SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended January 26, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Transition period from_________________to________________
Commission File Number 0-8513
CHEFS INTERNATIONAL, INC.
[Exact name of registrant as specified in its charter]
Delaware 22-2058515
[State or other jurisdiction of [IRS Employer
incorporation or organization] Identification Number]
62 Broadway, P.O. Box 1332
Pt. Pleasant Beach, New Jersey 08742
[Address of principal executive offices] [Zip Code]
Registrant's telephone number, including area code 908-295-0350
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant [1] has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months [or for such shorter period that the registrant was
required to file such reports], and [2] has been subject to such filing
requirements for the past ninety days. YES X NO___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
On March 31, 1997, the aggregate market value of the voting stock of Chefs
International, Inc. (consisting of Common Stock, $.01 par value) held by
non-affiliates of the Issuer was approximately $1,500,000 based upon the last
sale price for such Common Stock on said date in the over-the-counter market as
reported by the National Quotation Bureau, Inc. On such date, there were
4,489,722 shares of Common Stock of the Issuer outstanding.
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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 Mexican theme restaurant operated under the name
"Garcia's," 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 seafood restaurant in November
1978 and opened its Garcia's restaurant in April 1996. The Company had operated
LaCrepe restaurants in various shopping malls in New Jersey, Pennsylvania and
Florida (the first such restaurant opening in November 1975), but closed its
last La Crepe restaurant in December 1995 at its present Garcia's restaurant
site. See "Recent Developments" as to the sale by the Company on February 20,
1997 (as of January 26, 1997) of 95% of the common stock of its Mister Cookie
Face, Inc. subsidiary ("MCF" or Mr. Cookie Face"), a Lakewood, New Jersey
producer of ice cream sandwiches. (As used herein, the term the "Company" may
also at times include Chefs and its various subsidiaries.)
The Company's executive offices are located at 62 Broadway, Point Pleasant
Beach, New Jersey 08742. Its telephone number is (908) 295-0350.
Recent Developments
Reverse Stock Splits
Effective June 8, 1993, the Company completed a one-for-three reverse
stock split of its outstanding Common Stock. Subsequent thereto and effective
November 22, 1996, the Company completed another one-for-three reverse stock
split of its outstanding Common Stock. Unless otherwise indicated, all share and
per share information contained in this report gives effect to the two said
one-for-three reverse stock splits. 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 up to and including June 8, 1993 by nine and for
periods commencing June 9, 1993 and prior to November 23, 1996 by three. No
assurances can be given that the actual price quotations for the Common Stock
during such pre-split periods would have approximated such adjusted prices if
the one-for-three reverse stock splits had been effectuated at such time.
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Termination of SEC Investigation
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 was held up due to the
conduct by the Commission's staff of a private investigation pursuant to a
formal order of investigation (HO-2781) issued by the Commission in October
1993. See Item 3 herein. During the more than two-year period of the private
investigation, the market price for Chefs' common stock materially declined. As
a result, the Company's management determined that the proposed public offering
was no longer viable and on March 28, 1996, the Commission granted the Company's
application to withdraw the Registration Statement.
By letter dated October 16, 1996, the Staff of the Commission notified the
Company that the "...staff inquiry..." in the matter (the private investigation)
"...has been terminated and that, at this time, no enforcement action has been
recommended to the Commission...."
Discontinued Operation
The failure to complete the above described proposed public offering
prevented the Company from adequately funding the growth of MCF's ice cream
operations. As a result, MCF was unable to expand its markets and product lines
as originally planned. Management determined it was advisable to divest Chefs of
the bulk of its 100% ownership of MCF and to terminate its obligation to
continue to fund MCF's operations. On February 20, 1997 (as of January 26,
1997), Chefs sold 95% of the outstanding capital stock of MCF to a Chefs'
director, Frank "Doc" Koenemund.
At the closing, Chefs received a $500,000 payment which amount was paid to
Chefs' lending bank, First Union National Bank (the "Bank") to extinguish Chefs'
outstanding indebtedness under its revolving line of credit with the Bank.
Borrowings under the line had been utilized to fund the operations of MCF. In
addition, at the closing, Chefs received three MCF promissory notes in the
aggregate principal amount of $1,100,000. The first note (Note A) in the
principal amount of $100,000 was payable on or before March 24, 1997 together
with interest at an annual rate of 8 1/4% and was secured by a first lien on all
of MCF's assets. Note A was paid in full prior to its due date.
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The second note (Note B) in the principal amount of
$500,000 is payable in the following principal installments:
Principal Payment Due Date Principal Payment Amount
March 1, 1998, March 1, 1999,
March 1, 2000 $16,667 each
April 1, 1998, April 1, 1999,
April 1, 2000 $16,667 each
May 1, 1998, May 1, 1999, May 1, 2000 $16,667 each
June 1, 1998, June 1, 1999, June 1, 2000 $16,667 each
October 1, 1998, October 1, 1999 $16,667 each
November 1, 1998, November 1, 1999 $16,667 each
July 1, 1998, July 1, 1999 $33,333 each
August 1, 1998, August 1, 1999 $33,333 each
September 1, 1998, September 1, 1999 $33,333 each
July 1, 2000 (Balance) $33,330
together with interest on the unpaid principal balance at the rate of 9 1/4% per
annum payable monthly commencing March 1, 1997. Note B, although secured by a
first lien on all of MCF's assets, is subordinated to any liens granted in the
future by MCF to its senior lending bank or institutional lender but solely with
respect to a maximum aggregate $1,750,000 of indebtedness.
The third note (Note C) in the principal amount of $500,000 is
payable together with interest at an annual rate of 8 1/4% on or before February
20, 2004 but is mandatorily prepayable on a quarterly basis from 30% of MCF's
"cash flow" on a consolidated basis, commencing with the quarter ending April
30, 1997. Note C is also secured by a first lien on all of MCF's assets and is
also subordinated to any liens granted in the future by MCF to its senior
lending bank or institutional lender but solely with respect to a maximum
$1,750,000 of indebtedness.
Notes B and C are also required to be prepaid in full upon
consummation of a public offering of MCF's securities or of a private sale or
sales of MCF's securities for gross proceeds aggregating at least $100,000
(excluding loans from MCF's senior bank or institutional lender). As part of the
transaction, Chefs cancelled all prior indebtedness owed to it by MCF prior to
the closing (excluding the indebtedness paid or agreed to be paid by MCF to
Chefs or for its account pursuant to the Stock Purchase/Sale Agreement between
the parties).
MCF also agreed to pay Chefs certain monthly amounts equal to the
monthly rental payments being paid by Chefs to the Bank under two Master Lease
Finance Schedules with respect to ice cream manufacturing and packaging
equipment installed at MCF's Lakewood, New Jersey plant. The payments are as
follows:
Schedule #1 - $6,214 monthly commencing February 24, 1997 through
March 24, 1999 with a final payment of $6,215 on April 30, 1999.
Schedule #2 - $1,403 monthly commencing February 15, 1997 through
April 15, 1999 with a final payment of $1,404 on May 30, 1999.
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MCF had been acquired by Chefs in July 1993 (as of June 30, 1993)
from Mr. Koenemund. In the last three fiscal years (1995, 1996, 1997), MCF's
sales had declined from approximately $15,873,000 to $14,711,000 to $11,261,000.
Chefs had advanced substantial sums to fund MCF's operations and at the closing,
was indebted to the Bank under a revolving line of credit, all of the proceeds
of which had been advanced to or on behalf of MCF, in the approximate amount of
$500,000.
In view of the substantial advances made to MCF, the fact that MCF's
operating loss in fiscal 1997 was approximately $600,000, the decline in MCF's
sales and other factors, Chefs' management concluded that it was in Chefs' best
interest to sell MCF. Chefs' management examined a number of alternatives and
the Board of Directors (with Mr. Koenemund abstaining) concluded that the
transaction proposed by Mr. Koenemund afforded Chefs with the best chance to
recoup all or a significant portion of its substantial investment in MCF. The
board noted that Chefs also was retaining a 5% equity interest in MCF, protected
by a pre-emptive right until all of the Notes were paid. See Note 16 of Notes to
the Consolidated Financial Statements.
Bank Loans
On January 19, 1996, the Company's $2,000,000 line of credit arrangement
was replaced with a Term Loan and Revolving Credit Agreement (the "Loan
Agreement") with First Fidelity Bank, N.A., subsequently acquired by First Union
National Bank (the "Bank"). Pursuant to the Loan Agreement, the Bank advanced a
$625,000 term loan ("Term Loan A") and a $1,000,000 term loan ("Term Loan B") to
the Company, and also agreed to extend a $1,000,000 revolving line of credit to
the Company expiring on May 31, 1997.
Term Loan A represented a consolidation of approximately $175,000 of
outstanding Company indebtedness under a loan previously incurred for renovation
of its Toms River restaurant, approximately $100,000 of outstanding Company
indebtedness under a loan previously incurred for renovation of its Belmar, New
Jersey restaurant, and a new borrowing of $350,000 used by the Company for
construction of its new Garcia's restaurant at the Monmouth Mall in Eatontown,
New Jersey which opened on April 29, 1996. Term Loan A is evidenced by a
$625,000 promissory note repayable in principal installments of $34,000 on June
15, July 15 and August 15 of the years 1996 through 1998 and in principal
installments of $17,750 on March 15, April 15, May 15, September 15, October 15
and November 15 of each such year (except that the final principal payment on
November 15, 1998 is only $17,250). Approximately $416,500 in principal
indebtedness was outstanding under Term Loan A at January 26, 1997.
Term Loan B, evidenced by a $1,000,000 promissory note, represents a shift
of $1,000,000 of outstanding indebtedness under the old line of credit to this
term loan. Term Loan B is repayable in principal installments of $16,667 on
March 15, April 15, May 15, September 15, October 15 and November 15 of the
years 1996 through 2000 and in principal installments of $33,333 on June 15,
July 15 and August 15 of each such year. Approximately $800,000 in
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principal indebtedness was outstanding under Term Loan B at January 26, 1997.
With each repayment of principal under Term Loan A and Term Loan B, the
Company is required to pay interest on the outstanding principal balance
computed at an annual rate equal to 7.51%. Advances under the line of credit
bear interest at LIBOR plus 200 basis points.
Repayment of the two term loans and of borrowings under the line of credit
is guaranteed by each of the Company's subsidiaries and is secured by mortgages
on the Company's two Point Pleasant Beach, New Jersey restaurants and its Toms
River, New Jersey
restaurant.
Pursuant to the Loan Agreement, the Company made certain affirmative and
negative covenants to the Bank (including covenants not to pay dividends, effect
stock redemptions or incur certain additional indebtedness while the loan is
outstanding, and 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 $12,900,000 increasing by $100,000 at
each subsequent fiscal year-end commencing with fiscal 1997; 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 1.25:1; and cash and
cash equivalents of not less than $750,000). A failure by the Company to satisfy
any such covenant would constitute an event of default under the Loan Agreement
enabling the Bank to accelerate payment of all outstanding indebtedness.
At the end of fiscal 1997, the Company was not in compliance with certain
of its covenants under the Loan Agreement by failing to maintain the requisite
Consolidated Working Capital, Consolidated Current Ratio, Consolidated Tangible
Net Worth and Debt Service Coverage Ratio. However, the Company requested and
the Bank granted a waiver of its right to declare a default based on the
Company's failure to comply with these covenants at January 26, 1997.
At the start of fiscal 1997, the Company was indebted to the Bank under
its revolving credit line for approximately $125,000. In the first quarter of
fiscal 1997, the Company borrowed an additional approximately $375,000 under the
line which was used to fund MCF's operations. The indebtedness under this line
was retired in February 1997 by applying the $500,000 downpayment received by
the Company in connection with its sale of 95% of MCF.
During fiscal 1997, the Company borrowed $100,000 under a maximum $350,000
line of credit extended by the Bank and expiring on June 30, 1997. The line was
secured by the Company's Toms River restaurant property. The borrowings were
applied by the Company to purchase inventory. This indebtedness was retired in
March 1997 with the proceeds of Note A received by the Company in connection
with its sale of 95% of MCF.
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In December 1995, the Company closed its last "La Crepe" restaurant at the
Monmouth Mall in Eatontown, New Jersey. The Company then commenced construction
of a "Garcia's" restaurant at the site which opened on April 29, 1996. Costs of
the construction aggregated approximately $720,000 of which $350,000 was
furnished out of the proceeds of Term Loan A described above. See "Restaurant
Operations - Garcia's Restaurant" in this Item 1.
(b) Business of Issuer - The Company is engaged in one business; the
operation of nine restaurants in New Jersey and Florida on a year-round basis.
RESTAURANT OPERATIONS
The Company is principally engaged in the operation of nine restaurants on
a year-round basis, eight of which are free-standing seafood restaurants in New
Jersey (five) and Florida (three) and one of which is a Mexican theme restaurant
operated under the name "Garcia's," 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 seafood
restaurant in November 1978 and opened its sole Garcia's restaurant in April
1996. The Company had operated La Crepe restaurants in various shopping malls in
New Jersey, Pennsylvania and Florida (the first such restaurant opening in
November 1975), but closed its last La Crepe restaurant in December 1995 at its
present Garcia's restaurant site. 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
GARCIA'S RESTAURANT
Monmouth Mall, Eatontown,
New Jersey April 1996
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Seafood Restaurants
The Company's seafood restaurants provide a variety of seafood dishes
including shellfish such as lobster, scallops, shrimp, oysters and clams, and
other fish including red snapper, bluefish, grouper and other varieties. A
limited selection of non-seafood entrees is also offered including steak and
chicken as well as a dessert selection. Most of the Company's seafood
restaurants have a nautical decor.
Lobster Shanty Restaurants
Vero Beach, Florida - This restaurant, consisting of approximately 6,900
square feet, is free standing in Vero Beach, Florida 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 at least as favorable as those which
could have been obtained from unaffiliated sources. In view of the fact that Mr.
Brennan has filed a voluntary petition for relief in the United States
Bankruptcy Court for the District of New Jersey under Chapter 11 of the
Bankruptcy Code (which proceedings are currently pending), no assurances can be
given that the Company will be able to continue to lease this restaurant on the
current basis or on a modified basis for any substantial future period.
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.
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
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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 - 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 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.
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-
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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 January 1997, the Company gave the Landlord its notice to
terminate this lease effective February 28, 1999 because of unsatisfactory
operating results at this restaurant.
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.
Garcia's Restaurant
In November 1995, the Company entered into an agreement (the "Agreement")
with Garcimex of New Jersey, Inc. ("Garcimex"), the exclusive owner of the
"Garcia's" trade mark, service mark and trade name along with the goodwill and
recipes of a Mexican restaurant business associated with the marks. Pursuant to
the Agreement, the Company was granted the exclusive right to establish and open
Mexican restaurants using the marks, goodwill and recipes in six New Jersey
counties, Hunterdon, Mercer, Middlesex, Monmouth, Ocean and Somerset (the
"Territory"). The Company was granted the right but not the obligation to open a
restaurant utilizing the marks and goodwill in each of the first five 12-month
periods, in the Territory, with a six-month grace period with respect to each
such 12-month period. If the Company does not open a Garcia's restaurant in each
of the first five 12-month periods (including the grace period) it will lose the
right to develop additional restaurants within the Territory. Regardless of
whether the Company opens one Garcia's restaurant in each such period, it will
have and retain the exclusive right to utilize the marks, goodwill and recipes
at all Garcia's restaurants opened by the Company pursuant to the Agreement and
Garcimex has agreed not to open another Mexican restaurant within an 18-mile
radius of any Company operated Garcia's restaurant.
Assuming the Company opens the requisite number of Garcia's restaurants in
the initial five-year period in the Territory, it has the right to open an
unspecified number of additional Garcia's restaurants in the Territory in the
subsequent five-year period. Such right automatically renews every five years as
long as the Company is in compliance with the Agreement.
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The Agreement is for an initial term of 20 years with additional automatic
ten-year renewal periods unless the Company elects not to renew the Agreement.
During the period that the Agreement is in effect, the Company is required to
pay 3% of the gross annual sales from each Garcia's restaurant which it operates
in the Territory, to Garcimex on a quarterly basis. The Company has also been
accorded a right of first refusal with respect to offers received by Garcimex
from third parties seeking to obtain rights in the marks, goodwill and recipes
for restaurants to be opened outside of the Territory. Furthermore, the
Agreement also provides the Company with certain rights to open Mexican
restaurants in New Jersey outside the Territory. To date, the Company has opened
one Garcia's restaurant which opened at the Monmouth Mall on April 29, 1996.
Monmouth Mall, Eatontown, Monmouth County, New Jersey - The Company's
Garcia's restaurant at the Monmouth Mall consists of 4,371 square feet of leased
space and is decorated in a bright, multi-color Mexican motif. The restaurant
has a bar and tables and booths which can accommodate approximately 130 patrons.
The Company has a liquor license permitting the consumption of wine and
alcoholic beverages on the premises. The restaurant is open for lunch and dinner
seven days per week.
The restaurant features Mexican cuisine including fajitas, tortillas,
burritos and enchiladas with cheese, beef, chicken, pork and seafood fillings.
The menu also includes appetizers, soups and salads and a limited number of
American style offerings such as steaks and burgers. Alcoholic offerings such as
margaritas and tequilas complement fruit drinks and other soft drinks.
The Company's lease for this restaurant is for a 12-year term providing
for a minimum annual rental of $109,275 during each of the first five years and
a minimum annual rental of $118,017 per annum thereafter. The Company was
granted a $24,000 per year Construction Allowance for the five-year period
commencing January 1, 1997 to be applied on a monthly basis in reduction of the
said minimum annual rental. The Company is also required to pay additional rent
equal to 5% of the restaurant's annual gross revenues in excess of $2,185,000 in
each of the first five years and in excess of $2,360,340 in each subsequent
year. The Company is also required to pay a proportionate share of the Mall's
real estate taxes, utility charges and the Landlord's operating costs as well as
certain other charges.
The restaurant is on the site of the Company's La Crepe restaurant which
closed in December 1995. The Company has spent approximately $720,000 to
construct its Garcia's restaurant on this site.
The Monmouth Mall has been in operation for approximately 20 years.
Macy's, J.C. Penny and Stern's are major department stores in the Mall. The Mall
is a large shopping center with 1,500,000 square feet of shopping area on 105
acres with parking for 7,200 cars.
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Sources of Food Products
The food products used by the Company in the operation of its seafood
restaurants and its Garcia's restaurant are readily available from a variety of
sources including national distributors and local sources on an order basis when
needed. 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. As the Company has only operated its Garcia's restaurant for
approximately one year, it is unable to predict at this time the extent to which
its business will be subject to seasonality.
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 the
rights purchased from Garcimex as described above to use of the trade mark,
service mark and trade name "Garcia's."
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. There are other restaurants in the mall and
in the vicinity of the mall where the Company is now operating a Garcia's
restaurant, all of which supply competition to the Company's Garcia's unit.
Although there are no Mexican style restaurants in the mall, there are other
Mexican style restaurants in the area. Typical "chain" competitors, all of which
are affiliated with better established and more prominent national chains, are
the Friendly Ice Cream chain and McDonalds. 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
11
<PAGE>
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 10 Directors and Executive
Officers of the Registrant,") secretarial and bookkeeping personnel. Each of the
Company's seafood restaurant units employs a general manager, two assistant
managers and between 40 and 130 other employees to serve as waitresses, waiters,
busboys, bartenders, cooks, dishwashers, kitchen help, hostesses and cashiers
(some on a part-time basis). The Company's Garcia's restaurant when fully
staffed, will employ approximately 80 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 26, 1997,
the Company had a total of approximately 450 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
In August 1993, the Company filed a Registration Statement on Form SB-2
(File No. 33-66936) with respect to a proposed public offering of its
securities. In October 1993, the Securities and Exchange Commission (the
"Commission") issued a formal order of private investigation concerning the
Company (HO-2781). The order alleged that members of the staff had reported
information to the Commission which tended to show that certain persons,
including persons associated with Chefs, and persons associated with broker
dealer firms who make a market in Chefs' securities, may have, in connection
with the offer, purchase, or sale of Chefs' securities, employed devices,
schemes or artifices to defraud; obtained money or property by means of untrue
statements of material facts or omissions to state material facts; or may have
engaged in transactions, practices or courses of business which operated or
would operate as a fraud upon other persons, including purchasers or sellers of
Chefs' securities, in that, among other things, such persons may have engaged in
a scheme to dominate, control and manipulate the market for Chefs' securities,
and that Chefs'
12
<PAGE>
Registration Statement (filed in August 1993) may have included untrue
statements of material facts or omitted to state material facts necessary in
order to make the statements therein not misleading, concerning among other
things, recent activity in the market for Chefs' securities, the market price
for Chefs' securities, or the possible existence of a scheme to dominate,
control and manipulate the market for Chefs' securities.
The Commission deemed that if the alleged acts and practices were true,
they would constitute possible violations of the Securities Act of 1933 and the
Securities Exchange Act of 1934 and be the possible basis for the issuance of a
stop order pursuant to the Securities Act of 1933 suspending the effectiveness
of the Registration Statement and therefore issued a formal order of private
investigation with respect to these allegations.
Chefs' management was unaware of any violations of law concerning activity
in the market for Chefs' securities, the market price for Chefs' securities or
the existence of a scheme to dominate, control or manipulate the market for
Chefs' securities. During the more than two-year period of the Commission's
private investigation, the market price for Chefs' common stock materially
declined. As a result, the Company's management determined that the proposed
public offering was no longer viable and on March 28, 1996, the Commission
granted the Company's application to withdraw the Registration Statement thereby
removing any possibility of the Commission issuing a stop order suspending the
effectiveness of the Registration Statement.
By letter dated October 31, 1996, the Staff of the Commission notified the
Company that the "...staff inquiry..." in the matter (the private investigation)
"...has been terminated and that, at this time, no enforcement action has been
recommended to the Commission...."
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on
Thursday, November 7, 1996. At the meeting, the following five
individuals, namely
Anthony Papalia
James Fletcher
Martin Fletcher
Frank Koenemund
Jack Mariucci
were each elected to serve as directors of the Company until the next annual
meeting of stockholders and until their successors are elected and qualify. At
said meeting, 10,262,546 shares of Common Stock were voted in favor and 242,684
shares of Common Stock were votes against a proposed amendment to the Company's
Certificate of Incorporation (a) to reduce the number of authorized shares of
Common Stock from 50,000,000 shares of Common Stock, $.01 par value per share to
15,000,000 shares of Common Stock, $.01 par value per share, and (b) to effect a
one-for-three reverse stock split of the outstanding shares of Common Stock.
Therefore, the proposal was duly adopted in accordance with the Delaware
Corporation Law and the reverse stock split was effective on November 22, 1996.
13
<PAGE>
CHEFS INTERNATIONAL, INC.
PART II
Item 5. Market for the Registrant's Common Stock
and Related Security Holder Matters
The Common Stock is quoted in the over-the-counter market on the NASDAQ
Small Cap System under the symbol "CHEF." The following table sets forth the
range of high and low closing bid prices for the Common Stock for the periods
indicated, as derived from reports furnished by the National Quotation Bureau,
Inc.
Quarter Bid Prices
Ended High Low
April 28, 1995 $2.82 $1.32
July 28, 1995 $2.64 $1.14
October 27, 1995 $1.98 $1.14
January 28, 1996 $1.14 $ .75
April 28, 1996 $1.02 $ .84
July 28, 1996 $1.98 $ .94
October 27, 1996 $1.98 $ .84
January 26, 1997 $ .94 $ .50
The above quotations represent prices between dealers and do not include
retail mark-ups, mark-downs or commissions. They do not necessarily represent
actual transactions.
At March 31, 1997, the number of record holders of the Common Stock was
7,409. Such number of record owners was determined from the Company's
shareholder records and does not include beneficial owners whose shares are held
in nominee accounts with brokers, dealers, banks and clearing agencies.
Pursuant to the Company's Term Loan and Revolving Credit Agreement with
First Union National Bank entered into on January 19, 1996, the Company is
restricted during the period any loans are outstanding under such agreement from
paying dividends on any of its outstanding stock.
14
<PAGE>
Item 6. Selected Consolidated Financial Data
[In thousands, except per share data]
Y e a r s e n d e d
<TABLE>
January 26,January 28,January 29,January 30, January 31,
1 9 9 7 1 9 9 6 1 9 9 5 1 9 9 4 1 9 9 3
Operating Data:
<S> <C> <C> <C> <C> <C>
Gross Revenues $ 17,299 $ 16,571 $ 16,044 $ 15,318 $ 15,255
Operating Expenses $ 11,
[Loss] Income from
Continuing Operations $ (175) $ (336) $ 184 $ 182 $ 252
[Loss] from Discontinued
Operations $ (1,165) $ (1,848) $ (441) $ (359) $ --
[Loss] on Disposal of
Discontinued Operations $ (573) $ -- $ -- $ -- $ --
Net [Loss] Income $ (1,913) $ (2,184) $ (257) $ (177) $ 252
[Loss] Income Per Share
from Continuing Operations $ (.04) $ (.07) $ .04 $ .04 $ .06
Net [Loss] Income Per
Common Share $ (.43) $ (.49) $ (.06) $ (.03) $ .06
Cash Dividends Per
Common Share $ -- $ -- $ -- $ -- $ --
Balance Sheet Data:
Cash and Cash Equivalents $ 952 $ 1,379 $ 1,267 $ 1,043 $ 1,139
Total Assets * $ 16,945 $ 18,508 $ 20,945 $19,863 $17,774
Total Long-Term Liabilities$ 1,000 $ 1,613 $ 1,844 $ 540 $ 1,603
Total Liabilities $ 3,774 $ 3,424 $ 3,678 $ 2,340 $ 3,225
Working Capital $ 178 $ 957 $ 495 $ 375 $ 489
Stockholders' Equity $ 13,171 $ 15,084 $ 17,266 $17,523 $14,549
</TABLE>
* At fiscal year end 1997, 1996, 1995, 1994 and 1993, includes $557, $1,221,
$3,529, $3,590, and $645 of goodwill.
15
<PAGE>
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
On February 20, 1997 (as of January 26, 1997) Chefs sold 95% of the
outstanding stock of its wholly-owned Mister Cookie Face, Inc. ("MCF")
subsidiary to a Chefs' director, Frank "Doc" Koenemund. MCF had been acquired by
Chefs in July 1993 (as of June 30, 1993) from Mr. Koenemund. In view of
declining sales in the last three fiscal years and the fact that MCF had
realized losses since the July 1993 purchase, management concluded that it was
in Chefs' best interest to sell MCF. At the closing, Chefs received $500,000 in
cash and notes in the aggregate principal amount of $1,100,000 which were
discounted to $498,950 based on the estimated present value of the payments.
Additionally, MCF agreed to reimburse Chefs on a monthly basis for amounts due
on two capital leases secured by equipment at MCF which Chefs will continue to
pay. As a result of the sale, the Company recorded a loss of $572,900.
In fiscal 1997, the Company sustained a loss of $1,912,800 compared to
losses of $2,184,100 in 1996 and $257,100 in 1995. The fiscal 1997 loss includes
a loss from the discontinued MCF operations of $1,165,100 and the loss on the
MCF sale of $572,900. The 1996 and 1995 losses included losses from MCF
operations of $1,847,800 and $441,400 respectively. Effective for fiscal 1996,
the Company adopted the Statement of Financial Account Standards No. 121 (FASB
121), "Accounting for Impairment of Long-Lived Assets and Long-Lived Assets To
Be Disposed Of." The MCF operational losses for 1997 and 1996 included
impairment losses of $565,900 and $2,024,700 respectively from writing down
goodwill. The Company's fiscal 1996 loss from continuing operations included an
impairment loss of $171,000 in connection with restaurant operations. The fiscal
1995 loss included registration costs of $270,700 associated with an aborted
public offering.
The Company's continuing restaurant operations realized a net loss of
$174,700 for fiscal 1997 compared to a loss of $336,300 for fiscal 1996 and net
income of $184,200 in fiscal 1995. Sales for fiscal 1997 were $17,298,600, an
increase of $727,300 over 1996 sales of $16,571,400. While gross sales increased
by 4.4%, the number of customers served increased by 3.5% indicating an increase
of approximately 1% in the average check per customer. The Company operated nine
restaurants during the comparable periods. However, fiscal 1997 sales include
"Garcia's," the Company's Mexican restaurant, which opened in May 1996, while
fiscal 1996 sales included the Eatontown, New Jersey LaCrepe, which was closed
in December of 1995. Garcia's had sales of $969,000 in fiscal 1997 while LaCrepe
had sales of $469,100 in fiscal 1996, a net increase in sales of $499,900
representing a majority of the Company's 1997 sales increase. For the eight
restaurants that operated during the comparative periods, sales were $227,400
higher. 1996 sales were $527,700 or 3.3% higher than 1995 sales.
Gross profit for fiscal 1997 was 67.3% of sales, a slight improvement over
the gross profits of 66.7% and 67% for 1996 and 1995
respectively. The improvement primarily resulted from the addition of
Garcia's which has a lower cost of sales than the seafood restaurants.
Payroll and related expenses were 30.3% of sales for fiscal 1997 versus
30.40% in 1996 and 29.5% in 1995. Salary increases and higher
16
<PAGE>
health and workers compensation insurance costs were offset by the increase in
sales. The federal minimum wage increased to $4.75 an hour on October 2, 1996,
and will increase to $5.15 in September 1997. Management anticipates that these
increases should have a minimal impact on the Company's payroll costs because
the bulk of the Company's minimum wage earners work in New Jersey where the
state minimum wage per hour is $5.05 (increasing to $5.15 when the federal rate
goes up in September 1997) and because the new federal law freezes the cash
wages of tipped employees (as long as their tips and cash wages together equal
or exceed the minimum).
Other operating expenses were 22.6% of sales during fiscal 1997 compared
to 21.7% and 21.1% for the two previous years. The main components of the 1997
increase were $113,000 of start-up costs associated with the opening of Garcia's
and higher chain wide utility and occupancy costs. Depreciation and amortization
expenses were slightly lower in fiscal 1997 despite capital expenditures of
$1,144,000, $718,000 of which was spent building and outfitting Garcia's. The
decrease resulted primarily from the fiscal 1996 write-down of $171,000 of
long-lived assets due to the adoption of FASB 121. General and administrative
expenses were $138,300 higher in fiscal 1997 versus 1996 primarily due to
increased salaries and payroll taxes of $87,300, higher insurance costs of
$22,200 and $50,000 in expenses associated with the Company's November 1996
reverse stock split. General and administrative expenses for 1996 were higher
versus 1995 primarily because of higher health insurance costs and wage
increases.
The fiscal 1996 loss of $54,300 from the closing of restaurants resulted
from the December 1995 closing of the Eatontown, New Jersey LaCrepe restaurant.
The restaurant was renovated and re-opened as Garcia's during fiscal 1997. The
1995 gain of $76,400 on the sale of restaurants resulted from the Company's
Quakerbridge, New Jersey LaCrepe liquor license and the early termination of the
lease.
Interest expense was slightly higher in fiscal 1997 due to the interest
associated with a three-year bank loan of $350,000 borrowed in January of 1996
to partially finance the Garcia's renovation. Interest expense was $13,100 lower
in 1996 than in 1995 due to debt reduction. Interest income was slightly less in
1997 due to lower rates and less funds available for short-term investments.
Liquidity and Capital Resources
The Company's ratio of current assets to current liabilities was 1.06:1 at
January 26, 1997, compared to 1.53:1 and 1.27:1 for the two previous years.
Working capital was $177,800 at the end of fiscal 1997 compared to $957,200 and
$494,700 for the two previous years. Net cash provided by operating activities
was $1,062,100. The primary asset change was an increase in inventories of
$93,200 reflecting increased sales in January 1997 which continued into the
first quarter of the new fiscal year. Due to the sales increase, the primary
change in liabilities was a $343,400 increase in accounts payable. Net cash
flows from investing activities were a negative $1,341,600 resulting primarily
from capital expenditures of $1,144,200 for restaurant improvements and
equipment of which $718,000 was spent to build Garcia's. Net cash flows from
financing activities during fiscal 1997 were a negative $181,600 resulting from
new debt offset by debt repayment. The $100,000 in debt proceeds which the
Company borrowed for inventory purposes was a draw on its $350,000 line of
credit secured by the Toms River, New Jersey restaurant. In fiscal 1996, net
cash flows from operations was a
17
<PAGE>
positive $479,400. The significant change in operating assets and liabilities
was a decrease in accounts payable of $79,200 due to the poor winter weather
which resulted in lower sales. Cash outflows from investing activities in fiscal
1996 were $530,400 for capital expenditures while financing activities resulted
in an increase of $150,400. 1996 financing activities included debt proceeds of
$1,125,000 offset by debt repayment of $976,800. Borrowings included $350,000
used to finance a portion of the Garcia's renovation. In January 1996, the
Company and its primary bank agreed to restructure its $2,000,000 revolving line
of credit into two parts, a $1,000,000 five-year term loan at 7.5% and a
$1,000,000 line of credit at LIBOR +2% due in May 1997. During fiscal 1995,
operations generated $1,282,400 in cash. The changes in assets and liabilities
included increases of $173,600 in inventories and $263,900 in accounts payable
and accrued expenses. Net cash flows from investing activities were a negative
$588,200 comprised of $419,500 in restaurant capital expenditures and $267,000
spent on purchasing the Belmar, New Jersey restaurant offset by the sale of the
Quakerbridge LaCrepe restaurant assets for $211,300. Financing activities in
fiscal 1995 netted a cash outflow of $234,600.
At the end of fiscal 1997, the Company was not in compliance with certain
of its covenants under its Loan Agreement with First Union National Bank by
failing to maintain the requisite Consolidated Working Capital, Consolidated
Current Ratio, Consolidated Tangible Net Worth and Debt Service Coverage Ratio.
However, the Company requested and the Bank granted a waiver of its right to
declare a default under the Loan Agreement based on the Company's failure to
comply with these covenants at January 26, 1997.
Subsequent to the year end January 26, 1997, the Company sold 95% of the
stock of MCF. At the closing Chefs received $500,000 which was used to pay off
Chefs' outstanding indebtedness under its revolving line of credit with the
bank. On March 21, 1997, Chefs received $100,000 from MCF as per the terms of
the sale, which was used to pay off the outstanding balance due on the $350,000
line of credit. Consequently, the Company has the entire $350,000 available for
future borrowing needs.
Management anticipates that funds from operations and the $350,000 line
will be sufficient to meet obligations in fiscal 1998, including 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. 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 federal minimum wage
will increase to $5.15 per hour in September 1997.
18
<PAGE>
Item 8. Financial Statements and Supplementary Data
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 sheets of
Chefs International, Inc. and its subsidiaries as of January 26, 1997 and
January 28, 1996, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three fiscal years in the
period ended January 26, 1997. 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 26,
1997 and January 28, 1996, and the consolidated results of their operations and
their cash flows for each of the three fiscal years in the period ended January
26, 1997, in conformity with generally accepted accounting principles.
As discussed in the accompanying notes to the financial statements,
for the year ended January 28, 1996, the Company adopted a new accounting
standard promulgated by the Financial Accounting Standards Board, changing its
method of accounting for impairment of long-lived assets and goodwill relating
to those assets.
MOORE STEPHENS, P.C.
Certified Public Accountants.
Cranford, New Jersey
March 21, 1997
19
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
January 26, January 28,
1 9 9 7 1 9 9 6
Assets:
Current Assets:
Cash and Cash Equivalents $ 951,668 $ 1,378,814
Investments 160,000 350,000
Miscellaneous Receivables 147,101 102,714
Due on Sale of Discontinued Operations - Current 679,154 --
Inventories 925,463 832,243
Prepaid Expenses 88,509 105,054
Net Assets of Discontinued Operations -- 2,001,693
---------- -----------
Total Current Assets 2,951,895 4,770,518
---------- -----------
Property, Plant and Equipment - At Cost 18,200,415 17,382,920
Less: Accumulated Depreciation 6,676,718 6,068,502
---------- -----------
Property, Plant and Equipment - Net 11,523,697 11,314,418
---------- -----------
Other Assets:
Investments 631,000 356,000
Goodwill - Net 557,364 1,221,448
Liquor Licenses - Net 727,663 752,347
Due on Sale of Discontinued Operations - Long-Term 508,593 --
Due from Related Parties 6,524 11,782
Other 38,333 81,599
---------- -----------
Total Other Assets 2,469,477 2,423,176
---------- -----------
Total Assets $16,945,069 $18,508,112
=========== ===========
See Notes to Consolidated Financial Statements.
20
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
January 26, January 28,
1 9 9 7 1 9 9 6
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 967,245 $ 623,820
Accrued Payroll 134,954 144,487
Accrued Expenses 337,897 333,089
Notes and Mortgages Payable to Banks 1,008,500 408,500
Capital Lease Obligations - Current 79,154 73,084
Other Liabilities 246,304 228,695
---------- -----------
Total Current Liabilities 2,774,054 1,811,675
---------- -----------
Long-Term Debt:
Notes and Mortgages Payable to Banks 807,999 1,341,500
Capital Lease Obligations - Long-Term 109,643 188,797
---------- -----------
Total Long-Term Debt 917,642 1,530,297
---------- -----------
Other Liabilities 82,396 82,396
---------- -----------
Commitments and Contingencies -- --
---------- -----------
Stockholders' Equity:
Capital Stock - Common, $.01 Par Value, Authorized
15,000,000 Shares; Issued and Outstanding 4,488,291 44,883 44,883
Additional Paid-in Capital 32,304,486 32,304,486
Accumulated [Deficit] (19,178,392) (17,265,625)
----------- -----------
Total Stockholders' Equity 13,170,977 15,083,744
---------- -----------
Total Liabilities and Stockholders' Equity $16,945,069 $18,508,112
=========== ===========
See Notes to Consolidated Financial Statements.
21
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------
For the years ended
January 26, January 28, January 29,
1 9 9 7 1 9 9 6 1 9 9 5
Sales $17,298,626 $16,571,357 $16,043,702
Cost of Goods Sold 5,656,124 5,511,095 5,288,679
----------- ---------- -----------
Gross Profit 11,642,502 11,060,262 10,755,023
----------- ---------- -----------
Operating Expenses:
Payroll and Related Expenses 5,238,257 5,037,515 4,734,671
Other Operating Expenses 3,910,968 3,593,820 3,382,870
Depreciation and Amortization 974,758 990,867 940,435
Suspended Registration Expenses -- -- 270,750
General and Administrative Expenses 1,733,963 1,595,644 1,332,296
Loss [Gain] on Closing and Sale
of Restaurants -- 54,355 (76,467)
Impairment Loss of Long-Lived Assets -- 170,867 --
----------- ---------- -----------
Total Operating Expenses 11,857,946 11,443,068 10,584,555
----------- ---------- -----------
[Loss] Income from Operations (215,444) (382,806) 170,468
----------- ---------- -----------
Other Income [Expense]:
Interest Expense (47,713) (45,892) (59,045)
Interest Income 88,408 92,373 72,817
----------- ---------- -----------
Other Income - Net 40,695 46,481 13,772
----------- ---------- -----------
[Loss] Income from Continuing Operations
Before Income Taxes (174,749) (336,325) 184,240
Provision for Income Taxes -- -- --
----------- ---------- -----------
[Loss] Income from Continuing Operations (174,749) (336,325) 184,240
[Loss] from Operations of Discontinued
Ice Cream Business (1,165,135) (1,847,824) (441,370)
[Loss] on Disposal of Ice Cream Business (572,883) -- --
----------- ---------- -----------
Net [Loss] $(1,912,767) $(2,184,149) $ (257,130)
=========== =========== ===========
[Loss] Income Per Share from Continuing
Operations $ (.04) $ (.07) $ .04
=========== ========== ===========
Net [Loss] Per Share $ (.43) $ (.49) $ (.06)
=========== ========== ===========
See Notes to Consolidated Financial Statements.
22
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------
<TABLE>
Capital Additional Total
Number Stock Paid-in Accumulated Stockholders'
of Shares Par Value Capital [Deficit] Equity
<S> <C> <C> <C> <C> <C>
Balance - January 30, 1994 4,486,034 $ 44,861 $32,302,319 $(14,824,346) $17,522,834
Common Stock Issued - 1:3
Split Fractional Shares 35 -- 1 -- 1
Income from Continuing
Operations -- -- -- 184,240 184,240
[Loss] from Discontinued
Operations -- -- -- (441,370) (441,370)
---------- --------- ---------- ---------- ----------
Balance - January 29, 1995 4,486,069 44,861 32,302,320 (15,081,476) 17,265,705
Common Stock Options
Exercised 2,222 22 2,166 -- 2,188
[Loss] from Continuing
Operations -- -- -- (336,325) (336,325)
[Loss] from Discontinued
Operations -- -- -- (1,847,824) (1,847,824)
---------- --------- ---------- ----------- ----------
Balance - January 28, 1996 4,488,291 44,883 32,304,486 (17,265,625) 15,083,744
[Loss] from Continuing
Operations -- -- -- (174,749) (174,749)
[Loss] from Discontinued
Operations -- -- -- (1,165,135) (1,165,135)
[Loss] from Sale of
Discontinued Operations -- -- -- (572,883) (572,883)
---------- --------- ---------- ----------- ---------
Balance - January 26, 1997 4,488,291 $ 44,883 $32,304,486 $(19,178,392) $13,170,977
========== ========= =========== ============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
23
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
<TABLE>
Y e a r s e n d e d
January 26, January 28, January 29,
1 9 9 7 1 9 9 6 1 9 9 5
Operating Activities:
<S> <C> <C> <C>
[Loss] Income From Continuing Operations $ (174,749) $ (336,325) $ 184,240
----------- ---------- -----------
Adjustments to Reconcile Net [Loss] Income to Net
Cash Provided by Continuing Operating Activities:
Depreciation and Amortization 974,758 990,867 940,435
Loss on Asset Disposals 3,293 2,512 3,225
Loss [Gain] on Closing and Sale of Restaurants -- 54,355 (76,467)
Changes in Assets and Liabilities:
[Increase] Decrease in:
Inventories (93,220) (62,843) (173,574)
Prepaid Expenses 16,545 (40,096) 23,900
Other Assets 48,524 (50,488) 145,325
Miscellaneous Receivable (44,387) 25,961 (28,571)
Increase [Decrease] in:
Accounts Payable 343,425 (79,219) 142,613
Accrued Expenses and Other Liabilities 12,884 (25,350) 121,303
----------- ---------- -----------
Total Adjustments 1,261,822 815,699 1,098,189
----------- ---------- -----------
Net Cash - Continuing Operations - Forward 1,087,073 479,374 1,282,429
----------- ---------- -----------
Discontinued Operations:
[Loss] From Discontinued Operations (1,738,018) (1,847,824) (441,370)
----------- ---------- -----------
Adjustments to Reconcile Net [Loss] to Net Cash
Provided [Used] by Discontinued Operating Activities:
Depreciation and Amortization 293,711 381,959 301,514
[Gain] on Asset Disposals (7,776) -- --
Impairment Loss of Long-Lived Assets 565,948 2,195,750 --
Loss on Disposal of Discontinued Operations 572,883 -- --
[Increase] Decrease in Net Assets of
Discontinued Operations 126,156 (50,195) (750,876)
----------- ---------- -----------
Total Adjustments 1,550,922 2,527,514 (449,362)
----------- ---------- -----------
Net Cash - Discontinued Operations - Forward (187,096) 679,690 (890,732)
---------- ---------- -----------
Investing Activities - Continuing Operations:
Capital Expenditures (1,144,192) (530,382) (419,484)
Proceeds from Sale of Restaurant Assets 8,939 -- 211,273
Sale or Redemption of Investments -- -- 347,000
Purchase of Investments (50,000) -- (460,000)
Acquisition of Restaurant -- -- (267,008)
Sale of Discontinued Operations - Cash Transferred (156,384) -- --
Net Cash - Investing Activities - Continuing
Operations - Forward $(1,341,637) $ (530,382) $ (588,219)
</TABLE>
See Notes to Consolidated Financial Statements.
24
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
<TABLE>
Y e a r s e n d e d
January 26, January 28, January 29,
1 9 9 7 1 9 9 6 1 9 9 5
<S> <C> <C> <C>
Net Cash - Continuing Operations - Forward $ 1,087,073 $ 479,374 $ 1,282,429
----------- ---------- -----------
Net Cash - Discontinued Operations - Forwarded (187,096) 679,690 (890,732)
-------- ---------- -----------
Net Cash - Investing Activities - Continuing
Operations - Forwarded (1,341,637) (530,382) (588,219)
----------- ---------- -----------
Investing Activities - Discontinued Operations:
Capital Expenditures (100,574) (342,571) (536,418)
Proceeds from Sale of Restaurant Assets 140,126 -- --
----------- ---------- -----------
Net Investing Activities - Discontinued Operations 39,552 (342,571) (536,418)
------ ---------- -----------
Financing Activities - Continuing Operations:
Repayment of Debt (281,585) (976,785) (1,175,257)
Proceeds from Debt 100,000 1,125,000 940,618
Proceeds from Exercise of Stock Options -- 2,188 --
----------- ---------- -----------
Net Cash - Financing Activities - Continuing
Operations (181,585) 150,403 (234,639)
----------- ---------- -----------
Financing Activities - Discontinued Operations:
Repayment of Debt (213,260) (724,501) (119,013)
Proceeds from Debt 375,000 400,000 1,310,000
Repayment of Related Party Loan (5,193) -- --
----------- ---------- -----------
Net Cash - Financing Activities - Discontinued
Operations 156,547 (324,501) 1,190,987
----------- ---------- -----------
Net [Decrease] Increase in Cash and Cash
Equivalents (427,146) 112,013 223,408
Cash and Cash Equivalents - Beginning of Years 1,378,814 1,266,801 1,043,393
---------- ---------- -----------
Cash and Cash Equivalents - End of Years $ 951,668 $1,378,814 $ 1,266,801
=========== ========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 178,777 $ 197,752 $ 202,400
Income Taxes $ -- $ -- $ --
</TABLE>
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
During fiscal 1996, the discontinued ice cream business acquired equipment
from a director/employee for an interest free note valued at $74,857.
See Notes to Consolidated Financial Statements.
25
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
[1] Nature of Operations and Summary of Significant Accounting Policies
Chefs International and its subsidiaries [the "Company"] operated nine and eight
restaurants at January 26, 1997 and January 28, 1996, respectively. Eight of the
restaurants are seafood restaurants, operated in New Jersey and Florida
generally under the trade name, Lobster Shanty. The Company also operated a
Garcia's franchised Mexican restaurant in New Jersey in fiscal 1997.
On January 26, 1997, the Company sold 95% of the Mr. Cookie Face ["MCF"] ice
cream operation [See Note 16], which is treated as a disposal of a business
segment. The statements of operations for the years ended January 28, 1996 and
January 29, 1995 have been now restated to reflect this transaction as
discontinued operations for comparative purposes.
Principals 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. Uninsured cash
balances totaled approximately $780,000 and $1,427,000 at the end of fiscal
years 1997 and 1996, respectively. The Company does not require collateral to
support financial instruments subject to credit risk.
The Company also maintains a highly liquid money market account classified as a
cash equivalent, which is uninsured. Balances in this account totaled $44,916
and $46,602 at the end of fiscal 1997 and 1996, respectively.
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 stated at actual
cost, which approximates market value and are classified as current or long-term
based on maturities at the balance sheet date. All certificates are considered
as "held-to-maturity". At the end of fiscal 1997, investments include the
estimated fair value of 5% of the stock of Mister Cookie Face ice cream
operation retained by the Company of $35,000.
Inventories - Inventories consist of food, beverages and supplies. Inventories
are stated at the lower of cost [determined by the first-in, first-out method]
or market.
Property, Plant and Equipment and Depreciation - Property, plant and equipment
are carried at cost. Depreciation is computed over the estimated useful lives of
the assets using the straight-line method. 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 10 to 40 years
under the straight-line method.
Impairment - Certain long-term assets of the Company, including goodwill, are
reviewed at least annually as to whether their carrying value has become
impaired. This evaluation is done by comparing the carrying value of the asset
to the value of the projected discounted net cash flow from related operations.
Impairment, if any, is measured by the amount that the carrying value of the
asset exceeds the projected discounted net cash flow.
Management also re-evaluates the periods of amortization to determine whether
subsequent events and circumstances warrant revised estimates of useful lives.
26
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
- ------------------------------------------------------------------------------
[1] Nature of Operations and Summary of Significant Accounting
Policies [Continued]
Impairment [Continued] - As of January 26, 1997, management expects these assets
to be fully recoverable. For fiscal 1996, the Company adopted Statement of
Financial Accounting Standards ["SFAS"] No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" [See Note 4].
Liquor Licenses - Liquor licenses are amortized over 40 years under the
straight-line method.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
Actual results could differ from those estimates.
Income Taxes - The Company uses the asset and liability method in accounting for
income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
Advertising - The Company expenses advertising costs as incurred. Advertising
costs for fiscal 1997, 1996 and 1995 were $455,409, $466,737 and $406,617,
respectively.
[2] Inventory
Inventories consist of the following:
January 26, January 28,
1 9 9 7 1 9 9 6
Food $ 479,575 $ 416,763
Beverages 103,455 117,893
Supplies 342,493 297,587
--------- ---------
Totals $ 925,463 $ 832,243
------ ========= =========
[3] Property, Plant and Equipment
The classification of property, plant and equipment together with their
estimated useful lives is as follows:
January 26, January 28, Estimated
1 9 9 7 1 9 9 6 Useful Life
Land $ 2,335,026 $ 2,335,026 N/A
Buildings and Improvements 12,655,064 12,547,356 20 - 40 Years
Leasehold Improvements 976,123 390,132 Term of Lease
Furniture and Equipment 2,140,220 2,022,259 5 - 10 Years
China, Glassware and Utensils 93,982 88,147 *
----------- ------------
Totals $18,200,415 $ 17,382,920
------ =========== ============
* Carried at original cost for each restaurant. All replacement purchases are
charged to expense as incurred.
Depreciation expense was $922,682, $936,274 and $890,777 for fiscal 1997, 1996
and 1995, respectively.
27
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
- ------------------------------------------------------------------------------
[4] Intangible Assets
As of the end of fiscal 1997 and 1996, intangible assets consist of:
Liquor
1997 Goodwill Licenses
Cost $ 967,132 $ 987,307
Less: Accumulated Amortization 409,768 259,644
---------- ----------
Net $ 557,364 $ 727,663
--- ========== ==========
1996
Cost $1,998,875 $ 987,307
Less: Accumulated Amortization 777,427 234,960
---------- ----------
Net $1,221,448 $ 752,347
--- ========== ==========
Amortization expense was $52,076, $54,593 and $49,658 for fiscal 1997, 1996 and
1995, respectively.
In the fourth quarter of fiscal 1997, goodwill attributable to the discontinued
operation of $565,948 was written off to the loss from operations of
discontinued business segment [See Note 16].
During the fourth quarter of fiscal 1996, the Company adopted SFAS No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." The Company recorded an impairment loss of $2,195,750 from the
write-down of goodwill and property and equipment of which $2,024,883 was from
the discontinued business segment. Facts and circumstances leading to the
impairment loss consist primarily of the Company's ice cream operation's
inability to expand its markets and products as previously planned. In addition,
there was a write-down of goodwill for approximately $171,000 in connection with
restaurant operations.
Fair values were determined for the ice cream operation through estimating the
fair value of ice cream manufacturing equipment, leasehold improvements and the
product trade name and trade mark using discounted cash flows. For the
restaurants, fair value was generally determined through estimating the fair
value of real property and liquor licenses based on the prices of similar assets
and appraisals. The impairment losses recorded are the differences between these
estimated fair values and the carrying values of the ice cream operations and
the individual restaurants. A significant assumption for the cash flows forecast
for fiscal 1996 was a nine year period for ice cream operations.
[5] Notes and Mortgages Payable to Banks
Notes and mortgages payable to banks as of the end of fiscal 1997 and 1996, were
as follows:
1 9 9 7 1 9 9 6
------- -------
Note Payable, Due November 15, 2000, at 7.51% fixed,
collateralized by real estate $ 799,999 $1,000,000
Note Payable, Due November 15, 1998, at 7.51% fixed,
collateralized by real estate 416,500 625,000
---------- ---------
Totals - Forward $1,216,499 $1,625,000
28
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
- ------------------------------------------------------------------------------
[5] Notes and Mortgages Payable to Banks [Continued]
1 9 9 7 1 9 9 6
------- -------
Totals - Forwarded $1,216,499 $1,625,000
Revolving Credit, Due May 31, 1997, at LIBOR + 2%,
collateralized by real estate 500,000 125,000
Line of credit, Due June 30, 1997, at prime, collateralized
by real estate 100,000 --
---------- ---------
Totals 1,816,499 1,750,000
Less: Current Portion 1,008,500 408,500
---------- ---------
Total Long-Term Notes and Mortgages Payable to Banks $ 807,999 $1,341,500
---------------------------------------------------- ========== ==========
At January 26, 1997, unused amounts under the revolving line of credit was
$500,000 and under the line of credit was $250,000.
The weighted average interest rate for short-term borrowing at January 26, 1997
was 8.25% and at January 28, 1996 was 8.50%.
LIBOR and the prime rate were 5.94% and 8.25%, respectively at January 26, 1997.
The notes payable are due in periodic installments through the due dates.
At January 26, 1997, annual maturities of the above debt are as follows:
1998 $1,008,500
1999 408,000
2000 200,000
2001 199,999
Thereafter --
----------
Total $1,816,499
All of the above obligations are due to the same financial institution.
The loan covenant governing the borrowings includes, among other items,
requirements to maintain certain working capital and tangible net worth amounts
and restrictions on dividends.
[6] Capital Lease Obligations
The Company leases equipment under capital leases expiring in 2000. Future
minimum payments by the Company under capital leases consist of the following at
January 26, 1997:
Payments Due in Fiscal:
1998 $ 91,404
1999 91,404
2000 24,254
Thereafter --
-----------
Total Minimum Lease Payments 207,062
Amount Representing Interest 18,265
Present Value of Minimum Lease Payment 188,797
Less: Current Portion 79,154
Capital Lease Obligations - Long-Term $ 109,643
------------------------------------- ===========
29
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
- ------------------------------------------------------------------------------
[6] Capital Lease Obligations [Continued]
This equipment was sold as part of the discontinued operation [See Note 16]. The
Company remains responsible for the payments, and as a result, has created a
receivable from the sale of the discontinued operation for an amount equal to
the lease obligation.
[7] Transactions with Related Parties
A principal stockholder of the Company is the principal owner of a partnership
which leases the Vero Beach Restaurant to the Company. The lease is on a
month-to-month basis and requires monthly payments of $10,000. Total rent
expense was $120,000 for fiscal 1997, 1996 and 1995.
A loan has been made to a director with an outstanding balance at January 26,
1997 of $6,515. Principal and interest payments are made on a monthly basis with
interest at 6%.
[8] Commitments
The Company leases restaurant, office and storage facilities, and equipment
under operating leases expiring at various times through the year 2008.
Minimum future rental payments under noncancelable operating leases as of
January 26, 1997, are as follows:
Year ending
January
1998 $ 207,123
1999 169,463
2000 91,203
2001 86,004
2002 96,017
Thereafter 698,267
-----------
Total Minimum Future Rentals $ 1,348,077
---------------------------- ===========
Rent expense was $383,603, $315,723 and $289,630 for fiscal 1997, 1996 and 1995,
respectively.
The Company has three year employment agreements with two employee/directors for
annual amounts ranging from $87,000 to $150,000. Total payments under the
agreements over the next five years are $474,000. These agreements provide for
lump sum payments in the event of the termination of the employee/directors
without cause or a change in control of the Company, as defined, for a portion
of the unexpired term of the contracts.
The Company has an agreement with a director/employee which provides for the
payment of $20,000/year upon retirement. The discounted present value of this
agreement is recorded as a liability. The amount has been partially insured with
a life insurance contract owned by the Company.
In October 1995, the Company entered into a consulting agreement with a
corporation controlled by a director. The original agreement calls for the
corporation to provide marketing, advertising and promotional services through
January 1999 for a fee of $3,000 per month. The revised agreement calls for the
same services to be provided without payment in return for the director's
retention of stock options previously issued to him.
30
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
- ------------------------------------------------------------------------------
[9] Earnings Per Share
Earnings per share are based on weighted average number of shares outstanding of
4,488,291, 4,487,180 and 4,486,052 for fiscal years 1997, 1996 and 1995,
respectively. The effect of options or warrants is anti-dilutive for fiscal
years 1997, 1996 and 1995. On November 22, 1996, the Company effected a
onefor-three reverse stock split of its outstanding common stock. All share data
has been adjusted retroactively to reflect this change.
[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 55,556 shares of common stock were
reserved for issuance. Options may be exercised over a period of five or ten
years from the date of grant and expire in 1999 and 2000.
In October 1994, the stockholders approved the grant of 216,667 non-qualified
options to four directors to purchase the Company's stock at $3.75 per share.
The options are for five years.
In October 1995, the stockholders approved the grant of 300,000 non-qualified
options to two directors to purchase the company stock at $3.00 per share. The
options are for five years.
In July 1995, one individual exercised options to buy 2,222 shares of stock at
the option price of $.984 per share. An additional option to buy 556 shares was
canceled during the fiscal year.
As part of the sale of the ice cream manufacturing segment [See Note 16], a
director forfeited 304,167 options.
The Company periodically awards stock options to employees and applies the
intrinsic value method of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for these awards. No
compensation cost has been recognized. Had compensation cost for the stock
options awarded been determined based on the fair value at the grant dates for
these awards, consistent with the fair value method set forth under SFAS 123,
"Accounting for Stock-Based Compensation," the Company's net loss and net loss
per share would have increased in the year of issuance and decreased in the
subsequent year due to forfeitures of a portion of those options.
The pro forma amounts are indicated below:
1 9 9 7 1 9 9 6
------- -------
Net Loss:
As Reported $(1,912,767) $(2,184,149)
Pro Forma $(1,687,420) $(2,454,566)
Net Loss Per Share:
As Reported $ (.43) $ (.49)
Pro Forma $ (.38) $ (.55)
All options are granted at an exercise price in excess of the stock price on the
date of grant.
The fair value of each stock option grant is estimated on the date of grant
using the Black-Scholes optionpricing model with the following assumptions used
for grants in fiscal year 1996: dividend yields of 0%; expected volatility of
116%, risk-free interest rate of 5.77%; and an expected life of five years. The
weighted average fair value of options granted were $-0- and $0.90 in 1997 and
1996, respectively.
31
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
- ------------------------------------------------------------------------------
[10] Stock Options [Continued]
Summary of stock option activity is as follows:
1 9 9 7 1 9 9 6 1 9 9 5
--------------- --------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding - Beginning
of Years 565,667 $3.11 268,445 $ 3.22 52,111 $ 0.984
Granted or Sold During
the Years -- -- 300,000 3.00 216,667 3.75
Canceled During the Years (304,167) 3.13 (556) 0.984 (333) 0.984
Expired During the Years (4,661) 0.984 -- -- -- --
Exercised During the Years -- -- (2,222) 0.984 -- --
------- ------- ------ ------- ------- -------
Outstanding - End
of Years 256,839 $3.13 565,667 $ 3.11 268,445 $ 3.22
======= ======= ======= ======= ======= =======
Exercisable - End
of Years 256,839 $3.13 565,667 $ 3.11 268,445 $ 3.22
======= ======= ======= ======= ======= =======
The following table summarizes stock option information as of January 26, 1997:
Weighted
Average Weighted
Remaining Average
Contractual Exercise
Range of Exercise Prices Shares Life Price
$ 0.984 $ 44,339 2.8 Years $ 0.984
$3.00 to $3.75 212,500 3.0 Years 3.57
--------- --- ---------
256,839 3.0 Years $ 3.13
========= =========
[11] Income Taxes
The significant components of deferred tax assets and liabilities are as
follows:
January 26, January 28,
1 9 9 7 1 9 9 6
Deferred Tax Assets:
U.S. Federal Tax Loss Carryforwards $ 5,100,000 $5,118,000
Impairment Loss 226,400 880,000
----------- ----------
Gross Deferred Tax Asset 5,326,400 5,998,000
Less: Valuation Allowance 4,742,000 5,062,000
----------- ----------
Net Deferred Tax Assets 584,400 936,000
Deferred Tax Liability:
Depreciation 584,400 936,000
----------- ----------
Net Deferred Taxes $ -- $ --
------------------ =========== ==========
32
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
- ------------------------------------------------------------------------------
[11] Income Taxes [Continued]
For the fiscal years 1997 and 1996, the valuation reduces the net deferred tax
asset to zero. The net change in the valuation allowance of $320,000 is
primarily due to a decrease in the non-deductible impairment loss in the current
year.
The Company has available at January 26, 1997, operating loss carryforwards as
follows:
Year of Unused Operating
Expiration Loss Carryforwards
1999 $ 1,170,004
2000 2,341,860
2001 1,838,179
2002 1,509,463
2003 2,072,345
2004 2,942,316
2005 472,062
2009 118,411
2010 285,130
-----------
Totals $12,749,770
[12] Fair Value
The following table summarizes the carrying amount and estimated fair value of
the Company's significant financing instruments, all of which are held for
non-trading purposes.
January 26, 1997 January 28, 1996
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Long-Term Debt $ 807,999 $ 807,999 $1,341,500 $1,341,500
Long-Term Notes Receivable $ 508,593 $ 508,593 $ -- $ --
In assessing the fair value of financial instruments, the Company has used a
variety of methods and assumptions, which were based on estimates of market
conditions and risks existing at that time. For certain instruments, including
cash and cash equivalents, short-term receivables and payables, related party
receivables and payables, and short-term debt, it was assumed that the carrying
amount approximated fair value for the majority of these instruments because of
their short maturities.
[13] 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 1997, 1996 and 1995.
[14] New Authoritative Pronouncements
The Financial Accounting Standards Board ["FASB"] has issued Statement of
Financial Accounting Standards ["SFAS"] No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." SFAS No. 125
is effective for transfers and servicing of financial assets and extinguishment
of liabilities occurring after December 31, 1996. Earlier application is not
allowed. The provisions of SFAS No. 125 must be applied prospectively;
retroactive application is prohibited. Adoption on January 1, 1997 is not
expected to have a material impact on the Company. The FASB deferred some
provisions of SFAS No. 125, which are expected to be relevant to the Company.
33
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
- ------------------------------------------------------------------------------
[14] New Authoritative Pronouncements [Continued]
FASB has issued SFAS No. 128, "Earnings per Share," and SFAS No. 129,
"Disclosure of Information about Capital Structure," in February 1997.
SFAS No. 128 simplifies the earnings per share ["EPS"] calculations required by
Accounting Principles Board ["APB"] Opinion No. 15, and related interpretations,
by replacing the presentation of primary EPS with a presentation of basic EPS.
SFAS No. 128 requires dual presentation of basic and diluted EPS by entities
with complex capital structures. Basic EPS includes no dilution and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution of securities that could share in the earnings of an entity,
similar to the fully diluted EPS of APB Opinion No. 15. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods; earlier application is not permitted. When
adopted, SFAS No. 128 will require restatement of all prior-period EPS data
presented; however, the Company has not sufficiently analyzed SFAS No. 128 to
determine what effect SFAS No. 128 will have on its historically reported EPS
amounts.
SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.
[15] Acquisitions
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 [See Notes 4 and 16].
On October 28, 1994, the Company purchased a liquor license and trade name 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 3 years
under the straight-line method, after adjustment for impairment.
In November 1995, the Company licenced the rights to the "Garcia" trade name for
a six county area in central New Jersey. Consideration is 3% of gross sales
generated. In April 1996, the Company converted an existing "LaCrepe" restaurant
into a "Garcia's". A loss of $54,355 was recognized on the conversion.
[16] Discontinued Operations
On February 20, 1997 [as of January 26, 1997], the Company sold 95% of the
common stock of MCF, its ice cream production segment to a director for an
aggregate purchase price of $1,600,000, consisting of a $500,000 cash payment
and three notes totaling $1,100,000. The first note is due on or before March
24, 1997, the second note is due in installments through July 1, 2000, and the
third note is due on or before February 20, 2004, with mandatory prepayments
based on MCF's cash flow. The notes are secured by a first lien on all of MCF's
assets, however, the Company has agreed to subordinate the loans up to
$1,750,000 for additional financing obtained by the purchaser. Based on the
estimated present value of the payments, management has set the aggregate value
of the consideration at $998,950. An additional amount of $188,797 is due from
the purchaser, representing the balance due on two capital leases which the
Company will continue to pay. The purchaser has agreed to reimburse the Company
for the payments. The equipment subject to the lease was transferred by the
Company as part of the sale. The value of the 5% of MCF capital stock retained
by the company has been valued at $35,000.
34
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
- ------------------------------------------------------------------------------
[16] Discontinued Operations [Continued]
On a per share basis, MCF's losses were $0.26, $0.42 and $0.10 for fiscal years
1997, 1996 and 1995, respectively.
The Company recorded a loss of $572,883 or $0.13 per share on the disposal. MCF
sales were $11,260,976, $14,711,350 and $15,872,555 for the fiscal years 1997,
1996 and 1995, respectively.
The $500,000 down payment from the sale was used to retire bank debt subsequent
to year end.
[17] 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.
On November 22, 1996, 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 retroactively to reflect
this change.
[18] Registration Statement and SEC Investigation
In September 1993, the Company filed a registration statement which was
subsequently withdrawn on March 28, 1996. The Company incurred approximately
$270,750 in registration costs which were written off in fiscal 1995.
. . . . . . . . . . . . . .
35
<PAGE>
INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTAL SCHEDULE
To the Stockholders and Board of Directors of
Chefs International, Inc.
Point Pleasant, New Jersey
Our report on the consolidated financial statements of Chefs
International Inc. and its subsidiaries is included on page F-1 of this Form
10-K. In connection with our audits of such financial statements, we have also
audited the related accompanying financial statement Schedule II -Valuation and
Qualifying Accounts.
In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
MOORE STEPHENS, P.C.
Certified Public Accountants.
Cranford, New Jersey
March 21, 1997
36
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- ------------------------------------------------------------------------------
Additions
<TABLE>
Balance at Charged Charged to Deductions Balance at
Beginning Against Other from Close
of Period Income Accounts Reserves[A] of Period
For the period ended January 26, 1997:
<S> <C> <C> <C> <C> <C>
Amortization of Goodwill [See Note] $ 777,427 $ 98,136 $ -- $ (465,795) $ 409,768
========= ========== ========= ========== ==========
Amortization of Other Intangibles
[See Note 4] $ 234,960 $ 24,684 $ -- $ -- $ 259,644
========== ========== ========= ========== ==========
</TABLE>
[A] Deduction Due to Sale of Business Segment.
37
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- ------------------------------------------------------------------------------
Additions
<TABLE>
Balance at Charged Charged to Deductions Balance at
Beginning Against Other from Close
of Period Income Accounts Reserves of Period
For the period ended January 28, 1996:
<S> <C> <C> <C> <C> <C>
Amortization of Goodwill [See Note] $ 594,594 $ 182,833 $ -- $ -- $ 777,427
========== ========== ========= ========== ==========
Amortization of Other Intangibles
[See Note 4] $ 210,276 $ 24,684 $ -- $ -- $ 234,960
========== ========== ========= ========== ==========
</TABLE>
38
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- ------------------------------------------------------------------------------
Additions
<TABLE>
Balance at Charged Charged to Deductions Balance at
Beginning Against Other from Close
of Period Income Accounts Reserves of Period
For the period ended January 29, 1995:
<S> <C> <C> <C> <C> <C>
Amortization of Goodwill [See Note] $ 416,149 $ 178,445 $ -- $ -- $ 594,594
========= ========== ========= ========== ==========
Amortization of Other Intangibles $ 218,964 $ 24,136 $ -- $ 32,824 $ 210,276
========== ========== ========= ========== ==========
</TABLE>
39
<PAGE>
Item 9: Changes in and Disagreement with Accountants on Accounting and Financial
Disclosure
None
40
<PAGE>
CHEFS INTERNATIONAL, INC.
PART III
Item 10. Directors and Executive Officers of the
Registrant
The following table sets forth certain information with respect to each of the
directors and executive officers of the Company:
Name Age Office
Anthony Papalia 39 President, Treasurer, Chief
Executive Officer, Chief
Financial Officer and Director
James Fletcher 66 Director
Martin W. Fletcher 44 Secretary and Director
Frank Koenemund 53 Director
Jack Mariucci 57 Director
- ------------
(a) James Fletcher is the father of Martin Fletcher.
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.
Anthony 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.
James Fletcher was elected a vice president of the Company on
February 10, 1978 and a director in December, 1978. In April, 1980
Mr. Fletcher became general manager of the Company's Florida
seafood restaurants. Mr. Fletcher retired as a vice president and
an employee of the Company at the conclusion of fiscal 1997 but
continues to serve as a director.
41
<PAGE>
Martin 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 is currently devoting all of his working time to the business of the Company.
Frank Koenemund was principally engaged from 1988 through 1991 as a principal
of Thin's Inn and Thin N'Creamy, two New Jersey entities packaging and selling
diet cookies in various United States markets. Commencing in February 1992, Mr.
Koenemund was principally engaged as sole owner and as an executive officer of
Mr. Cookie Face which was acquired by the Company in July 1993, at which time,
he was elected a director of the Company. On February 20, 1997 (as of January
26, 1997), the Company sold 95% of the outstanding capital stock of Mr. Cookie
Face back to Mr. Koenemund who currently devotes substantially all of his
working time to the business of Mr. Cookie Face as its chief executive officer.
Mr. Koenemund continues to serve as a director of the Company.
Jack Mariucci was principally engaged for more than the past five years and
until October 1994 as Executive Vice President and Executive Creative Director
of DDB Needham Worldwide - New York. DDB Needham is a global advertising agency
with offices in cities throughout the world. Mr. Mariucci was also a member of
the New York Management Board of DDB Needham. Since October 1994, Mr. Mariucci
has been principally engaged as an independent marketing consultant. He was
elected a director of the Company in July 1993.
Compliance with Section 16 (a) of the Exchange Act
Based solely upon a review of Forms 3 and 4 and on representations that no
Forms 5 were required, the Company believes that with respect to fiscal 1997,
all Section 16(a) filing requirements applicable to its officers, directors and
beneficial owners of more than 10% of its equity securities were timely complied
with.
Item 11. 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, 1997 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 1997. During
the three-year period ended January 26, 1997, the Company did not grant any
restricted stock awards or have any long-term incentive plan in effect. The
Company maintains a 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 (except
that the contribution for Mr. Koenemund who first became covered under the
42
<PAGE>
Program in June 1995 was $8,352 in fiscal 1996 and in fiscal 1997). The Program
provides life insurance death benefits, disability income benefits and
retirement income benefits. James Fletcher is not covered under this Program but
the Company agreed that if he remained in its employ until age 65 and left such
employ at any time thereafter, the Company would pay him $20,000 annually for
the ten year period following such termination of employment or until his death,
if he dies prior thereto. The Company partially funds this obligation with an
insurance policy paying an annual premium of approximately $5,000.
SUMMARY COMPENSATION TABLE
Annual Compensation
Name and Fiscal Other Annual
Principal Position Year Salary Bonus Compensation
Anthony Papalia 1997 $150,000 $-0- $2,088(a)
President and 1996 $119,692 $-0- $2,088(a)
Chief Executive 1995 $110,600 $-0- $2,088(a)
Officer
Frank Koenemund 1997 $150,000 $-0- $8,352(a)
Chief Executive 1996 $111,539 $54,300 $8,352(a)
Office of MCF 1995 $100,000 $-0- $-0-
(a) Represents contributions under the Supplemental Employee Benefit
Program.
Long-Term
Compensation
Restric-
ted All
Name and Fiscal Options Stock LTIP Other
Principal Position Year SARs Awards Payouts Comp
Anthony Papalia 1997 -0- 0 $-0- $-0-
President and 1996 -0- 0 $-0- $-0-
Chief Executive 1995 54,167* 0 $-0- $-0-
Officer
Frank Koenemund 1997 -0- 0 $-0- $-0-
Chief Executive 1996 250,000** 0 $-0- $-0-
Officer of MCF 1995 54,167* 0 $-0- $-0-
*Each exercisable to purchase one share of Common Stock at $3.75 per
share.
**Each exercisable to purchase one share of Common Stock at $3.00 per
share.
43
<PAGE>
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 expires at the
conclusion of the Company's 1999 fiscal year and is automatically renewed on a
year by year basis for up to five consecutive additional one-year terms unless
either party gives at least six months prior notice that he or it does not
desire such renewal. Mr. Papalia's annual salary under the contract is $150,000
and Mr. Fletcher's annual salary under the contract is $87,000. Each individuals
salary is 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.
In connection with the Company's acquisition of MCF in July 1993, Frank
Koenemund executed an employment contract with MCF agreeing to serve as
president and chief executive officer at an annual salary of $100,000 plus a
percentage bonus based upon MCF's pre-tax income. Pursuant to the contract, Mr.
Koenemund earned a $54,300 bonus in fiscal 1996 but no bonus in prior years or
in fiscal 1997. In October 1995, the contract term was extended through January
31, 2001, Mr. Koenemund's salary was increased commencing October 31, 1995 to an
annual rate of $150,000 and the bonus provision was retained. On February 20,
1997 (as of January 26, 1997), Chefs sold 95% of the outstanding capital stock
of MCF back to Mr. Koenemund.
Effective October 2, 1995, the Company executed a Consulting Agreement with M&M
Creative Services, Inc. ("M&M") retaining M&M as a consultant for an
approximately three-year term through the conclusion of fiscal 1999, to provide
marketing, advertising and similar promotional services for a monthly consulting
fee of $3,000. Jack Mariucci, a director of the Company, is the principal
employee of M&M and his wife is the president and sole stockholder. The
Consulting Agreement required Mr. Mariucci to devote at least 10% of his working
time in each month to providing the consulting services and terminated, among
other reasons, in the event of Mr. Mariucci's death or disability. In connection
with Chefs' sale on February 20, 1997 (as of January 26, 1997) of 95% of MCF's
outstanding capital stock back to Mr. Koenemund, it was agreed that Chefs would
have no further payment obligations to M&M or to Jack Mariucci for consulting
services provided that if such consulting services continued to be rendered, Mr.
Mariucci's outstanding options to purchase shares of Chefs' common stock would
remain in full force and effect until expiration of their term.
Stock Options
On November 3, 1989, the Company's Board of Directors granted ten-year
Incentive Stock Options ("ISOs) exercisable to purchase an aggregate 48,778
shares of Common Stock at $.984375 per share (equal to the mean between the
closing bid price and the closing asked price for the Common
44
<PAGE>
Stock on NASDAQ on November 2, 1989), pursuant to the Company's 1982 Incentive
Stock Option Plan (the "ISO Plan"), to ten employees including three officers.
Anthony Papalia, James Fletcher and Martin W. Fletcher were granted 12,223,
6,667 and 11,000 of these options, respectively. To date, ISOs have been
exercised to purchase an aggregate 2,222 shares and an aggregate 8,885 of such
options including the ISOs granted to James Fletcher have been cancelled due to
terminations of employment.
The Company's ISO Plan terminated in August 1992.
At Chefs' annual meeting of stockholders held on October 3, 1994, stockholders
approved the grant to four key members of management of stock options
exercisable to purchase an aggregate 216,668 shares of Common Stock. The options
were each exercisable over a term of five years from October 3, 1994 at an
exercise price of $3.75 per share (the last sales price for the Common Stock on
the NASDAQ Small-Cap System on July 29, 1994, the last trading day prior to the
date of grant of the options by the Board of Directors). Each option is
non-transferable (except on death) and is exercisable by the optionee only while
serving as an officer, director or employee of the Company or one of its
subsidiaries. The optionees and the number of shares issuable upon exercise of
the options granted to such optionees were as follows:
Optionee Number of Shares
Anthony Papalia 54,167
(President, Treasurer, CEO,
CFO and Director)
Martin Fletcher 54,167
(Secretary and Director)
Frank Koenemund 54,167
(President of Mr. Cookie Face
and Director)
Jack Mariucci 54,167
(Director)
At Chefs' annual meeting of stockholders held on December 19, 1995,
stockholders approved the grant to Messrs. Koenemund and Mariucci of stock
options exercisable to purchase 250,000 shares and 50,000 shares of Common Stock
respectively. The options were each exercisable over a term of five years from
December 19, 1995 at an exercise price of $3.00 per share. On October 20, 1995,
the last trading day prior to the date of grant of the options by the Board of
Directors, the last sales price for the Common Stock on the NASDAQ Small-Cap
System was $1.22. Each option was non-transferable (except on death) and was
exercisable, in the case of Mr. Koenemund, only while serving as an officer,
director or employee of the Company or a subsidiary, and in the case of Mr.
Mariucci, only while rendering marketing and advertising services to the Company
or a subsidiary.
45
<PAGE>
In connection with Chefs' sale on February 20, 1997 (as of January 26, 1997) of
95% of the outstanding capital stock of MCF back to Mr. Koenemund, all of Mr.
Koenemund's options were cancelled.
The following table sets forth certain information concerning
unexercised options held by Mr. Papalia. No options were exercised in
fiscal 1997.
1997 Fiscal Year-End Option Values
Number of Unexercised Options at 1997 Fiscal Year-End
Value of Unexercised
In-The-Money
Name Exercisable Unexercisable Options at 1/26/97(1)
Anthony Papalia 12,223 -0- -0-
54,167 -0- -0-
- ----------
(1) The option exercise price exceeded the closing bid price for the Common
Stock in the over-the-counter market on the last trading day preceding January
26, 1997.
Directors' Compensation
During fiscal 1997 only one director, Jack Mariucci, was compensated for
serving as such. His compensation as a director at a monthly rate of $1,500 is
continuing in fiscal 1998. In addition, James Fletcher is being paid a monthly
director's fee of $1,250 in fiscal 1998.
46
<PAGE>
Item 12. Security Ownership of Certain
Beneficial Owners and Management
The following table sets forth information as of March 21, 1997 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. The
percentages have been calculated on the basis of treating as outstanding for a
particular holder, all shares of Chefs' Common Stock outstanding on said date
and all shares of Common Stock issuable to such holder in the event of exercise
or conversion of outstanding options, warrants and convertible securities owned
by such holder at said date which are exercisable or convertible within 60 days
of such date.
Shares of
Name and Address of Common Stock Percentage
Beneficial Owner Beneficially Owned Ownership
Directors*
Anthony Papalia 66,390(1) 1%
James Fletcher 334 --
Martin Fletcher 65,167(2) 1%
Frank Koenemund 333,334 7%
Jack Mariucci 104,167(3) 2%
All executive officers
and directors as a group
(five persons) 569,392(1)(2)(3) 12%
Other
Robert E. Brennan 1,766,557 39%
264 Route 537 East
Colts Neck, New Jersey
07722
Michael F. Lombardi, 305,667(4) 7%
Robert M. Lombardi,
Stephen F. Lombardi,
Joseph Lombardi,
Joseph S. Lombardi,
December '95 Investment
Club, Lombardi & Lombardi,
P.A., and Lombardi &
Lombardi, P.A. Defined
Benefit Plan c/o
Michael F. Lombardi
1862 Oak Tree Road
Edison, New Jersey 08820
47
<PAGE>
- ------------
*The address of each executive officer and director is c/o the Company, 62
Broadway, Point Pleasant Beach, New Jersey 08742.
(1) Includes 66,390 shares issuable upon exercise of stock options granted by
the Company.
(2) Includes 65,167 shares issuable upon exercise of stock options granted by
the Company.
(3) Includes 104,167 shares issuable upon exercise of stock options granted by
the Company.
(4) The five individuals, the Investment Club and the firm and Defined Benefit
Plan of Lombardi & Lombardi, P.A., have filed a report on Schedule 13D and two
amendments thereto indicating their ownership of the Company's Common Stock as
reflected in the table. The filing parties have indicated in the Schedule 13D
that they are all acting separately and not as a group and that the purpose of
their acquisition of the Common Stock "...is for investment and accumulation of
shares in Chefs International, Inc."
Robert E. Brennan through his stock ownership may be deemed the controlling
stockholder of the Company.
Item 13. Certain Relationships and Related Transactions
Robert E. Brennan is a principal stockholder of the Company as well as the
owner of Gourmet Associates ("Gourmet") which has leased the Vero Beach, Florida
Lobster Shanty restaurant to the Company since 1979. During the Company's two
most recently completed fiscal years and at present, the lease has been and
continues to be a month to month "net" lease at a monthly rental of $10,000 with
the Company also paying personal property taxes and insurance thereunder.
Management regards this lease to be advantageous to the Company. See Item 1
herein.
See Item 1 herein as to the sale by Chefs on February 20, 1997 (as of January
26, 1997) of 95% of the outstanding capital stock of MCF to Frank Koenemund.
48
<PAGE>
CHEFS INTERNATIONAL, INC.
PART IV
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K
(a)(1) Financial Statements
The consolidated financial statements of Chefs International, Inc.
("Chefs" or the "Company") and its wholly owned subsidiaries are included in
Part II, Item 8.
(2) Financial Statement Schedules
Schedule II, Valuation and Qualifying Accounts is included in this Part
IV. All other schedules are omitted because the required information is not
applicable, not material or included in the consolidated financial statements or
notes thereto.
(3) Exhibits
3.1 Certificate of Incorporation of the Company, as amended(A)
3.2 By-Laws of the Company, as amended(A)
4.1 Specimen Common Stock Certificate(A)
10.1 Monmouth Mall Shopping Center Lease for Garcia's restaurant(B)
10.2 Acquisition Agreement as of June 30, 1993 between the
Company and Frank Koenemund concerning the acquisition of
Mr. Cookie Face(C)
10.3 Employment Agreement as of June 30, 1993 between Mr. Cookie
Face and Frank Koenemund(C)
10.4 Amendment No. 1 dated as of October 30, 1995 to Employment
Agreement between Mr. Cookie Face and Frank Koenemund(B)
10.5 Term Loan and Revolving Credit Agreement dated January 19,
1996 between the Company and First Union National Bank(B)
10.6 Acquisition Agreement dated April 8, 1994 between the
Company and Evelyn's Fish Market, Inc. for the acquisition
of "Evelyn's" restaurant in Belmar, N.J.(D)
10.7 Lease Agreement dated September 29, 1995 between Evelyn's
Associates and Chefs International, Inc. for "Lobster
Shanty" restaurant in Belmar, New Jersey(E)
10.8 Employment Agreement dated as of December 19, 1995 between
Chefs and Anthony Papalia(B)
49
<PAGE>
10.9 Employment Agreement dated as of December 19, 1995 between
Chefs and Martin Fletcher(B)
10.10 Consulting Agreement dated as of October 2, 1995 between
Chefs and M&M Creative Services, Inc.(B)
10.11 Stock Option Agreement dated as of October 3, 1994 between
Chefs and Anthony Papalia. Substantially similar option
agreements were executed by Chefs with Martin Fletcher, Frank
Koenemund and Jack Mariucci as of October 3, 1994 for 162,500
shares each at an exercise price of $1.25 per share and as of
December 19, 1995 with Frank Koenemund (750,000 shares) and
Jack Mariucci (150,000 shares) at an exercise price of $1.00 per
share(B)
10.12 Stock Purchase/Sale Agreement as of January 26, 1997 between
Chefs and Frank Koenemund concerning the sale of 95% of MCF
and the three MCF Promissory Notes (A, B and C) issued
thereunder(F)
22 Subsidiaries - The following table indicates the wholly owned
subsidiaries of the Company, their respective states of
incorporation and the restaurant operated by each State
Name Incorporation Restaurants
Chefs International Florida Lobster Shantys -
Palm Beach, Inc. Vero Beach and Jensen
Beach, Florida
Kev, Inc. New Jersey Lobster Shanty -
Pt. Pleasant Beach,
New Jersey
Robbins Parkway New Jersey Lobster Shanty - Toms
Realty Co., Inc. River, New Jersey
Hightstown REB, Inc. New Jersey Lobster Shanty -
Hightstown, New Jersey
- ------------
(A) Incorporated by reference to exhibit filed with the Company's
Registration Statement on Form SB-2 (File no. 33-66936)
(B) Incorporated by reference to exhibit filed with the Company's annual report
on Form 10-K for the fiscal year ended January 28, 1996
(C) Incorporated by reference to exhibit filed with the Company's current
report on Form 8-K for July 23, 1993
(D) Incorporated by reference to exhibit filed with the Company's annual report
on Form 10-KSB for the fiscal year ended January 30, 1994
(E) Incorporated by reference to exhibit filed with the Company's annual report
on Form 10-KSB for the fiscal year ended January 29, 1995
(F) Incorporated by reference to exhibit filed with the Company's current
report on Form 8-K for February 20, 1997
The Company did not file any reports on Form 8-K during the last quarter of the
fiscal year ended January 26, 1997.
50
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
(Registrant) Chefs International, Inc.
By /s/Anthony C. Papalia
Anthony C. Papalia, President
Date April 28, 1997
Pursuant to the requirements of 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/Anthony C. Papalia By/s/Frank Koenemund
Anthony C. Papalia, Principal Frank Koenemund, Director
executive, financial and
accounting officer and director Date April 28, 1997
Date April 28, 1997
By/s/Martin Fletcher By/s/Jack Mariucci
Martin Fletcher, Director Jack Mariucci, Director
Date April 28, 1997 Date April 28, 1997
- --------------------------- -------------------------
By/s/James Fletcher
James Fletcher, Director
Date April 28, 1997
51
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and the consolidated statement of operations and
is qualified in its entirety by reference to such financial statements
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-26-1997
<PERIOD-END> JAN-26-1997
<CASH> 951,668
<SECURITIES> 160,000
<RECEIVABLES> 147,101
<ALLOWANCES> 0
<INVENTORY> 925,463
<CURRENT-ASSETS> 2,951,895
<PP&E> 18,200,415
<DEPRECIATION> 6,676,718
<TOTAL-ASSETS> 16,945,069
<CURRENT-LIABILITIES> 2,774,054
<BONDS> 0
0
0
<COMMON> 44,883
<OTHER-SE> 13,126,094
<TOTAL-LIABILITY-AND-EQUITY> 16,945,069
<SALES> 17,298,626
<TOTAL-REVENUES> 17,298,626
<CGS> 5,656,124
<TOTAL-COSTS> 11,857,946
<OTHER-EXPENSES> (88,408)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,713
<INCOME-PRETAX> 174,749
<INCOME-TAX> 0
<INCOME-CONTINUING> 174,749
<DISCONTINUED> (1,165,135)
<EXTRAORDINARY> (572,883)
<CHANGES> 0
<NET-INCOME> (1,912,767)
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
