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 25, 1998
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 (732) 295-0350
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the 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, 1998, 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 $1,950,000 based upon the last
sale price for such Common Stock on said date in the over-the-counter market as
reported by the National Quotation Bureau, Inc. On such date, there were
4,488,347 shares of Common Stock of the Issuer outstanding.
<PAGE>
CHEFS INTERNATIONAL, INC.
PART I
Item 1. Description of Business
(a) Business Development - Chefs International, Inc. ("Chefs" or the
"Company") was organized under the laws of the State of Delaware in March 1975.
The Company currently operates nine restaurants on a year-round basis, eight of
which are free-standing seafood restaurants in New Jersey (five) and Florida
(three) and one of which is a 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 (732) 295-0350.
Recent Developments
Reverse Stock Split
Effective November 22, 1996, the Company completed a 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
said one-for-three reverse stock split. In addition, unless otherwise indicated,
actual price quotations for the Common Stock as quoted on the NASDAQ System have
been adjusted throughout this report by multiplying the actual price for the
Common Stock for periods prior to November 23, 1996 by three. No assurances can
be given that the actual price quotations for the Common Stock during such
pre-split period would have approximated such adjusted prices if the one-for-
three reverse stock split had been effectuated at such time.
Discontinued Operation
The failure to complete a proposed 1993 public offering of its securities
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 ("First Union") to extinguish
Chefs' outstanding indebtedness under its $1,000,000 revolving line of credit
with First Union. 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.
1
<PAGE>
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. At the date of this report, the
March 1 and April 1, 1998 installments of principal and interest had been paid
in full. 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. During fiscal 1998, certain interest payments were
made to Chefs with respect to Note C based on MCF's "cash flow."
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.
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
2
<PAGE>
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 17 of Notes to the Consolidated Financial
Statements.
Bank Loans
At January 26, 1997, the Company's principal bank financing was provided
pursuant to a $625,000 term loan ("Term Loan A") and a $1,000,000 term loan
("Term Loan B") from First Union National Bank ("First Union") as well as a
$1,000,000 revolving line of credit ("L/C line") from First Union. At that date,
approximately $416,500 was outstanding under Term Loan A payable in installments
of principal and interest through November 15, 1998; approximately $800,000 was
outstanding under Term Loan B payable in installments of principal and interest
through November 15, 2000 and approximately $500,000 was outstanding under the
L/C line, due on May 31, 1997. Interest on the Term Loans was computed at a
fixed annual rate of 7.51%. These loans were secured by first mortgages on the
Company's two Pt. Pleasant Beach, New Jersey seafood restaurants and its Toms
River, New Jersey seafood restaurant. The Company also had a $350,000 revolving
line of credit from First Union due June 30, 1997 secured by a mortgage on the
Toms River restaurant under which approximately $100,000 was outstanding at
January 26, 1997.
During fiscal 1998, the Company paid approximately $191,000 in reduction
of the principal of Term Loan A. The balance was retired out of the proceeds of
the December 1997 $525,000 bank loan hereinafter described. Principal payments
on Term Loan B during fiscal 1998 reduced the outstanding balance of that loan
at January 25, 1998 to approximately $600,000. The L/C line obligation was paid
in full at the time of the February 20, 1997 (as of January 26, 1997) sale of
95% of the capital stock of MCF to Frank Koenemund out of the proceeds received
from that sale. The $350,000 line of credit was renewed at June 30, 1997 for an
additional year. Advances under that line bear interest at First Union's prime
rate. At January 25, 1998, approximately $325,000 was outstanding under this
line of credit.
On December 1, 1997, the Company borrowed $525,000 from First Union
pursuant to a five-year term loan repayable in monthly installments of principal
commencing in March 1998 together with interest on the unpaid balance at a fixed
annual rate of 9 1/4%. This loan is also secured by a mortgage on the Toms River
restaurant. The Company applied $225,000 of the loan proceeds to pay the
outstanding balance of Term Loan A. The $300,000 balance of the loan proceeds
has been applied by the Company to partially finance renovations at its Toms
River restaurant. The entire amount of this loan was outstanding at January 25,
1998.
Repayment of the Company's term loans and of borrowings under its line of
credit is guaranteed by each of the Company's subsidiaries.
Pursuant to its principal Loan Agreement, the Company has made certain
affirmative and negative covenants to First Union (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, tangible
net worth of at least $11,400,000 increasing by $50,000 at each subsequent
fiscal year-end commencing with fiscal 1999; a debt to equity ratio of no
greater than .5:1; a net income, depreciation and amortization to current
portion of long term debt ratio of not less than 1.2:1; 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 First Union to accelerate payment of all outstanding indebtedness.
At the end of fiscal 1998, the Company was not in compliance with certain
of its covenants under the Loan Agreement by failing to maintain the requisite
Debt Service Coverage Ratio. However, the Company requested and First Union
granted a waiver of its right to declare a default based on the Company's
failure to comply with this covenant at January 25, 1998.
(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.
3
<PAGE>
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
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. During
fiscal 1998, the Company constructed an outdoor deck with a bar and dining
facilities at this restaurant at a cost of approximately
4
<PAGE>
$125,000. The Company made an offer in March 1998 to purchase this restaurant
but no assurances can be given that its offer will be accepted.
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 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. During fiscal 1998, the Company commenced an interior renovation of
this restaurant, the bulk of which was completed in fiscal 1998 with the balance
completed early in fiscal 1999. The total cost of this renovation was
approximately $300,000. In the current fiscal year, the Company intends to
construct an outdoor deck with a bar and dining facilities at this restaurant at
an expected cost of approximately $150,000.
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.
5
<PAGE>
Belmar, New Jersey - This restaurant, consisting of approximately 9,000
square feet, is free standing on Main Street in Belmar, New Jersey. The
restaurant seats approximately 250 and has parking for approximately 110
automobiles. The Company purchased the liquor license and trade name for use at
this restaurant in October 1994 for $250,000 from unaffiliated parties and
leased the restaurant, the parking lot and the restaurant furniture, fixtures
and equipment at such time from such parties pursuant to a five-year lease in
which the Company was given four consecutive five-year options to renew. The
lease provides for a monthly base rent (currently approximately $8,640)
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 did not open a Garcia's restaurant in each
of the first five 12-month periods (including the grace period), the Agreement
provided that it would lose the right to develop additional restaurants within
the Territory. The Company did not open an additional Garcia's restaurant within
18 months of the April 1996 opening of its initial Garcia's restaurant.
Regardless of whether the Company opened 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.
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.
6
<PAGE>
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.
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. The Company's Garcia's restaurant has experienced its greatest
sales volume during the Thanksgiving through Christmas period.
Trademarks
The Company has no patents, trademarks, licenses, franchises or
concessions which it regards as material to its restaurant business with the
exception of the service mark "Jack Baker's Lobster Shanty"R registered for a 20
year period with the U.S. Patent and Trademark Office in February, 1989 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.
7
<PAGE>
Government Regulation
The Company is subject to various Federal, state and local laws affecting
the operation of its restaurants, including licensing and regulation by health,
sanitation, safety and fire departments and alcoholic beverage control
authorities. The Company is also subject to the Fair Labor Standards Act, which
governs such matters as minimum wages, overtime and other working conditions.
While such regulations have not had a material negative impact on the Company's
operations to date, difficulties in obtaining necessary licenses or permits
could result in delays or cancellations in the opening of new restaurants and
increases in the minimum wage could increase the Company's labor cost.
Employees
The Company maintains its administrative employees at its executive
offices including its principal officers (see "Item 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 employs
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 25, 1998, the Company had a
total of approximately 430 employees (including part-time workers). The Company
is not a party to any collective bargaining agreements and has enjoyed
satisfactory employee relations since inception.
Item 2. Description of Property
The Company's executive and administrative offices are located in an
approximately 4,000 square foot two story Company owned building of cinder block
construction at 62 Broadway, Point Pleasant Beach, New Jersey.
See Item 1 herein for a description of the Company's operating
restaurants.
Item 3. Legal Proceedings
In May 1997, a lawsuit was filed in the Superior Court of New Jersey,
Chancery Division, Middlesex County (Docket No. C-133-97) by Michael F.
Lombardi, various Lombardi relatives, the law firm of Lombardi & Lombardi, P.A.
and the Lombardi & Lombardi, P.A. Defined Benefit Pension Plan (collectively the
"Lombardi Group") as plaintiffs, against the Company's five individual
directors, Anthony C. Papalia, James Fletcher, Martin Fletcher, Frank Koenemund
and Jack Mariucci (the "Director Group") and the Company's former wholly-owned
subsidiary, Mister Cookie Face, Inc. ("MCF") as defendants. Because the lawsuit
was a purported shareholder derivative action brought on behalf of the Company,
the Company was named as a nominal defendant.
The complaint alleged that certain corporate actions including the
Company's purchase of MCF in July 1993 from Frank Koenemund, the subsequent
increase in Mr. Koenemund's salary, a bonus payment made to Mr. Koenemund during
fiscal 1996 and the February 1997 sale (as of January 26, 1997) by the Company
of 95% of the stock of MCF back to Mr. Koenemund constituted a waste of the
Company's assets. Among other remedies sought by the plaintiffs was a judgment
finding that the defendants "wasted" the Company's assets in violation of their
fiduciary duties and ordering them to account for damages incurred and profits
lost by the Company; a judgment declaring the Stock Purchase/Sale Agreement by
which the Company sold 95% of MCF to Mr. Koenemund in February 1997 to be null
and void "ab initio"; a judgment enjoining borrowings, fund raising or loan
transactions on behalf of MCF; a judgment enjoining Mr. Koenemund and MCF from
transferring, encumbering, hypothecating or diluting the 950 shares of MCF stock
transferred to Mr. Koenemund in the February 1997 sale and placing a
constructive trust on said shares; a judgment enjoining Mr. Koenemund from
transferring, encumbering, hypothecating or diluting his approximately 7% stock
ownership in the Company; and in the alternative, a judgment awarding
compensatory and/or punitive damages against
8
<PAGE>
the defendants, jointly and severally in an amount to be determined at trial.
The plaintiffs also asked for an award of costs and disbursements in the lawsuit
including a reasonable allowance for their attorneys' and experts' fees, and
such other or further relief as "may be just and proper under the
circumstances."
Although management intends to respond at an appropriate time to the
substance of the complaint, if required, the suit appeared to be legally
deficient for several reasons and management filed a motion with respect
thereto. Management noted that subsequent to the Company's 1993 acquisition of
MCF, the terms of which were fully disclosed, the Lombardi Group continued to
accumulate a substantial position in the Company's Common Stock through
purchases of same and according to the most recently filed amendment to its
Schedule 13D, the Lombardi Group appeared to be the beneficial owner of
approximately 8% of the Company's outstanding Common Stock. In addition, in
October 1996, in an apparent effort to gain control of the Company, Michael F.
Lombardi wrote to the Company's attorneys stating a wish to explore with the
Company's Board of Directors, the possibility of the Lombardi Group purchasing
2,000,000 shares of the Company's Common Stock. Management rejected such
possibility. Furthermore, by letter dated December 27, 1996, Michael F.
Lombardi, presumably on behalf of the Lombardi Group, wrote to counsel for
Robert E. Brennan offering to buy Mr. Brennan's 1,766,557 shares of the
Company's Common Stock for $1,095,264.72, which purchase, if made, would have
given the Lombardi Group ownership of approximately 46.4% of the Company's
outstanding Common Stock and practical control. To date, such offer has not been
accepted.
Management filed a motion for summary judgment with respect to the
complaint asking for dismissal of the complaint, disqualification of plaintiffs'
counsel, an award of expenses and other relief. The plaintiffs in turn,
cross-moved for disqualification of defendants' counsel and for other relief.
After conferring in Chambers with the Court, the parties stipulated and agreed
effective September 4, 1997 to a dismissal of the complaint without prejudice
and without costs, and also agreed that the plaintiffs may not institute another
action in any court relating in any way to the subject matter of this lawsuit
except upon a refusal by the Board of Directors of a demand, if any, made by the
plaintiffs to the Board in accordance with applicable law to bring such a
lawsuit against the defendants.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders
during the quarter ended January 25, 1998.
9
<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.
Because the bid price for the Common Stock since February 23, 1998 has
been less than $1.00, such security is not in compliance with NASDAQ's minimum
bid price requirement. If the prices does not increase to at least $1.00 for at
least ten consecutive trade dates prior to May 28, 1998, the Common Stock may be
delisted from trading on the NASDAQ System. Such delisting may adversely impact
the liquidity for the Common Stock.
Quarter Bid Prices
Ended High Low
April 28, 1996 $ 1.02 $ .84
July 28, 1996 $ 1.98 $ .94
October 27, 1996 $ 1.98 $ .84
January 26, 1997 $ .94 $ .50
April 27, 1997 $ .65625 $ .5625
July 27, 1997 $ .625 $ .50
October 26, 1997 $ 1.00 $ .5625
January 25, 1998 $ .90625 $ .53125
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, 1998, the number of record holders of the Common Stock was
7,051. 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 Agreement with First Union National
Bank, the Company is restricted during the period any loans are outstanding
under such agreement from paying dividends on any of its outstanding stock.
10
<PAGE>
<TABLE>
Item 6. Selected Financial Data
[In thousands, except per share data]
Y e a r s e n d e d
January 25,January 26,January 28,January 29, January 30,
1 9 9 8 1 9 9 7 1 9 9 6 1 9 9 5 1 9 9 4
Operating Data:
<S> <C> <C> <C> <C> <C>
Gross Revenues $ 18,097 $ 17,299 $ 16,571 $16,044 $15,318
Operating Expenses $ 12,224 $ 11,858 $ 11,443 $10,585 $11,355
[Loss] Income from
Continuing Operations $ (36) $ (175) $ (336) $ 184 $ 182
[Loss] from Discontinued
Operations $ -- $ (1,165) $ (1,848) $ (441) $ (359)
[Loss] on Disposal of
Discontinued Operations $ -- $ (573) $ -- $ -- $ --
Net [Loss] $ (36) $ (1,913) $ (2,184) $ (257) $ (177)
[Loss] Income Per Share from
Continuing Operations $ (.01) $ (.04) $ (.07) $ .04 $ .04
Net [Loss] Per Common Share$ (.01) $ (.43) $ (.49) $ (.06) $ (.03)
Cash Dividends Per
Common Share $ -- $ -- $ -- $ -- $ --
Balance Sheet Data:
Cash and Cash Equivalents $ 1,136 $ 1,037 $ 1,379 $ 1,267 $ 1,043
Total Assets * $ 16,805 $ 17,280 $ 18,508 $20,945 $19,863
Total Long-Term Liabilities$ 1,302 $ 1,000 $ 1,613 $ 1,844 $ 540
Total Liabilities $ 3,670 $ 3,774 $ 3,424 $ 3,678 $ 2,340
Working Capital $ 465 $ 178 $ 957 $ 495 $ 375
Stockholders' Equity $ 13,135 $ 13,171 $ 15,084 $17,266 $17,523
* At fiscal year end 1998, 1997, 1996, 1995 and 1994, includes $530, $557, $1,221, $3,529 and $3,590
of goodwill.
</TABLE>
11
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
In fiscal 1998, the Company sustained a loss of $36,300 compared to losses
of $1,912,800 in 1997 and $2,184,100 in 1996. The 1997 and 1996 losses include
results from the Company's wholly-owned Mister Cookie Face, Inc. ("MCF")
subsidiary. The Company sold 95% of the capital stock of MCF to a Chefs'
director, Frank "Doc" Koenemund, on February 20, 1997 (as of January 26,1997).
The fiscal 1997 loss included a loss from the discontinued MCF operations
of $1,165,100 and a loss of $572,900 resulting from the sale of MCF. The 1996
loss included a loss of $1,847,800 from MCF's operations. Effective for fiscal
1996, the Company adopted the Statement of Financial Account Standards No. 121
("FASB121"), "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 $2,024,900 respectively. The Company's fiscal
1996 loss from continuing operations included an impairment loss of $171,000 in
connection with restaurant operations.
The Company's continuing restaurant operations realized a loss of $36,300
for fiscal 1998 compared to losses of $174,700 and $336,300 for fiscal years
1997 and 1996 respectively. Sales for fiscal 1998 were $18,097,100, an increase
of $798,500 or 4.6% over 1997 sales of $17,298,600. The number of customers
served increased by 2.1% in fiscal 1998 and there was an increase of
approximately 2.4% in the average check per customer. The Company operated nine
restaurants during the comparable periods. A majority of the sales increase in
fiscal 1998 occurred during the first quarter of such year primarily as a result
of a mild winter and sales during such quarter of $234,300 at "Garcia's," the
Company's Mexican restaurant, which opened during the second quarter of fiscal
1997. Fiscal 1997 sales were $727,300 or 4.4% higher than 1996 sales.
Gross profit for fiscal 1998 was 67.2% of sales, slightly below the 1997
gross profit of 67.3% and higher than the 66.7% in 1996. During fiscal 1998 the
Company experienced higher seafood and produce prices. A majority of the
increased costs were offset with some menu price increases and other menu
strategies including removal of high cost items. Additionally, management
purchased substantial quantities of inventory in anticipation of further seafood
increases. Drink prices were also increased modestly to compensate for higher
liquor costs.
Payroll and related expenses were 30% of gross sales in fiscal 1998 versus
30.3% in 1997 and 30.4% in 1996. Although the Company experienced increases in
salaries and health and worker's compensation insurance costs, the substantial
increase in sales resulted in an improvement in overall payroll costs as a
percentage of sales. The federal minimum wage, which was raised to $5.15 per
hour in September 1997 (from $4.75 per hour since October 1996), had a minimal
impact on payroll costs because most of the Company's employees, other than
tipped employees whose cash wages remained the same, already received hourly
compensation in excess of $5.15.
Other operating expenses were 22.3% of sales for fiscal 1998 compared to
22.6% and 21.7% for the two previous years. The primary reason for the
improvement was the increase in sales. Depreciation and amortization expenses
were approximately $27,000 higher in 1998 due to capital expenditures and a full
year of depreciation for "Garcia's" compared to nine months in fiscal 1997.
General and administrative expenses were $27,700 higher in fiscal 1998 compared
to 1997 primarily due to legal costs associated with a lawsuit brought against
the Company's directors and MCF. Approximately $100,000 was expended defending
the suit which was dismissed in September 1997. General and administrative
expenses were $138,000 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.
Interest expense was $67,500 higher in fiscal 1998 as compared to fiscal
1997 primarily as a result of the interest expense associated with a bank
term-loan allocated to MCF's operations. Interest income was $61,000 higher in
fiscal 1998 as compared to fiscal 1997 due to interest received on the notes
from the MCF sale. Interest expense in fiscal 1997 was slightly higher in fiscal
1996 due to borrowings used to finance the "Garcia's" renovations and interest
income was lower in fiscal 1997 as compared to fiscal 1996 due to lower rates
available for short-term investments.
12
<PAGE>
Liquidity and Capital Resources
The Company's ratio of current assets to current liabilities was 1.20:1 at
January 25, 1998, compared to 1.06:1 and 1.53:1 at the end of each of the two
previous fiscal years. Working capital was $465,100 at the end of fiscal 1998
compared to $177,800 and $957,200 at the end of fiscal 1997 and 1996. Net cash
provided by operating activities was $754,100. The primary changes in assets and
liabilities in fiscal 1998 were an increase in inventories of $113,700
reflecting purchases made during the third quarter in anticipation of higher
seafood prices and an increase in other assets of $93,300 primarily due to
deposits advanced on the renovation of the Toms River, New Jersey Lobster Shanty
and an increase in the cash surrender values of the "Company's Supplemental
Employee Benefit Program." Net cash flows from investing activities in fiscal
1998 were a net outlay of $209,700 resulting from capital expenditures of
$790,700 for restaurant improvements and equipment offset by $670,500 in
payments on notes receivable from the MCF sale. The capital expenditures
included approximately $125,000 to build an outdoor deck and bar at the Vero
Beach, Florida restaurant and approximately $300,000 spent on the renovation of
the interior of the Toms River, New Jersey restaurant. The Company will spend an
additional $150,000 to build an outdoor dining area and bar for the Toms River
restaurant which will open during the second quarter of fiscal 1999. Net cash
flows from financing activities in fiscal 1998 were a net outlay of $455,600
resulting from debt repayment of $1,295,600 offset by the incurrence of new debt
of $850,000. Approximately 50% of the debt repayment was made with proceeds from
amounts received as a result of the MCF sale. During the second quarter of
fiscal 1998, the Company's $350,000 bank line of credit was renewed and $325,000
was borrowed to finance inventory purchases leaving an available balance of
$25,000 at year end. In December of 1997, First Union National Bank, the
Company's primary bank, advanced a five-year $525,000 term loan to the Company.
The proceeds were used to pay off an existing term loan which had an outstanding
balance of $225,000 and to partially fund the Toms River renovation. In fiscal
1997, net cash provided by operations was $1,172,800. The significant changes in
assets and liabilities were an increase in inventory of $93,200 and an increase
of $343,400 in accounts payable due to increased sales. Cash outflows from
investing activities in fiscal 1997 included $1,144,200 for capital expenditures
primarily to build Garcia's, while financing activities including debt repayment
of $281,600. For fiscal 1996, net cash flows from operations totaled $479,400.
The primary change in assets and liabilities was a decrease in accounts payable
of $79,200 due to lower sales. Cash outflows from investing activities were
$530,400 for capital expenditures while financing activities resulted in an
increase of $150,400. Fiscal 1996 financial 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.
At the end of fiscal 1998, the Company was not in compliance with one of
its covenants under its Loan Agreement with First Union by failing to maintain
the requisite Funds Flow 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 this covenant at January 25, 1998.
Management anticipates that funds from operations will be sufficient to
meet obligations in fiscal 1999, 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
and are dependent upon a complex set of factors.
13
<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 25, 1998 and
January 26, 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three fiscal years in the
period ended January 25, 1998. 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 25,
1998 and January 26, 1997, and the consolidated results of their operations and
their cash flows for each of the three fiscal years in the period ended January
25, 1998, 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 20, 1998
F-1
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
<TABLE>
January 25, January 26,
1 9 9 8 1 9 9 7
Assets:
Current Assets:
<S> <C> <C>
Cash and Cash Equivalents $1,136,063 $ 1,037,379
Investments 196,000 160,000
Miscellaneous Receivables 66,228 58,286
Inventories 1,039,203 925,463
Due on Sale of Discontinued Operations
from Related Party - Current 297,441 682,258
Prepaid Expenses 98,547 88,509
---------- -----------
Total Current Assets 2,833,482 2,951,895
---------- -----------
Property, Plant and Equipment - At Cost 18,591,633 18,200,415
Less: Accumulated Depreciation 7,234,384 6,676,718
---------- -----------
Property, Plant and Equipment - Net 11,357,249 11,523,697
---------- -----------
Other Assets:
Investments 685,000 631,000
Goodwill - Net 529,972 557,364
Liquor Licenses - Net 702,979 727,663
Due on Sale of Discontinued Operations
from Related Party - Long-Term 222,866 508,593
Cash Surrender Value of Life Insurance 406,438 358,406
Due from Related Party 4,702 6,524
Other 62,144 15,076
---------- -----------
Total Other Assets 2,614,101 2,804,626
---------- -----------
Total Assets $16,804,832 $17,280,218
=========== ===========
See Notes to Consolidated Financial Statements.
</TABLE>
F-2
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
<TABLE>
January 25, January 26,
1 9 9 8 1 9 9 7
Liabilities and Stockholders' Equity:
Current Liabilities:
<S> <C> <C>
Accounts Payable $ 945,067 $ 967,245
Accrued Payroll 120,470 134,954
Accrued Expenses 305,688 337,897
Notes and Mortgages Payable to Banks 630,000 1,008,500
Capital Lease Obligations - Current 85,727 79,154
Other Liabilities 281,435 246,304
---------- -----------
Total Current Liabilities 2,368,387 2,774,054
---------- -----------
Long-Term Debt:
Notes and Mortgages Payable to Banks 819,998 807,999
Capital Lease Obligations - Long-Term 23,916 109,643
---------- -----------
Total Long-Term Debt 843,914 917,642
---------- -----------
Other Liabilities 457,806 417,545
---------- -----------
Commitments and Contingencies -- --
---------- -----------
Stockholders' Equity:
Capital Stock - Common, $.01 Par Value, Authorized
15,000,000 Shares; Issued and Outstanding 4,488,347 in
1998 and 4,488,291 in 1997 44,883 44,883
Additional Paid-in Capital 32,304,486 32,304,486
Accumulated [Deficit] (19,214,644) (19,178,392)
----------- -----------
Total Stockholders' Equity 13,134,725 13,170,977
---------- -----------
Total Liabilities and Stockholders' Equity $16,804,832 $17,280,218
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------
<TABLE>
P e r i o d s E n d e d
January 25, January 26, January 28,
1 9 9 8 1 9 9 7 1 9 9 6
<S> <C> <C> <C>
Sales $18,097,100 $17,298,626 $16,571,357
Cost of Goods Sold 5,943,083 5,656,124 5,511,095
----------- ---------- -----------
Gross Profit 12,154,017 11,642,502 11,060,262
----------- ---------- -----------
Operating Expenses:
Payroll and Related Expenses 5,424,262 5,238,257 5,037,515
Other Operating Expenses 4,036,281 3,910,968 3,593,820
Depreciation and Amortization 1,002,238 974,758 990,867
General and Administrative Expenses 1,761,706 1,733,963 1,595,644
Loss on Closing and Sale of Restaurants -- -- 54,355
Impairment Loss of Long-Lived Assets -- -- 170,867
----------- ---------- -----------
Total Operating Expenses 12,224,487 11,857,946 11,443,068
----------- ---------- -----------
[Loss] from Operations (70,470) (215,444) (382,806)
----------- ---------- -----------
Other Income [Expense]:
Interest Expense (115,181) (47,713) (45,892)
Interest Income 149,399 88,408 92,373
----------- ---------- -----------
Other Income - Net 34,218 40,695 46,481
----------- ---------- -----------
[Loss] from Continuing Operations
Before Income Taxes (36,252) (174,749) (336,325)
Provision for Income Taxes -- -- --
----------- ---------- -----------
[Loss] from Continuing Operations (36,252) (174,749) (336,325)
[Loss] from Operations of Discontinued
Ice Cream Business -- (1,165,135) (1,847,824)
[Loss] on Disposal of Ice Cream Business -- (572,883) --
----------- ---------- -----------
Net [Loss] $ (36,252) $(1,912,767) $(2,184,149)
=========== =========== ===========
Basic [Loss] Per Common Share from
Continuing Operations $ (.01) $ (.04) $ (.07)
=========== ========== ===========
Basic [Loss] Per Common Share $ (.01) $ (.43) $ (.49)
=========== ========== ===========
See Notes to Consolidated Financial Statements.
</TABLE>
F-4
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------
<TABLE>
Capital Additional Total
Number Stock Paid-in AccumulatedStockholders'
of Shares Par Value Capital [Deficit] Equity
<S> <C> <C> <C> <C> <C>
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
Fractional Shares Conversion 56 -- -- -- --
Net [Loss] -- -- -- (36,252) (36,252)
---------- --------- ---------- ----------- ----------
Balance - January 25, 1998 4,488,347 $ 44,883 $32,304,486 $(19,214,644) $13,134,725
========== ========= =========== ============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
<TABLE>
P e r i o d s e n d e d
January 25, January 26, January 28,
1 9 9 8 1 9 9 7 1 9 9 6
Operating Activities:
<S> <C> <C> <C>
[Loss] Income From Continuing Operations $ (36,252) $ (174,749) $ (336,325)
----------- ---------- -----------
Adjustments to Reconcile Net [Loss] Income
to Net Cash Provided by Continuing
Operating Activities:
Depreciation and Amortization 1,002,238 974,758 990,867
Loss on Asset Disposals 6,558 3,293 2,512
Loss [Gain] on Closing and Sale of Restaurants -- -- 54,355
Changes in Assets and Liabilities:
[Increase] Decrease in:
Inventories (113,740) (93,220) (62,843)
Prepaid Expenses (10,038) 16,545 (40,096)
Other Assets (93,278) 48,524 (50,488)
Miscellaneous Receivable (7,942) 41,324 25,961
Increase [Decrease] in:
Accounts Payable (22,179) 343,425 (79,219)
Accrued Expenses and Other Liabilities 28,699 12,884 (25,350)
----------- ---------- -----------
Total Adjustments 790,318 1,347,533 815,699
----------- ---------- -----------
Net Cash - Continuing Operations - Forward 754,066 1,172,784 479,374
----------- ---------- -----------
Discontinued Operations:
[Loss] From Discontinued Operations -- (1,738,018) (1,847,824)
----------- ---------- -----------
Adjustments to Reconcile Net [Loss] to Net
Cash Provided [Used] by Discontinued
Operating Activities:
Depreciation and Amortization -- 293,711 381,959
[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)
----------- ---------- -----------
Total Adjustments -- 1,550,922 2,527,514
----------- ---------- -----------
Net Cash - Discontinued Operations - Forward -- (187,096) 679,690
---------- ---------- -----------
Investing Activities - Continuing Operations:
Capital Expenditures (790,701) (1,144,192) (530,382)
Proceeds from Sale of Restaurant Assets 430 8,939 --
Sale or Redemption of Investments 160,000 -- --
Purchase of Investments (250,000) (50,000) --
Proceeds from Notes Receivable - Discontinued
Operations 670,544 -- --
Sale of Discontinued Operations - Cash Transferred -- (156,384) --
---- ---------- -----------
Net Cash - Investing Activities - Continuing
Operations - Forward $ (209,727) $(1,341,637) $ (530,382)
See Notes to Consolidated Financial Statements.
</TABLE>
F-6
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
<TABLE>
P e r i o d s e n d e d
January 25, January 26, January 28,
1 9 9 8 1 9 9 7 1 9 9 6
<S> <C> <C> <C>
Net Cash - Continuing Operations -
Forwarded $ 754,066 $1,172,784 $ 479,374
----------- ---------- -----------
Net Cash - Discontinued Operations -
Forwarded -- (187,096) 679,690
-------- ---------- -----------
Net Cash - Investing Activities - Continuing
Operations - Forwarded (209,727) (1,341,637) (530,382)
----------- ---------- -----------
Investing Activities - Discontinued Operations:
Capital Expenditures -- (100,574) (342,571)
Proceeds from Sale of Restaurant Assets -- 140,126 --
----------- ---------- -----------
Net Investing Activities - Discontinued
Operations -- 39,552 (342,571)
---- ---------- -----------
Financing Activities - Continuing Operations:
Repayment of Debt (1,295,655) (281,585) (976,785)
Proceeds from Debt 850,000 100,000 1,125,000
Proceeds from Exercise of Stock Options -- -- 2,188
----------- ---------- -----------
Net Cash - Financing Activities - Continuing
Operations (445,655) (181,585) 150,403
----------- ---------- -----------
Financing Activities - Discontinued Operations:
Repayment of Debt -- (213,260) (724,501)
Proceeds from Debt -- 375,000 400,000
Repayment of Related Party Loan -- (5,193) --
----------- ---------- -----------
Net Cash - Financing Activities - Discontinued
Operations -- 156,547 (324,501)
----------- ---------- -----------
Net Increase [Decrease] in Cash and Cash
Equivalents 98,684 (341,435) 112,013
Cash and Cash Equivalents - Beginning of
Periods 1,037,379 1,378,814 1,266,801
--------- ---------- -----------
Cash and Cash Equivalents - End of Periods $ 1,136,063 $1,037,379 $ 1,378,814
=========== ========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ 113,399 $ 178,777 $ 197,752
Income Taxes $ -- $ -- $ --
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.
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<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
restaurants at January 25, 1998 and January 26, 1997. Eight of the restaurants
are seafood restaurants, operated in New Jersey and Florida, generally under the
trade name, "Lobster Shanty." The Company also operated Garcia's, a franchised
Mexican restaurant in New Jersey.
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 fiscal 1997 and 1996 have been
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 $1,025,000 and $780,000 at the end of fiscal
years 1998 and 1997, respectively. The Company does not require collateral to
support financial instruments subject to credit risk.
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. At the end of fiscal 1998 and
1997, investments include the estimated fair value of 5% of the stock of the MCF
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 businesses
acquired and is being amortized over estimated useful lives ranging from 3 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 fair value usually measured by 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.
As of January 25, 1998, 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].
F-8
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
- ------------------------------------------------------------------------------
[1] Nature of Operations and Summary of Significant Accounting Policies
[Continued]
Reclassification - Certain amounts in the 1997 financial statements have been
reclassified to conform with the 1998 financial statement presentation.
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 1998, 1997 and 1996 were $548,355, $455,409 and $466,737,
respectively.
Earnings Per Share - The Financial Accounting Standards Board has issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share"; which is effective for financial statements issued for periods ending
after December 15, 1997. Accordingly, earnings per share data in the financial
statements for the year ended January 25, 1998, have been calculated in
accordance with SFAS No. 128. Prior periods earnings per share data have been
recalculated and it was determined that no adjustment was necessary.
SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, "Earnings
per Share," and replaces its primary earnings per share with a new basic
earnings per share representing the amount of earnings for the period available
to each share of common stock outstanding during the reporting period. SFAS No.
128 also requires a dual presentation of basic and diluted earnings per share on
the face of the statement of operations for all companies with complex capital
structures. Diluted earnings per share reflects the amount of earnings for the
period available to each share of common stock outstanding during the reporting
period, while giving effect to all dilutive potential common shares that were
outstanding during the period, such as common shares that could result from the
potential exercise or conversion of securities into common stock.
The computation of diluted earnings per share does not assume conversion,
exercise, or contingent issuance of securities that would have an antidilutive
effect on earnings per share (i.e., increasing earnings per share or reducing
loss per share). The dilutive effect of outstanding options and warrants and
their equivalents are reflected in dilutive earnings per share by the
application of the treasury stock method which recognizes the use of proceeds
that could be obtained upon exercise of options and warrants in computing
diluted earnings per share. It assumes that any proceeds would be used to
purchase common stock at the average market price during the period. Options and
warrants will have a dilutive effect only when the average market price of the
common stock during the period exceeds the exercise price of the options or
warrants. The Company's options were not included in the computation of diluted
earnings per share because to do so would have been antidilutive for the periods
presented; however, such options could potentially dilute basic earnings per
share in the future.
F-9
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
- ------------------------------------------------------------------------------
[2] Inventory
Inventories consist of the following:
January 25, January 26,
1 9 9 8 1 9 9 7
Food $ 580,036 $ 479,575
Beverages 111,127 103,455
Supplies 348,040 342,493
--------- ---------
Totals $1,039,203$ 925,463
------ ===================
[3] Property, Plant and Equipment
The classification of property, plant and equipment together with their
estimated useful lives is as follows:
January 25, January 26, Estimated
1 9 9 8 1 9 9 7 Useful Life
Land $ 2,335,026 $ 2,335,026 N/A
Buildings and Improvements 12,617,504 12,595,530 20 - 40 Years
Leasehold Improvements 1,100,618 976,123 Term of Lease
Furniture and Equipment 2,168,098 2,140,220 5 - 10 Years
Construction in Progress 276,405 59,534
China, Glassware and Utensils 93,982 93,982 *
----------- ------------
Totals $18,591,633 $ 18,200,415
------ =========== ============
* Carried at original cost for each restaurant. All replacement purchases are
charged to expense as incurred.
Depreciation expense was $950,161, $922,682 and $936,274 for fiscal 1998, 1997
and 1996, respectively.
[4] Intangible Assets
As of the end of fiscal 1998 and 1997, intangible assets consist of:
Liquor
1998 Goodwill Licenses
Cost $ 967,132 $ 987,307
Less: Accumulated Amortization 437,160 284,328
---------- ----------
Net $ 529,972 $ 702,979
--- ========== ==========
1997
Cost $ 967,132 $ 987,307
Less: Accumulated Amortization 409,768 259,644
---------- ----------
Net $ 557,364 $ 727,663
--- ========== ==========
Amortization expense was $52,077, $52,076 and $54,593 for fiscal 1998, 1997 and
1996, respectively.
F-10
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
- ------------------------------------------------------------------------------
[4] Intangible Assets [Continued]
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 Receivable - Impairment
As part of the sale of a subsidiary to a director [See Note 16], two notes with
a face value of $1,000,000 are held by the Company at January 25, 1998.
Valuation allowances totaling $601,050 were taken against these notes for the
years ending January 25, 1998 and January 26, 1997, resulting in a net
receivable of $398,950.
Cash receipts for these notes are applied to principal and interest based on the
note payment schedules, and have been applied as follows:
1 9 9 8 1 9 9 7
------- -------
Interest Income $ 58,480 $ --
========= =========
Average Recorded Investment in Loan$ 398,950 $ 398,950
Cash Basis Interest Income $ 54,883 $ --
========= =========
The valuation allowance related to the notes receivables was based on current
facts and circumstances and it is at least reasonably possible that a change in
the estimate may occur in the near term.
[6] Notes and Mortgages Payable to Banks
Notes and mortgages payable to banks as of the end of fiscal 1998 and 1997, were
as follows:
1 9 9 8 1 9 9 7
------- -------
Note Payable, Due November 15, 2000, at 7.51% fixed,
collateralized by real estate $ 599,998 $ 799,999
Note Payable, Due November 15, 1998, at 7.51% fixed,
collateralized by real estate -- 416,500
Revolving Credit, Due May 31, 1997, at LIBOR + 2%,
collateralized by real estate -- 500,000
---------- ---------
Totals - Forward $ 599,998 $1,716,499
F-11
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
- ------------------------------------------------------------------------------
[6] Notes and Mortgages Payable to Banks [Continued]
1 9 9 8 1 9 9 7
------- -------
Totals - Forwarded $ 599,998 $1,716,499
Line of credit, Due June 30, 1997, at prime, collateralized
by real estate -- 100,000
Line of Credit, Due June 30, 1998, at prime, collateralized
by real estate 325,000 --
Mortgage Payable, due December 2, 2002, at 9.25%,
collateralized by real estate 525,000 --
---------- ---------
Totals 1,449,998 1,816,499
Less: Current Portion 630,000 1,008,500
---------- ---------
Total Long-Term Notes and Mortgages Payable to Banks $ 819,998 $ 807,999
---------------------------------------------------- ========== =========
At January 25, 1998, unused amount under the line of credit was $25,000.
The weighted average interest rate for short-term borrowings at January 25, 1998
was 8.5% and at January 26, 1997 was 8.25%.
LIBOR and the prime rate were 5.7% and 8.5%, respectively at January 25, 1998.
The notes payable are due in periodic installments through the due dates.
At January 25, 1998, annual maturities of the above debt are as follows:
1999 $ 630,000
2000 305,000
2001 304,998
2002 105,000
2003 105,000
Thereafter --
----------
Total $1,449,998
All of the above obligations are due to the same financial institution.
The loan covenant governing the borrowings includes, among other items,
requirements related to certain working capital components, tangible net worth
amounts and restrictions on dividends.
The Company is in technical violation of one loan covenant, but has obtained a
waiver from the lending institution.
F-12
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
- ------------------------------------------------------------------------------
[7] Capital Lease Obligations
The Company leases equipment under capital leases expiring in fiscal year 2000.
Future minimum payments by the Company under capital leases consist of the
following at January 25, 1998:
Payments Due in Fiscal:
1999 $ 91,404
2000 24,254
Thereafter --
-----------
Total Minimum Lease Payments 115,658
Amount Representing Interest 6,015
Present Value of Minimum Lease Payment 109,643
Less: Current Portion 85,727
Capital Lease Obligations - Long-Term $ 23,916
------------------------------------- ===========
Equipment purchased through capital leases was sold as part of the discontinued
operation [See Note 16]. The Company remains responsible for the payments, but
as a result of the sale, has a receivable from the buyer for an amount equal to
the lease obligation.
[8] 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 1998, 1997 and 1996.
A loan has been made to a director with an outstanding balance at January 25,
1998 of $4,702 and at January 26, 1997 of $6,524. Principal and interest
payments are made on a monthly basis with interest at 6%.
A director purchased 95% of a subsidiary as of January 26, 1997 [See Note 16].
Notes receivable totaling $398,950 [See Note 5], capital leases receivable of
$109,643 [See Note 7] and a miscellaneous receivable of $11,714 resulted from
this transaction as of January 25, 1998.
The Company has a retirement agreement with a director/former employee [See Note
9].
[9] Commitments and Contingencies
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 25, 1998, are as follows:
Year ending
January
1999 $ 218,309
2000 114,832
2001 110,342
2002 121,086
2003 137,238
Thereafter 580,250
-----------
Total Minimum Future Rentals $ 1,282,057
---------------------------- ===========
F-13
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
- ------------------------------------------------------------------------------
[9] Commitments and Contingencies [Continued]
Rent expense was $434,347, $383,603 and $315,723 for fiscal 1998, 1997 and 1996,
respectively.
The Company has three year employment agreements terminating January 1999 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 $237,000. 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/former employee which provides for
the payment of $20,000 per year through 2007. 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.
[10] Loss Per Share
Basic loss per share are based on weighted average number of shares outstanding
of 4,488,347, 4,488,291 and 4,487,180 for fiscal years 1998, 1997 and 1996,
respectively. The effect of options or warrants is anti-dilutive for fiscal
years 1998, 1997 and 1996. On November 22, 1996, the Company effected a one-
for-three reverse stock split of its outstanding common stock. All share data
has been adjusted retroactively to reflect this change.
[11] 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 vest immediately and 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.
F-14
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
- ------------------------------------------------------------------------------
[11] Stock Options [Continued]
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 8 1 9 9 7 1 9 9 6
------- ------- -------
Net Loss:
As Reported $ (36,252)$(1,912,767)$(2,184,149)
Pro Forma $ (36,252)$(1,687,420)$(2,454,566)
Net Loss Per Share:
As Reported $ (.01)$ (.43) $ (.49)
Pro Forma $ (.01)$ (.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 option-pricing 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-, $-0- and $0.90 in
1998, 1997 and 1996, respectively.
Summary of stock option activity is as follows:
1 9 9 8 1 9 9 7 1 9 9 6
--------------- --------------- -----------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding - Beginning of
Years 256,839 $ 3.13 565,667 $ 3.11 268,445 $ 3.22
Granted or Sold During the
Years -- -- -- -- 300,000 3.00
Canceled During the Years (7,779) 0.984(304,167) 3.13 (556) 0.984
Expired During the Years -- -- (4,661) 0.984 -- --
Exercised During the Years -- -- -- -- (2,222) 0.984
------- ------- ------ ------- ------- -------
Outstanding - End of Years249,060 $ 3.19 256,839 $ 3.13 565,667 $ 3.11
======= ======= ======= ======= ======= =======
Exercisable - End of Years249,060 $ 3.19 256,839 $ 3.13 565,667 $ 3.11
======= ======= ======= ======= ======= =======
F-15
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
- ------------------------------------------------------------------------------
[11] Stock Options [Continued]
The following table summarizes stock option information as of January 25, 1998:
Weighted-Average
Remaining Weighted-Average
Range of Exercise Prices Shares Contractual Life Exercise Price
$ 0.984 $ 36,560 1.8 Years $ 0.984
$3.00 to $3.75 212,500 2.0 Years 3.57
--------- --- ---------
249,060 2.0 Years $ 3.19
========= =========
[12] Income Taxes
The significant components of deferred tax assets and liabilities are as
follows:
January 25, January 26,
1 9 9 8 1 9 9 7
Deferred Tax Assets:
Tax Loss Carryforwards $ 4,166,000 $5,100,000
Impairment Loss -- 226,400
Capital Loss Carryforward 215,000 215,000
Amortization 92,000 79,000
----------- ----------
Totals 4,473,000 5,620,400
----------- ----------
Deferred Tax Liabilities:
Depreciation 425,000 584,400
Valuation Reserves 294,000 294,000
----------- ----------
Totals 719,000 878,400
----------- ----------
Net Deferred Tax Assets 3,754,000 4,742,000
Less: Valuation Allowance 3,754,000 4,742,000
----------- ----------
Net Deferred Taxes $ -- $ --
------------------ =========== ==========
For the fiscal years 1998 and 1997, the valuation allowance reduces the net
deferred tax asset to zero. The net change in the valuation allowance was
$988,000 for fiscal year 1998 and $320,000 for fiscal year 1997. The change in
fiscal 1998 was primarily due to the sale of the subsidiary with substantial tax
loss carryforwards [See Note 16].
F-16
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
- ------------------------------------------------------------------------------
[12] Income Taxes [Continued]
The Company used approximately $230,000 of operating loss carryforwards in
fiscal 1998 as follows:
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
Federal:
Income Tax Expense $ 73,000 $ 55,000 $ 43,000
Operating Loss Carryforward (73,000) (55,000) (43,000)
----------- ---------- ----------
Total $ -- $ -- $ --
----- =========== ========== ==========
State:
Income Tax Expense $ 18,000 $ 20,000 $ 31,000
Operating Loss Carryforward (18,000) (20,000) (31,000)
----------- ---------- ----------
Total $ -- $ -- $ --
----- =========== ========== ==========
The Company has available at January 25, 1998, operating loss carryforwards as
follows:
Year of Unused Operating
Expiration Loss Carryforwards
2000 $ 1,740,749
2001 1,838,179
2002 1,509,463
2003 2,072,345
2004 2,942,316
2005 472,062
2006 220,595
2007 215,047
2008 196,704
2009 155,075
2010 103,553
2011 144,559
2012 88,405
-----------
Totals $11,699,052
A reconciliation of the Company's effective tax rate to the statutory U.S.
federal tax rate is as follows:
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
Statutory Rate (34)% (34)% (34)%
State Taxes (5) (5) (5)
Operating Loss Carryforwards 39 39 39
--------- -------- -------
Effective Rate --% --% --%
F-17
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
- ------------------------------------------------------------------------------
[13] Fair Value
The following table summarizes the carrying amount and estimated fair value of
the Company's significant financial instruments, all of which are held for
non-trading purposes.
January 25, 1998 January 26, 1997
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Long-Term Investments $ 685,000 $ 685,000 $ 631,000 $ 631,000
Related Party Long-Term Receivable$ 222,866 $ 222,866 $ 508,593 $ 508,593
Long-Term Debt $ (843,914)$ (843,914) $(917,642) $ (917,642)
For certain short-term instruments, including cash and cash equivalents,
investments, receivables, related party receivables, payables, and debt, it was
assumed that the carrying amount approximated fair value for the majority of
these instruments because of their short maturities. The fair value of long-term
financial instruments is determined to be the same as the carrying amount, based
on the similarity of current market interest rates with the interest rates of
the financial instruments.
[14] 52-53 Week Period
The Company's year end is the last Sunday in January. The statements of
operations are comprised of a 52-week period for fiscal 1998, 1997 and 1996.
[15] Capital Transactions
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.
[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 was 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 was 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 5% of MCF capital stock retained by the company
has been assigned a cost of $35,000.
On a per share basis, MCF's losses were $0.26 and $0.42 for fiscal years 1997
and 1996, respectively.
The Company recorded a loss of $572,883 or $0.13 per share on the disposal. MCF
sales were $11,260,976 and $14,711,350 for the fiscal years 1997 and 1996,
respectively.
The $500,000 down payment from the sale was used to retire bank debt in fiscal
1998.
F-18
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12
- ------------------------------------------------------------------------------
[17] New Authoritative Pronouncements
In June 1997, the Financial Accounting Standards Board ["FASB"] issued SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in the
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company is in the process of
determining its preferred format. The adoption of SFAS No. 130 will have no
impact on the Company's consolidated results of operations, financial position
or cash flows.
In June 1997, the FASB has issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. SFAS No. 131 is effective for financial
statements for fiscal years beginning after December 15, 1997. Financial
statement disclosures for prior periods are required to be restated. The Company
is in the process of evaluating the disclosure requirements. The adoption of
SFAS No. 131 will have no impact on the Company's consolidated results of
operations; financial position or cash flows.
. . . . . . . . . . . . . .
F-19
<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 20, 1998
F-20
<PAGE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- ------------------------------------------------------------------------------
<TABLE>
Additions
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 25, 1998:
Amortization of Goodwill
<S> <C> <C> <C> <C> <C>
[See Note 4] $ 409,768 $ 27,392 $ -- $ -- $ 437,160
========= ========= ========= ========== ==========
Amortization of Other
Intangibles
[See Note 4] $ 259,644 $ 24,684 $ -- $ $ 284,328
========= ========= ========= ========== ==========
For the period ended
January 26, 1997:
Amortization of Goodwill $ 777,427 $ 98,136 $ -- $ (465,795)[A]$ 409,768
========= ========= ========= ========== ==========
Amortization of Other
Intangibles $ 234,960 $ 24,684 $ -- $ -- $ 259,644
========= ========= ========= ========== ==========
For the period ended
January 28, 1996:
Amortization of Goodwill $ 594,594 $ 182,833 $ -- $ -- $ 777,427
========= ========= ========= ========== ==========
Amortization of Other
Intangibles $ 210,276 $ 24,684 $ -- $ -- $ 234,960
========= ========= ========= ========== ==========
</TABLE>
[A] Deduction Due to Sale of Business Segment.
F-21
<PAGE>
Item 9: Changes in and Disagreement with Accountants on Accounting and Financial
Disclosure
None
14
<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 40 President, Treasurer, Chief
Executive Officer, Chief Financial
Officer and Director
James Fletcher 67 Director
Martin W. Fletcher 45 Secretary and Director
Frank Koenemund 54 Director
Jack Mariucci 58 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.
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.
15
<PAGE>
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 1998,
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 25,
1998 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 1998.
During the three-year period ended January 25, 1998, 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. 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 funded this obligation with an
insurance policy paying an annual premium of approximately $5,000 until Mr.
Fletcher's retirement at the conclusion of fiscal 1997.
SUMMARY COMPENSATION TABLE
Annual Compensation
Name and Fiscal Other Annual
Principal Position Year Salary Bonus Compensation
Anthony Papalia 1998 $150,000 $-0- $2,088(a)
President and 1997 $150,000 $-0- $2,088(a)
Chief Executive 1996 $119,692 $-0- $2,088(a)
Officer
(a) Represents contributions under the Supplemental Employee Benefit Program.
Employment Agreements
At the annual meeting of the Company's stockholders held on December 19,
1995, stockholders ratified employment contracts between the Company and Anthony
Papalia as chief executive officer and chief financial officer and between the
Company and Martin Fletcher as controller. Each contract 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
individual's 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
16
<PAGE>
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 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 9,997 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
17
<PAGE>
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.
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 1998.
1998 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 1/25/98(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
25, 1998.
Directors' Compensation
During fiscal 1998, Jack Mariucci, was compensated at a monthly rate of
$1,500 for serving as a director. Such compensation is continuing in fiscal
1999. In addition, James Fletcher was paid a monthly director's fee of $1,250 in
fiscal 1998, which compensation is continuing in fiscal 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of March 31, 1998 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.
18
<PAGE>
Shares of
Name and Address of Common Stock Percentage
Beneficial Owner Beneficially Owned Ownership
Directors*
Anthony Papalia 71,390(1) 2%
James Fletche 334 --
Martin Fletcher 65,167(2) 1%
Frank Koenemund 233,334 5%
Jack Mariucci 104,167(3) 2%
All executive officers
and directors as a group
(five persons) 474,392(1)(2)(3) 10%
Other
Robert E. Brennan 1,766,557(4) 39%
264 Route 537 East
Colts Neck, New Jersey 07722
Michael F. Lombardi, 358,665(5) 8%
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
- ----------
*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) On June 10, 1997, Donald Conway, CPA was appointed as Trustee in the
Chapter 11 Bankruptcy proceedings involving Mr. Brennan pending in the United
States District Court for the District of New Jersey (Case No. 95-35502). As a
result, Mr. Conway in his capacity as Trustee may also be deemed a beneficial
owner of these shares.
(5) The five individuals, the Investment Club and the firm and Defined
Benefit Plan of Lombardi & Lombardi, P.A. (collectively the "Lombardi Group"),
have filed a report on Schedule 13D and 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 their acquisition of the Common Stock is for
investment purposes. However, the Lombardi Group has offered to purchase the
shares owned by Robert E. Brennan which purchase, if consummated, would give the
Lombardi Group beneficial ownership of approximately 47% of the outstanding
Common Stock and would thereby enable the Lombardi Group to control the Company.
To date, the Lombardi Group offer has not been accepted.
Robert E. Brennan through his stock ownership and Donald Conway as his
Bankruptcy Trustee may each be deemed to be controlling stockholders of the
Company.
19
<PAGE>
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. In
March 1998, the Company made an offer to purchase this restaurant. No assurances
can be given that the offer will be accepted. 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.
20
<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)
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)
21
<PAGE>
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 restaurants operated by each
State of
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 25, 1998.
22
<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 24, 1998
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 24, 1998
Date April 24, 1998
By/s/Martin Fletcher By/s/Jack Mariucci
Martin Fletcher, Director Jack Mariucci, Director
Date April 24, 1998 Date April 24, 1998
--------------------------- --------------
By/s/James Fletcher
James Fletcher, Director
Date April 24, 1998
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial data extracted from the consolidated
balance sheet and the consolidated statement of operations and is qualified in
its entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> year
<FISCAL-YEAR-END> Jan-25-1998
<PERIOD-END> Jan-25-1998
<CASH> 1,136,063
<SECURITIES> 0
<RECEIVABLES> 66,228
<ALLOWANCES> 0
<INVENTORY> 1,039,203
<CURRENT-ASSETS> 2,833,482
<PP&E> 18,591,633
<DEPRECIATION> 7,234,384
<TOTAL-ASSETS> 16,804,832
<CURRENT-LIABILITIES> 2,368,387
<BONDS> 0
0
0
<COMMON> 44,883
<OTHER-SE> 13,089,842
<TOTAL-LIABILITY-AND-EQUITY> 16,804,832
<SALES> 18,097,100
<TOTAL-REVENUES> 18,097,100
<CGS> 5,943,083
<TOTAL-COSTS> 12,224,487
<OTHER-EXPENSES> (149,399)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 115,181
<INCOME-PRETAX> (36,252)
<INCOME-TAX> 0
<INCOME-CONTINUING> (36,252)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (36,252)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
