Document/Exhibit Description Pages Size
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2: EX-21 Subsidiaries of the Registrant 1 5K
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4: EX-31.2 Certification per Sarbanes-Oxley Act (Section 302) 2 11K
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6: EX-32.2 Certification per Sarbanes-Oxley Act (Section 906) 1 6K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 30, 2005
----------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from_________________to________________
Commission File Number 0-8513
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CHEFS INTERNATIONAL, INC.
-------------------------
[Name of small business issuer in its charter]
Delaware 22-2058515
---------------------------------------- ------------------
[State or other jurisdiction of [IRS Employer
incorporation or organization] Identification Number]
62 Broadway, P.O. Box 1332
Pt. Pleasant Beach, New Jersey 08742
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[Address of principal executive offices] [Zip Code]
Issuer's telephone number, including area code: (732) 295-0350
------------------
Securities registered pursuant to Section 12(b) of the Exchange Act: NONE
----
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
----------------------------
(Title of Class)
Check whether the issuer [1] filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months [or for such shorter
period that the issuer was required to file such reports], and [2] has been
subject to such filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
[ ]
The issuer's revenues for the year ended January 30, 2005 totaled $21,563,608.
On April 1, 2005, the aggregate market value of the voting stock of the issuer
(consisting of Common Stock, $.01 par value) held by non-affiliates was
approximately $3,775,000 based upon the last sale price for such Common Stock on
said date in the over-the-counter market as reported by the Pink Sheets LLC. On
such date, there were 3,925,384 shares of the issuer's Common Stock issued and
outstanding.
Transitional Small Business Disclosure Format (check one)
Yes No X
--- ---
CHEFS INTERNATIONAL, INC.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
(a) BUSINESS DEVELOPMENT - Chefs International, Inc. ("Chefs" or the
"Company") was organized under the laws of the State of Delaware in March 1975.
The Company currently operates nine restaurants on a year-round basis, seven of
which are free-standing seafood restaurants in New Jersey (four) and Florida
(three); one of which is a free-standing Mexican theme restaurant located in
Freehold, New Jersey, and one of which is a free-standing restaurant also
located in Freehold, New Jersey featuring an eclectic American food menu. Five
of the seafood restaurants are operated under the name "Jack Baker's Lobster
Shanty," one under the name "Baker's Wharfside" and one under the name "Mr.
Manatee's Casual Grille." The Mexican theme restaurant is operated under the
name "Escondido's Mexican Restaurant." The eclectic American food restaurant is
operated under the name "Moore's Tavern and Restaurant." The Company opened its
first seafood restaurant in November 1978, its Mexican theme restaurant in
January 2002 and "Moore's Tavern and Restaurant" in February 2000. (As used
herein, the term the "Company" may at times include Chefs and its various
subsidiaries.)
The Company's executive offices are located at 62 Broadway, Point
Pleasant Beach, New Jersey 08742. Its telephone number is (732) 295-0350.
DEVELOPMENTS SINCE THE BEGINNING OF THE LAST FISCAL YEAR
"GOING PRIVATE" TRANSACTION
On April 18, 2005, the Company announced that at a Special Meeting of
its Stockholders held on that date, an Agreement and Plan of Merger between the
Company and Lombardi Restaurant Group, Inc. (at times referred to as
"Acquisition Co.") pursuant to which Acquisition Co. would be merged into the
Company and each share of Chefs common stock (other than the 2,606,446 shares
owned by Acquisition Co.) would be canceled and converted into the right to
receive a cash payment of $3.12, had been approved and adopted by the
affirmative vote of a majority of the shares of Chefs common stock outstanding
on the February 25, 2005 Record Date for the meeting. The proposed Merger is
designed to convert Chefs from a publicly owned to a privately owned
corporation. It is contemplated that the Merger will be effected in May 2005.
Although the required stockholder vote has been obtained, the Merger will not be
completed unless all of the remaining closing conditions are satisfied so there
can be no assurance that the Merger will occur.
If the Merger does occur;
o The Company will no longer be publicly owned;
o Chefs common stock will no longer trade in the
over-the-counter market or be quoted on the OTC Bulletin
Board(R);
o The stockholders of Acquisition Co., namely Anthony M.
Lombardi, Joseph S. Lombardi, Michael F. Lombardi, Robert M.
Lombardi, Stephen F. Lombardi (the five "Lombardi Brothers"),
the Lombardi & Lombardi P.A. law firm. the Lombardi & Lombardi
P.A. Defined Benefit Pension Plan (the Lombardi Brothers, the
law firm and the Pension Plan at times referred to as the
"Lombardi Group"), Lee Maschler and Matthew Maschler, (the
"Maschler Brothers"), (the Lombardi Group and the Maschler
Brothers collectively referred to at times as the
2
"Continuing Stockholders"), will own all of the Company's
outstanding common stock; and
o The Company's "Public Stockholders" which term excludes the
Continuing Stockholders and stockholders who properly
exercised dissenters' rights of appraisal, will have their
shares of common stock canceled and converted into the right
to receive a cash payment of $3.12 per share, without
interest, and without deduction of any commission, and will no
longer have any interest in the Company's assets or its future
earnings or growth, if any.
RESTAURANT CLOSING
In the first quarter of calendar year 2004, management decided to sell
the Company's Jensen Beach, Florida Lobster Shanty restaurant due to declining
sales and a lack of profitability. The Company executed a contract to sell this
restaurant for $900,000. The closing took place on May 3, 2004. The Company
recognized a gain of $415,473 from this sale. See Note 8 of Notes to the
Consolidated Financial Statements.
RESIGNATION OF PRESIDENT, TREASURER, PRINCIPAL EXECUTIVE AND PRINCIPAL FINANCIAL
OFFICER
In April 2004, Anthony C. Papalia, the Company's president, principal
executive, principal financial and principal accounting officer requested of the
Company's board of directors that he be released from his employment contract
(due to expire in March 2005) effective at the close of business on June 28,
2004 "...in order to pursue personal interests...." The board agreed to release
Mr. Papalia from his employment contract at said date and he agreed to a one
year non-competition agreement with the Company. Robert M. Lombardi was
appointed to succeed Mr. Papalia as president and principal executive officer.
Martin W. Fletcher, the Company's controller, was appointed to succeed Mr.
Papalia as the Company's principal financial and principal accounting officer
and was elected a vice president of the Company.
RESTAURANT CLOSINGS DUE TO HURRICANE DAMAGE
In September 2004, Florida hurricanes caused the closings of the
Company's three Florida restaurants for approximately ten days in the case of
the Cocoa Beach restaurant, approximately two months in the case of the Vero
Beach Lobster Shanty restaurant and approximately two and one-half months in the
case of the Vero Beach Mr. Manatee's Casual Grill restaurant. To date, the
Company has received insurance advances against its claims of approximately
$1,060,000 and anticipates a final settlement of its claims will occur in fiscal
2006. The Company realized a gain of $202,399 in the fourth quarter of fiscal
2005 related to partial settlement of its hurricane damage claims.
BANK LOANS
At January 26, 2004, the Company had a $500,000 revolving line of
credit ("L/C line") from First Union Bank (subsequently acquired by Wachovia
Bank), expiring on June 30, 2005 and secured by a first mortgage on its Toms
River, New Jersey Lobster Shanty restaurant. All subsequent references to
Wachovia Bank shall refer to Wachovia Bank as well as to First Union Bank prior
to its acquisition by Wachovia Bank. In November 2004, the L/C line was
increased to $1,000,000 and the Company borrowed $500,000 for repairs to its
Florida
3
restaurants due to the hurricane damage. As a result, at January 30, 2005, the
outstanding indebtedness under the L/C line was $500,000. In February 2005, the
Company borrowed an additional $300,000 for repairs, bringing the total
outstanding indebtedness under the line to $800,000. In April, 2005, the Company
reduced the outstanding indebtedness under the line to $400,000 using $400,000
of insurance proceeds to pay down the loan. Interest on the unpaid principal
balance under this L/C line is at the LIBOR Market Index Rate plus 2%.
The Company is indebted to Wachovia Bank under a $500,000 Term Loan
made in May 2002, the proceeds of which were applied to the repayment of the
balance under an outstanding L/C line. Principal payments under the Term Loan
are due in amounts varying from $5,000 to $25,000 in the months of March through
November through 2007 together with interest at the LIBOR Market Index Rate plus
2%. Indebtedness under the Term Loan is secured by a mortgage on the Company's
Toms River, New Jersey Lobster Shanty restaurant. At January 30, 2005, the
outstanding principal balance under this Term Loan was approximately $210,000.
In September 2001, the Company borrowed $600,000 from Wachovia Bank
secured by a first mortgage on its Baker's Wharfside restaurant in Point
Pleasant Beach, New Jersey and borrowed an additional $600,000 from the Bank
secured by a first mortgage on its Jack Baker's Lobster Shanty restaurant in
Point Pleasant Beach. Each of these two loans have a ten year maturity providing
for annual principal payments of approximately $60,000 commencing in fiscal 2003
together with interest on the unpaid balance at an annual rate of 7.57%. At
January 30, 2005, the outstanding principal balance of each of these loans was
approximately $417,500.
The Company applied the $1,200,000 of loan proceeds as part of the
$1,300,000 it utilized to renovate, decorate and equip (kitchen, bar, furniture,
fixtures) its Escondido's Mexican Restaurant in Freehold, New Jersey which
opened in January 2002.
In October 1998, the Company borrowed $880,000 from Wachovia Bank to
fund the $1,100,000 purchase of its Vero Beach, Florida Lobster Shanty seafood
restaurant. This loan is repayable in monthly installments of $8,319 comprised
of principal and interest at an annual rate of 7.82% through November 2008 and
is secured by a first mortgage on the Vero Beach property. At January 30, 2005,
approximately $644,100 was outstanding under this loan (which provides for a
$431,429 "balloon" payment in November 2008).
In March 2005, the Company obtained a $1,500,000 non-revolving Line of
Credit from Wachovia Bank to partially fund renovations to the Lobster Shanty
restaurant in Point Pleasant Beach, New Jersey. Borrowings under this line of
credit convert into a ten year term loan commencing July 31, 2005. In April
2005, the Company borrowed $750,000 under this line. Borrowings under this line
are collaterized by a mortgage on the Point Pleasant Beach Lobster Shanty
property. Interest on borrowings under this line is at the LIBOR Market Index
Rate plus 2%.
Repayment of the Company's term loans and of borrowings under its lines
of credit is guaranteed by each of the Company's subsidiaries.
Pursuant to its principal Loan Agreements, the Company has agreed to
certain affirmative and negative covenants, violation of which without Wachovia
Bank's waiver would constitute a default under the Loan Agreements. Included are
affirmative covenants by the Company to maintain its properties in good
condition and repair; maintain adequate insurance coverage; conduct its business
in the
4
manner and at the locations where it is currently being conducted; maintain a
Funds Flow Coverage of not less than 1.20 to 1.00; maintain a Tangible Net Worth
at fiscal 2005 year end of not less than $12,650,000 increasing by not less than
$50,000 in each subsequent year; maintain a ratio of Senior Liabilities to
Effective Tangible Net Worth of not more than .50 to 1.00 measured
semi-annually; and maintain liquid assets (cash, time deposits, marketable
securities) of not less than $500,000. Also included are negative covenants of
the Company not to permit or effect a material change in ownership or in
management; not to create or permit certain liens or encumbrances on its assets;
not to guarantee third party obligations; and not to retire or otherwise acquire
any of its capital stock (without receiving a waiver from the Bank.) The Company
received a waiver from Wachovia Bank of any claim that the resignation and
departure of Anthony C. Papalia at June 28, 2004 as the Company's principal
executive and principal financial officer might be deemed a violation of the
covenant regarding a material change in management. The Company was in
compliance with all material covenants under the Loan Agreements at January 30,
2005.
(b) BUSINESS OF ISSUER - The Company is engaged in one business; the
operation of nine restaurants in New Jersey and Florida on a year-round basis.
RESTAURANT OPERATIONS
The Company currently operates nine restaurants on a year-round basis,
seven of which are free-standing seafood restaurants in New Jersey (four) and
Florida (three); one of which is a free-standing Mexican theme restaurant
located in Freehold, New Jersey, and one of which is a free-standing restaurant
also located in Freehold, New Jersey featuring an eclectic American food menu.
Five of the seafood restaurants are operated under the name "Jack Baker's
Lobster Shanty," one under the name "Baker's Wharfside" and one under the name
"Mr. Manatee's Casual Grille." The Mexican theme restaurant is operated under
the name "Escondido's Mexican Restaurant." The eclectic American food restaurant
is operated under the name "Moore's Tavern and Restaurant." The Company opened
its first seafood restaurant in November 1978, its Mexican theme restaurant in
January 2002 and "Moore's Tavern and Restaurant" in February 2000. The Company's
restaurants, all of which are operated on a year-round basis, are as follows:
Date of Opening Under
Location the Company's Management
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SEAFOOD RESTAURANTS
-------------------
Jack Baker's Lobster Shanty
---------------------------
Vero Beach, Florida December 1979
Pt. Pleasant Beach, New Jersey October 1980
Toms River, New Jersey October 1980
Cocoa Beach, Florida September 1981
Hightstown, New Jersey December 1981
Baker's Wharfside
-----------------
Pt. Pleasant Beach, New Jersey October 1980
Mr. Manatee's Casual Grille Restaurant
--------------------------------------
Vero Beach, Florida April 2002
5
Date of Opening Under
Location the Company's Management
-------- ------------------------
ESCONDIDO'S MEXICAN RESTAURANT
------------------------------
Freehold, New Jersey January 2002
MOORE'S TAVERN AND RESTAURANT
-----------------------------
Freehold, New Jersey February 2000
SEAFOOD RESTAURANTS
The Company's seafood restaurants provide a variety of seafood dishes
including shellfish such as lobster, scallops, shrimp, oysters and clams, and
other fish including red snapper, bluefish, grouper and other varieties. A
limited selection of non-seafood entrees is also offered including steak and
chicken as well as a dessert selection. Most of the Company's seafood
restaurants have a nautical decor.
JACK BAKER'S LOBSTER SHANTY RESTAURANTS
VERO BEACH, FLORIDA - This restaurant, consisting of approximately
6,900 square feet, is free standing in Vero Beach, Florida on the intracoastal
waterway, and seats approximately 200. It opened in December, 1979 pursuant to a
lease from a partnership, the principal partner of which was the Company's then
principal stockholder. During fiscal 1998, the Company constructed an outdoor
deck with a bar and dining facilities at this restaurant at a cost of
approximately $125,000. At August 31, 1998, the Company was continuing to lease
this restaurant on a month-to-month "net" basis at a monthly rental of $10,000
with the Company also paying personal property taxes and insurance thereunder.
On that date, the United States Bankruptcy Court for the District of New Jersey
ordered the acceptance of the Company's bid of $1,100,000 to purchase the Vero
Beach restaurant property from the partnership. On October 30, 1998, the Company
completed the purchase of the property for $1,100,000. To fund the purchase, the
Company obtained an $880,000 first mortgage loan from its principal lending
bank, and paid the balance of the purchase price from working capital. The
Company's successful bid was based upon an independent appraisal of the property
and was equal to the appraised value. See "Bank Loans" herein as to the
repayment terms of this loan.
During fiscal 2002, the Company was assessed and paid $62,674 as its
share for the development by the City of Vero Beach of the Royal Palm Pointe
project. This project is a city park development contiguous to the Company's
Jack Baker's Lobster Shanty and its Mr. Manatee's restaurants. Among other
amenities, it provides municipal parking which the Company believes has enhanced
its restaurant business at those locations.
The Company was forced to close this restaurant for 53 days in
September and October 2004 due to damage from the September 2004 Florida
hurricanes. To date, the Company has spent approximately $625,000 in capital
expenditures and repairs on this restaurant and anticipates spending an
additional $30,000 to $50,000 to complete the work.
PT. PLEASANT BEACH, NEW JERSEY - This restaurant, consisting of
approximately 17,000 square feet, is free standing with a waterfront location on
Channel Drive in Pt. Pleasant Beach, New Jersey and seats approximately 750. It
shares parking with the Baker's Wharfside restaurant in Pt. Pleasant Beach with
space for approximately 250 automobiles. The Company purchased this restaurant
and three others (including the land, buildings, improvements and businesses
6
including personal property and fixtures, liquor licenses and all of the
outstanding stock of the four corporations operating these restaurants) from its
then principal stockholder, and from three partnerships owned by him, in
October, 1980 for an aggregate $7,750,000 less a subsequent $250,000 prepayment
discount.
The Company has commenced major renovations to this restaurant which
will take place in fiscal 2005 and 2006 at an anticipated cost of approximately
$2,200,000. The Company expects to finance approximately $1,500,000 of the cost
with bank loans and the balance from working capital.
TOMS RIVER, NEW JERSEY - This restaurant, consisting of approximately
10,750 square feet, is free standing on Robbins Parkway with a waterfront
location on the Toms River in Toms River, New Jersey and seats approximately
375. Municipal parking facilities are available nearby. The Company purchased
this restaurant and three others (including the land, buildings, improvements,
and businesses including personal property and fixtures, liquor licenses and all
of the outstanding stock of the four corporations operating these restaurants)
from its then principal stockholder, and from three partnerships owned by him,
in October 1980 for an aggregate $7,750,000 less a subsequent $250,000
prepayment discount. During fiscal 1998, the Company commenced an interior
renovation of this restaurant, the bulk of which was completed in fiscal 1998
with the balance completed early in fiscal 1999. The total cost of this
renovation was approximately $338,000. In fiscal 1999, the Company constructed
an outdoor deck with a bar and dining facilities at this restaurant adding
approximately 125 seats at a cost of approximately $188,000.
In May 1998, the Company spent $166,000 to purchase a lot and building
with a waterfront location adjacent to the Toms River Lobster Shanty. The
Company partially funded the purchase price with the bank loan previously
described. The Company has obtained the permits and variances necessary for it
to develop an outdoor patio dining area with seating for 125 on this site but
delayed construction pending resolution of a lawsuit initiated by a neighboring
landowner attempting to prevent construction. The landowner's time to appeal
from the granting of the permits and variances to the Company has expired.
Management assumes there will be no further objection to the Company's
construction of the planned patio dining area. As a result of the delay, the
board of directors has deferred its decision on whether to proceed with the
construction of the patio. If the board determines to proceed in the next
several months, the Company estimates the total cost of construction and
outfitting at approximately $350,000 for an opening which could take place in
fiscal 2007.
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
7
using the net proceeds from the sale in June 1993 of another Florida restaurant
property.
The Company was forced to close this restaurant for twelve days in
September 2004 due to damage from the September 2004 Florida hurricanes.
HIGHTSTOWN, NEW JERSEY - This restaurant, consisting of approximately
4,600 square feet, is free standing on State Highway 33 approximately two miles
east of Hightstown and seats approximately 175. The restaurant has parking for
approximately 100 automobiles. The Company purchased this restaurant and three
others (including the land, buildings, improvements and businesses including
personal property and fixtures, liquor licenses and all of the outstanding stock
of the four corporations operating these restaurants) from its then principal
stockholder and from three partnerships owned by him, in October 1980 for an
aggregate $7,750,000 less a subsequent $250,000 prepayment discount.
BAKER'S WHARFSIDE RESTAURANT
PT. PLEASANT BEACH, NEW JERSEY - This restaurant, consisting of
approximately 7,500 square feet, is free standing with a waterfront location on
Channel Drive in Pt. Pleasant Beach, New Jersey and seats approximately 500. It
shares parking with the Lobster Shanty restaurant in Pt. Pleasant Beach with
space for approximately 250 automobiles. The Company purchased this restaurant
and three others (including the land, buildings, improvements and businesses
including personal property and fixtures, liquor licenses and all of the
outstanding stock of the four corporations operating these restaurants) from its
then principal stockholder, and from three partnerships owned by him, in
October, 1980 for an aggregate $7,750,000 less a subsequent $250,000 prepayment
discount.
MR. MANATEE'S CASUAL GRILLE RESTAURANT
VERO BEACH, FLORIDA - This restaurant, consisting of approximately
4,000 square feet, is free standing at 30 Royal Palm Pointe in Vero Beach and
seats approximately 165. It has parking for approximately 40 automobiles but
there are additional municipal parking spaces available at the contiguous Royal
Palm Pointe municipal park. Pursuant to a January 2002 asset purchase agreement,
the Company purchased the furnishings, fixtures and equipment, liquor license,
goodwill, right to the name and the business of Mr. Manatee's from an
unaffiliated third party for $800,000. The Company paid $300,000 of the purchase
price from its available cash reserves and borrowed the $500,000 balance (which
it repaid in fiscal 2003) under its available Line of Credit. On April 1, 2002,
the Company entered into a five year lease of the restaurant property at a
monthly rental of $8,000 under a triple "net-net" Lease. The Lease provides the
Company with an option to renew the lease for up to three additional five year
terms with the rental increasing by ten percent for each additional five-year
renewal term. The Lease also provides the Company with the right to purchase the
Property for $1,075,000 at the expiration of the initial five year term of the
Lease.
Mr. Manatee's Casual Grille opened under the Company's management on
April 1, 2002. It is a casual theme restaurant primarily featuring seafood
items, serving lunch meals, dinner meals and sandwiches. To date, the average
check at Mr. Manatee's has been approximately 15% to 20% lower than the check
average at the Company's other seafood restaurants.
The Company was forced to close this restaurant for 76 days in
September through November 2004 due to damage from the September 2004 Florida
hurricanes. To date, the Company has spent approximately $335,000 in capital
expenditures and
8
repairs and anticipates spending an additional $30,000 to $50,000 to complete
the work.
MEXICAN THEME RESTAURANT
At January 30, 2005, the Company was operating one Mexican theme
restaurant; its free-standing "Escondido's Mexican Restaurant" in Freehold, New
Jersey.
The Company's Mexican theme restaurant features Mexican cuisine
including fajitas, tortillas, burritos and enchiladas with cheese, beef,
chicken, pork and seafood fillings. The 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 opened its Freehold, New Jersey "Escondido's Mexican
Restaurant" located on West Main Street (Route 537) in January 2002. This
free-standing restaurant, consisting of approximately 5,000 square feet of
leased space, is decorated in a bright multi-colored Mexican motif. The
restaurant has a bar and tables and booths which can accommodate approximately
225 patrons and shares parking facilities with the adjoining Moore's Tavern and
Restaurant. It has a liquor license permitting the consumption of wine and
alcoholic beverages on the premises. The restaurant is open for lunch and dinner
seven days per week.
The Company leased the facility ("Building B") from Moore's Realty
(whose partners are members of the Lombardi family). The lease is a "triple-net"
lease pursuant to which the Company is required to pay real estate taxes,
insurance and heating and air conditioning costs. The lease is for a five-year
term through January 2007 and contains provisions for three consecutive
five-year renewals at the Company's option which are automatically effective
unless the Company gives written notice at least six months before the end of
the applicable term that it does not intend that such option be exercised. The
Company has the right to terminate the lease upon six months' written notice
during the initial lease term provided that such notice cannot be given until 18
months after the commencement of the initial lease term and upon twelve months
written notice during any renewal term.
The lease provides for a minimum annual rental of $90,000 during each
year of the initial five-year term, $100,000 during each year of the first
five-year renewal period, $112,500 during each year of the second five-year
renewal period and $125,500 during each year of the third five-year renewal
period. In addition to the minimum annual rental, the Company is also required
to pay an amount to Moore's Realty equal to (i) 6% of the total gross sales of
food and beverages etc. at the facility in each year (excluding taxes and
gratuities) (the "gross annual rental") less (ii) the minimum annual rental for
that year. For the fiscal year ended January 30, 2005, the gross rental
aggregated $99,656. Moore's Realty has the right to terminate the lease upon
twelve months' prior written notice if, for the preceding lease year, the gross
annual rental did not exceed the minimum annual rental for that year.
The Company expended approximately $1,300,000 to renovate, decorate and
equip (kitchen, bar, furniture, fixtures) its Escondido's Mexican Restaurant in
Freehold, New Jersey. The bulk of the costs were paid from the proceeds of two
bank loans from Wachovia Bank aggregating $1,200,000. See "Developments Since
the Beginning of the Last Fiscal Year - Bank Loans" in this Item 1. During the
renovation of this restaurant, the Company paid an aggregate $15,000 in rents to
9
Moore's Realty with respect to Building B. The Company had no additional cost
for the liquor license for these premises, the license being permitted as an
expansion of the license on the adjoining "Moore's Tavern and Restaurant."
See "Moore's Tavern and Restaurant" herein as to the Company's lease of
the Building C pad site to provide additional parking for both this restaurant
and Moore's Tavern and Restaurant.
MOORE'S TAVERN AND RESTAURANT
In February 2000, the Company executed a lease with Moore's Realty
(whose partners are members of the Lombardi family). The lease was of premises
on West Main Street (Route 537) in Freehold, New Jersey (Building A), where an
entity affiliated with Moore's Realty, Moore's Inn, Inc. was operating a
restaurant and tavern under the name "Moore's Inn." The Company provided
consulting services to the operators of Moore's Inn from January 3, 2000 until
February 23, 2000 when it executed the following described lease and purchase
agreements and commenced to operate the facility under the name "Moore's Tavern
and Restaurant."
The lease was for a five-year term through February 22, 2005 and
contains provisions for three consecutive five-year renewals at the Company's
option which are automatically effective unless the Company gives written notice
at least six months before the end of the initial term or at least six months
before the end of the applicable renewal period that it does not intend that
such option be exercised. After 18 months, the Company can terminate the lease
upon six months' written notice provided that during each of the five-year
renewal periods, the Company must provide at least twelve months' prior written
notice to terminate.
The lease is a "triple-net" lease pursuant to which the Company will
pay real estate taxes, insurance and heating and air conditioning costs. The
lease provides for a minimum annual rental of $90,000 during each year of the
initial five-year term, $100,000 during each year of the first five-year renewal
period, $112,500 during each year of the second five-year renewal period and
$125,500 during each year of the third five-year renewal period. In addition to
the minimum annual rental, the Company is also required to pay an amount to
Moore's Realty equal to (i) 6% of the total gross sales of food and beverages
etc. at the facility in each year (excluding taxes and gratuities) (the "gross
annual rental") less (ii) the minimum annual rental for that year. For the
fiscal year ended January 30, 2005, the gross rental aggregated $152,545.
Moore's Realty has the right to terminate the lease upon twelve months' prior
written notice if, for the preceding lease year, the gross annual rental did not
exceed the minimum annual rental for that year.
During the lease term, the Company has been granted the exclusive right
to the use of the names "Moore's Inn" and "Moore's Tavern" within the State of
New Jersey. Moore's Realty has agreed not to operate, lease, rent or permit to
be operated as a restaurant or tavern during the lease term, any premises owned,
leased or occupied by it or members of the Lombardi family (not presently
occupied as such), located within ten miles of Moore's Tavern and Restaurant.
In connection with the lease, the Company purchased a New Jersey liquor
license from Moore's Inn, Inc. for $350,000 and agreed to sell the license back
to the Seller or to Moore's Realty at the termination of the lease for the same
$350,000. In addition, the Company purchased existing furniture, fixtures and
equipment at Moore's Inn from Moore's Inn, Inc. for $250,000 agreeing to leave
all of the furniture, fixtures and equipment at the premises "...in good working
condition, reasonable wear and tear excepted... " upon termination of the lease.
10
The lease of the Moore's Inn and the purchase of the liquor license and
the furniture, fixtures and equipment cannot be deemed "arm's length"
transactions due to the interest therein of the Lombardi family. The
transactions were negotiated for the Company by Anthony C. Papalia, its then
president and chief executive officer. In negotiating the transactions, Mr.
Papalia took into account his experience in similar restaurant leases, the
prices at which liquor licenses were sold in neighboring areas (finding such
prices to be comparable to the liquor license purchase price paid by the
Company) and the condition of the furniture, fixtures and equipment. The bulk of
the furniture, fixtures and equipment had been purchased by the Seller during
the twelve months ended June 30, 1999 at a price of $621,893. Mr. Papalia and
the non-interested directors concluded that the terms of the transaction were
fair and in the best interests of the Company.
At the time of execution of the lease, Moore's Realty agreed not to
sell or lease a building ("Building B") adjacent to the Moore's Inn or the
nearby pad site for a proposed building ("Building C") for a period of one year.
If during the first year, the Company entered into an agreement to purchase or
lease Building B, Moore's Realty agreed not to sell or lease the pad site to
anyone other than the Company for an additional one-year period. See "Mexican
Theme Restaurant" herein as to the Company's lease of Building B from Moore's
Realty in fiscal 2002, renovation of the facility and opening of an "Escondido's
Mexican Restaurant" at the facility in January 2002. At the time of the
Company's leasing of Building B, the Company and Moore's Realty executed an
amendment to their January 21, 2000 lease agreement extending the initial term
of the earlier lease to the termination date provided for in the later lease and
similarly extending the renewal periods of the earlier lease to coincide with
the renewal periods of the Building B lease.
The Moore's Tavern and Restaurant, consisting of approximately 7,700
square feet, is free standing and is located on West Main Street (Route 537) in
Freehold, New Jersey. The restaurant seats approximately 260 (with an outdoor
patio for warm weather use that can seat an additional approximately 40 persons)
and accommodates parking for approximately 200 automobiles, the parking to be
shared with any businesses operated from Building B (now operated by the Company
as an Escondido's Mexican Restaurant), and proposed Building C. See "Building
Pad C Parking Lot" as to the Company's leasing of the Building C pad site to
provide additional parking for patrons of its two Freehold, New Jersey
restaurants. The tavern portion of this restaurant is of an historic nature
having been initially constructed in the late 18th century and owned by an
officer in the American Revolutionary Army. The entire restaurant is decorated
in a revolutionary period decor.
The Moore's Tavern and Restaurant is open for lunch and dinner on a
year-round basis. It features an eclectic American food menu offering
sandwiches, burgers, steak and other meats, chicken and fish, potatoes,
vegetables and desserts, and alcoholic beverages.
BUILDING PAD C PARKING LOT
In connection with the February 2000 execution of the lease of Moore's
Inn to the Company, Moore's Realty agreed not to sell or lease a building
("Building B") adjacent to Moore's Inn or the nearby pad site for a proposed
building ("Building C") to a third party for a period of one year. Moore's
Realty also agreed that if during the initial one-year period, the Company
entered into an agreement to purchase or lease Building B, it would not sell or
lease the Building C pad site to anyone other than the Company for an additional
one-year
11
period. In October 2001, the Company leased Building B from Moore's Realty and
in January 2002, opened its Mexican theme restaurant in Building B under the
name "Escondido's Mexican Restaurant."
In September 2002, the Company leased the Building C pad site from
Moore's Realty for use as a parking lot for its Freehold, New Jersey Moore's
Tavern and Restaurant and its Escondido's Mexican Restaurant. The lease is for a
five-year term through January 2007 and contains provisions for three
consecutive five-year renewals at the Company's option. Either party has the
right to terminate the lease upon twelve (12) months written notice after
conclusion of the initial five (5) year term provided that if the Landlord
elects to terminate the lease, it must offer the Tenant the right to lease an
adjoining paved parking area sufficient to park at least fifty (50) automobiles
on terms and conditions similar to those contained in the lease. The lease also
provides that if the Company is leasing either Building A (Moore's Tavern and
Restaurant) or Building B (Escondido's Mexican Restaurant) at the time of
termination by Moore's Realty, Moore's Realty will not permit a restaurant to be
developed on the Building C pad site.
The lease is a "triple-net" lease pursuant to which the Company pays
real estate taxes, insurance, electricity charges, snow and ice removal,
cleaning and maintenance. The lease provides for a minimum rent at an annual
rate of $40,000 during each year of the initial five-year term, $44,000 during
each year of the first five-year renewal period; $50,000 during each year of the
second five-year renewal period and $55,000 during each year of the third
five-year renewal period. In addition to the minimum annual rent, the Company is
required to pay an amount to Moore's Realty equal to (i) 1% of the total gross
sales of the food and beverages etc. at the Moore's Tavern and Restaurant and at
the Escondido's Mexican restaurant in each year (excluding taxes and gratuities)
(the "gross annual rent"), less (ii) the minimum annual rent for such year.
During fiscal 2003, the Company installed curbing, paving and other improvements
to the site at a cost of approximately $134,000. The site now provides parking
for approximately 65 automobiles for patrons of the two Freehold restaurants.
Moore's Realty has agreed to reimburse the Company's costs. Moore's Realty's
reimbursement obligation is being applied as a credit against the minimum rent
and the gross annual rent, if any, due under the lease. As a result, the Company
did not pay any rent to Moore's Realty in fiscal 2005 with respect to this pad
site and still has approximately $36,000 of credits remaining.
The lease for the Building C pad site cannot be deemed as an "arm's
length" transaction due to the interest therein of the Lombardi family. The
lease was negotiated for the Company by Anthony C. Papalia, its then president
and chief executive officer. Mr. Papalia and the non-interested directors
concluded that the terms of the transaction were fair and in the best interests
of the Company.
SOURCES OF FOOD PRODUCTS
The food products used by the Company in the operation of its seafood
restaurants, its Moore's Tavern and Restaurant and its Escondido's Mexican
Restaurant are readily available from a variety of sources including national
distributors and local sources on an order basis when needed.
SEASONAL ASPECTS
The Company's New Jersey seafood restaurants experience a significant
portion of their sales from May through September whereas its Florida seafood
restaurants experience a significant portion of their sales from January through
12
April. Moore's Tavern and Restaurant and the Freehold Escondido's Mexican
Restaurant have experienced a seasonality factor similar to but not as dramatic
as the seasonality factor of the Company's New Jersey seafood restaurants. Mr.
Manatee's Casual Grille follows the seasonality pattern of the Company's Florida
restaurants.
TRADEMARKS
The Company has no patents, trademarks, licenses, franchises or
concessions which it regards as material to its restaurant business with the
exception of the service mark "Jack Baker's Lobster Shanty" registered for a 20
year period with the U.S. Patent and Trademark Office in February, 1989, and its
rights to use of the names "Moore's Inn" and "Moore's Tavern" as described
above. The Company also believes its use of the service mark "Escondido's
Mexican Restaurant" is material to its restaurant business. The Company applied
to the United States Commissioner of Trademarks and effective September 2002,
obtained registration of the service mark "Escondido's Mexican Restaurant."
COMPETITION
The restaurant business is highly competitive and the success of any
restaurant depends to a great extent upon the services it supplies and its
location. The Company's seafood restaurants compete primarily with other local
seafood restaurants and to a lesser extent, with local restaurants serving a
more general fare. The principal national competition to the Company's seafood
restaurants is the Red Lobster restaurant chain. This chain has substantially
greater resources than the Company. The Company's Florida seafood restaurants
also face competition from Shells seafood restaurants operating in their area.
There are other restaurants in the vicinity of the location where the Company is
now operating its Escondido's Mexican Restaurant, all of which supply
competition to the Company's Mexican theme restaurant. In addition, there are
other Mexican style restaurants including an outlet of Chevy's, a national
chain, in the area. The Moore's Tavern and Restaurant faces competition from
local restaurants as well as from national chains including TGI Fridays and
Chili's restaurants in the area. Typical "chain" competitors to all of the
Company's restaurants, which are affiliated with better established and more
prominent national chains, are Ruby Tuesdays and TGI Fridays. There can be no
assurance that the Company's units will be able to successfully compete with any
of such other restaurants.
GOVERNMENT REGULATION
The Company is subject to various Federal, state and local laws
affecting the operation of its restaurants, including licensing and regulation
by health, sanitation, safety and fire departments and alcoholic beverage
control authorities. The Company is also subject to the Fair Labor Standards
Act, which governs such matters as minimum wages, overtime and other working
conditions. While such regulations have not had a material negative impact on
the Company's operations to date, difficulties in obtaining necessary licenses
or permits could result in delays or cancellations in the opening of new
restaurants and increases in the minimum wage will increase the Company's labor
costs.
Each of the Company's New Jersey and Florida restaurants holds a state
liquor license and is subject to the liquor licensing laws of New Jersey or
Florida (depending on location). Management regards the aggregate and per claim
liability insurance which it carries to be adequate for the nature of its
operations taking into account the fact that it serves liquor at each location.
13
EMPLOYEES
The Company maintains its administrative employees at its executive
offices including its principal officers (see "Item 9 - Directors, Executive
Officers, Promoters and Control Persons; Compliance with Section 16(a) of the
Exchange Act"), secretarial and bookkeeping personnel. Each of the Company's
seafood restaurant units employs a general manager, two assistant managers and
between 40 and 130 other employees to serve as waitresses, waiters, busboys,
bartenders, cooks, dishwashers, kitchen help, hostesses and cashiers (some on a
part-time basis). The Company's Escondido's Mexican Restaurant in Freehold, New
Jersey employs between 30 and 60 employees and its Moore's Tavern and Restaurant
employs approximately 60 employees, in each case serving similar functions. The
Company also presently employs two area supervisors, each responsible for
certain of the Company's restaurants. Managerial candidates are recruited for
the Company's restaurants from hotel and restaurant management schools,
restaurant recruiting agencies, through advertising in restaurant management
magazines and by promotion from within the Company's own organization. At
January 30, 2005, the Company had approximately 500 employees (including
part-time workers). The Company is not a party to any collective bargaining
agreements and has enjoyed satisfactory employee relations since inception.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's executive and administrative offices are located in an
approximately 4,000 square foot two story Company owned building of cinder block
construction at 62 Broadway, Point Pleasant Beach, New Jersey.
See Item 1 herein for a description of the Company's operating
restaurants.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the quarter ended January 30, 2005.
A Special Meeting of the Company's stockholders was held on April 18,
2005. At the Special Meeting, a total of 2,873,469 votes were cast in favor of,
a total of 8,944 votes were cast against and 2,084 shares abstained from voting
with respect to the proposal to approve and adopt the Agreement and Plan of
Merger dated as of December 22, 2004 between Acquisition Co. and the Company and
the Merger pursuant to which Acquisition Co. would be merged with and into the
Company and each share of Chefs common stock (other than shares owned by
Acquisition Co. and shares owned by stockholders who have properly exercised
dissenters' rights of appraisal) will be canceled and converted into the right
to receive a cash payment of $3.12 without interest, and without deduction of
any commission, so that the Agreement and Plan of Merger and the Merger have
been approved and adopted by the affirmative vote of a majority of the shares of
Chefs common stock outstanding on the February 25, 2005 Record Date for the
meeting.
14
CHEFS INTERNATIONAL, INC.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The common stock was listed on the NASDAQ Stock Market Small Cap System
under the symbol "CHEF" until the close of business on December 16, 1998 when it
was delisted because of the failure of the common stock to maintain a closing
bid price at or above $1.00 per share. Commencing December 17, 1998, the common
stock has been traded in the over-the-counter market under the symbol "CHEF."
The following chart sets forth the range of high and low closing bid prices for
the common stock in the over-the-counter market for the periods indicated as
obtained from the Pink Sheets LLC.
Fiscal 2004 Bid Prices
Quarter --------------------------
Ended High Low
----- ---- ---
April 27, 2003 1.42 1.35
July 27, 2003 1.38 1.35
October 26, 2003 1.40 1.38
January 25, 2004 1.85(a) 1.40(a)
Fiscal 2005
Quarter
Ended
-----
April 25, 2004 2.76(b) 1.55(b)
July 25, 2004 3.05(c) 2.76(c)
October 24, 2004 3.05 3.03
January 30, 2005 3.05 2.90
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.
--------------------------
(a) During the quarter (on November 21, 2003), the Company publicly announced
its receipt of a Merger offer from the Lombardi Group offering to purchase the
outstanding Common Stock owned by the Public Stockholders for a cash purchase
price of $1.75 per share.
(b) During the quarter, after publicly announcing on March 8, 2004, the
rejection of the $1.75 per share offered purchase price, the Company, on March
15, 2004, publicly announced the increased offer by the Lombardi Group of a cash
purchase price of $2.50 per share. After publicly announcing on April 19, 2004,
the rejection of the $2.50 per share offered purchase price, the Company, on
April 21, 2004, publicly announced the increased offer by the Lombardi Group of
a cash purchase price of $3.00 per share.
(c) During the quarter (on June 1, 2004), the Company publicly announced that
the Special Committee appointed by the Board of Directors to review and make a
recommendation to the Board regarding the fairness of the proposed Merger offer
to the Public Stockholders, had advised the Board of Directors that in the
Committee's judgment, the proposed increased purchase price of $3.12 per share
15
(increased after discussions between counsel for the Special Committee and
counsel for the Lombardi Group), was fair to the Company's Public Stockholders,
and had determined to recommend that the Board accept the proposal.
At February 25, 2005, the number of record holders of the Common Stock
was 6,296. Such number of record holders was determined from the Company's
shareholder records and does not include beneficial owners whose shares are held
in nominee accounts with brokers, dealers, banks and clearing agencies.
The Company did not sell any of its equity securities during the fiscal
year ended January 30, 2005.
ITEM 6. MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements regarding future performance in this Annual Report
on Form 10-KSB constitute forward-looking statements under the Private
Securities Litigation Reform Act of 1995. No assurance can be given that the
future results covered by the forward-looking statements will be achieved. The
Company cautions readers that important factors may affect the Company's actual
results and could cause those results to differ materially from the
forward-looking statements. Such factors include, but are not limited to,
changing market conditions, weather, the state of the economy, substantial
increases in insurance costs, the impact of competition to the Company's
restaurants, pricing and acceptance of the Company's food products. In addition,
the Company's performance may be adversely affected if it is unable to find a
satisfactory successor to its president and principal executive officer, Anthony
C. Papalia, who left the Company's employ at the end of June 2004.
FINANCIAL REPORTING
Note 1 to the consolidated financial statements includes a summary of
significant accounting policies and methods used in the preparation of the
Company's consolidated financial statements. However, in the opinion of
management, the Company does not have any individual accounting policy that is
critical to the preparation of its consolidated financial statements. This is
due principally to the nature of the accounting requirements of the Company's
business. The following is a review of the more significant accounting policies
and methods used by the Company.
Depreciation and Amortization: The Company depreciates its property and
equipment and amortizes its definite life intangible assets using straight-line
methods over the estimated useful lives of the assets. Intangible assets
(including liquor licenses) deemed to have indefinite useful lives are not
amortized but are subject to impairment tests at least annually, or more
frequently if circumstances occur that indicate impairment may have occurred.
The Company tested for impairment of its definite and indefinite life intangible
assets and no impairment charges were necessary during fiscal 2004 or fiscal
2005. See Note 6 of Notes to the Consolidated Financial Statements.
Income Taxes: The Company accounts for income taxes in accordance with
statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." Under SFAS No. 109, deferred tax assets and liabilities are
determined based on the difference between book and tax assets and liabilities,
using enacted tax rates in effect for the year in which the differences are
16
expected to reverse. The recognition of the deferred tax assets is based on
management's best assumptions and estimates of future income. A valuation
allowance is recorded when management determines that it is more likely than not
that some portion of the deferred tax assets will not be realized. These
assumptions and estimates will be periodically reviewed and, if needed,
adjustments will be made as required. During fiscal 2005, the Company determined
that sales of certain of its tangible and intangible assets will result in
sufficient taxable income so that a valuation allowance against the deferred tax
assets is no longer warranted.
Hedging Instruments: The Company has interest rate swap agreements
relating to a portion of its variable rate debt. The Company accounts for these
hedging instruments under SFAS No. 133 "Accounting for Derivative Instruments
and Hedging Activities," and its related amendment, SFAS No. 138 "Accounting for
Certain Derivative Instruments and Certain Hedging Activities" (collectively
referred to as "SFAS No. 133"). The interest rate swap agreements are designated
as cash flow hedges and are reflected at fair value in the Consolidated Balance
Sheet and the related losses on these contracts are deferred in shareholders'
equity as a component of accumulated other comprehensive loss.
OVERVIEW
The Company's principal source of revenue is from the operations of its
restaurants. The Company's cost of goods sold includes food and liquor costs.
Operating expenses include labor costs, supplies and occupancy costs (rent and
utilities), marketing and maintenance costs. General and administrative expenses
include costs incurred for corporate support and administration, including the
salaries and related expenses of personnel and the costs of operating the
corporate office at the Company's headquarters in Point Pleasant Beach, New
Jersey.
The Company currently operates nine restaurants on a year-round basis.
See Item 1, "Developments Since the Beginning of the Last Fiscal Year" as to the
Company's sale of its Lobster Shanty Restaurant in Jensen Beach, Florida during
the second quarter of calendar 2004. The Company opened its first seafood
restaurant in November 1978 and currently has six free-standing seafood
restaurants in New Jersey and Florida operating under the names "Jack Baker's
Lobster Shanty" or "Baker's Wharfside." In February 2000, the Company commenced
the operation of Moore's Tavern and Restaurant, ("Moore's"), a free-standing
restaurant in Freehold, New Jersey serving an eclectic American food type menu.
On January 29, 2002, the Company commenced operation of its Escondido's Mexican
Restaurant ("Freehold"), a Mexican theme restaurant located in Freehold, New
Jersey, adjacent to Moore's. On April 1, 2002, the Company acquired the
operations of Mr. Manatee's Casual Grille ("Manatee's"), a casual theme
restaurant primarily featuring seafood items, located in Vero Beach, Florida
near the Company's Vero Beach, Florida Lobster Shanty. The closing of the
Company's Escondido's restaurant in the Monmouth Mall in Eatontown, New Jersey
("Monmouth") in June 2003 and its sale of its Jensen Beach, Florida Lobster
Shanty restaurant in May 2004 reduced the number of restaurants operated by the
Company to nine.
Generally, the Company's New Jersey seafood restaurants derive a
significant portion of their sales from May through September. The Company's
Florida seafood restaurants derive a significant portion of their sales from
January through April. Moore's experiences a seasonality factor similar to but
not as dramatic as the seasonality factor of the New Jersey seafood restaurants.
The Company's Freehold Escondido's experiences a seasonality factor similar to
Moore's. Manatee's follows the seasonality pattern of the other Florida
restaurants.
17
The Company operated eleven restaurants during the year ended January
25, 2004.
The statements of operations are comprised of a 53-week period for the
year ended January 30, 2005 ("fiscal 2005") and a 52-week period for the year
ended January 25, 2004 ("fiscal 2004").
RESULTS OF OPERATIONS
Sales for the year ended January 30, 2005 totaled $21,563,600,
a decrease of $719,600 or 3.2%, as compared to total sales of $22,283,200 for
the year ended January 25, 2004, despite an additional week of sales included in
the fiscal 2005 results. Fiscal 2004's sales included $311,800 in sales at the
Monmouth Escondido's ("Monmouth") which was closed in June 2003 and $1,210,300
in sales at the Jensen Beach, Florida Lobster Shanty, ("Jensen Beach") which was
sold in May 2004, compared to $526,900 for Jensen Beach in fiscal 2005, a
decrease of $683,400 at Jensen Beach. Sales for the nine restaurants that
operated during the comparable periods increased by $275,600 or 1.3%. The three
Florida restaurants that operated during the comparable periods realized
decreased sales of $228,500 or 3.4% due to closure of the restaurants as a
result of the devastation caused by the September 2004 hurricanes. The closures
ranged from twelve days at the Cocoa Beach restaurant to 76 days at the Vero
Beach Mr. Manatee's restaurant. Some weather observers believe that this was the
worst Florida storm season ever recorded and clearly the effect of the damage
has impacted the 2004-2005 Florida tourist season by the continued closure of
several major hotels/motels. All three Florida restaurants reported lower sales
for the current (2004-2005) tourist season. The six New Jersey restaurants that
operated during the comparable periods realized increased sales of $504,100 or
3.6% versus last year due to a mild 2003-2004 winter and despite lower sales
during a lack-luster rainy 2004 summer tourist season. Sales in both states
continue to be under pressure due to concerns about terrorism and the record
high cost of gasoline. The number of customers served in the nine restaurants
that operated during the comparable periods decreased by 3.8% while the average
check increased by 5.3% versus the prior year.
GROSS PROFIT
Gross profit was $14,678,200 or 68.1% of sales for fiscal 2005 compared
to $15,248,300 or 68.4% for fiscal 2004. The primary reasons for the decline
were continued increases in commodity costs, particularly poultry, beef, dairy
and produce, the addition of fuel surcharges by suppliers due to the increase in
the price of oil, and the closing of the Monmouth restaurant with its lower cost
Mexican fare. The Florida storms and Midwest droughts have dramatically impacted
commodity costs and will continue to do so for the foreseeable future.
Management raised some menu prices and introduced lower cost specials to
compensate for the higher costs.
OPERATING EXPENSES.
Total operating expenses decreased by 8% from $15,318,500 for fiscal
2004 to $14,090,800 for fiscal 2005. Payroll and related expenses were 30.5% of
sales for fiscal 2005 compared to 31.1% of sales for fiscal 2004. The primary
reasons for the improvement were the closure of the Monmouth and Jensen Beach
restaurants which operated with higher payroll costs, and lower health and
worker's compensation insurance costs at the other nine restaurants. Other
operating expenses were 21.7% of sales for fiscal 2005 compared to 22.2% of
sales for fiscal 2004 primarily attributable to the closures of Monmouth and
Jensen Beach,
18
which offset increased utility costs at the other restaurants related to the
substantial increase in oil prices.
Depreciation and amortization expenses in fiscal 2005 were lower by
approximately $65,700 versus fiscal 2004 due primarily to the closings of
Monmouth and Jensen Beach and the write off of property and equipment destroyed
or damaged by the hurricanes. Depreciation expenses will increase in the future
as the replacement assets purchased in fiscal 2005 are depreciated.
General and administrative expenses for fiscal 2005 were lower by
approximately $130,000 versus the prior fiscal year due primarily to reductions
in salaries and payroll taxes of approximately $78,200 and lower insurance costs
of approximately $54,200. Salaries for fiscal 2005 included $71,500 attributed
to the Company's Executive Incentive Bonus Plan ("Bonus Plan") (see Note 12 to
the Consolidated Financial Statements), while salaries in fiscal 2004 attributed
to the Bonus Plan were $51,000.
During the second quarter ended July 25, 2004, the Company sold the
restaurant and property located in Jensen Beach, Florida for $900,000 in cash to
an unrelated third party resulting in a gain of approximately $415,000. In June
2003, the Company closed the Monmouth Mall Mexican theme restaurant and recorded
a loss of approximately $410,000 which included an early lease termination fee
of $180,000. As part of a Surrender Agreement, the Mall was given an option to
purchase the Company's liquor license for a specified price. However, during
fiscal 2005, the Mall declined to purchase the license and management is
currently in the process of marketing the license to interested parties.
During the third quarter ended October 24, 2004, the Company recorded a
loss of $320,400 for costs associated with the Florida hurricanes. The loss
included lost inventory, clean-up expenditures and an estimate for the carrying
value for the property and equipment destroyed or damaged.
During the fourth quarter of fiscal 2005, the Company spent an
additional $35,200 on hurricane costs and received net insurance advances of
approximately $558,000 from its insurance carriers resulting in a net gain
related to the hurricanes of approximately $202,400 for the year ended January
30, 2005.
OTHER INCOME AND EXPENSE.
Interest expense was $9,400 lower in fiscal 2005 due to debt reduction.
During the fourth quarter of fiscal 2005, the Company's primary bank lender
agreed to increase the Company's bank line of credit ("line") from $500,000 to
$1,000,000 with all other terms remaining unchanged including the maturity date
of June 30, 2005 and a variable interest rate equal to the monthly LIBOR Market
Index Rate plus 2%. The Company intends to use the line to cover short-term cash
needs related to the hurricane losses. At the year end, the Company had drawn
$500,000 on the line. Investment income was $114,700 higher in fiscal 2005
primarily due to an increase of $60,700 in capital gains realized on the sale of
investments (see Note 10 to the Consolidated Financial Statements).
NET INCOME.
For the year ended January 30, 2005, the Company realized net income of
$783,500 or $.20 per share compared to $39,000 or $.01 per share for the year
ended January 25, 2004. Net income for the current year includes a gain of
approximately $415,000 recognized on the sale of Jensen Beach and a net gain of
19
approximately $202,400 related to the Florida hurricanes. The prior year's net
income included a charge of $410,000 for the loss on closing the Monmouth
restaurant and a credit of $57,000 for income taxes.
LIQUIDITY AND CAPITAL RESOURCES.
The Company has financed its operations primarily from revenues derived
from its restaurants.
The Company's ratio of current assets to current liabilities was 2.12:1
at January 30, 2005, compared to 2.56:1 at January 25, 2004. Working capital was
$3,355,700 at the end of fiscal 2005, a decrease of $331,200 versus the prior
year. During fiscal 2005, there was an increase in cash of $831,300. Net cash
provided from operating activities was $2,090,700. The primary components were
net income, after adjustment for depreciation, deferred income taxes, the gain
on the sale of Jensen Beach, and the net gain related to the hurricanes of
$1,999,200; a decrease in inventories of $86,000 primarily related to the sale
of Jensen Beach; a decrease in pre-paid expenses of $90,400 as a result of a
change in the financing of the Company's annual property and casualty insurance
program; an increase of $131,800 in accounts payable primarily due to
construction costs associated with restaurant renovations and hurricane costs;
and a decrease of $210,000 in accrued expenses primarily due to a final payment
of $120,000 paid as per the Surrender Agreement associated with the closing of
Monmouth (see Note 8 to the Consolidated Financial Statements).
Investing activities during fiscal 2005 resulted in a net cash outflow
of approximately $1,222,600. Capital expenditures were $2,165,200, including
$984,600 for hurricane related furniture, fixtures and equipment, $655,200 for
in-progress renovations at the Lobster Shanty restaurants in Cocoa Beach,
Florida and Point Pleasant Beach, New Jersey, and the balance of approximately
$525,400 for routine restaurant improvements and the purchase of two Company
vehicles. Other investing activities included $842,200 in net proceeds from the
sale of Jensen Beach. Investment purchases of $1,295,400 for available-for-sale
securities were offset by $1,291,300 from the sale of investments which resulted
in a gain of $129,800. At January 30, 2005, the fair value of the Company's
holdings available-for-sale securities resulted in net unrealized gains of
$109,100 (see Note 3 to the Consolidated Financial Statements). The resulting
gains are recorded in stockholder's equity as a component of accumulated other
comprehensive income.
Financing activities for fiscal 2005 resulted in a net cash outflow of
$36,700 and included debt repayment of $271,300; bank loan proceeds of $500,000
which were drawn on the bank line to partially finance the cost of rebuilding
the Florida restaurants pursuant to damages incurred by the hurricanes, and a
change in other assets primarily due to approximately $226,500 in costs related
to the proposal by the principal shareholders of the Company to purchase all of
the remaining outstanding shares of common stock (see Note 2 to the Consolidated
Financial Statements).
During fiscal 2004, net cash increased by $341,000. Net cash provided
from operating activities was $1,342,000. The primary components were net
income, after adjustment for depreciation, deferred income taxes, and a loss on
closing of the Monmouth restaurant, of $1,442,300; an increase in inventories of
$111,000 primarily related to bulk purchases of shrimp; an increase in prepaid
expenses of $90,000 primarily related to the revised financing agreement for the
Company's property and casualty insurance premiums; an increase in the current
portion of the Company's deferred tax assets, and an increase of $120,400 in
accounts
20
payable due to increased sales and the inventory purchases. Investing activities
for fiscal 2004 resulted in a net cash outflow of $568,600. Capital expenditures
were $449,100, including $31,400 to renovate the Freehold Escondido's bar and
$417,700 for routine restaurant improvements. Other investing activities
included the purchase of various investments totaling $534,300 offset by
$453,100 realized from the proceeds of maturing certificates of deposit and the
sale of investments which resulted in a gain of $69,200. Financing activities in
fiscal 2004 resulted in a net cash outflow of $432,400 and included debt
repayment of $271,500; treasury stock purchases of $59,200 to repurchase 40,000
shares of the Company's outstanding common stock, and approximately $110,000 in
costs related to the Merger proposal (see Note 2 to the Consolidated Financial
Statements).
At the end of fiscal 2005, the Company was in compliance with all of
the financial covenants under its loan agreements with its primary bank,
Wachovia Bank, National Association. The Company was also in full compliance at
the year ended January 25, 2004.
RECENT DEVELOPMENTS
In January 2005, the Company began a major renovation of the Lobster
Shanty located in Point Pleasant Beach, New Jersey, at a projected cost of
approximately $2,200,000. Management expects that the renovated restaurant will
be fully operational in May, 2005. In order to partially finance the project,
the Company entered into an agreement to borrow up to $1,500,000 through a
Non-Revolving Line of Credit with Wachovia Bank ("Construction Line") which
expires on July 31, 2005 at a monthly interest rate of one-month LIBOR plus
2.00%. At July 31, 2005 the balance due on the construction line will be
converted to a term loan based on a 15-year payout with a ten year balloon at an
interest rate to be determined prior to the conversion. At April 21, 2005 the
Company had borrowed $750,000 on the construction line.
In February 2005, the Company borrowed an additional $300,000 on its
$1,000,000 bank line for repair costs associated with the Florida hurricanes.
In April 2005, the Company received additional net insurance advances
of $502,600 which brings the total advances received to date to $1,060,600. Upon
receipt of the recent advances, the Company paid $400,000 against the balance
due on the $1,000,000 bank line of credit, leaving a total of $600,000 available
for future borrowings.
In April 2005, management negotiated the annual renewals for group
health ("health") and property and casualty ("property") insurance coverages.
The health plan was renewed at a decrease of approximately 3.7% versus the prior
year. The property plan coverage was renewed at an increase of approximately
10.5%, a majority of which can be attributed to the impact of last year's
hurricanes on Florida insurance companies.
Management anticipates that funds from operations and the construction
line will be sufficient to meet the Company's obligations in fiscal 2006,
including projected capital expenditures for improvements and renovations of
approximately $3,000,000.
INFLATION
It is not possible for the Company to predict with any accuracy the
effect of inflation upon the results of its operations in future years. In
general, the Company is able to increase menu prices to counteract the
21
majority of the inflationary effects of increasing costs with the exception of
the substantial increase in insurance costs that the Company has had to absorb
over the last several years.
ITEM 7. FINANCIAL STATEMENTS
Attached.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
ITEM 8A CONTROLS AND PROCEDURES
(a) EXPLANATION OF DISCLOSURE CONTROLS AND PROCEDURES. Robert
M. Lombardi, the Company's principal executive officer and Martin W. Fletcher,
the Company's principal financial and principal accounting officer, after
evaluating the effectiveness of the Company's disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of a date within
90 days of the filing date of this Annual Report (the "Evaluation Date") have
each concluded that as of the Evaluation Date, the Company's disclosure controls
and procedures were adequate and effective to ensure that material information
relating to the Company and its consolidated subsidiaries would be made known to
him by others within those entities, particularly during the period in which
this Annual Report was being prepared.
(b) CHANGES IN INTERNAL CONTROLS. There were no significant
changes in the Company's internal controls or in other factors that could
significantly affect the Company's disclosure controls and procedures subsequent
to the Evaluation Date, nor any significant deficiencies or material weaknesses
in such disclosure controls and procedures requiring corrective action. As a
result, no corrective actions were taken.
ITEM 8B OTHER INFORMATION
NONE
CHEFS INTERNATIONAL, INC.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth certain information with respect to each
of the current directors of the Company:
Date First
Name Age Position Elected a Director
---- --- -------- ------------------
Chairman of
Robert M. Lombardi(a) 53 the Board, President, May 1999
Principal Executive
Officer
Nicholas B. Boxter(b) 57 Director December 1999
Kenneth Cubelli(b) 51 Director December 1999
Raymond L. Dademo(b) 47 Director December 1999
22
Anthony M. Lombardi(a) 49 Director July 1999
Joseph S. Lombardi(a) 54 Director July 1999
Michael F. Lombardi(a) 56 Director July 1999
Stephen F. Lombardi(a) 49 Director July 1999
-------------------
(a) The five Lombardis who serve as directors are brothers.
(b) Messrs. Boxter, Cubelli and Dademo were the members of the Special Committee
appointed by the Board of Directors to review and make a recommendation to the
Board regarding the fairness of the proposed Merger transaction to the Public
Stockholders. If the Merger is consummated, they will resign from the Board.
The other executive officer of the Company (in addition to Robert M.
Lombardi) is:
Name Age Office
---- --- ------
Martin W. Fletcher 52 Vice President,
Principal Financial and
Principal Accounting Officer
The Company does not have an Executive Committee or a separate Audit
Committee. The entire Board of Directors serves as the Company's Audit
Committee. The term of office of each director and executive officer expires
when his successor is elected and qualified. Executive officers are elected by
and hold office at the discretion of the Board of Directors.
CODE OF ETHICS
The Board of Directors adopted a code of ethics applicable to the
Company's principal executive, principal financial and principal accounting
officer during the second quarter of fiscal 2005. The Company will provide a
copy of the code of ethics without charge, to any person requesting same in
writing addressed to the Company's chief financial officer at the Company's
executive offices at 62 Broadway, Point Pleasant Beach, NJ 08742.
DIRECTORS AND EXECUTIVE OFFICERS
The following is a brief account of the business experience of each
director and executive officer of the Company during the past five years.
DIRECTORS
Robert M. Lombardi, M.D. is, and for more than the past five years has
been principally engaged as a physician and orthopedic surgeon with the
Edison-Metuchen Orthopedic Group, a medical practice group located in Edison,
New Jersey, where he also serves as a senior officer. He is also an officer of
Moore's Inn, Inc. and a partner in Moore's Realty. He was elected president and
principal executive officer of the Company in June 2004 to succeed Anthony C.
Papalia.
Nicholas B. Boxter, C.P.A. is, and for more than the past five years
has been principally engaged in the practice of accountancy with his own firm in
Whitehouse, New Jersey.
23
Kenneth Cubelli, M.D. is, and for more than the past five years has
been principally engaged as a physician and orthopedic surgeon with the Morris
County Orthopedic Group in Denville, New Jersey.
Raymond L. Dademo, Esq. is, and for more than the past five years has
been principally engaged as a practicing attorney with his own law firm in
Brick, New Jersey.
Anthony M. Lombardi, D.D.S. is, and for more than the past five years
has been principally engaged in the practice of dentistry in Edison, New Jersey.
He is also an officer of Moore's Inn, Inc.
Joseph S. Lombardi, M.D. is, and for more than the past five years has
been principally engaged as a physician and orthopedic surgeon with the
Edison-Metuchen Orthopedic Group, where he is a senior officer. He is also an
officer of Moore's Inn, Inc. and a partner in Moore's Realty.
Michael F. Lombardi, Esq. is, and for more than the past five years has
been principally engaged as a practicing attorney and a senior officer of
Lombardi & Lombardi, P.A., an Edison, New Jersey law firm. He is also an officer
of Moore's Inn, Inc. and a partner in Moore's Realty.
Stephen F. Lombardi, Esq. is, and for more than the past five years has
been principally engaged as a practicing attorney and a senior officer of
Lombardi & Lombardi, P.A., an Edison, New Jersey law firm. He is also an officer
of Moore's Inn, Inc. and a partner in Moore's Realty.
EXECUTIVE OFFICER
The other executive officer of the Company in addition to Robert M.
Lombardi is Martin W. Fletcher who has been continuously employed by the Company
for the preceding five years in various capacities. He has served as general
manager of the Company's Toms River, New Jersey Lobster Shanty, as area
supervisor for its Florida west coast restaurants, as assistant controller,
since September 1987 as controller and since March 1988 as secretary and a
director of the Company. He resigned as a director of the Company in July 1999.
Mr. Fletcher was elected principal financial and principal accounting officer of
the Company in June 2004 to succeed Anthony C. Papalia. At the same time, he was
elected a vice president of the Company. He is currently devoting all of his
working time to the business of the Company.
COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT
Based solely upon a review of Forms 3, 4 and 5, the Company believes
that with respect to fiscal 2005, all Section 16(a) filing requirements
applicable to its officers, directors and beneficial owners of more than 10% of
its equity securities were timely complied with.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
paid or accrued by the Company during the three fiscal years ended January 30,
2005 to its Principal Executive Officer as well as to any other executive
officer of the Company or a subsidiary who earned at least $100,000 during
fiscal 2005. During the three-year period ended January 30, 2005, the Company
did not grant any restricted stock awards or have any long-term incentive plan
in effect. The Company maintains a non-qualified Supplemental Employee Benefit
Program for its
24
officers, supervisors, restaurant managers and assistant managers paying annual
contributions ranging from $1,000 to approximately $3,000 per individual. The
Program provides life insurance death benefits, disability income benefits and
retirement income benefits. A former officer and director, James Fletcher, the
father of Martin W. Fletcher, is not covered under this Program but the Company
agreed that if he remained in its employ until age 65 and left such employ at
any time thereafter, the Company would pay him $20,000 annually for the ten year
period following such termination of employment or until his death, if he dies
prior thereto. To date, the Company has made annual payments over an eight year
period pursuant to this agreement.
SUMMARY COMPENSATION TABLE
Annual Compensation
Name and Fiscal Other Annual
Principal Position Year Salary Bonus(d) Compensation(e)
------------------ ------ ------ ----- ------------
Robert M. Lombardi 2005(a) -0- -0- -0-
President and
Principal Executive
Officer
Anthony C. Papalia 2005(b) $77,833 -0- $1,044
President and 2004 $179,162 $7,500 $2,088
Principal Executive 2003 $174,630 $4,500 $2,088
Officer
Martin W. Fletcher 2005(c) $124,603 $17,000 $2,902
Principal Financial 2004 $103,915 $9,100 $2,902
Officer and Controller 2003 $101,255 $5,367 $2,902
-----------------------------
(a) Dr. Lombardi was elected president and principal executive officer of the
Company to succeed Anthony C. Papalia in June 2004.
(b) Mr. Papalia resigned as president, principal executive and principal
accounting officer of the Company effective in June 2004.
(c) Mr. Fletcher was elected principal financial and principal accounting
officer of the Company in June 2004 to succeed Mr. Papalia.
(d) In May 2000, the Company's Board of Directors adopted an executive incentive
bonus plan providing for an annual cash bonus to be paid to Company employees
performing executive type functions with respect to each fiscal year (commencing
with fiscal 2001) in which the Company achieved certain specified levels of
earnings before deducting interest, income taxes, depreciation and amortization.
Extraordinary items are excluded for purposes of the computation. The bonus pool
for fiscal 2005 aggregated $71,500 and was distributed to five employees
including Martin Fletcher who received $17,000.
(e) Represents contributions under the Supplemental Employee Benefit Program.
EMPLOYMENT AGREEMENTS
At the annual meeting of the Company's stockholders held on December
19, 1995, stockholders ratified employment contracts between the Company and
Anthony Papalia as principal executive officer and principal financial officer
and between the Company and Martin Fletcher as controller. Each contract expired
at the conclusion of the Company's 1999 fiscal year and was automatically
renewed on a year by year basis for up to five consecutive additional one-year
terms unless either party gave at least six months' prior notice that he or it
did not desire
25
such renewal. As no such notice was given during fiscal 1999, each contract was
extended for a first renewal year. Mr. Papalia's annual salary under the
contract was $150,000 and Mr. Fletcher's annual salary under the contract was
$87,000 but each individual's salary was made subject to automatic increase in
each Renewal Year based on increases in the Consumer Price Index. If the
employment of either individual was terminated other than for cause, he would
become entitled to a Severance Payment equal to the amount of his compensation
over the balance of the contract term. Each individual was also entitled to
terminate his employment and receive a Severance Payment equal to six months'
salary in the event of a "change of control" of the Company. Amendments to each
employment contract executed in June 1999 and August 1999 extended the first
renewal year through March 31, 2000, renewed each contract for a second renewal
year through March 31, 2001 and recast each renewal year so as to commence on
April 1 of each year and to expire on March 31 of the following year. Notice of
intention not to renew must now be given no later than September 30 of the year
preceding the year in which the renewal term commences. In November 2001, each
employment contract was further amended to renew the term through March 31,
2005. The amendments retained the automatic salary increase provision based on
increases in the Consumer Price Index and provided for an automatic one year
renewal in the absence of prior notice not to renew. As a result, during fiscal
2005, Mr. Papalia's annual salary was increased to $186,702 and Mr. Fletcher's
annual salary was increased to $133,208.
See Item 1 - "Developments Since the Beginning of the Last Fiscal Year"
herein as to the release of Mr. Papalia from his obligations under his
employment contract effective at the close of business on June 28, 2004 and his
resignation, effective at such date, as president, principal executive officer
and principal financial and principal accounting officer of the Company.
STOCK OPTIONS
At January 30, 2005 and at January 30, 2005 there were no outstanding
employee or non-employee stock options exercisable to purchase shares of Chefs'
common stock.
DIRECTORS' COMPENSATION
During fiscal 2005, no compensation was paid to any of the Company's
directors for serving in such capacity. Furthermore, no method of compensation
has been established for the directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of April 15,
2005 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.
26
Name and Address of Shares of Common Stock Percentage
Beneficial Owner Beneficially Owned Ownership
Directors* ------------------ ---------
----------
Robert M. Lombardi 1,335,826(1) 34%
(also president)
Nicholas B. Boxter -- --
Kenneth Cubelli 100,000 3%
Raymond L. Dademo 2,000 --
Anthony M. Lombardi 111,001(1) 3%
Joseph S. Lombardi 599,633(1) 15%
Michael F. Lombardi 332,047 8%
Stephen F. Lombardi 191,669(1)(2)(3) 5%
All executive officers and
directors as a group
(eight persons) 2,511,508(1)(2)(3) 64%
Other 5% Stockholders
---------------------
Maschler Group(4) 196,938(4) 5%
-------------------------
* The address of each director and executive officer is c/o the Company, 62
Broadway, Point Pleasant Beach, New Jersey 08742.
(1) Robert M. Lombardi, Anthony M. Lombardi, Joseph S. Lombardi, Michael F.
Lombardi and Stephen F. Lombardi, Lombardi & Lombardi, P.A. and the Lombardi &
Lombardi, P.A. Defined Benefit Pension Plan previously filed a report on
Schedule 13D and amendments thereto indicating that they were acting separately
and not as a group but subsequently filed amendments to the Schedule 13D
indicating that they are acting as a "group." The five individual Lombardis are
brothers and for purposes of this report, they and the above entities are deemed
the "Lombardi Group." See Item 1 - "Developments Since the Beginning of the Last
Fiscal Year" as to the proposal by the Lombardi Group to acquire all of the
outstanding shares of Chefs common stock not owned by the Lombardi Group and the
two Maschler Brothers in connection with a Merger transaction designed to take
the Company "private". The proposed Merger Agreement and the Plan of Merger were
duly adopted by the Company's stockholders at a special meeting held on April
18, 2005.
(2) Includes 111,668 shares owned by the Lombardi & Lombardi, P.A. Defined
Benefit Pension Plan. Michael F. Lombardi and Stephen F. Lombardi each have
voting and dispositive power with respect to all 111,668 of such shares.
(3) Includes 49,000 shares owned by Lombardi & Lombardi, P.A. Michael F.
Lombardi and Stephen Lombardi each have voting and dispositive power with
respect to all 49,000 of such shares.
(4) The Maschler Group includes two brothers, Lee Maschler and Matthew H.
Maschler who each own 98,469 shares of Common Stock. See Item 1 as to the Merger
Agreement and the Plan of Merger designed to take the Company "private."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 1 - "Restaurant Operations - Mexican Theme Restaurant -
Moore's Tavern and Restaurant" as to rentals paid in fiscal 2005 by the Company
with respect to its two Freehold, New Jersey restaurants and the "Building Pad C
Parking Lot" to Moore's Realty (whose partners are members of the Lombardi Group
and other members of the Lombardi family).
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
2.1 Agreement and Plan of Merger between the Company and Lombardi
Restaurant Group, Inc. dated as of December 22, 2004.(A)
27
3.1 Restated Certificate of Incorporation of the Company(B)
3.2 By-Laws of the Company, as amended(C)
4.1 Specimen Common Stock Certificate(D)
10.2 Employment Agreement dated as of December 19, 1995 between Chefs and
Anthony Papalia(E)
10.3 Employment Agreement dated as of December 19, 1995 between Chefs and
Martin Fletcher(F)
10.4 Loan Agreement dated October 30, 1998 between the Company and First
Union National Bank ("First Union")and the Company's $880,000
Promissory Note issued pursuant thereto for funding utilized by the
Company to purchase the Vero Beach, Florida Lobster Shanty
Restaurant(B)
10.4.1 Loan Agreement dated September 7, 2001 between the Company and First
Union containing the Company's affirmative and negative covenants(H).
10.5 Lease Agreement executed in January 2000 for Moore's Inn facility,
between Moore's Realty Associates ("Moore's Realty") as Landlord and
the Company as Tenant(C)
10.5.1 Lease Agreement dated October 1, 2001 for Building B in Freehold, New
Jersey between Moore's Realty as Landlord and the Company as Tenant
(opened as Escondido's Mexican Restaurant)(H).
10.5.2 Lease Agreement dated September 1, 2002 for the Building C pad site
between Moore's Realty and the Company.(J)
10.6 Liquor License Sale/Purchase Agreement executed in January 2000 between
Moore's Inn, Inc. as Transferor and the Company as Transferee(C)
10.7 Sale/Purchase Agreement for Furniture, Fixtures and Equipment executed
in January 2000 between Moore's Inn, Inc. as Seller and the Company as
Purchaser(C)
10.9 Chefs International Executive Incentive Bonus Plan(H)
10.10 Asset Purchase Agreement dated January 25, 2002 for personal property,
furnishings, fixtures and equipment, liquor license, tradename and
goodwill of Mr. Manatee's restaurant in Vero Beach, Florida between
Causeway Foods, Inc. and Mr. Manatee's Franchise Corporation as Sellers
and the Company as Buyer.(H)
10.11 Commercial Lease Option dated April 1, 2002 between Stephen Craig Long
as Lessor and the Company as Lessee for the Mr. Manatee's facility.(I)
21 Subsidiaries
31.1 Certifications of Principal Executive and Principal Financial Officers
31.2 Certifications of Principal Executive and Principal Financial Officers
28
32.1 Certifications of Principal Executive and Principal Financial Officers
of the Company pursuant to 18 United States Code Section 1350.
32.2 Certifications of Principal Executive and Principal Financial Officers
of the Company pursuant to 18 United States Code Section 1350.
-------------------------
(A) Incorporated by reference to Appendix to the Company's Rule 13e-3
Transaction Statement on Schedule 13E-3 filed with the Securities and Exchange
Commission on December 23, 2004.
(B) Incorporated by reference to exhibit filed with the Company's annual report
on Form 10-KSB for the fiscal year ended January 31, 1999.
(C) Incorporated by reference to exhibit filed with the Company's annual report
on Form 10-KSB for the fiscal year ended January 30, 2000.
(D) Incorporated by reference to exhibit filed with the Company's Registration
Statement on Form SB-2 (File No. 33-66936).
(E) Incorporated by reference to exhibit filed with the Company's annual report
on Form 10-K for the fiscal year ended January 28, 1996.
(F) Incorporated by reference to exhibit filed with Amendment No. 1 to the
Company's current report on Form 8-K/A for April 1, 1999.
(G) Incorporated by reference to exhibit filed with the Company's current report
on Form 8-K for October 6, 2000.
(H) Incorporated by reference to exhibit filed with the Company's annual report
on Form 10-KSB for the fiscal year ended January 27, 2002
(I) Incorporated by reference to exhibit filed with the Company's annual report
on Form 10-KSB for the fiscal year ended January 26, 2003.
(J) Incorporated by reference to exhibit filed with the Company's annual report
on Form 10-KSB for the fiscal year ended January 25, 2004.
(b) REPORTS ON FORM 8-K
During the last quarter of its fiscal year ended January 30, 2005, the
Company filed one current report on Form 8-K. This report, for December 22,
2004, in Item 1.01 reported the execution on that date of the Agreement and Plan
of Merger by the Company with the Lombardi Restaurant Group, Inc. On April 18,
2005, the Company filed a current report on Form 8-K for that date reporting in
Item 8.01 that at the Special Meeting of Stockholders held on April 18, 2005,
the Agreement and Plan of Merger between the Company and Lombardi Restaurant
Group, Inc. had been approved and adopted by the affirmative vote of a majority
of the shares of the Company's common stock outstanding on the Record Date for
the Meeting.
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
The firm of McGladrey & Pullen, LLP ("McGladrey Pullen"), certified
public accountants, audited the accounts of Chefs and its subsidiaries
(collectively the "Company") for the fiscal years ended January 30, 2005 and
January 25, 2004.
29
(1) AUDIT FEES. McGladrey Pullen billed the Company approximately
$71,500 for professional services rendered for the audit of the Company's annual
consolidated financial statements for its 2005 fiscal year and to review the
financial statements included in its quarterly reports on Form 10-QSB filed with
respect to quarterly periods in such fiscal year as compared to approximately
$70,000 for such services with respect to the Company's 2004 fiscal year.
(2) AUDIT-RELATED FEES. None.
(3) TAX FEES. McGladrey Pullen billed the Company approximately $12,000
for tax services for fiscal 2005 and approximately $10,000 for tax services for
fiscal 2004. The fees were billed for tax return preparation.
(4) ALL OTHER FEES. Approximately $10,000 in fees were billed to the
Company by McGladrey Pullen with respect to fiscal 2005 and no fees were billed
by said firm to the Company with respect to fiscal 2004 for miscellaneous
professional services.
(5) PRE-APPROVAL AND PROCEDURES. The engagement of McGladrey Pullen to
render the above services was approved by the Company's Board of Directors.
30
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
(Registrant) CHEFS INTERNATIONAL, INC.
By s/ Robert M. Lombardi
----------------------------------
Robert M. Lombardi, President,
Principal Executive Officer
Date: April 29, 2005
By s/ Martin W. Fletcher
----------------------------------
Martin W. Fletcher, Vice President
Principal Financial and
Accounting Officer
Date: April 29, 2005
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
By s/ Robert M. Lombardi By s/ Michael F. Lombardi
--------------------------------- ---------------------------------
Robert M. Lombardi, Chairman Michael F. Lombardi,
Of the Board of Directors Director
Date: April 29, 2005 Date: April 29, 2005
By s/ Anthony Lombardi By s/ Stephen F. Lombardi
--------------------------------- ---------------------------------
Anthony Lombardi, Director Stephen F. Lombardi,
Director
Date: April 29, 2005 Date: April 29, 2005
By s/ Joseph S. Lombardi
---------------------------------
Joseph S. Lombardi, Director
Date: April 29, 2005
31
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
Financial Report
January 30, 2005
CONTENTS
--------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-1
--------------------------------------------------------------------------------
Financial Statements:
Consolidated Balance Sheet F-2-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7-20
--------------------------------------------------------------------------------
McGladrey & Pullen
Certified Public Accountants
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Chefs International, Inc.
Point Pleasant, New Jersey
We have audited the accompanying consolidated balance sheet of Chefs
International, Inc. and subsidiaries as of January 30, 2005, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two fiscal years in the period ended January 30, 2005. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Chefs International,
Inc. and subsidiaries as of January 30, 2005, and the results of their
operations and their cash flows for each of the two fiscal years in the period
ended January 30, 2005, in conformity with U.S. generally accepted accounting
principles.
/s/ McGLADREY & PULLEN, LLP
New York, New York
April 1, 2005, except for Note 2, as to which the date is April 20, 2005
McGladrey & Pullen, LLP is an independent member firm of
RSM International, an affiliation of independent accounting
and consulting firms.
F-1
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JANUARY 30, 2005
--------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,242,184
Available-for-sale securities 2,494,277
Miscellaneous receivables 62,007
Receivable - related party 36,489
Inventories 1,154,026
Deferred income taxes 244,000
Prepaid expenses and other 107,554
------------
TOTAL CURRENT ASSETS 6,340,537
------------
Property and Equipment, at cost 20,353,272
Less: Accumulated depreciation 8,377,549
------------
PROPERTY AND EQUIPMENT, NET 11,975,723
------------
Other Assets:
Asset held for sale 50,181
Intangibles 867,087
Equity in life insurance policies 536,596
Deferred income taxes 293,000
Deferred going private costs 336,539
Other 72,959
------------
TOTAL OTHER ASSETS 2,156,362
------------
$ 20,472,622
============
See notes to consolidated financial statements.
F-2
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (CONTINUED)
JANUARY 30, 2005
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit $ 500,000
Current maturities of notes and mortgages payable 270,770
Accounts payable 954,350
Accrued payroll 211,325
Other accrued expenses 496,536
Income taxes payable 61,524
Gift certificates 490,363
------------
TOTAL CURRENT LIABILITIES 2,984,868
------------
Notes and Mortgages Payable 1,418,322
------------
Other Liabilities:
Accrued retirement benefits 462,773
Interest rate swap agreements 86,494
------------
OTHER LIABILITIES 549,267
------------
Stockholders' Equity:
Capital stock - common $.01 par value,
Authorized 15,000,000 shares,
Issued and outstanding 3,925,384 39,254
Additional paid-in capital 31,488,838
Accumulated deficit (16,031,543)
Accumulated other comprehensive income 23,616
------------
TOTAL STOCKHOLDERS' EQUITY 15,520,165
------------
$ 20,472,622
============
See notes to consolidated financial statements.
F-3
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 30, 2005 AND JANUARY 25, 2004
[Enlarge/Download Table]
2005 2004
------------------------------------------------------------------------------------------------------
Sales $ 21,563,608 $ 22,283,169
Cost of Goods Sold 6,885,461 7,034,878
------------- -------------
GROSS PROFIT 14,678,147 15,248,291
------------- -------------
Operating Expenses:
Payroll and related expenses 6,579,630 6,924,219
Other operating expenses 4,679,150 4,956,505
Depreciation and amortization 1,050,592 1,116,291
General and administrative expenses 1,781,472 1,911,472
Loss on restaurant closings -- 410,024
------------- -------------
14,090,844 15,318,511
------------- -------------
INCOME (LOSS) FROM OPERATIONS BEFORE OTHER OPERATING INCOME 587,303 (70,220)
------------- -------------
Other Operating Income:
Gain on restaurant closings 415,473 --
Gain related to settlement for hurricane damages 202,399 --
------------- -------------
617,872 --
------------- -------------
OPERATING INCOME (LOSS) 1,205,175 (70,220)
------------- -------------
Other Income (Expense):
Investment income 325,930 211,259
Interest expense (149,635) (159,042)
------------- -------------
176,295 52,217
------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES 1,381,470 (18,003)
Provision (Credit) for Income Taxes 598,000 (57,000)
------------- -------------
NET INCOME $ 783,470 $ 38,997
============= =============
Basic and Diluted Income Per Common Share $ 0.20 $ 0.01
============= =============
See notes to consolidated financial statements.
F-4
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 30, 2005 AND JANUARY 25, 2004
--------------------------------------------------------------------------------
[Enlarge/Download Table]
Accumulated
Capital Additional Other Total
Number Stock Paid-in Accumulated Comprehensive Treasury Stockholders'
of Shares Par Value Capital Deficit Income (Loss) Stock Equity
--------- --------- ------------ ------------ ------------- --------- -------------
BALANCE AT JANUARY 26, 2003 3,969,540 39,695 $ 31,549,492 $(16,854,010) $ (379,272) $ (3,885) $ 14,352,020
------------
Comprehensive Income:
Net income -- -- -- 38,997 -- -- 38,997
Net unrealized gains on
available-for-sale
securities arising
during period, net of
$109,000 of taxes -- -- -- -- 425,282 -- 425,282
Reclassification
adjustment for gains
realized on available-
for-sale securities,
net of $14,000 of taxes -- -- -- -- (55,175) -- (55,175)
Change in fair value of
derivatives accounted
for as hedges, net of
$8,000 of taxes -- -- -- -- 29,376 -- 29,376
------------
TOTAL COMPREHENSIVE INCOME -- -- -- -- -- -- 438,480
------------
Stock repurchase program (40,000) (400) (58,800) -- -- -- (59,200)
------------
Retirement of treasury stock (3,550) (36) (3,849) -- -- 3,885 --
------------
Fractional shares conversion
and other 126 2 1,988 -- -- -- 1,990
--------- --------- ------------ ------------ ------------ --------- ------------
BALANCE AT JANUARY 25, 2004 3,926,116 39,261 31,488,831 (16,815,013) 20,211 -- 14,733,290
------------
Comprehensive Income:
Net income -- -- -- 783,470 -- -- 783,470
Net unrealized gains on
available-for-sale
securities arising
during period, net of
$27,000 of taxes -- -- -- -- 25,102 -- 25,102
Reclassification
adjustment for gains
realized on available-
for-sale securities,
net of $66,000 of taxes -- -- -- -- (60,805) -- (60,805)
Change in fair value of
derivatives accounted
for as hedges, net of
$24,000 of taxes -- -- -- -- 39,108 -- 39,108
------------
TOTAL COMPREHENSIVE INCOME -- -- -- -- -- -- 786,875
------------
Fractional shares conversion (732) (7) 7 -- -- -- --
--------- --------- ------------ ------------ ------------ --------- ------------
BALANCE AT JANUARY 30, 2005 3,925,384 39,254 $ 31,488,838 $(16,031,543) $ 23,616 $ -- $ 15,520,165
========= ========= ============ ============ ============ ========= ============
See notes to consolidated financial statements.
F-5
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 30, 2005 AND JANUARY 25, 2004
[Enlarge/Download Table]
2005 2004
------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income $ 783,470 $ 38,997
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,050,592 1,116,291
Deferred income taxes 502,000 (63,000)
Gain on sale of investments (129,827) (69,175)
(Gain) loss on restaurant closings (415,473) 350,024
Other disposal losses 2,486 --
Hurricane damage settlements 78,623 --
Changes in assets and liabilities:
(Increase) decrease in:
Miscellaneous receivables 59,103 22,137
Inventories 86,028 (111,062)
Prepaid expenses 90,422 (89,988)
Increase (decrease) in:
Accounts payable 131,760 120,357
Accrued expenses and other liabilities (210,046) 27,421
Income taxes payable 61,524 --
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,090,662 1,342,002
------------ ------------
Cash Flows From Investing Activities:
Purchase of property and equipment (2,165,194) (449,129)
Proceeds sale of restaurant 842,193 --
Sale and redemption of investments 1,291,340 453,066
Purchase of investments (1,295,402) (534,343)
Equity in life insurance policies 104,428 (38,202)
------------ ------------
NET CASH (USED IN) INVESTING ACTIVITIES (1,222,635) (568,608)
------------ ------------
Cash Flows From Financing Activities:
Proceeds from line of credit 500,000 --
Repayment of debt (271,346) (271,490)
Purchase and retirement of treasury stock -- (59,200)
Other (265,396) (101,662)
------------ ------------
NET CASH (USED IN) FINANCING ACTIVITIES (36,742) (432,352)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 831,285 341,042
Cash and Cash Equivalents:
Beginning 1,410,899 1,069,857
------------ ------------
Ending $ 2,242,184 $ 1,410,899
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash payment for:
Interest $ 147,630 $ 160,453
============ ============
Income taxes $ -- $ 4,000
============ ============
Noncash Transactions:
(Decrease) increase in fair value of securities available for sale $ (74,703) $ 465,107
============ ============
Change in fair value of derivatives accounted for as hedges $ 63,108 $ 29,576
============ ============
See notes to consolidated financial statements.
F-6
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business:
Chefs International, Inc. and its subsidiaries (the "Company") operate
nine restaurants. Six of these restaurants are seafood restaurants,
located in New Jersey and Florida, generally operating under the trade
name, "Jack Bakers Lobster Shanty". The Company also operates
Escondido's Mexican Restaurant, Moore's Tavern and Restaurant, an
eclectic American restaurant, and Mr. Manatee's Casual Grille, a casual
theme restaurant primarily featuring seafood items. Escondido's and
Moore's Tavern are located in New Jersey; Mr. Manatee's is located in
Florida. Segment information is not presented since all of the
Company's revenue is attributable to a single reportable segment.
52-53 Week Period:
The Company's year-end is the last Sunday in January. The statements of
operations are comprised of a 53 week period for fiscal 2005, and a 52
week period for fiscal 2004.
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts
of the Company and all of its wholly-owned subsidiaries. Intercompany
transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents:
Cash equivalents are comprised of certain highly liquid investments
with a maturity of three months or less when purchased.
The Company maintains cash balances at several financial institutions
in New Jersey and Florida. The balances are insured by the Federal
Deposit Insurance Corporation up to $100,000 at each financial
institution. Uninsured cash balances at January 30, 2005 totaled
approximately $2,005,000.
Available-for-Sale Securities:
At January 30, 2005, available-for-sale securities consist of mutual
funds, and equity securities. Available-for-sale securities are carried
at fair value with unrealized gains or losses reported in a separate
component of stockholders' equity. Realized gains or losses are
determined based on the specific identification method.
Revenue Recognition:
Sales from restaurants are recognized as revenue at the point of the
delivery of meals and services. Gift certificates are sold in the
ordinary course of business. Proceeds from gift certificate sales are
recorded as deferred revenue at the time a gift certificate is sold and
are not recognized as revenue until a gift certificate is redeemed.
Inventories:
Inventories consist of food, beverages and supplies and are stated at
the lower of cost (determined by the first-in, first-out method) or
market.
F-7
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Property and Equipment:
Property and equipment are carried at cost. Depreciation is computed
over the estimated useful lives of the assets using the straight-line
method. The estimated useful lives range from 5 to 40 years for
buildings and improvements, including leaseholds, and 5 to 10 years for
furniture and equipment.
Intangible Assets:
Indefinite life intangible assets are not amortized but are tested
annually for impairment, or more frequently if events or changes in
circumstances indicate that the asset might be impaired. In assessing
the recoverability of goodwill and indefinite life intangible assets,
the Company must make assumptions about the estimated future cash flows
and other factors to determine the fair value of these assets.
The impairment evaluation for indefinite life intangible assets
includes the comparison of the asset's carrying value to the asset's
fair value. When the carrying value exceeds the fair value, an
impairment charge is recorded for the amount of the difference. An
intangible asset is determined to have an indefinite useful life when
there are no legal, regulatory, contractual, competitive, economic or
any other factors that may limit the period over which the asset is
expected to contribute directly or indirectly to the future cash flows
of the Company. In each reporting period, the Company also evaluates
the remaining useful life of an intangible asset that is not being
amortized to determine whether events and circumstances continue to
support an indefinite useful life. If an intangible asset that is not
being amortized is determined to have a finite useful life, the asset
will be amortized prospectively over the estimated remaining useful
life and accounted for in the same manner as intangible assets subject
to amortization.
The Company has determined that the Company's liquor licenses have an
indefinite life and these assets are no longer being amortized.
Intangible assets subject to amortization are amortized on a
straight-line method over their estimated useful lives.
Income Taxes:
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets
and liabilities and their tax bases. Deferred tax assets are reduced by
a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted
for the effects of changes in tax laws and rates on the date of
enactment.
F-8
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Derivative Financial Instruments:
The Company's interest rate swap agreements are recognized on the
balance sheet at their fair value. On the date the derivative contract
is entered into, the Company designates the derivative as a hedge of a
forecasted transaction or of the variability of cash flows to be
received or paid related to a recognized asset or liability "cash flow"
hedge. Changes in the fair value of a derivative that is highly
effective as (and that is designated and qualifies as) a cash-flow
hedge are recorded in other comprehensive income, until earnings are
affected by the variability of cash flows (e.g., when periodic
settlements on a variable-rate asset or liability are recorded in
earnings).
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective
and strategy for undertaking various hedged transactions. This process
includes linking all derivatives that are designated as cash-flow
hedges to specific assets and liabilities on the balance sheet or
forecasted transactions. The Company also formally assesses, both at
the hedge's inception and on an ongoing basis, whether the derivatives
that are used in hedging transactions are highly effective in
offsetting changes in cash flows of hedged items. When it is determined
that a derivative is not highly effective as a hedge or that it has
ceased to be a highly effective hedge, the Company discontinues hedge
accounting prospectively, as discussed below.
The Company discontinues hedge accounting prospectively when (1) it is
determined that the derivative is no longer effective in offsetting
changes in the cash flows of a hedged item (including forecasted
transactions); (2) the derivative expires or is sold, terminated, or
exercised; (3) the derivative is designated as a hedge instrument,
because it is unlikely that a forecasted transaction will occur; or (4)
management determines that designation of the derivative as a hedge
instrument is no longer appropriate.
When hedge accounting is discontinued because it is probable that a
forecasted transaction will not occur, the derivative will continue to
be carried on the balance sheet at its fair value, and gains and losses
that were accumulated in other comprehensive income will be recognized
immediately in earnings. In all other situations in which hedge
accounting is discontinued, the derivative will be carried at its fair
value on the balance sheet, with subsequent changes in its fair value
recognized in current-period earnings.
Advertising:
The Company expenses advertising costs as incurred. Advertising costs
for fiscal 2005 and 2004 were $421,500 and $516,700, respectively.
Use of Estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-9
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Accounting for Consolidation of Variable Interest Entities:
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51." FIN 46 was subject
to significant interpretation by the FASB, and was revised and reissued
in December 2003 ("FIN 46R"). FIN 46R states that if an entity has a
controlling financial interest in a variable interest entity, the
assets, the liabilities and results of activities of the variable
interest entity should be included in the consolidated financial
statements to the entity. The provisions of FIN 46 and FIN 46R are
applicable for small business issuers that have variable interest
entities (VIE) by the end of the first reporting period ending after
December 15, 2004. The adoption of FIN 46 and FIN 46R did not have any
effect on the Company's consolidated financial statements.
Earnings Per Share:
The weighted average number of shares outstanding used to compute basic
and diluted earnings per share for fiscal 2005 and 2004 was 3,925,384
and 3,926,116, respectively.
Reclassifications:
Certain reclassifications have been made to the 2004 financial
statements to conform to the 2005 presentation.
2. GOING PRIVATE TRANSACTION
On November 21, 2003, the Company announced that it had received an
offer from the principal shareholders of the Company, who own
approximately 61% of the Company's outstanding common stock, to
purchase all of the remaining outstanding shares of common stock for a
cash purchase price of $1.75 per share, subject to various conditions.
The Company's Board of Directors appointed a Special Committee,
consisting of the three non-principal shareholder directors, to review
and analyze the proposal. The initial purchase price of $1.75 was
rejected by the Special Committee, which concluded that the offered
price did not adequately reflect the Company's value. A subsequent
offer of $3.12 per share was deemed acceptable by the Special Committee
and accepted by the Board.
At a special meeting of the stockholders on April 18, 2005, the
proposed plan, which provides for the merger of the Company with
Acquisition Co., a company formed to merge with the Company, was
approved. Acquisition Co. is owned by nine shareholders (continuing
shareholders) of the Company. The Company, after the merger, will
acquire approximately 1,320,000 shares of its common stock at a total
purchase cost of approximately $4,120,000, financed through capital
contributions by the continuing shareholders. Costs incurred in
connection with this transaction were $336,539 through January 30,
2005, and have been deferred pending completion of the transaction.
These costs will be added to the cost to acquire the shares and will be
treated as a cost of treasury stock.
F-10
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
3. AVAILABLE-FOR-SALE SECURITIES
Details as to available-for-sale securities at January 30, 2005 are as
follows:
[Download Table]
Fair Value
of
Securities
Gross Gross with
Unrealized Unrealized Unrealized
Gross Cost Gains (Losses) Fair Value (Losses)
----------- ----------- ----------- ----------- -----------
Mutual funds $ 1,862,193 $ 76,114 $ (54,943) $ 1,883,364 $ 764,601
Equity securities 522,974 129,721 (41,782) 610,913 90,503
----------- ----------- ----------- ----------- -----------
$ 2,385,167 $ 205,835 $ (96,725) $ 2,494,277 $ 855,104
=========== =========== =========== =========== ===========
All of the investments with unrealized losses have been in a continuous
unrealized loss position for more than one year. The severity of the
impairments in relation to the carrying amounts of the individual
investments (fair value average is approximately 10% less than cost) is
consistent with current market conditions. The Company evaluated the
near-term prospects of the issuers in relation to the severity and
duration of the impairment. Based on that evaluation and the Company's
ability and intent to hold these investments for a reasonable period of
time sufficient for a forecasted recovery of fair value, the Company
does not consider these investments to be other-than-temporarily
impaired at January 30, 2005.
4. INVENTORIES
Inventories consist of the following at January 30, 2005:
Food $ 578,674
Beverages 142,010
Supplies 433,342
-----------
$ 1,154,026
===========
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at January 30, 2005:
Land $ 3,168,630
Buildings and improvements, including leaseholds 14,073,456
Furniture and equipment 2,236,206
Construction in progress 789,507
China, glassware and utensils (a) 85,473
-----------
$ 20,353,272
============
(a) Carried at original cost for each restaurant. All replacement
purchases are charged to expense as incurred.
Depreciation expense was $1,037,000 and $1,103,000 for fiscal 2005 and
2004, respectively.
F-11
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
6. INTANGIBLE ASSETS
Intangible assets deemed to have indefinite useful lives are not
amortized but are subject to impairment tests at least annually, or
more frequently if circumstances occur that indicate impairment may
have occurred. Management has determined that the Company's liquor
licenses have an indefinite life. The Company's annual impairment test
of the liquor license intangible asset resulted in no impairment during
the year ended January 30, 2005.
Intangible assets at January 30, 2005 consist of:
Liquor Covenant Not
Licenses to Compete (a)
--------------- ---------------
Cost $ 1,175,998 $ 63,126
Accumulated amortization (336,266) (35,771)
----------- -----------
$ 839,732 $ 27,355
=========== ===========
(a) Arising from the acquisition of Mr. Manatee's Casual Grille.
Amortization expense was $12,625 for both fiscal 2005 and 2004.
The aggregate amortization expense for the covenant not to compete for
each of the next three years is as follows: $12,625 annually for the
fiscal years 2006 through 2007 and $2,105 for 2008.
F-12
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
7. LINE OF CREDIT AND NOTES AND MORTGAGES PAYABLE
[Enlarge/Download Table]
Borrowing under $1,000,000 line of credit payable on demand and is which is
collateralized by real estate located in Toms River, New Jersey. The line expires
June 30, 2005 and bears interest at LIBOR plus 2.00%. $ 500,000
===========
Mortgages payable in various monthly installments to amortize the mortgage
principal at the rate of $120,000 annually, through September 2011
with interest at LIBOR plus 2.00%, collateralized by real estate located in
Point Pleasant Beach, New Jersey $ 835,000
Mortgage payable in monthly installments of $8,319, inclusive of interest at
LIBOR plus 2.00%, through November 2008, collateralized by real estate
located in Vero Beach, Florida 644,092
Mortgage payable in various monthly installments to amortize the mortgage
principal at the rate of $100,000 annually, through May 2007, with interest at
LIBOR plus 2.00%, collateralized by real estate located in Toms River,
New Jersey 210,000
-----------
1,689,092
Less: Current maturities 270,770
-----------
$ 1,418,322
===========
Annual maturities for fiscal years 2007 through 2010 are $274,909,
$189,283, $599,130 and $120,000, respectively.
LIBOR was 2.6% at January 30, 2005.
The Company maintains an interest rate risk-management strategy that
uses derivative financial instruments to minimize unanticipated
earnings fluctuations caused by interest rate volatility. The Company's
specific goal is to lower (where possible) the cost of its borrowed
funds.
As of January 30, 2005, the Company had interest rate swap agreements
relating to approximately $1,479,000 of the Company's variable rate
debt. Unrealized net losses under the interest rate swap agreements
totaled approximately $86,500 at January 30, 2005. These unrealized net
losses are recorded in Accumulated Other Comprehensive Income in the
consolidated balance sheet. Since the Company does not intend to
terminate the swap agreements during the upcoming year, the Company
does not anticipate that any of these unrealized losses will be
reclassified into earnings in the next twelve months, except for the
amounts that will be realized when periodic settlements of the variable
interest liability are recorded in earnings. No gain or loss was
recognized in earnings during the year ended January 30, 2005 as a
result of hedge ineffectiveness.
F-13
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
7. LINE OF CREDIT AND NOTES AND MORTGAGES PAYABLE (CONTINUED)
All of the Company's mortgages and loans are with the same financial
institution. The loan covenants governing the borrowings include, among
other items, requirements relating to tangible net worth, capital
expenditures and working capital.
During February 2005, the Company entered into an agreement to borrow
up to $1,500,000 through a Non-Revolving Line of Credit with a bank, in
order to partially finance a major renovation of the Lobster Shanty
located in Point Pleasant Beach, New Jersey. The line expires on July
31, 2005 and carries a monthly interest rate of 1-month LIBOR plus
2.00%. At July 31, 2005, the balance due on the line will be converted
to a term loan based on a 15-year payout with a 10-year balloon with
the interest rate to be determined prior to the conversion. The Company
has borrowed $750,000 on the line, subsequent to year-end. Also,
subsequent to year-end, the Company borrowed an additional $300,000 on
its $1,000,000 bank line for costs associated with the Florida
hurricanes, leaving a total of $200,000 available.
8. RESTAURANT CLOSINGS
In June 2003, the Company closed one of its Mexican theme restaurants.
In connection with the closing, the Company wrote off leasehold
improvements and other equipment of $230,024 and entered into a
Surrender Agreement with the restaurant's landlord which required the
Company to pay $180,000. An aggregate loss of $410,024 was recorded for
the year ended January 25, 2004. In connection with this restaurant
closing, the Company is attempting to sell the liquor license used in
that location. The liquor license has been classified as an "Asset held
for sale" in the accompanying balance sheet as of January 30, 2005.
In May 2004, the Company sold its restaurant and property located in
Jensen Beach, Florida for $900,000, resulting in a gain of $415,473 for
the year ended January 30, 2005.
9. HURRICANE DAMAGES AND SETTLEMENTS
In September 2004, the Company's three Florida restaurants were damaged
as a result of Hurricanes Frances and Jeanne. The Company has
recognized a gain of $202,399 related to the event. The Company has
received interim payments of $600,000 (which it has recognized as
income) on its insurance claims and incurred $397,601 of costs,
including lost inventory, clean-up expenditures and an estimate of the
carrying value for the property and equipment destroyed or damaged. In
addition, the Company spent approximately $985,000 in fiscal 2005 for
capital expenditures related to the hurricanes and expects to spend
substantial additional amounts for additional capital expenditures in
the future.
The Company is in discussions with its insurers as to additional
insurance proceeds that the Company believes it is entitled to. The
insurer has not yet determined its obligation for payments of the
claims. Should the insurer determine that its obligations are less than
interim payments already made to the Company, the Company maybe
required to reimburse the insurer for the excess. Additionally, the
Company may be eligible for claims under its business interruption
policy.
Total claims for damages under various insurance policies that the
Company has filed, for which no settlements or interim payments have
been received, approximate $1,200,000 as of March 31, 2005.
F-14
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
10. INVESTMENT INCOME
The components of investment income are summarized as follows:
[Download Table]
2005 2004
--------- ---------
Interest $ 18,621 $ 13,603
Dividends 177,482 128,481
Realized gain on sales of available-for-sale securities 129,827 69,175
--------- ---------
$ 325,930 $ 211,259
========= =========
11. RETIREMENT PROGRAMS
The Company has a non-qualified supplemental retirement program which
provides life insurance to certain eligible employees. The Company is
the owner of all cash values of the policies. The death benefit is
split, reimbursing the Company for premiums paid with the balance paid
to the beneficiary designated by the employee. Employees vest in the
program after ten years, with the option to take ownership of the
policy at that time or let the Company continue to fund the policy. The
Company has recorded, as a long-term asset in the accompanying balance
sheet, its equity in life insurance for premiums advanced and has
included in other long-term liabilities the Company's estimated
liability for the amount of the equity in life insurance which the
Company will be required to turn over to employees.
Additionally, the Company has an agreement with a former
director/employee which provides for the payment of $20,000 per year
through 2007. The discounted present value of this agreement is
included in accrued retirement benefit. The amount has been partially
insured with a life insurance contract owned by the Company.
F-15
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
11. RETIREMENT PROGRAMS (CONTINUED)
Reconciliation of changes in the accrued retirement benefits and funded
status of the plan as of January 30, 2005 were:
[Download Table]
Change in estimated benefit obligation:
Benefit obligation at the beginning of year $ 589,720
Change in cash surrender value for vested employees 55,100
Estimating obligation increase for non-vested employees 6,233
Employee withdrawals (169,835)
Benefit payments (20,000)
Dividends received 2,697
Other (1,142)
----------
Benefit obligation at end of year $ 462,773
==========
Components of retirement plan expense were:
2005 2004
--------- ----------
Policy premiums $ 43,456 $ 52,600
(Increase) decrease in cash surrender value in excess of
estimated change in obligation for nonvested employees (6,233) 8,198
Companies' portion of nonvested employee withdrawals (2,159) (11,970)
Other (760) 857
--------- ----------
$ 34,304 $ 49,685
========= ==========
Although the Company has designated the equity in life insurance
policies to fund the benefit obligation for those retirement benefits,
the equity in these policies are not segregated plan assets. As such,
the retirement obligation is considered non-funded at January 30, 2005.
12. EXECUTIVE INCENTIVE BONUS PLAN
The Company has an executive incentive bonus plan which provides
eligible employees an annual cash bonus if the Company achieves certain
financial goals. The charge to operations applicable to the incentive
plan for fiscal 2005 and 2004 was $71,485 and $51,000, respectively.
F-16
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
13. INCOME TAXES
The provision (credit) for income taxes consist of the following:
2005 2004
--------- ---------
Current - Federal $ 15,000 $ --
- State 81,000 6,000
Deferred 502,000 (63,000)
--------- ---------
$ 598,000 $ (57,000)
========= =========
The significant components of deferred tax assets and liabilities as of
January 30, 2005 are as follows:
Deferred Tax Assets:
Tax loss carryforwards $ 189,000
Depreciation and amortization 321,000
Other comprehensive loss 1,000
Other 54,000
---------
TOTAL DEFERRED TAX ASSETS 565,000
Deferred Tax Liability:
Other 28,000
---------
NET DEFERRED TAX ASSETS $ 537,000
=========
For the fiscal years ended January 30, 2005 and January 25, 2004, no
valuation allowance was required. The net change in the valuation
allowance for fiscal 2004 was a reduction of $1,098,000, principally
due to the expiration of tax loss carryforwards.
F-17
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
13. INCOME TAXES (CONTINUED)
The Company has available at January 30, 2005, operating loss
carryforwards which expires as follows:
Year of Expiration
------------------
2010 $ 58,000
2011 145,000
2012 88,000
2024 166,000
---------
$ 457,000
=========
The difference between the tax provision at the statutory Federal
income tax rate and the tax provision attributable to income before
income tax for the years ended January 30, 2005 and January 25, 2004 is
as follows:
[Download Table]
2005 2004
----------- -----------
Federal statutory rate $ 478,000 $ (6,100)
State taxes net of Federal benefit 70,500 (900)
Expiration of operating loss carryforwards 91,500 1,090,000
Valuation allowance change -- (1,098,000)
Non taxable income (42,000) (42,000)
----------- -----------
PROVISION (CREDIT) FOR INCOME TAXES $ 598,000 $ (57,000)
=========== ===========
14. TRANSACTIONS WITH RELATED PARTIES
The Company has a lease through January 2007 for its Moore's Inn
("Moore's") restaurant property with Moore's Realty Associates
("Moore's Realty"), a partnership owned by the principal shareholders
of the Company. The lease requires minimum annual rentals of $90,000,
plus percentage rent of 6% of sales exceeding $1.5 million. The lease
contains three five-year renewal options.
The Company also has a five-year lease for the property adjacent to
Moore's for the Company's Escondido's Mexican Restaurant (Escondido's).
The terms of this lease are the same as the lease for Moore's.
F-18
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
14. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
Additionally, the Company has a lease with Moore's Realty for an
additional parking lot for Moore's and Escondido's. The initial term of
the lease expires January 25, 2007 and contains three five-year renewal
options. During the initial term of the lease, minimum annual rentals
are $40,000, plus percentage rent of 1% of the combined annual sales of
Moore's and Escondido's exceeding $4million. The lease also contains a
provision whereby Moore's Realty agreed to reimburse the Company for
improvements made to the parking lot up to $150,000. During fiscal
2003, the Company made improvements of approximately $135,000, which is
being reimbursed by an offset to the monthly rent payment. Included in
the accompanying balance sheet at January 30, 2005 is a current
receivable of $36,489.
Rent expense paid pursuant to these leases for fiscal 2005 and 2004 was
$294,234 and $279,763, respectively, which included percentage rent of
$59,763 and $51,963, respectively.
Moores Realty is not considered a variable interest entity as there is
sufficient equity investment by the partners and the partners have a
controlling financial interest in the partnership. Additionally, as of
January 30, 2005 there was no debt on the partnership.
The Company has a retirement agreement with a former director/employee
(see Note 11).
15. COMMITMENTS AND CONTINGENCIES
Leases:
The Company leases restaurants, parking lots and equipment under
operating leases including related party leases (Note 14) expiring at
various times through fiscal 2008.
Minimum future rental payments under noncancelable operating leases as
of January 30, 2005 are as follows:
2006 $ 356,892
2007 353,001
2008 40,506
---------
$ 750,399
=========
Total rent expense, including rent paid to related parties, was
$452,455 and $497,615 for fiscal 2005 and 2004, respectively.
Employment Agreements:
The Company has employment agreements through June 2007 with three
employees for annual amounts ranging from $124,800 to $151,400. The
agreements provide for annual adjustments based on the increase in the
consumer price index. These agreements also provide for lump sum
payments in the event of the termination of the employees without cause
or a change in control of the Company, as defined, for a portion of the
unexpired term of the contracts.
F-19
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
16. FINANCIAL INSTRUMENTS
The carrying amounts reflected in the consolidated balance sheet for
cash and cash equivalents, investments, receivables and notes and
mortgages payable approximate their respective fair values. Fair values
for investments are based primarily on quoted prices for those or
similar instruments. The carrying value of cash and cash equivalents,
receivables and notes and mortgages payable is considered to be
representative of their fair value because of their relatively short
maturities or variable interest rates.
F-20
Dates Referenced Herein and Documents Incorporated by Reference
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