July 25, 1995
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Chefs International, Inc.
'34 Act File No. 0-8513
Gentlemen:
Chefs International, Inc. (the "Registrant") has filed an Amendment No. 1
on Form 10-KSB/A
to its annual report on Form 10-KSB for the year ended January 29, 1995. The
Division of Enforcement
has commenced an investigation regarding certain matters related to the
Registrant. The Registrant and
management are not in possession of all facts with respect to the matters
under investigation. However,
the Registrant hereby acknowledges the following:
The adequacy and accuracy of the disclosure in the filing is the
responsibility of the
Registrant. The Registrant acknowledges that staff comment or changes
in response to
staff comment in the proposed disclosure in the Annual Report on Form
10-KSB for the
period ended January 29, 1995, as amended, do not foreclose the
Commission from
taking any action with respect to the filing. The Registrant also
represents that staff
comment may not be asserted as a defense in any proceeding initiated by
the Commission
or any person under the federal securities laws of the United States.
Concerning the staff's letter of comment dated June 29, 1995, all
numbered comments have been
responded to except as follows:
#1 The Company did not acquire any restaurants from Robert E. Brennan
within the past ten years.
#11 The escrowed shares in connection with the Mr. Cookie Face acquisition
were not accounted for
as contingent consideration but rather were recorded initially as
outstanding securities due to
managements's determination that the achievement of the target net
revenues, given the
requirement that the ice cream operation be provided $5,000,000 in
funding, was beyond a
reasonable doubt. As such, the escrowed shares were not considered to
be contingent
consideration.<PAGE>
Mr. Koenemund's compensation subsequent to the
acquisition is at $100,000 per year with an
incentive bonus on pre-tax profits of the following amounts:
Amount up to $1,000,000 10%
Amount in excess of $1,000,000 but not in
excess of $2,000,000 7.5%
Amount in excess of $2,000,000 but not in
excess of $3,000,000 5%
Amount in excess of $3,000,000 2.5%
Management considers Mr. Koenemund's compensation to be adequate.
Very truly yours,
CHEFS INTERNATIONAL, INC.
By /s/Anthony Papalia
Anthony Papalia, President
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
_____________
FORM 10-KSB/A
_____________
AMENDMENT TO APPLICATION OR REPORT
FILED PURSUANT TO SECTION 12, 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
CHEFS INTERNATIONAL INC.
[Exact name of registrant as specified in its charter]
Commission File Number: 0-8513
AMENDMENT NO. 1
The undersigned registrant hereby amends the following items
of its Annual Report on Form 10-KSB for the fiscal year ended
January 29, 1995 as set forth in the pages attached hereto:
Part I, Item 1. Business
Part II, Item 6. Management's Discussion and Analysis or
Plan of Operation
Part II, Item 7. Financial Statements
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CHEFS INTERNATIONAL INC.
[Registrant]
Date: July 25, 1995 By:/s/Anthony Papalia
Anthony Papalia
President (Principal Executive
Officer, Principal Financial
Officer, Principal Accounting
Officer)
<PAGE>
CHEFS INTERNATIONAL, INC.
PART I
Item 1. Description of Business
(a) Business Development - Chefs International, Inc. ("Chefs"
or the "Company") was organized under the laws of the State of
Delaware in March 1975. The Company currently operates nine
restaurants on a year-round basis, eight of which are free-standing
seafood restaurants in New Jersey (five) and Florida (three) and
one of which is a limited menu La Crepe restaurant located in a
shopping mall in New Jersey. Seven of the seafood restaurants are
operated under the name "Lobster Shanty" and one under the name
"Baker's Wharfside." The Company opened its first La Crepe
restaurant in November, 1975 and its first seafood restaurant in
November, 1978. In July 1993 effective June 30, 1993, the Company
acquired all of the issued and outstanding capital stock of Mister
Cookie Face, Inc. ("MCF" or "Mr. Cookie Face"), a Lakewood, New
Jersey producer of ice cream sandwiches currently available in 35
states. Mr. Cookie Face's products are currently being distributed
primarily in the northeastern United States including the New York,
Philadelphia and Boston metropolitan areas, and also in the
midwest, including the Chicago metropolitan area, Colorado and
Arizona, the northwest, Florida and the greater Los Angeles and San
Francisco areas. (As used herein, the term the "Company" may also
at times include Chefs and its various subsidiaries, including "Mr.
Cookie Face").
The Company's executive offices are located at 62 Broadway,
Point Pleasant Beach, New Jersey 08742. Its telephone number is
(908) 295-0350. Mr. Cookie Face's offices and production facility
are located at 170 North Oberlin Avenue, Unit 19, Lakewood, New
Jersey 08701 where its telephone number is (908) 370-5533.
Recent Developments
Effective June 8, 1993, the Company completed a one-for-three
reverse stock split of its outstanding Common Stock, $.01 par value
(the "Common Stock"). Unless otherwise indicated, all share and
per share information contained in this report gives effect to the
said one-for-three reverse stock split. In addition, unless
otherwise indicated, actual price quotations for the Common Stock
as quoted on the NASDAQ System have been adjusted throughout this
report by multiplying the actual price for the Common Stock for
periods prior to June 8, 1993 by three. No assurances can be given
that the actual price quotations for the Common Stock during such
pre-split period would have approximated such adjusted prices if
the one-for-three reverse stock split had been effectuated at such
time.
In July 1993 effective June 30, 1993, the Company acquired all
of the issued and outstanding capital stock of Mr. Cookie Face from
its sole stockholder, Frank Koenemund, in exchange for 1,000,000
authorized but unissued shares of Chefs Common Stock. In
connection with the acquisition, Mr. Koenemund agreed to execute an
approximately four and one-half year employment contract with Mr.
Cookie Face to serve as its president and chief executive officer.
See "Item 10 - Executive Compensation."
An aggregate 500,000 of the 1,000,000 shares of Chefs Common
Stock issued to Mr. Koenemund were held in escrow subject to
forfeiture pursuant to a formula requiring Mr. Cookie Face to
achieve certain net revenues in fiscal 1994 and fiscal 1995,
provided that Chefs provide at least $5,000,000 of funding to Mr.
Cookie Face on or before January 31, 1994. As Chefs was unable to
provide the $5,000,000 of funding to Mr. Cookie Face by January 30,
1994, the escrowed shares were released to Mr. Koenemund. Despite
Chefs' inability to provide $5,000,000 of funding by January 31,
1994, Mr. Cookie Face achieved net revenues in excess of the target
net revenues it would have been required to achieve to avoid
forfeiture ($2,000,000 in fiscal 1994 and $10,000,000 in fiscal
1995).
At the Closing, Mr. Koenemund was elected to the Chefs board
of directors and two of Chefs' principal executive officers,
Anthony Papalia and Martin Fletcher, were elected as directors and
as vice president and as secretary-treasurer of Mr. Cookie Face.
See "Item 12 - Certain Relationships and Related Transactions"
herein as to the grant by the Company's principal stockholder to
Messrs. Papalia, Martin Fletcher, Koenemund and Jack Mariucci, of
options to purchase an aggregate 3,250,000 of his approximately
5,800,000 shares of Chefs' Common Stock.
On August 3, 1993, Chefs filed a Registration Statement on
Form SB-2 (File No. 33-66936) with the Securities and Exchange
Commission (the "Commission") for the purpose of registering shares
of Common Stock and warrants for sale to the public in an
underwritten public offering. The offering was seeking to raise
net proceeds of approximately $8,500,000, approximately $5,000,000
of which was to be applied to the expansion of the business of Mr.
Cookie Face and the balance to the acquisition and/or construction
by Chefs of additional seafood restaurants.
The effectiveness of the Registration Statement is currently
being delayed due to the conduct by the staff of the Commission of
an investigation pursuant to a formal order of investigation (HO-
2781) issued by the Commission in October 1993. See Item 3 herein.
The ongoing investigation has inhibited the Company's ability to
obtain sufficient additional financing to adequately fund the
growth of Mr. Cookie Face or to adequately fund the planned
expansion of the Company's restaurant business. No assurances can
be given that the Registration Statement will be declared effective
or that the proposed public offering will be consummated upon
completion of the investigation. Furthermore, management is unable
to predict the long-term effect which this investigation will have
on the Company or the market for its securities.
On February 25, 1994, the Company obtained a $2,000,000 line
of credit pursuant to a two-year revolving credit agreement with
First Fidelity Bank, National Association ("First Fidelity")
secured by mortgages on the Company's two Point Pleasant Beach, New
Jersey restaurants. Repayment of borrowings under the line of
credit is guaranteed by each of the Company's subsidiaries. At
the end of fiscal 1995, approximately $1,225,000 was outstanding
under the line. Pursuant to the credit agreement, the Company has
made certain affirmative and negative covenants to First Fidelity
(including covenants not to pay dividends while the loan is
outstanding, to maintain on a consolidated basis, minimum working
capital of at least $600,000 and a current asset to current
liability ratio of at least 1.25:1; tangible net worth of at least
$12,300,000; a debt to equity ratio of no greater than .55:1; a net
income, depreciation and amortization to current portion of long
term debt ratio of not less than 1.15:1; and cash and cash
equivalents of not less than $750,000). A failure by the Company
to satisfy any such covenant constitutes an event of default which
would enable First Fidelity to accelerate repayment of borrowings
under the line of credit. The Company applied proceeds borrowed
under the line of credit to the expansion of Mr. Cookie Face's
business. Subsequent to said fiscal year-end, Chefs drew down an
additional $200,000 under the line to provide additional working
capital for Mr. Cookie Face. In September 1994, Chefs borrowed an
additional $150,000 from First Fidelity (not pursuant to the line
of credit) to fund renovations at its newly opened seafood
restaurant in Belmar, New Jersey. This loan is repayable over a
three-year period in principal installments of $12,500 in June,
July, August and September, the balance being due September 30,
1997. Interest is paid monthly at an annual rate equal to 1% above
the Bank's prime rate. See "Item 6 - Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note
5 to Notes to the Company's Consolidated Financial Statements.
In September 1994, Chefs closed its LaCrepe restaurant at the
Quakerbridge Mall in Lawrenceville, New Jersey. In connection with
the closing of this restaurant, Chefs sold the liquor license for
$160,000 and was paid an additional $60,000 in order to prematurely
abandon the lease.
In October 1994, Chefs opened an additional approximately
9,000 square foot seafood restaurant in Belmar, New Jersey under
the name "Lobster Shanty." See "Restaurant Operations - Lobster
Shanty Restaurants" in this Item 1.
(b) Business of Issuer - The Company is engaged in two
principal lines of business; the operation of nine restaurants in
New Jersey and Florida on a year-round basis and, through its Mr.
Cookie Face subsidiary acquired in July 1993, the production of ice
cream sandwiches currently distributed primarily in the
northeastern United States including the New York, Philadelphia and
Boston metropolitan areas and also distributed in the midwest, the
northwest, Florida and the greater Los Angeles area.
RESTAURANT OPERATIONS
For the past three fiscal years and at present, the Company
has been principally engaged in the operation of nine restaurants
on a year-round basis, eight of which are free-standing seafood
restaurants in New Jersey (five) and Florida (three) and one of
which is a limited menu La Crepe restaurant located in a shopping
mall in New Jersey. Seven of the seafood restaurants are operated
under the name "Lobster Shanty" and one under the name "Baker's
Wharfside." The Company opened its first La Crepe restaurant in
November, 1975 and its first seafood restaurant in November, 1978.
The Company's restaurants, all of which are operated on a year-
round basis, are as follows:
Date of Opening
Under the Company's
Location Management
SEAFOOD RESTAURANTS
Lobster Shanty
Vero Beach, Florida December, 1979
Pt. Pleasant Beach, New Jersey October, 1980
Toms River, New Jersey October, 1980
Jensen Beach, Florida December, 1980
Cocoa Beach, Florida September, 1981
Hightstown, New Jersey December, 1981
Belmar, New Jersey October, 1994
Baker's Wharfside
Pt. Pleasant Beach, New Jersey October, 1980
LA CREPE RESTAURANT
Monmouth Mall, Eatontown,
New Jersey November, 1975
Seafood Restaurants
The Company's seafood restaurants provide a variety of seafood
dishes including shell fish such as lobster, scallops, shrimp,
oysters and clams, and other fish including red snapper, bluefish,
grouper and other varieties. A limited selection of non-seafood
entrees is also offered including steak and chicken as well as a
dessert selection. Most of the Company's seafood restaurants have
a nautical decor.
Lobster Shanty Restaurants
Vero Beach, Florida - This restaurant, consisting of
approximately 6,900 square feet, is free standing in Vero Beach,
Florida approximately 100 yards off U.S. Highway #60 on the
intracoastal waterway. It opened in December, 1979 pursuant to a
lease from Gourmet Associates ("Gourmet") owned by Robert E.
Brennan, the principal stockholder of the Company. The lease is
currently a month to month "net" lease at a monthly rental of
$10,000 with the Company paying personal property taxes and
insurance thereunder. Management believes that the terms of this
lease agreement are comparable to those which would have been
obtainable from unaffiliated sources.
Gourmet had purchased the property for $700,000 in April, 1979
by making a $200,000 down payment and issuing its $500,000
promissory note for the balance, payable with 9 1/2% annual interest
over 18 years secured by a first mortgage. Gourmet expended
approximately $315,000 in extensions and improvements to the
facility as well as for equipment therein prior to leasing this
restaurant to the Company.
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 Robert E.
Brennan, the principal stockholder of the Company, and from three
partnerships owned by him, in October, 1980 for an aggregate
$7,750,000 less a subsequent $250,000 prepayment discount.
Subsequent to its January 26, 1992 fiscal year-end, the Company
commenced renovations and improvements to this restaurant at a cost
of approximately $375,000. These renovations were completed in the
second quarter of calendar 1992.
Toms River, New Jersey - This restaurant, consisting of
approximately 10,750 square feet, is free standing on Robbins
Parkway in Toms River, New Jersey and seats approximately 400.
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 Robert E.
Brennan, the principal stockholder of the Company, and from three
partnerships owned by him, in October, 1980 for an aggregate
$7,750,000 less a subsequent $250,000 prepayment discount.
Jensen Beach, Florida - This 200 seat restaurant, consisting
of approximately 4,500 square feet, is located in a free standing
building on the intracoastal waterway in Jensen Beach, Martin
County, approximately 50 miles north of Palm Beach. The restaurant
has parking for 100 automobiles. Acquired in October, 1980 were
two lots, the restaurant with furnishings and a liquor license from
an unaffiliated party for $975,000. The Company made a $295,000
down payment and paid the balance over a ten year period through
September, 1990.
Cocoa Beach, Florida - On September 29, 1981, the Company
purchased all of the outstanding capital stock of two corporations
engaged in the ownership and operation of two Florida seafood
restaurants from two unaffiliated individuals. One restaurant was
in Cocoa Beach and the other (sold by the Company in January, 1988)
was in Titusville, Florida. 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. Each restaurant was free standing and had approximately
240 seats. The Cocoa Beach restaurant on Highway A1A has parking
for approximately 90 cars. The Titusville restaurant on Marina
Road, within one mile of Highway A1A had parking for approximately
120 cars. The Company commenced operation of both restaurants
immediately after the purchase under the names "Jack Baker's
Pelican Point Inn" and "Jack Baker's Sands Point Inn" and
subsequently changed the name of each to "Lobster Shanty."
The purchase price for the stock of the two corporations was
$3,370,000 increased by an amount equal to certain additional
assets available at the closing, primarily cash and receivables
totalling $414,029 and decreased by indebtedness under various bank
notes, recapture taxes and other liabilities paid by the Company
leaving a net balance of $2,655,239. The Company paid $289,671 in
cash at the closing and issued two $1,182,784 promissory notes, one
to each seller, for the balance. Each note was secured by a
mortgage on the restaurants and was payable in 240 consecutive
monthly installments with interest computed on the unpaid balance
at an annual rate of 12%. In addition, the Company paid a $130,000
sales commission to the unaffiliated real estate broker involved in
the transaction, Skakandy & Associates, Inc., by delivering its
check for $60,000 and its ten year note for the $70,000 balance.
In January, 1988, the Company sold the Titusville restaurant
to an unaffiliated third party in a transaction in which it
realized a loss of approximately $942,000. The $800,000
consideration received by the Company together with an additional
$263,126 paid by the Company was applied to reduce the outstanding
promissory notes to 50% of the outstanding balance immediately
prior to the sale thereby enabling the release of a mortgage lien
on the Titusville restaurant. The outstanding notes secured by a
mortgage on the Cocoa Beach restaurant were paid in July 1993 with
the proceeds received from the sale in June 1993 of the Company's
Ft. Myers, Florida 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 Robert E. Brennan, the principal stockholder of
the Company and from three partnerships owned by him, in October,
1980 for an aggregate $7,750,000 less a subsequent $250,000
prepayment discount. The Company made substantial renovations to
this restaurant commencing in fiscal 1993 which renovations were
completed early in fiscal 1994. The renovations, which cost
approximately $200,000, were paid for by the Company out of
existing cash reserves.
Belmar, New Jersey - This restaurant, consisting of
approximately 9,000 square feet, is free standing on Main Street in
Belmar, New Jersey. The restaurant seats approximately 250 and has
parking for approximately 110 automobiles. The Company purchased
the liquor license and trade name for use at this restaurant in
October 1994 for $250,000 from unaffiliated parties and leased the
restaurant, the parking lot and the restaurant furniture, fixtures
and equipment at such time from such parties pursuant to a five-
year lease in which the Company was given four consecutive five-
year options to renew. The lease provides for a monthly base rent
of $8,000 increasing every three years up to a monthly base rent
after the eighteenth year of $12,693 with an additional annual
percentage rent equal to 6% of Chefs' gross receipts at the
restaurant for such period less the base rent. The restaurant
opened as a "Lobster Shanty" restaurant under the Company's
management in October 1994. In November 1994, the Company borrowed
$150,000 from First Fidelity to fund renovations at this
restaurant. This loan is repayable over a three-year period in
principal installments of $12,500 in June, July, August and
September, the balance being due September 30, 1997. Interest is
paid monthly at an annual rate equal to 1% above the bank's prime
rate.
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 Robert E.
Brennan, the principal stockholder of the Company, and from three
partnerships owned by him, in October, 1980 for an aggregate
$7,750,000 less a subsequent $250,000 prepayment discount.
La Crepe Restaurant
The Company's La Crepe restaurant features authentic crepes;
thin, delicate French pancakes which can be filled with more than
fifty different fillings ranging from breakfast and brunch items,
such as sausages and eggs, to French culinary specialties suitable
for lunch and dinner, such as ratatouille, beef bourguignon,
seafood, etc., to dessert items, such as crepe suzettes, hot apples
and ice cream, etc. The crepes are prepared and filled in a stone-
faced barbecue area in full view of the customers. Soups and salad
dishes and a variety of other desserts are also featured. The
Company's La Crepe unit features a sidewalk cafe area.
Monmouth Mall, Eatontown, Monmouth County, New Jersey - The
Company has leased approximately 3,550 square feet in the Monmouth
Mall, Eatontown, New Jersey for an approximately twenty-year period
ending December 31, 1995 and has constructed a 150-seat La Crepe
restaurant and sidewalk cafe within the leased premises. The
restaurant opened in November, 1975 and has a liquor license for
which the Company paid $85,000, permitting the consumption of wine
and alcoholic beverages on the premises.
The lease requires the Company to pay a minimum annual rental
of the greater of $34,450 or 5% of gross sales as well as a common
area charge, taxes and Merchants' Association dues. The Mall and
the restaurant are open seven days per week.
The Mall has been in operation for approximately nineteen
years. Macy's, J.C. Penney and Abraham & Straus are major
department stores in the Mall. The Mall is one of the largest
shopping centers in New Jersey with 1,500,000 square feet of
shopping area on 105 acres with parking for 7,200 cars.
The restaurant is located on the upper level of the Mall next
to a major Mall entrance between J.C. Penney and Abraham & Straus.
Sources of Food Products
The food products used by the Company in the operation of its
seafood restaurants and its La Crepe restaurant are readily
available from a variety of sources including national distributors
and local sources on an order basis when needed. In its last three
fiscal years, the Company has not purchased any of its food
products from affiliated entities or entities affiliated with
former executive officers or directors.
Seasonal Aspects
To date, the Company's New Jersey seafood restaurants have
experienced their greatest sales volumes from May through September
whereas its Florida seafood restaurants have experienced their
greatest sales volumes from January through April. The Company's
La Crepe restaurant has experienced a greater sales volume during
the period from Thanksgiving through the beginning of January, than
at any other similar time span during the year.
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.
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 owned and operated
by General Mills. This chain has substantially greater resources
than the Company. There are other restaurants in the mall and in
the vicinity of the mall where the Company is now operating a La
Crepe restaurant, all of which supply competition to the Company's
La Crepe unit. Typical "chain" competitors, all of which are
affiliated with better established and more prominent national
chains, are the Friendly Ice Cream chain, McDonalds and Roy Rogers
Restaurants. Local Chinese restaurants and "sit-down"
delicatessens also provide competition. 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 cost.
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 manager, a relief manager 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). Each La Crepe restaurant
unit employs approximately 25 to 40 employees serving similar
functions. The Company also presently employs three area
supervisors, each responsible for three 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 29, 1995, the Company had a total of
approximately 477 employees (including part-time workers). This
number excludes the employees of Mr. Cookie Face acquired in July
1993. The Company is not a party to any collective bargaining
agreements and has enjoyed satisfactory employee relations since
inception.
ICE CREAM OPERATIONS
(Mister Cookie Face)
In July 1993, the Company acquired all of the issued and
outstanding capital stock of Mr. Cookie Face, a Lakewood, New
Jersey producer of ice cream sandwiches currently available in 35
states. Mr. Cookie Face's products are currently being distributed
primarily in the northeastern United States including New York,
Philadelphia and Boston metropolitan areas, and also in the
midwest, including the Chicago metropolitan area, Colorado and
Arizona, the northwest, Florida and the greater Los Angeles and San
Francisco areas. The Company's ice cream operations are presently
conducted through its wholly owned Mister Cookie Face, Inc.
subsidiary.
Products
Mr. Cookie Face's ice cream sandwiches consist of
approximately three fluid ounces of ice cream covered top and
bottom with a chocolate wafer. At present, approximately twelve
varieties of ice cream and combinations thereof are used including
vanilla, chocolate, chocolate vanilla swirl, vanilla nut, mint,
mint chip, strawberry, chocolate chunk, chocolate fudge and butter
pecan. Mr. Cookie Face ice cream sandwiches are wrapped in
polypropylene plastic containers and are sold to consumers in
convenient six-pack and twelve-pack trays primarily at supermarkets
and other food chains and as singles primarily at convenience
stores. Current retail prices for a six-pack tray generally range
from $2.99 to $3.99 and for a twelve-pack tray from $4.99 to $5.99.
The current suggested retail price for single ice cream sandwiches
is $1.49. Other products include "COOKIES AND CREAMS," a miniature
ice cream sandwich containing approximately one-half fluid ounce of
vanilla ice cream covered top and bottom with a small chocolate
cookie, "CHIPSTER," a similar miniature ice cream sandwich using
chocolate chip cookies, and a lowfat product similar to the
standard Mr. Cookie Face ice cream sandwich but using lowfat
vanilla chocolate swirl ice cream.
Production
All of Mr. Cookie Face's ice cream products are presently
produced at its production facility in Lakewood, New Jersey by an
independent subcontractor pursuant to a subcontracting agreement
which expires in June 1995 subject to Mr. Cookie Face's right to
renew the contract for incremental periods of six months on the
same terms and conditions up to a maximum of thirty months. The
subcontractor currently operates one to three shifts per diem at
the facility as business requires.
Mr. Cookie Face's ice cream products are produced using
chocolate wafers provided by three different suppliers, mini
cookies provided by two other suppliers and ice cream mix provided
by two other suppliers. All of the suppliers (except for one
located in the midwest) are located in the greater New York
metropolitan area. Mr. Cookie Face does not have any long term
contract with its suppliers but does not regard this fact as a
material risk to its business as the wafers, the mini cookies and
the ice cream mix are currently available in similar qualities and
quantities at competitive prices from a variety of sources on an
order basis if needed.
Mr. Cookie Face regards its ice cream sandwiches as handmade
as the amount of ice cream in each sandwich is determined by a
production worker who draws the mix for each sandwich by hand onto
a wafer or mini cookie from an ice cream dispensing machine. After
production, the ice cream sandwiches are placed in freezers and
then packaged before shipment to retail outlets. With its present
configuration of 24 ice cream dispensing machines and its present
freezer and packaging equipment, management believes that Mr.
Cookie Face can ship approximately $20,000,000 by dollar volume in
product (based on its current pricing) on an annual basis from the
Lakewood facility.
Marketing and Distribution
Mr. Cookie Face ice cream products are sold directly or
through food brokers to supermarket and other food chains and
through distributors, to convenience stores. At present, Mr.
Cookie Face utilizes more than 40 independent food brokers under
contracts terminable on 30 days notice to attempt to place its
products in various retail outlets . The brokers are compensated
on a commission basis equal to a percentage of Mr. Cookie Face's
collections and provide nationwide coverage. Marketing efforts are
also conducted directly by Mr. Cookie Face's chief executive
officer, Frank Koenemund and two full-time salaried salespersons.
In order for its products to be afforded retail "shelf" space
in most supermarkets, Mr. Cookie Face has been required to pay
"slotting" fees to various supermarket chains ranging from $2,000
to $35,000 per product and will be required to pay additional
slotting fees for each additional type of ice cream sandwich. No
assurances can be given that Mr. Cookie Face will be able to obtain
retail shelf space in additional chains or will be able to obtain
additional shelf space for new products at chains where its present
product line is carried, even with the availability of financial
resources to pay additional slotting fees.
Supermarket and other retail food chains which presently carry
Mr. Cookie Face's products include Pathmark, Waldbaums, A&P,
Shoprite, Food Town, Grand Union, King Kullen, Winn-Dixie, Stop &
Shop, Albertsons, Acme and Shaws; in the Los Angeles area - Vons,
Ralph's and Lucky's; and Safeway, Food Lion, Jewel, Dominicks and
Kroger.
Mr. Cookie Face was organized in February 1992 and to date has
not conducted any substantial advertising of its product line.
Advertising has been limited to radio (primarily in the New York
metropolitan area), in-store promotions, circulars and coupons.
Management believes that Chefs' inability to provide substantial
funding for Mr. Cookie Face's operations including advertising has
had an adverse effect on its potential growth. See "Developments
Since the Beginning of the Last Fiscal Year".
Seasonal Aspects
During its first full year of operation after acquisition by
the Company, Mr. Cookie Face experienced its greatest sales volume
during the period from May through August, which management
believes is typical in the industry for sales of ice cream
products.<PAGE>
Competition
Mr. Cookie Face's ice cream products compete primarily with
other ice cream products as well as non-ice cream and other frozen
dessert products. Various national and regional ice cream
manufacturers with substantially greater resources than the Company
produce ice cream products similar to Mr. Cookie Face's products.
Certain well known competitors with similar "novelty" ice cream
products are Carvel (in the eastern United States), Colemans (in
Pennsylvania), and Klondike's "Big Bear" square ice cream sandwich
(nationwide). In addition, there are relatively few entry barriers
to new manufacturers and/or products. Management believes that in
addition to product quality and appearance, accessibility of retail
"shelf" space, entry into new markets before competitors and
advertising are major competitive factors. No assurances can be
given that Mr. Cookie Face will be able to successfully compete.
Proposed Mr. Cookie Face Restaurant
Mr. Cookie Face expects to open its first "Mister Cookie Face"
restaurant in a Manalapan, New Jersey strip mall in May 1995. The
restaurant, occupying approximately 2,000 square feet, will seat
approximately 65 people and will offer a limited menu during lunch
and dinner hours. In addition, it will sell Mr. Cookie Face
products as well as other ice cream and dessert products such as
sundaes and cakes for consumption on the premises as well as on a
retail take-out basis. See Item 12 herein as to the sale of the
furniture, fixtures and equipment at this restaurant to Mr. Cookie
Face by a related party.
Trademark and Litigation
Mr. Cookie Face filed an application with the United States
Patent Office in 1992 to register the trademark "MISTER COOKIE
FACE." On July 26, 1994, the application was granted and the
trademark was registered. Mr. Cookie Face regards this trademark
to be of material importance to its business.
Employees
In addition to Frank Koenemund who devotes substantially all
of his working time to Mr. Cookie Face's business as chief
executive and chief marketing officer and president, two of the
Company's executive officers, Anthony Papalia and Martin Fletcher
also serve as executive officers of Mr. Cookie Face. Messrs.
Papalia and Fletcher, who had no prior association with Mr. Cookie
Face, were elected officers of Mr. Cookie Face at the time of its
acquisition by the Company in July 1993. Mr. Cookie Face also
employs a plant manager, two full-time salaried salespersons and
Mr. Koenemund's wife who performs administrative functions. Mr.
Cookie Face's production operations are performed by production
workers employed by an independent subcontractor. See "Ice Cream
Operations - Production."
Item 6. Management Discussion and Analysis or Plan of Operation
Results of Operations
In fiscal 1995, the Company sustained a loss of $257,100
compared to a loss of $176,700 in fiscal 1994. The figures for
1995 included registration costs of $270,700 associated with the
Company's September 1993 registration statement which were written
off due to the ongoing investigation related to the registration
statement. As a result of its inability to obtain funding from the
proposed public offering, the Company was required to finance the
planned Mister Cookie Face ("MCF") expansion, in part, through
borrowings. As a result, additional interest expense of $101,600
was incurred. Sales rose 80% to $31,916,300 primarily due to the
MCF expansion. Segment operating results are summarized below.
Restaurants
Net income from restaurant operations in fiscal 1995 increased
by 23% to $334,500 compared to $271,200 for fiscal 1994. Sales for
1995 were $16,043,700, an increase of $726,100 or 4.7% over 1994
sales of $15,317,600. The increase was due to increased customer
counts (1.4% higher than 1994), as well as higher menu prices (3.3%
higher).
Gross profit for 1995 was 67% of sales, slightly less than
1994's 67.3%. Management offset higher costs by raising menu
prices modestly and by attractively pricing higher margin items.
Payroll and related expenses were 29.5% of sales in 1995
versus 29.1% in 1994. The main components of the increase were
higher workers' compensation premiums and payroll tax costs. The
Company's restaurant servers and busboys are the only employees who
earn the minimum wage. In view of the fact that the bulk of such
individuals are employed in the Company's New Jersey operations and
that New Jersey's minimum wage is almost 20% higher than the
federal minimum wage, management does not believe that an increase
in the federal minimum wage requirement would adversely impact
operations in a material way.
Other operating expenses were 21% of sales, essentially the
same as in 1994. Depreciation and amortization costs were $36,000
higher in 1995, mainly as a result of asset purchases and
restaurant improvements. General and administrative expenses were
$7,300 lower in 1995. The main components of the decrease included
a reduction in group health insurance costs of $40,300 resulting
from a very good year of low medical claims versus premiums paid,
offset by reduced rental income of $26,200 due to the sale of the
Ft. Myers, Florida restaurant the previous year and an increase in
payrolls and related expenses of $62,300 resulting from pay
increases and addition of supervisory personnel.
The gain of $76,467 from the sale of restaurants in fiscal
1995 resulted from the sale of the Company's Quakerbridge, New
Jersey, LaCrepe liquor license and the early termination of the
lease in September, 1994. The 1994 fiscal year gain of $71,318
resulted from the sale of the Company's Fort Myers, Florida
property.
Interest expense in the restaurant operations was $66,200
lower in 1995 due to debt reduction. The 1994 interest expense
included the early pay-off of the Cocoa Beach, Florida restaurant
mortgage. Interest income was $22,700 lower in fiscal 1995 due to
reduced amounts of cash available for short-term investments.
The Company operated a total of nine restaurants in both
fiscal 1995 and 1994. During fiscal 1995, the Company sold the
Quakerbridge, New Jersey restaurant and opened a new seafood
restaurant in Belmar, New Jersey, under the name Jack Baker's
Lobster Shanty. Management believes that the addition of the
Belmar restaurant should have a positive effect on the restaurant
division's overall results.
Mister Cookie Face ("MCF")
MCF sustained a loss of $320,900 for fiscal 1995 compared to
a loss of $447,900 for the seven months of operations during fiscal
1994. Sales increased by $13,477,800 to $15,872,600 during fiscal
1995. The increase was comprised of higher sales of $4,810,100 for
the seven-month comparative period and $8,667,700 for the five
additional months of operation in fiscal 1995. Expansion into new
markets across the country, as well as successful promotions in
existing markets, accounted for the increase in sales.
Gross profit was 33% of sales in fiscal 1995 compared to 38.2%
of sales in 1994. The increased cost of promotional price
discounts given to supermarket chains was partially offset by a
reduction in raw material costs. This was achieved through the use
of additional suppliers and volume discounts. Additionally, MCF
was able to raise its prices modestly in selective markets.
Other operating expenses were 27.9% of sales in 1995 versus
34% in 1994. The improvement is due primarily to the large
increase in sales volume. Depreciation and amortization expenses
increased by $170,000 due to depreciation of equipment purchases
and plant upgrades and the amortization of the excess fair value
resulting from the Company's purchase of MCF. General and
administrative expenses increased by $272,000 primarily due to the
fact that MCF operated for five additional months during fiscal
1995. None of the executive officers of the Company or any of its
subsidiaries has an employment contract except for Frank Koenemund
who in connection with the Company's acquisition of Mr. Cookie Face
in July 1993, executed an approximately four and one-half year
employment contract with Mr. Cookie Face (through January 31, 1998)
agreeing to serve as president and chief executive officer and to
devote at least 90% of his working time to such duties. Pursuant
to the employment contract, Mr Koenemund is compensated at an
annual salary of $100,000 and is also entitled to an annual bonus
equal to the following percentages of Mr. Cookie Face's pre-tax
income (excluding extraordinary items) provided that no losses from
any fiscal period will be carried over to reduce profits in any
other fiscal period.
MCF Pre-Tax Income Percentage Bonus
On amounts up to $1,000,000 10%
On amounts in excess of $1,000,000
but not in excess of $2,000,000 7.5%
On amounts in excess of $2,000,000
but not in excess of $3,000,000 5%
On amounts in excess of $3,000,000 2.5%
Interest expense increased by $132,000 in fiscal 1995 due to
borrowings used to finance equipment acquisitions and for working
capital needs and due to increases in the prime rate.
Management believes that MCF should be able to maintain its
sales volume, despite increased competition, by introduction of new
products and expansion into new markets. MCF is currently in the
process of introducing new products including Club Pack (a 12-pack
of three flavor varieties of large ice cream sandwiches designed
for club stores such as the Price Club and Sams) and Feature Flavor
(a variety of six-packs designed to minimize the impact of slotting
fees as instead of paying a slotting fee for each flavor, MCF pays
only for the "feature flavor"). MCF is currently producing these
products and attempting to market them. MCF has also expanded its
geographic market through sales in Alabama to the Winn Dixie chain
and in Texas to H.E. Butt Company. Additionally, MCF will open its
first Mister Cookie Face restaurant during May 1995. The
restaurant will be located in a Manalapan, New Jersey strip mall
and will offer a limited menu during lunch and dinner hours. In
addition, the restaurant will sell ice cream products such as
sundaes and cakes for consumption on the premises as well as on a
retail take-out basis.<PAGE>
Liquidity and Capital Resources
The Company's ratio of current assets to current liabilities
was 1.45:1 at January 29, 1995 compared to 1.11:1 at January 30,
1994. Working capital was $1,195,200 at January 29, 1995, $908,700
more than at January 30, 1994. Net cash flows from financing
activities were $956,000 resulting from net bank borrowings while
investing activities were a negative $1,124,600 resulting from
capital expenditures and the acquisition of a restaurant offset by
proceeds from the sale of another restaurant. Capital expenditures
included outlays of $465,900 for restaurant improvements and
equipment and $501,400 for MCF equipment and plant upgrades. Net
cash from operating activities was $505,800. Material changes in
operating assets included a $749,000 increase in inventories
primarily due to the increased sales volumes at MCF, a $246,000
decrease in other assets due primarily to the use of fiscal 1994
deposits totaling $120,000 to complete capital expenditures in
fiscal 1995 and $136,000 worth of registration costs related to the
September 1993 registration costs which were carried as an asset at
January 30, 1994 pending resolution of the SEC investigation. The
material change in operating liabilities was an increase in
accounts payable and accrued expenses of $253,000 due primarily to
an increase in sales volume in the restaurants in January 1995
versus January 1994 resulting in additional payables and expenses.
In fiscal 1994 net cash flows from financing activities were a
negative $933,400 resulting from net debt repayment, including the
early pay-off of the Cocoa Beach mortgage of $854,700 while
investing activities were $5,700 resulting primarily from proceeds
of the sale of a restaurant and mortgage receivable payments off-
set by capital expenditures. Capital expenditures included
$742,300 for restaurant renovations, improvements and equipment and
$363,100 for MCF equipment. Net cash from operating activities was
$860,100. Material changes in operating assets and liabilities
included an increase in inventories of $245,400 due to the addition
of MCF, and an increase in other assets of $277,800 resulting from
deposits on MCF equipment and prepaid registration costs and an
increase of $540,600 in accounts payable and accrued expenses due
to the addition of MCF.
Subsequent to the year ended January 29, 1995, the Company
drew down an additional $200,000 from its revolving line of credit
leaving available a balance of $575,000. Additionally, the Company
has $350,000 available in a line of credit secured by the Toms
River, New Jersey restaurant.
Management anticipates that funds from operations, the
$2,000,000 line and the $350,000 line will be sufficient to meet
obligations in fiscal 1996 including routine capital expenditures.
During fiscal 1996, management will be negotiating with the
Company's bank to discuss pay-out terms of the revolving line of
credit, the balance of which is due in February 1996. The
expenditures necessary to open the planned MCF restaurant estimated
at approximately $75,000 will be paid with existing cash. There
are no additional major capital expenditures planned.
Inflation
It is not possible for the Company to predict with any
accuracy the effect of inflation upon the results of its operations
in future years. The price of food is extremely volatile and
projections as to its performance in the future vary and are
dependent upon a complex set of factors. The Company is currently
experiencing food cost increases due to higher seafood prices
resulting from fishing quotas in New England.
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors of
Chefs International, Inc.
Point Pleasant, New Jersey
We have audited the accompanying consolidated balance sheet of Chefs
International, Inc. and its subsidiaries as of January 29, 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the two fiscal years in the period ended January 29, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated 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 consolidated financial
position of Chefs International, Inc. and its subsidiaries as of January 29,
1995, and the consolidated results of their operations and their cash flows
for each of the two fiscal years in the period ended January 29, 1995, in
conformity with generally accepted accounting principles.
MORTENSON AND ASSOCIATES, P. C.
Certified Public Accountants.
Cranford, New Jersey
March 22, 1995
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF JANUARY 29, 1995.
Assets:
Current Assets:
Cash and Cash Equivalents $ 1,408,957
Investments 100,000
Accounts Receivable [Net of Allowance of $3,878] 383,138
Miscellaneous Receivables 128,675
Inventories 1,761,273
Prepaid Expenses 93,705
Total Current Assets 3,875,748
Property, Plant and Equipment - At Cost 19,065,295
Less: Accumulated Depreciation 6,111,219
Property, Plant and Equipment - Net 12,954,076
Other Assets:
Investments 606,000
Goodwill - Net 3,528,859
Liquor Licenses - Net 777,031
Due from Employees 12,529
Deposits and Other Assets 49,575
Total Other Assets 4,973,994
Total Assets $21,803,818
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 1,471,349
Accrued Expenses 524,021
Notes and Mortgages Payable to Banks 333,000
Other Liabilities 258,920
Capital Lease Obligations - Current 93,286
Total Current Liabilities 2,680,576
Long-Term Debt:
Notes and Mortgages Payable to Banks 1,500,000
Capital Lease Obligations - Long-Term 275,141
Total Long-Term Debt 1,775,141
Other Liabilities 82,396
Commitments and Contingencies --
Stockholders' Equity:
Capital Stock - Common, $.01 Par Value, Authorized 50,000,000
Shares; Issued and Outstanding 13,459,576 134,595
Additional Paid-in Capital 32,212,586
Accumulated [Deficit] (15,081,476)
Total Stockholders' Equity 17,265,705
Total Liabilities and Stockholders' Equity $21,803,818
See Notes to Consolidated Financial Statements.
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended
January 29, January 30,
1 9 9 5 1 9 9 4
Sales $31,916,257 $ 17,712,293
Cost of Goods Sold 15,920,043 6,485,019
Gross Profit 15,996,214 11,227,274
Operating Expenses [Income]:
Payroll and Related Expenses 4,734,671 4,455,080
Other Operating Expenses 7,819,627 4,074,802
Depreciation and Amortization 1,241,949 1,036,010
Suspended Registration Expenses 270,750 --
General and Administrative Expenses 2,125,045 1,860,207
[Gain] on Sale of Restaurant (76,467) (71,318)
Total Operating Expenses 16,115,575 11,354,781
[Loss] from Operations (119,361) (127,507)
Other Income [Expense]:
Interest Expense (210,586) (144,725)
Interest Income 72,817 95,568
Total Other [Expense] - Net (137,769) (49,157)
[Loss] Before Income Taxes (257,130) (176,664)
Income Tax Expense [Current] -- --
Net [Loss] (257,130) (176,664)
Net [Loss] Per Share $ (.02) $ (.01)
See Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Capital Additional Total
Number Stock Paid-in Accumulated Stockholders'
of Shares Par Value Capital [Deficit] Equity
<S> <C> <C> <C> <C> <C>
Balance - January 31, 1993 12,458,389 $ 124,584 $ 29,072,596 $(14,647,682) $14,549,498
Common Stock Issued in Connection
with Acquisition 1,000,000 10,000 3,139,990 -- 3,149,990
Common Stock Issued - 3:1 Split
Fractional Shares 1,082 10 -- -- 10
Net [Loss] for the Year -- -- -- (176,664) (176,664)
Balance - January 30, 1994 13,459,471 134,594 32,212,586 (14,824,346) $17,522,834
Common Stock Issued - 3:1 Split
Fractional Shares 105 1 -- -- 1
Net [Loss] for the year -- -- -- (257,130) (257,130)
Balance - January 29, 1995 13,459,576 $ 134,595 $ 32,212,586 $(15,081,476) $17,265,705
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended
January 29, January 30,
1 9 9 5 1 9 9 4
<S> <C> <C>
Operating Activities:
Net [Loss] $ (257,130) $ (176,664)
Adjustments to Reconcile Net [Loss] to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 1,241,949 1,036,010
Loss on Asset Disposals 3,225 129,477
Allowance for Doubtful Accounts (29,873) 22,005
[Gain] on Sale of Restaurant (76,467) (71,318)
Change in Assets and Liabilities:
[Increase] Decrease in:
Inventories (748,915) (245,414)
Prepaid Expenses 25,621 (26,477)
Other Assets 246,948 (277,870)
Accounts Receivable (124,790) (81,545)
Miscellaneous Receivable (28,571) 11,349
Increase [Decrease] in:
Accounts Payable 143,238 446,341
Accrued Expenses and Other Liabilities 110,550 94,290
Total Adjustments 762,915 1,036,848
Net Cash - Operating Activities 505,785 860,184
Investing Activities:
Capital Expenditures (955,902) (1,105,389)
Proceeds from Sale of Restaurant 211,273 895,897
Payment Received on Mortgage Receivables -- 104,495
Sale or Redemption of Investments 347,000 297,000
Purchase of Investments (460,000) (146,000)
Loans to Acquired Company Prior to Acquisition -- (100,000)
Purchase of Subsidiary - Cash Acquired -- 59,696
Acquisition of Restaurant (267,008) --
Net Cash - Investing Activities (1,124,637) 5,699
Financing Activities:
Repayment of Debt (1,294,270) (1,178,474)
Proceeds from Debt 2,250,618 245,000
Net Cash - Financing Activities 956,348 (933,474)
Net Increase [Decrease] in Cash and
Cash Equivalents 337,496 (67,591)
Cash and Cash Equivalents - Beginning of Years 1,071,461 139,052
Cash and Cash Equivalents - End of Years $ 1,408,957 $ 1,071,461
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 202,400 $ 139,536
Income Taxes $ -- $ 6,500
</TABLE>
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
As of June 30, 1993, the Company acquired all of the outstanding common
stock of Mister Cookie Face for 1,000,000 shares of its common stock in a
business combination accounted for as a purchase. The purchase price of
$3,150,000 exceeded the fair value of the net assets acquired by $3,056,626,
which was recorded as cost in excess of fair value that is being amortized
over 20 years under the straight-line method.
During the year ending January 30, 1994, the Company acquired $139,052 of
equipment which was financed through capital leases.
See Notes to Consolidated Financial Statements.
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[1] Summary of Significant Accounting Policies
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.
Segment Information - The Company is involved in two businesses, the
restaurant business and the manufacturing and sale of ice cream products.
The Company had nine restaurants in operation at January 29, 1995 and
January 30, 1994. At January 29, 1995 and January 30, 1994, the Company
had one manufacturing plant in operation.
Segment information for the year ended January 29, 1995 is as follows:
Ice Cream
Restaurants Products Total
Sales $ 16,043,702 $ 15,872,555 $ 31,916,257
Operating Income [Loss] 170,468 (289,829) (119,361)
Assets 16,317,017 5,486,801 21,803,818
Depreciation and Amortization 940,435 301,514 1,241,949
Capital Expenditures 420,160 535,742 955,902
Cash and Cash Equivalents - Cash equivalents are comprised of certain highly
liquid investments with a maturity of three months or less when purchased.
The Company has a significant portion of its cash in one bank, which at times
may exceed federally insured limits.
Investments - Investments are separated between current and long-term based
on maturity. These consist solely of certificates of deposit and are stated
at cost, which approximates market value.
Inventories - Inventories consist of food, beverages and supplies for the
restaurant operations and raw materials and finished goods for the ice cream
manufacturing operation. Inventories are stated at the lower of cost
[determined by the first-in, first-out method] or market.
Property, Plant and Equipment and Depreciation - Plant and equipment are
carried at cost less accumulated depreciation. Depreciation is computed over
the estimated useful lives of the assets using the straight-line method. The
costs of maintenance and repairs are expensed as incurred, whereas
significant betterments and renewals are capitalized.
Goodwill - Goodwill represents cost in excess of fair value of property
acquired and is being amortized over estimated useful lives ranging from 20
to 40 years under the straight-line method.
Management of the Company evaluates the periods of goodwill amortization to
determine whether later events and circumstances warrant revised estimates of
useful lives. Management also evaluates whether the carrying value of goodwill
has become impaired. This evaluation is done by comparing the carrying value of
goodwill to the value of projected discounted net cash flow from related
operations. Impairment, if any, is measured by the amount the carrying value of
goodwill exceeds the projected discounted net cash flows.
Liquor Licenses - Liquor licenses are being amortized over 40 years under the
straight-line method.
[2] Inventories
Inventories consist of the following:
Raw Materials $ 539,159
Finished Goods 1,222,114
Total $ 1,761,273
[3] Property, Plant and Equipment
The classification of property, plant and equipment together with their
estimated useful lives is as follows:
January 29, Estimated
1 9 9 5 Useful Life
Land $ 2,335,026 N/A
Buildings and Improvements 12,531,683 20 - 40 Years
Leasehold Improvements 886,210 Term of Lease
Furniture and Equipment 2,699,873 5 - 10 Years
China, Glassware and Utensils 105,830 *
Equipment Held Under Capital Leases 506,673 5 - 10 Years
Total $ 19,065,295
* Carried at original cost for each restaurant. All replacement purchases are
charged to expense as incurred.
Accumulated depreciation for equipment held under capital leases was $76,163 at
January 29, 1995, and the related depreciation expense was $53,126 and $12,990
for fiscal 1995 and 1994, respectively.
In June 1993, the Company sold a former restaurant located in Fort Myers,
Florida for $896,000 resulting in a gain of $71,318. The net cash proceeds were
used to pay off a mortgage on another restaurant owned by the Company.
In September 1994, the Company sold a former restaurant located in Quakerbridge,
New Jersey for $211,273 resulting in a gain of $76,467.
[4] Intangible Assets
Intangible assets consist of:
Liquor
Goodwill Licenses
Cost $ 4,123,453 $ 987,307
Less: Accumulated Amortization 594,594 210,276
Net $ 3,528,859 $ 777,031
Amortization of goodwill is $178,445 and $111,427 for fiscal 1995 and 1994,
respectively. Amortization of liquor licenses is $24,136 and $24,330 for fiscal
1995 and 1994.
[5] Notes and Mortgages Payable
Notes and mortgages payable as of January 29, 1995, are as follows:
Line of Credit, Due February 25, 1996, at prime plus
1-1/8%, collateralized by all corporate assets $ 1,225,000
Note Payable, Due November 25, 1995, at prime plus
1%, collateralized by real estate 233,000
Note Payable, Due February 1, 1996 at prime,
collateralized by real estate 225,000
Note Payable, Due September 30, 1997 at prime plus
1%, collateralized by real estate 150,000
Total 1,833,000
Less: Current Portion 333,000
Total Long-Term Debt $ 1,500,000
Availability under the line of credit at January 29, 1995, was $775,000. The
notes payable are due in periodic installments through the due dates. An
additional $200,000 was borrowed subsequent to year end. The prime rate at
January 29, 1995 was 8.5%.
The Company has an additional line of credit available which permits borrowings
up to a maximum of $350,000 at the bank's base rate of interest plus 1%. The
current line expires in June 1995. At January 29, 1995, there was no
outstanding balance under this line.
Annual maturities of debt as of January 29, 1995, are as follows:
1996 $ 333,000
1997 1,450,000
1998 50,000
1999 --
2000 --
Thereafter --
Total $ 1,833,000
[6] Capital Lease Obligations
The Company leases machinery and equipment under capital leases expiring in
2000. Future minimum payments by the Company under capital leases consist of
the following at January 29, 1995:
Payments Due in Fiscal:
1996 $ 121,834
1997 105,353
1998 91,404
1999 91,404
2000 24,254
Thereafter --
Total Minimum Lease Payments 434,249
Amount Representing Interest 65,822
Present Value of Minimum Lease Payment 368,427
Less: Current Portion 93,286
Capital Lease Obligations - Long-Term $ 275,141
[7] Transactions with Related Parties
Mr. Robert E. Brennan, a principal stockholder of the Company, is the principal
owner of a partnership known as Gourmet Associates, which leases the Vero Beach
Restaurant to the Company. The lease for Vero Beach is on a month-to-month basis
and requires monthly payments of $10,000. Total rent expense for Gourmet
Associates was $120,000 for both fiscal 1995 and 1994.
[8] Operating Leases
The Company leases restaurant, office and storage facilities, and equipment
under operating leases expiring at various times through the year 2000.
Minimum future rental payments under non-cancelable operating leases as of
January 29, 1995, are as follows:
Year ending January
1996 $ 320,452
1997 257,498
1998 232,524
1999 129,117
2000 104,463
Thereafter --
Total Minimum Future Rentals $ 1,044,054
Rent expense was $363,947 and $284,618 for fiscal 1995 and 1994, respectively.
[9] Earnings per Share
Earnings [loss] per share are based on weighted average number of shares
outstanding of 13,459,576 and 13,010,156 for fiscal years 1995 and 1994,
respectively. The effect of options or warrants is anti-dilutive.
[10] Stock Options
In June of 1982, the Company's Board of Directors adopted an incentive stock
option plan for key employees which was subsequently approved by the Company's
stockholders. All incentive options granted under the plan were intended to
qualify as incentive stock options under Section 422A of the Internal Revenue
Code. Under the plan, an aggregate of 166,667 shares of common stock were
reserved for issuance. Options may be exercised over a period of ten years from
the date of grant and expire in 1996 and 1999.
In October of 1994, the stockholders approved the grant of 650,000 options to
four directors to purchase the Company's stock at $1.25 per share. The options
are for five years.
The following is a summary of transactions:
Shares Under Options
1 9 9 5 1 9 9 4
Outstanding, beginning of year 156,334 156,334
Granted or Sold during the year 650,000 --
Cancelled during the year (1,000) --
Exercised during the year -- --
Outstanding, end of year
[Option prices range from $.328 to 1.25] 805,334 156,334
[11] Income Taxes
Effective February 1, 1993, the Company adopted FASB Statement No. 109,
"Accounting for Income Taxes." Under Statement 109, the asset and liability
method is used in accounting for income taxes. Under this method, deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
At January 29, 1995, the Company has a deferral tax asset of approximately
$4,677,694 which was offset by a valuation allowance of the same amount. The
asset resulted from the availability of operating loss carryforwards and tax
credits and temporary differences primarily caused by using different
depreciation methods for financial reporting and income tax purposes of
approximately $280,000.
The Company has available at January 29, 1995, operating loss carryforwards and
unused investment credits expiring as follows:
Year of Unused Operating Unused
Expiration Loss Carryforwards Investment Credits
1997 $ -- $ 80,672
1998 289,544 71,197
1999 1,217,240 23,103
2000 2,341,860 27,682
2001 1,838,179 23,634
2002 1,509,463 --
2003 2,072,345 --
2004 2,942,316 --
2005 472,062 --
2009 118,411 --
2010 285,130 --
Totals $ 13,086,550 $ 226,288
[12] 52-53 Week Year
The Company's year end is the last Sunday in January. The statements of
operations are comprised of a 52-week year for fiscal 1995 and 1994.
[13] New Authoritative Pronouncements
The Financial Accounting Standards Board ["FASB"] has issued Statement of
Financial Accounting Standards ["SFAS"] No. 107, "Disclosure about Fair Value
of Financial Instruments", which the Company will adopt on January 28, 1996.
The FASB has also issued SFAS No. 119, "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments." While SFAS No. 119
primarily creates new disclosure requirements for derivative financial
instruments which the Company does not trade in at this time, the technical
disclosure amendments to SFAS No. 107 created by SFAS No. 119 will be
implemented on January 28, 1996. The Company adopted SFAS No. 109, "Accounting
for Income Taxes," on February 1, 1993. Since that implementation, the
Financial Accounting Standards Board has issued eleven new authorative
accounting pronouncements [SFASs]. These new pronouncements either do not apply
to the Company, will be implemented on the effective date as mentioned
previously, or will be implemented when the Company engages in applicable
transactions, such as making investments in certain debt and equity securities,
at which time the Company will implement SFAS No. 115. None of these applicable
accounting pronouncements is anticipated to have a material impact on the
Company's financial statements.
[14] Acquisition
On July 14, 1993, the Company acquired Mister Cookie Face for 1,000,000 shares
of its common stock as of June 30, 1993, in a business combination accounted for
as a purchase. The purchase price of $3,150,000 exceeded the fair value of the
net assets acquired by $3,056,626, which will be amortized over 20 years under
the straight-line method. The results of operations of Mister Cookie Face, Inc.
are included in the consolidated statements of operations from July 1, 1993
onward.
Pro forma information is as follows:
Years ended
January 30, January 31,
1 9 9 4 1 9 9 3
Sales $18,863,374 $15,877,005
[Loss] Before Extraordinary Item $ (159,443) $ (90,115)
Net [Loss] $ (159,443) $ (18,478)
Earnings [Loss] Per Share $ (.01) $ --
On October 28, 1994, the Company purchased a liquor license and tradename from
a restaurant in New Jersey. The purchase price of $267,008 exceeded the fair
value of the assets acquired by $117,008, which is being amortized over 20 years
under the straight-line method.
[15] Capital Transactions
On June 8, 1993, the Company effected a one-for-three reverse stock split of its
outstanding common stock, .01 par value, without changing the par value of the
common stock. All share data has been adjusted to reflect this change.
[16] Registration Statement and SEC Investigation
In September 1993, the Company filed a registration statement which was
subsequently suspended by the Securities and Exchange Commission pending
completion of an investigation which is still ongoing. The Company incurred
approximately $270,750 in registration costs which were written-off in fiscal
1995.
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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