not to
compete for each of the next five years is as follows: $12,625 annually
for the fiscal years 2004 through 2007 and $2,105 for 2008.
Amortization of liquor licenses is no longer required (see Note 1).
F-12
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 $ 1,075,000
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 733,663
Mortgage payable in various monthly installments to
amortize the mortgage at the rate of $105,000
annually, through May 2007 with interest at LIBOR
plus 2.00%, collateralized by real estate located
in Toms River, New Jersey 415,000
Mortgage payable in monthly installments of $2,067
through May 2003, plus interest at LIBOR plus
2.25%, collateralized by real estate located in
Toms River, New Jersey 8,265
-----------
2,231,928
Less: Current maturities 271,490
-----------
$ 1,960,438
===========
Annual maturities for fiscal years 2005 through 2008 are $266,346,
$270,771, $274,909 and $194,283, respectively.
At January 26, 2003, 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, 2003 and bears interest at LIBOR plus 2.00%. At
January 26, 2003, there were no amounts used under the line of credit.
LIBOR was 1.36% at January 26, 2003.
As of January 26, 2003, 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 $187,000 at January 26, 2003. These unrealized net losses
are recorded in Accumulated Other Comprehensive Income (Loss) 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. No gain or loss
was recognized in earnings during the year ended January 26, 2003 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 includes,
among other items, requirements relating to tangible net worth, capital
expenditures and working capital components.
F-13
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
7. INVESTMENT INCOME
The components of investment income are summarized as follows:
2003 2002
--------- ---------
Interest income $ 23,697 $ 68,718
Dividends 136,868 131,484
Realized gain on sales of available-for-sale
securities 5,154 55,852
--------- ---------
$ 165,719 $ 256,054
========= =========
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 $34,577 and $44,521 for
fiscal 2003 and 2002, respectively.
9. EXECUTIVE INCENTIVE BONUS PLAN
In Fiscal 2001, the Board of Directors approved an executive incentive
bonus plan which provides eligible employees an annual cash bonus if
the Company achieves certain financial goals. The charge to operations
applicable to the incentive plan for fiscal 2003 and 2002 was $32,867
and $63,929, respectively.
10. TRANSACTIONS WITH RELATED PARTIES
The Company has a lease for Moore's Inn ("Moore") 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.
On October 1, 2001, the Company entered into a five-year lease for the
property adjacent to Moore's for the Company's new restaurant,
Escondido's Mexican Restaurant (Escondido's). The terms of this lease
are the same as the lease for Moore's Inn.
F-14
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
10. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
Effective September 1, 2002, the Company entered into 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 $134,000, which is to be 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 $77,563
classified as a long-term receivable.
Rent expense paid pursuant to these leases for fiscal 2003 and 2002 was
$248,629 and $150,859, respectively, which included percentage rent of
$51,963 and $45,859, respectively.
The Company has a retirement agreement with a former director/employee
(see Note 8).
11. COMMITMENTS AND CONTINGENCIES
Leases:
The Company leases restaurants, parking lots and equipment under
operating leases expiring at various times through fiscal 2009.
Minimum future rental payments under noncancelable operating leases as
of January 26, 2003 are as follows:
2004 $ 474,233
2005 483,375
2006 485,558
2007 482,678
2008 160,159
Thereafter 13,780
-----------
$ 2,099,783
===========
Total rent expense, including rent paid to related parties, was
$541,588 and $352,481 for fiscal 2003 and 2002, respectively.
Employment Agreements:
The Company has employment agreements through March 2005 with two
employees for annual amounts ranging from $101,800 to $175,500. 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.
F-15
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Stock Repurchase Plan:
On May 24, 2000, the Board of Directors authorized the Company to
repurchase over a two-year period up to 400,000 shares of its
outstanding stock at market price. Through May 24, 2002, the Company
had repurchased 28,191 shares for $26,171, of which 24,641 shares had
been retired. 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. Subsequent to January 26,
2003, the Company purchased 40,000 shares for $59,600.
Additionally, on August 14, 2001, the Board of Directors authorized the
Company to purchase a block of 262,603 common shares for $569,896.
These common shares were purchased on August 29, 2001.
12. EARNINGS PER SHARE
The weighted average number of shares outstanding used to compute basic
and diluted earnings per share for fiscal 2003 and 2002 was 3,969,540
and 4,129,205, respectively.
13. INCOME TAXES
The provision (credit) for income taxes charged to operations consist
of the following:
2003 2002
------------ ------------
Current - Federal $ (27,918) $ 3,338
- State 25,000 38,369
Deferred 191,000 (1,166,000)
------------ ------------
$ 188,082 $(1,124,293)
============ ============
The significant components of deferred tax assets and liabilities as of
January 26, 2003 are as follows:
Deferred Tax Assets:
Tax loss carryforwards $1,570,000
Alternative minimum tax credit carryforward 14,000
Depreciation and amortization 355,000
Other comprehensive income 179,000
Other 60,000
----------
Gross deferred tax assets 2,178,000
Valuation allowance 1,098,000
----------
TOTAL DEFERRED TAX ASSETS 1,080,000
Deferred Tax Liability:
Other 16,000
----------
NET DEFERRED TAX ASSETS $1,064,000
==========
F-16
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
13. INCOME TAXES (CONTINUED)
As of January 26, 2003, a valuation allowance of $1,098,000 has been
provided for because, in the opinion of management, it is more likely
than not that some portion of the deferred tax assets will not be
realized. The net change in the valuation allowance for fiscal 2003 was
a reduction of $132,000. The reduction for fiscal 2003 was due to the
utilization and expiration of tax loss carryforwards.
The Company has available at January 26, 2003, operating loss
carryforwards as follows:
Year of Expiration
2004 $ 2,942,316
2005 472,062
2006 220,595
2007 215,047
2008 196,704
2009 155,075
2010 103,553
2011 144,559
2012 88,405
-----------
$ 4,538,316
===========
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 26,
2003 and January 27, 2002 are as follows:
2003 2002
------ ------
Federal statutory rate (34.0)% 34.0%
State taxes net of Federal benefit (5.0) 5.0
Valuation allowance change 7.4 11.2
Deferred tax asset recognized -- (193.4)
Non taxable income (6.1) --
(Utilization) expiration of operating
loss carryforwards 75.6 (43.3)
------ ------
EFFECTIVE RATE 37.9% (186.5)%
====== ======
14. 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-17
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 25, 2003
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 25, 2003 Date: April 25, 2003
By s/ Anthony Lombardi By s/ Stephen F. Lombardi
--------------------------------- ---------------------------------
Anthony Lombardi, Director Stephen F. Lombardi,
Director
Date: April 25, 2003
Date: April 25, 2003
By s/ Joseph S. Lombardi
---------------------------------
Joseph S. Lombardi, Director
Date: April 25, 2003
PRINCIPAL EXECUTIVE
AND PRINCIPAL FINANCIAL OFFICER
CERTIFICATION
I, Anthony C. Papalia, Principal Executive and Principal Financial
Officer of Chefs International, Inc. (the "Company") do hereby certify that:
(1) I have reviewed this annual report on Form 10-KSB of the Company
for the year ended January 26, 2003;
(2) Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this annual report;
(3) Based on my knowledge, the financial statements and other financial
information included in this annual report, fairly present in all material
respects, the financial condition, results of operations and cash flows of the
Company as of, and for, the period presented in this annual report;
(4) I am responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the Company and I have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the Company, including
its consolidated subsidiaries, is made known to me by others
within those entities, particularly during the period in which
this annual report was being prepared;
(b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
(c) presented in this annual report my conclusions about the
effectiveness of the disclosure controls and procedures based
on my evaluation as of the Evaluation Date;
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(5) I have disclosed, based on my most recent evaluation, to the
Company's auditors and the Company's board of directors:
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial
data and have identified for the Company's auditors any
material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls; and
(6) I have indicated in this annual report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of my most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: April 25, 2003
s/ Anthony C. Papalia
--------------------------------
Anthony C. Papalia
Principal Executive and
Principal Financial Officer
Chefs International, Inc.
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