-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NOOrTTPi9xVU/0d5O88hcilCWGNSMGwzSqKzQU/9Mbq81eNMcj+QhCM1IrY/9Fai EA3AhjDUhEIGYnOxFhGbbQ== 0000930413-02-001425.txt : 20020426 0000930413-02-001425.hdr.sgml : 20020426 ACCESSION NUMBER: 0000930413-02-001425 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020127 FILED AS OF DATE: 20020426 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHEFS INTERNATIONAL INC CENTRAL INDEX KEY: 0000201424 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 222058515 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-08513 FILM NUMBER: 02622465 BUSINESS ADDRESS: STREET 1: 62 BROADWAY STREET 2: PO BOX 1332 CITY: POINT PLEASANT BEACH STATE: NJ ZIP: 08742 BUSINESS PHONE: 7322950350 MAIL ADDRESS: STREET 1: 62 BROADWAY STREET 2: PO BOX 1332 CITY: POINT PLEASANT BEACH STATE: NJ ZIP: 08742 10KSB 1 c24241_10ksb.txt ANNUAL REPORT 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 27, 2002 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from _________________ to ________________ Commission File Number 0-8513 CHEFS INTERNATIONAL, INC. [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 - ---------------------------------------- ------------------------ [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 Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE ---------------------------- (Title of Class) Indicate by check mark whether the issuer [1] has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months [or for such shorter period that the issuer was required to file such reports], and [2] has been subject to such filing requirements for the past ninety days. YES [X] NO [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-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 27, 2002 totaled $20,798,333. On March 26, 2002, the aggregate market value of the voting stock of the issuer (consisting of Common Stock, $.01 par value) held by non-affiliates was approximately $2,205,000 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 3,965,958 shares of the issuer's Common Stock issued and outstanding. CHEFS INTERNATIONAL, INC. PART I ITEM 1. DESCRIPTION OF BUSINESS (A) BUSINESS DEVELOPMENT - Chefs International, Inc. ("Chefs" or the "Company") was organized under the laws of the State of Delaware in March 1975. The Company currently operates eleven restaurants on a year-round basis, eight of which are free-standing seafood restaurants in New Jersey (four) and Florida (four); two of which are Mexican theme restaurants, one located in an Eatontown, New Jersey shopping mall and the other, a free-standing restaurant located in Freehold, New Jersey, and one of which is a free-standing restaurant also located in Freehold, New Jersey featuring an eclectic American food menu. Six of the seafood restaurants are operated under the name "Jack Baker's Lobster Shanty," one under the name "Baker's Wharfside" and one under the name "Mr. Manatee's." The two Mexican theme restaurants are operated under the name "Escondido's Mexican Restaurant." The eclectic American food restaurant is operated under the name "Moore's Tavern and Restaurant." The Company opened its first seafood restaurant in November 1978, its first Mexican theme restaurant in April 1996 and "Moore's Tavern and Restaurant" in February 2000. (As used herein, the term the "Company" may at times include Chefs and its various subsidiaries.) The Company's executive offices are located at 62 Broadway, Point Pleasant Beach, New Jersey 08742. Its telephone number is (732) 295-0350. DEVELOPMENTS SINCE THE BEGINNING OF THE LAST FISCAL YEAR RESTAURANT OPENINGS In February 2000, the Company executed a lease with Moore's Realty Associates, a New Jersey partnership ("Moore's Realty") whose partners are members of the Lombardi Group and other members of the Lombardi family. (The Lombardi Group, consisting of various members of the Lombardi Family and their affiliates, purchased a substantial number of shares of Chefs' Common Stock in May 1999 resulting in their ownership in May 1999 of in excess of 50% of the issued and outstanding shares of Chefs' Common Stock, and as a result, in ownership of voting control of the Company. The Lombardi Group currently owns approximately 63% of the issued and outstanding shares of Chefs' Common Stock. Five Lombardi brothers, each of whom is a member of the Lombardi Group, serve as Chefs' directors.) The lease was of premises on West Main Street (Route 537) in Freehold, New Jersey where an entity affiliated with Moore's Realty, Moore's Inn, Inc. was operating a restaurant and tavern under the name "Moore's Inn." The Company provided consulting services to the operators of Moore's Inn from January 3, 2000 until 2 February 23, 2000 when it executed the lease and the purchase agreements described under "Restaurant Operations" in this Item 1, and commenced to operate the facility under the name "Moore's Tavern and Restaurant." In connection with the February 2000 execution of the lease of Moore's Inn to the Company, Moore's Realty agreed not to sell or lease a building ("Building B") adjacent to the Moore's Inn or the nearby pad site for a proposed building ("Building C") to a third party for a period of one year. In October 2001, the Company leased Building B from Moore's Realty and in January 2002, opened a Mexican theme restaurant in Building B under the name "Escondido's Mexican Restaurant." In February 2002, the Company changed the name of its Mexican theme restaurant in the Monmouth Mall in Eatontown, New Jersey to "Escondido's." The Company had previously operated this mall restaurant under the name "Garcia's." In April 2002, the Company commenced operation of a free-standing casual theme restaurant primarily featuring seafood items in a leased facility in Vero Beach, Florida continuing the operation of the restaurant under the name "Mr. Manatee's." See "Restaurant Operations" in this Item 1. SHARE REPURCHASE PROGRAM On June 8, 2000, the Company announced that it had decided to repurchase up to 400,000 shares of Chefs' Common Stock over the following 24 months. In its press release, the Company stated that the Board believed that Chefs' Common Stock was undervalued and that the Repurchase Program, if effected at current prices, could constitute an appropriate investment to the benefit of the Company's stockholders. Through January 27, 2002, the Company had repurchased an aggregate 28,191 shares of Chefs' Common Stock in the over-the-counter market at prices ranging from $.73 to $1.20 per share, and in addition, in August 2001, in a block transaction with a limited group of unaffiliated stockholders, repurchased an aggregate 262,603 shares of Chefs' Common Stock at $2.10 per share. The block purchase was authorized by the Company's Board of Directors. It was the Board's opinion that although the repurchase price was greater than the then market price for the stock, the size of the block and the fact that the per share repurchase price was substantially below the per share book value of Chefs' Common Stock made the repurchase an appropriate investment to the benefit of Chefs' stockholders. The Company utilized available cash reserves to effect each of its stock repurchases. To date, an aggregate 287,244 of the 290,794 repurchased shares have been cancelled. BANK LOANS At January 29, 2001, the Company's principal bank financing was provided pursuant to a term loan originally in the amount of $525,000 ("Term Loan X") from First Union National Bank ("First 3 Union") and a $500,000 revolving line of credit ("L/C line") from First Union. At said date, approximately $204,000 was outstanding under Term Loan X payable in monthly installments of principal with interest at an annual rate of 9 1/4% through December 2002 and no amounts were outstanding under the L/C line. Indebtedness under Term Loan X was secured by a first mortgage on the Company's Toms River, New Jersey seafood restaurant and indebtedness under the L/C line was secured by first mortgages on the Company's two Point Pleasant Beach, New Jersey seafood restaurants. During fiscal 2002, the Company reduced the outstanding principal balance of Term Loan X to $93,000. In September 2001, the Company restructured the above indebtedness. The existing L/C line under which there was no outstanding indebtedness was replaced with a new L/C line of $500,000 expiring June 30, 2003 secured by a first mortgage on the Toms River restaurant. No borrowings were made by the Company under the new L/C line in fiscal 2002. In March 2002, the Company borrowed $500,000 under the new L/C line and applied the proceeds towards the purchase of the assets of Mr. Manatee's. See "Restaurant Operations." At the same time, the Company borrowed $600,000 from First Union ("Term Loan Y") secured by a first mortgage on its Baker's Wharfside restaurant in Point Pleasant Beach and borrowed an additional $600,000 from First Union ("Term Loan Z") 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 27, 2002, the outstanding principal balance of each of these loans was $597,500. The Company applied the $1,200,000 of loan proceeds as part of the $1,300,000 it utilized to renovate, decorate and equip (kitchen, bar, furniture, fixtures) its Escondido's Mexican Restaurant in Freehold, New Jersey which opened in January 2002. In May 1998, the Company borrowed $124,000 from First Union to partially fund the purchase of property adjoining its Toms River, New Jersey seafood restaurant. The loan is repayable in monthly installments of principal with interest at LIBOR plus 2 1/4% through May 2003 and is secured by a first mortgage on the property. At January 27, 2002, approximately $33,000 was outstanding under this loan. In October 1998, the Company borrowed $880,000 from First Union to fund the $1,100,000 purchase of its Vero Beach, Florida seafood restaurant. This loan is repayable in monthly installments of $8,319 comprised of principal and interest at an annual rate of 7.82% through November 2008 and is secured by a first mortgage on the Vero Beach property. At January 27, 2002, approximately $774,000 was outstanding under this loan (which provides for a $431,429 "balloon" payment in November 2008). 4 Repayment of the Company's term loans and of borrowings under its line of credit is guaranteed by each of the Company's subsidiaries. Pursuant to its principal Loan Agreements, the Company has agreed to certain affirmative and negative covenants, violation of which without First Union's waiver would constitute a default under the Loan Agreements. Included are affirmative covenants by the Company to maintain its properties in good condition and repair; maintain adequate insurance coverage; conduct its business in the manner and at the locations where it is currently being conducted; maintain a Funds Flow Coverage of not less than 1.20 to 1.00; maintain a Tangible Net Worth at fiscal 2002 year end of not less than $12,500,000 increasing by not less than $50,000 in each subsequent year; maintain a ratio of Senior Liabilities to Effective Tangible Net Worth of not more than .50 to 1.00 measured semi-annually; and maintain liquid assets (cash, time deposits, marketable securities) of not less than $500,000. Also included are negative covenants of the Company not to permit or effect a material change in ownership or in management; not to create or permit certain liens or encumbrances on its assets; not to guarantee third party obligations; and not to retire or otherwise acquire any of its capital stock (excluding repurchases of up to 400,000 shares at market prices pursuant to its June 2000 Stock Repurchase Program and the 262,000 share block purchase described above for which First Union delivered a waiver). The Company was in compliance with all material covenants under the Loan Agreements at January 27, 2002. (B) BUSINESS OF ISSUER - The Company is engaged in one business; the operation of eleven restaurants in New Jersey and Florida on a year-round basis. RESTAURANT OPERATIONS The Company currently operates eleven restaurants on a year-round basis, eight of which are free-standing seafood restaurants in New Jersey (four) and Florida (four); two of which are Mexican theme restaurants, one located in an Eatontown, New Jersey shopping mall and the other, a free-standing restaurant located in Freehold, New Jersey, and one of which is a free-standing restaurant also located in Freehold, New Jersey featuring an eclectic American food menu. Six of the seafood restaurants are operated under the name "Jack Baker's Lobster Shanty," one under the name "Baker's Wharfside" and one under the name "Mr. Manatee's." The two Mexican theme restaurants are operated under the name "Escondido's Mexican Restaurant." The eclectic American food restaurant is operated under the name "Moore's Tavern and Restaurant." The Company opened its first seafood restaurant in November 1978, its first Mexican theme restaurant in April 1996 and "Moore's Tavern and Restaurant" in February 2000. The Company's restaurants, all of which are operated on a year-round basis, are as follows: 5 Date of Opening Under Location the Company's Management -------- ------------------------ SEAFOOD RESTAURANTS JACK BAKER'S LOBSTER SHANTY Vero Beach, Florida December 1979 Pt. Pleasant Beach, New Jersey October 1980 Toms River, New Jersey October 1980 Jensen Beach, Florida December 1980 Cocoa Beach, Florida September 1981 Hightstown, New Jersey December 1981 BAKER'S WHARFSIDE Pt. Pleasant Beach, New Jersey October 1980 MR. MANATEE'S Vero Beach, Florida April 2002 ESCONDIDO'S MEXICAN RESTAURANTS Monmouth Mall, Eatontown, New Jersey April 1996* Freehold, New Jersey January 2002 MOORE'S TAVERN AND RESTAURANT Freehold, New Jersey February 2000 - ---------- * The Company operated this restaurant under the name "Garcia's" until February 1, 2002. 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, 6 Florida on the intracoastal waterway, and seats approximately 200. It opened in December, 1979 pursuant to a lease from Gourmet Associates ("Gourmet") owned by 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 Gourmet. On October 30, 1998, the Company completed the purchase of the property for $1,100,000. To fund the purchase, the Company obtained an $880,000 first mortgage loan from its principal lending bank, First Union National Bank, and paid the balance of the purchase price from working capital. The Company's successful bid was based upon an independent appraisal of the property and was equal to the appraised value. See "Bank Loans" herein as to the repayment terms of this loan. During fiscal 2002, the Company was assessed and paid $62,674 as its share for the development by the City of Vero Beach of the Royal Palm Pointe project. This project is a city park development contiguous to the Company's Jack Baker's Lobster Shanty and its Mr. Manatee's restaurants. Among other amenities, it provides municipal parking which the Company believes will enhance its restaurant business at those locations. PT. PLEASANT BEACH, NEW JERSEY - This restaurant, consisting of approximately 17,000 square feet, is free standing with a waterfront location on Channel Drive in Pt. Pleasant Beach, New Jersey and seats approximately 750. It shares parking with the Baker's Wharfside restaurant in Pt. Pleasant Beach with space for approximately 250 automobiles. The Company purchased this restaurant and three others (including the land, buildings, improvements and businesses including personal property and fixtures, liquor licenses and all of the outstanding stock of the four corporations operating these restaurants) from its then principal stockholder, and from three partnerships owned by him, in October, 1980 for an aggregate $7,750,000 less a subsequent $250,000 prepayment discount. 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 7 prepayment discount. During fiscal 1998, the Company commenced an interior renovation of this restaurant, the bulk of which was completed in fiscal 1998 with the balance completed early in fiscal 1999. The total cost of this renovation was approximately $338,000. In fiscal 1999, the Company constructed an outdoor deck with a bar and dining facilities at this restaurant adding approximately 125 seats at a cost of approximately $188,000. In May 1998, the Company spent $166,000 to purchase a lot and building with a waterfront location adjacent to the Toms River Lobster Shanty. The Company partially funded the purchase price with the bank loan previously described. The Company has obtained the variances necessary for it to develop an outdoor patio dining area with seating for 125 on this site but has delayed construction pending resolution of a lawsuit initiated by a neighboring landowner attempting to prevent construction. The Company has been advised that the landowner is now attempting to sell his property for commercial use and if the property is sold for such use, management assumes there will be no further objection to the Company's planned patio dining area. If it is successful in resolving this matter, the Company estimates the total costs of construction and outfitting at approximately $350,000 for an opening anticipated in fiscal 2004. JENSEN BEACH, FLORIDA - This 200 seat restaurant, consisting of approximately 4,500 square feet, is located in a free standing building on the intracoastal waterway in Jensen Beach, Martin County, approximately 50 miles north of Palm Beach. The restaurant has parking for 100 automobiles. Acquired in October 1980 were two lots, the restaurant with furnishings and a liquor license from an unaffiliated party for $975,000. The Company made a $295,000 down payment and paid the balance over a ten year period through September, 1990. COCOA BEACH, FLORIDA - This approximately 240 seat restaurant, consisting of approximately 9,600 square feet, is located in a free standing building on Highway A1A in Cocoa Beach and has parking for approximately 90 cars. The Company acquired this restaurant as well as a seafood restaurant in Titusville, Florida in September 1981 through the purchase from two unaffiliated individuals of the outstanding capital stock of two corporations engaged in the ownership and operation of a Florida seafood restaurant at each of the two sites. The corporations owned the land on which the restaurants were located, the restaurant buildings, the restaurant businesses including personal property and fixtures and liquor licenses for each restaurant, all of which were included in the sale. The purchase price paid by the Company for the stock of the two corporations (prior to closing adjustments) was $3,370,000, the bulk of which was represented by 20-year promissory notes payable monthly and secured by mortgages on the restaurants. The Company sold the Titusville restaurant to an unaffiliated third party in January 1988 realizing a loss of approximately $942,000. The Company prepaid the balance of the remaining indebtedness under the 8 notes in July 1993 using the net proceeds from the sale in June 1993 of another Florida restaurant property. HIGHTSTOWN, NEW JERSEY - This restaurant, consisting of approximately 4,600 square feet, is free standing on State Highway 33 approximately two miles east of Hightstown and seats approximately 175. The restaurant has parking for approximately 100 automobiles. The Company purchased this restaurant and three others (including the land, buildings, improvements and businesses including personal property and fixtures, liquor licenses and all of the outstanding stock of the four corporations operating these restaurants) from its then principal stockholder and from three partnerships owned by him, in October 1980 for an aggregate $7,750,000 less a subsequent $250,000 prepayment discount. BAKER'S WHARFSIDE RESTAURANT PT. PLEASANT BEACH, NEW JERSEY - This restaurant, consisting of approximately 7,500 square feet, is free standing with a waterfront location on Channel Drive in Pt. Pleasant Beach, New Jersey and seats approximately 500. It shares parking with the Lobster Shanty restaurant in Pt. Pleasant Beach with space for approximately 250 automobiles. The Company purchased this restaurant and three others (including the land, buildings, improvements and businesses including personal property and fixtures, liquor licenses and all of the outstanding stock of the four corporations operating these restaurants) from its then principal stockholder, and from three partnerships owned by him, in October, 1980 for an aggregate $7,750,000 less a subsequent $250,000 prepayment discount. MR. MANATEE'S RESTAURANT VERO BEACH, FLORIDA - This restaurant, consisting of approximately 4,000 square feet, is free standing at 30 Royal Palm Pointe in Vero Beach and seats approximately 165. It has parking for approximately 40 automobiles but there are additional municipal parking spaces available at the contiguous Royal Palm Pointe municipal park. Pursuant to a January 2002 asset purchase agreement, the Company purchased the furnishings, fixtures and equipment, liquor license, goodwill, right to the name and the business of Mr. Manatee's from an unaffiliated third party for $800,000. The Company paid $300,000 of the purchase price from its available cash reserves and borrowed the $500,000 balance under its available Line of Credit. 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. 9 Mr. Manatee's 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. Management believes that the check average at Mr. Manatee's will be approximately 15% lower than the check average at its other seafood restaurants. MEXICAN THEME RESTAURANTS In November 1995, the Company entered into an agreement with Garcimex of New Jersey, Inc. ("Garcimex"), the purported exclusive owner of the "Garcia's" trademark, service mark and trade name along with the goodwill and recipes of a Mexican restaurant business associated with the marks. Pursuant to the agreement, the Company was granted the exclusive right to establish and open Mexican restaurants using the marks, goodwill and recipes in six New Jersey counties, Hunterdon, Mercer, Middlesex, Monmouth, Ocean and Somerset (the "Territory"). The Company was granted the right but not the obligation to open a restaurant utilizing the marks and goodwill in each of the first five 12-month periods, in the Territory, with a six-month grace period with respect to each such 12-month period. If the Company did not open a Garcia's restaurant in each of the first five 12-month periods (including the grace period), the agreement provided that the Company would lose the right to develop additional restaurants within the Territory. The Company opened a Garcia's restaurant at the Monmouth Mall in Eatontown, New Jersey in April 1996 but did not open any additional Garcia's restaurants thereafter. The agreement was for an initial term of 20 years. The agreement required the Company to pay a royalty to Garcimex equal to 3% of the gross annual sales of its Garcia's restaurants during the term of the agreement and granted the Company certain additional rights including a right of first refusal with respect to certain offers made to Garcimex. In September 2001 after the Company raised questions concerning Garcimex's rights to the "Garcia's" tradename and withheld certain of the royalties owed to Garcimex, the parties entered into a settlement agreement. Pursuant to the settlement agreement, the parties agreed to terminate the November 1995 agreement and the Company agreed to pay the withheld royalties, a continuation of the royalty through January 27, 2002 and an additional $80,000 to Garcimex. The Company paid these sums and was released by Garcimex from the restriction that prevented it from opening any other Mexican restaurants in the Territory prior to 2015. After consummating the settlement with Garcimex, the Company changed the name of its "Garcia's" restaurant at the Monmouth Mall to Escondido's at the end of January 2002 and commenced to operate the restaurant under the name "Escondido's Mexican Restaurant" on February 1, 2002. The Company opened its second Mexican theme 10 restaurant in Freehold, New Jersey in January 2002 under the name "Escondido's Mexican Restaurant" as hereinafter described. The Company's Mexican theme restaurants feature Mexican cuisine including fajitas, tortillas, burritos and enchiladas with cheese, beef, chicken, pork and seafood fillings. The menus also include appetizers, soups and salads and a limited number of American style offerings such as steaks and burgers. Alcoholic offerings such as margaritas and tequilas complement fruit drinks and other soft drinks. MONMOUTH MALL, EATONTOWN, MONMOUTH COUNTY, NEW JERSEY - The Company's "Escondido's Mexican Restaurant" at the Monmouth Mall consists of 4,371 square feet of leased space and is decorated in a bright, multi-color Mexican motif. The restaurant has a bar and tables and booths which can accommodate approximately 130 patrons. The Company has a liquor license permitting the consumption of wine and alcoholic beverages on the premises. The restaurant is open for lunch and dinner seven days per week. The Company's lease for this restaurant is for a twelve-year term ending in 2008 providing for a minimum annual rental of $109,275 during each of the first five years and a minimum annual rental of $118,017 per annum thereafter. The Company was granted a $24,000 per year Construction Allowance for the five-year period commencing January 1, 1997 which was applied on a monthly basis in reduction of the minimum annual rental through December 2001. The Company is also required to pay additional rent equal to 5% of the restaurant's annual gross revenues in excess of $2,185,000 in each of the first five years and in excess of $2,360,340 in each subsequent year. The Company is also required to pay a proportionate share of the Mall's real estate taxes, utility charges and the Landlord's operating costs as well as certain other charges. The Company is attempting to negotiate a reduction in the minimum annual rental and other charges under this lease with the Mall Landlord. Although it was successful in previously negotiating a reduction in the minimum annual rental (to $102,675) for the twelve-month period ended January 31, 2001, no assurances can be given that it will be able to obtain any reduction in future periods. The restaurant is on the site of the Company's La Crepe restaurant which closed in December 1995. The Company spent approximately $720,000 to construct its Garcia's restaurant on this site and after its settlement agreement with Garcimex, changed the name of the restaurant to "Escondido's Mexican Restaurant" on February 1, 2002. The Monmouth Mall has been in operation for approximately 20 years. Macy's and J.C. Penny are major department stores in the Mall. The Mall is a large shopping center with 1,500,000 square feet of shopping area on 105 acres with parking for 7,200 cars. 11 FREEHOLD, NEW JERSEY - The Company opened a second "Escondido's Mexican Restaurant" on West Main Street (Route 537) in Freehold, New Jersey 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 similar to the Monmouth Mall restaurant. The Freehold mexican theme restaurant has a bar and tables and booths which can accommodate approximately 225 patrons and shares parking facilities with the adjoining Moore's Tavern and Restaurant. It has a liquor license permitting the consumption of wine and alcoholic beverages on the premises. The restaurant is open for lunch and dinner seven days per week. The Company leased the facility ("Building B") from Moore's Realty (whose partners are members of the controlling Lombardi Group and other members of the Lombardi family). The lease is a "triple-net" lease pursuant to which the Company is required to pay real estate taxes, insurance and heating and air conditioning costs. The lease is for a five-year term through January 2007 and contains provisions for three consecutive five-year renewals at the Company's option which are automatically effective unless the Company gives written notice at least six months before the end of the applicable term that it does not intend that such option be exercised. The Company has the right to terminate the lease upon six months' written notice during the initial lease term provided that such notice cannot be given until 18 months after the commencement of the initial lease term and upon twelve months written notice during any renewal term. The lease is a "triple-net" lease pursuant to which the Company 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. 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 First Union aggregating $1,200,000. See "Developments Since the Beginning of the Last Fiscal Year - Bank Loans" in this Item 1. During the renovation period, the Company paid an aggregate $15,000 in rents to Moore's Realty with respect to Building B. The Company had no additional cost for the liquor license for these premises, the 12 license being permitted as an expansion of the license on the adjoining "Moore's Tavern and Restaurant." MOORE'S TAVERN AND RESTAURANT In February 2000, the Company executed a lease with Moore's Realty (whose partners are members of the controlling Lombardi Group and other members of the Lombardi family). The lease was of premises on West Main Street (Route 537) in Freehold, New Jersey where an entity affiliated with Moore's Realty, Moore's Inn, Inc. was operating a restaurant and tavern under the name "Moore's Inn." The Company provided consulting services to the operators of Moore's Inn from January 3, 2000 until February 23, 2000 when it executed the following described lease and purchase agreements and commenced to operate the facility under the name "Moore's Tavern and Restaurant." The lease was for a five-year term through February 22, 2005 and contains provisions for three consecutive five-year renewals at the Company's option which are automatically effective unless the Company gives written notice at least six months before the end of the initial term or at least six months before the end of the applicable renewal period that it does not intend that such option be exercised. After 18 months, the Company can terminate the lease 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 27, 2002, the gross rental aggregated $135,859. 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 13 presently occupied as such), located within ten miles of Moore's Inn. In connection with the lease, the Company purchased a New Jersey liquor license from Moore's Inn, Inc. for $350,000 and agreed to sell the license back to the Seller or to Moore's Realty at the termination of the lease for the same $350,000. In addition, the Company purchased existing furniture, fixtures and equipment at Moore's Inn from Moore's Inn, Inc. for $250,000 agreeing to leave all of the furniture, fixtures and equipment at the premises "...in good working condition, reasonable wear and tear excepted..." upon termination of the lease. The lease of the Moore's Inn and the purchase of the liquor license and the furniture, fixtures and equipment cannot be deemed "arm's length" transactions due to the interest of the Lombardi Group and other members of the Lombardi family. The transactions were negotiated for the Company by Anthony C. Papalia, its president and chief executive officer. In negotiating the transactions, Mr. Papalia took into account his experience in similar restaurant leases, the prices at which liquor licenses were sold in neighboring areas (finding such prices to be comparable to the liquor license purchase price paid by the Company) and the condition of the furniture, fixtures and equipment. The bulk of the furniture, fixtures and equipment had been purchased by the Seller during the twelve months ended June 30, 1999 at a price of $621,893. Mr. Papalia and the non-interested directors concluded that the terms of the transaction were fair and in the best interests of the Company. At the time of execution of the lease, Moore's Realty agreed not to sell or lease a building ("Building B") adjacent to the Moore's Inn or the nearby pad site for a proposed building ("Building C") for a period of one year. If during the first year, the Company entered into an agreement to purchase or lease Building B, Moore's Realty agreed not to sell or lease the pad site to anyone other than the Company for an additional one-year period. See "Mexican Theme Restaurants" herein as to the Company's lease of Building B from Moore's Realty in fiscal 2002, renovation of the facility and opening of an "Escondido's Mexican Restaurant" at the facility in January 2002. At the time of the Company's leasing of Building B, the Company and Moore's Realty executed an amendment to their January 21, 2000 lease agreement extending the initial term of the earlier lease to the termination date provided for in the later lease and similarly extending the renewal periods of the earlier lease to coincide with the renewal periods of the Building B lease. 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 14 with any businesses operated from Building B (now operated by the Company as an Escondido's Mexican Restaurant), and proposed Building C. 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. SOURCES OF FOOD PRODUCTS The food products used by the Company in the operation of its seafood restaurants, its Moore's Tavern and Restaurant and its Escondido's Mexican Restaurants are readily available from a variety of sources including national distributors and local sources on an order basis when needed. SEASONAL ASPECTS To date, the Company's New Jersey seafood restaurants have experienced a significant portion of their sales from May through September whereas its Florida seafood restaurants have experienced a significant portion of their sales from January through April. During its initial period of operation by the Company, Moore's Tavern and Restaurant experienced a seasonality factor similar to but not as dramatic as the seasonality factor of the Company's New Jersey seafood restaurants. The Company's Monmouth Mall restaurant (operated under the name Garcia's until February 1, 2002 and now operated under the name Escondido's Mexican Restaurant) has experienced its greatest sales volume during the Thanksgiving through Christmas period. Management believes that the Freehold, New Jersey Escondido's Mexican Restaurant will experience a seasonality factor more similar to Moore's Tavern and Restaurant due to its location then to the Monmouth Mall restaurant. TRADEMARKS The Company has no patents, trademarks, licenses, franchises or concessions which it regards as material to its restaurant business with the exception of the service mark "Jack Baker's Lobster Shanty"R registered for a 20 year period with the U.S. Patent and Trademark Office in February, 1989, and its rights to use of the names "Moore's Inn" and "Moore's Tavern" as described above. The Company also believes its use of the service mark "Escondido's Mexican Restaurant" is material to its restaurant business. The Company has applied to the United States Commissioner of Trademarks to register the service mark "Escondido's Mexican Restaurant." The application is pending and no assurance can be given that the mark will be registered. 15 COMPETITION The restaurant business is highly competitive and the success of any restaurant depends to a great extent upon the services it supplies and its location. The Company's seafood restaurants compete primarily with other local seafood restaurants and to a lesser extent, with local restaurants serving a more general fare. The principal national competition to the Company's seafood restaurants is the Red Lobster restaurant chain. This chain has substantially greater resources than the Company. The Company's Florida seafood restaurants also face competition from Shells seafood restaurants operating in their area. There are other restaurants in the vicinity of the locations where the Company is now operating its Escondido's Mexican Restaurants, all of which supply competition to the Company's Mexican theme restaurants. In addition, there are other Mexican style restaurants in the area. Typical "chain" competitors, all of which are affiliated with better established and more prominent national chains, are the Friendly Ice Cream chain, Ruby Tuesdays and TGI Fridays. The Moore's Tavern and Restaurant faces competition from local restaurants as well as from national chains including TGI Fridays and Chili's restaurants in the area. There can be no assurance that the Company's units will be able to successfully compete with any of such other restaurants. GOVERNMENT REGULATION The Company is subject to various Federal, state and local laws affecting the operation of its restaurants, including licensing and regulation by health, sanitation, safety and fire departments and alcoholic beverage control authorities. The Company is also subject to the Fair Labor Standards Act, which governs such matters as minimum wages, overtime and other working conditions. While such regulations have not had a material negative impact on the Company's operations to date, difficulties in obtaining necessary licenses or permits could result in delays or cancellations in the opening of new restaurants and increases in the minimum wage could increase the Company's labor costs. Each of the Company's New Jersey and Florida restaurants holds a state liquor license and is subject to the liquor licensing laws of New Jersey or Florida (depending on location). Management regards the aggregate and per claim liability insurance which it carries to be adequate for the nature of its operations taking into account the fact that it serves liquor at each location. 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 16 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 the Monmouth Mall employs approximately 40 employees. It's Escondido's Mexican Restaurant in Freehold, New Jersey employs between 60 and 70 employees and its Moore's Tavern and Restaurant employs approximately 60 employees, in each case serving similar functions. The Company also presently employs three area supervisors, each responsible for certain of the Company's restaurants. Managerial candidates are recruited for the Company's restaurants from hotel and restaurant management schools, restaurant recruiting agencies, through advertising in restaurant management magazines and by promotion from within the Company's own organization. At January 27, 2002, the Company had approximately 550 employees (including part-time workers). The Company is not a party to any collective bargaining agreements and has enjoyed satisfactory employee relations since inception. ITEM 2. DESCRIPTION OF PROPERTY The Company's executive and administrative offices are located in an approximately 4,000 square foot two story Company owned building of cinder block construction at 62 Broadway, Point Pleasant Beach, New Jersey. See Item 1 herein for a description of the Company's operating restaurants. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any material legal proceeding. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the quarter ended January 27, 2002. 17 CHEFS INTERNATIONAL, INC. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock was listed on the NASDAQ Stock Market Small Cap System under the symbol "CHEF" until the close of business on December 16, 1998 when it was delisted because of the failure of the Common Stock to maintain a closing bid price at or above $1.00 per share. Commencing December 17, 1998, the Common Stock has been traded in the over-the-counter market under the symbol "CHEF." The following chart sets forth the range of high and low closing bid prices for the Common Stock in the over-the-counter market for the periods indicated as obtained from the Pink Sheets LLC. Bid Prices Quarter ---------------------- Ended High Low ------- ---- --- April 28, 2000 $ 1.07 $ .68 July 28, 2000 .72 .60 October 27, 2000 .75 .63 January 26, 2001 .85 .71875 April 27, 2001 $ .90 $ .70 July 27, 2001 1.37 .81 October 26, 2001 1.41 1.07 January 25, 2002 2.15 1.15 The above quotations represent prices between dealers and do not include retail mark-ups, mark-downs or commissions. They do not necessarily represent actual transactions. At January 27, 2002, the number of record holders of the Common Stock was 6,684. 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 27, 2002. 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 18 can be given that the future results covered by the forward-looking statements will be achieved. The Company cautions readers that important factors may affect the Company's actual results and could cause those results to differ materially from the forward-looking statements. Such factors include, but are not limited to, changing market conditions, weather, the state of the economy, substantial increases in insurance costs, the impact of competition to the Company's restaurants, pricing and acceptance of the Company's food products. FINANCIAL REPORTING Financial Reporting Release No. 60, which was recently issued by the Securities and Exchange Commission ("SEC"), requires all registrants to discuss critical accounting policies or methods used in the preparation of financial statements. Note 1 to the consolidated financial statements includes a summary of significant accounting policies and methods used in the preparation of the Company's consolidated financial statements. However, in the opinion of management, the Company does not have any individual accounting policy that is critical to the preparation of its consolidated financial statements. This is due principally to the nature of the accounting requirements of the Company's business. The following is a review of the more significant accounting policies and methods used by the Company. Depreciation and Amortization: The Company depreciates its property and equipment and amortizes its goodwill and liquor licenses using straight-line methods. Through January 27, 2002 the Company used forty years to amortize goodwill and liquor licenses. Beginning January 28, 2002 with the adoption of a new accounting standard, the Company will no longer be required to amortize its goodwill and liquor licenses. The Company will continue to review annually its goodwill and liquor licenses for possible impairment or loss of value; however, the Company does not currently anticipate having to record an impairment loss when it adopts the new standard. Income Taxes: In fiscal 2002, the Company determined that it was more likely than not that it would able to utilize a portion of its operating loss carryforwards, and accordingly, recognized a deferred tax asset of $1,166,000. Prior to fiscal 2002 the Company had not recognized any benefit associated with the operating loss carryforwards. The recognition of the deferred tax asset was based on management's best assumptions and estimates of future income. These assumptions and estimates will be periodically reviewed and, if needed, adjustments will be made as required. Hedging Instruments: As of January 29, 2001, the Company adopted the provisions of the new accounting standard which requires that the fair value of all derivative financial instruments be recorded on the Company's consolidated balance sheet as assets or liabilities. The Company has interest rate swap agreements relating to substantially all of its variable rate debt. 19 The interest rate swap agreements are designated as cash flow hedges and are reflected at fair value in the consolidated balance sheet and the related losses on these contracts are deferred in shareholders' equity as a component of accumulated other comprehensive (loss). OVERVIEW The Company's principal source of revenue is from the operations of its restaurants. The Company's cost of sales includes food and liquor costs. Operating expenses include labor costs, supplies and occupancy costs (rent and utilities), marketing and maintenance costs. General and administrative expenses include costs incurred for corporate support and administration, including the salaries and related expenses of personnel and the costs of operating the corporate office at the Company's headquarters in Point Pleasant Beach, New Jersey. At January 27, 2002, the Company was operating nine restaurants on a year-round basis. Seven of the restaurants are free-standing seafood restaurants in New Jersey and Florida and are operated under the names "Jack Baker's Lobster Shanty" or "Baker's Wharfside." At said date, the Company was also operating a Mexican theme restaurant in New Jersey under the name "Garcia's." The Company opened its first seafood restaurant in November 1978 and opened its Garcia's restaurant in April 1996. In February 2000, the Company commenced the operation of the ninth restaurant, Moore's Tavern and Restaurant, ("Moore's"), a free-standing restaurant in Freehold, New Jersey serving an eclectic American food type menu. On January 29, 2002, the Company commenced operation of its tenth restaurant, Escondido's Mexican Restaurant ("Freehold"), a Mexican theme restaurant located in Freehold, New Jersey, adjacent to Moore's. On February 1, 2002, Garcia's began to operate under the trade name Escondido's ("Monmouth"). On April 1, 2002, the Company commenced operations of its eleventh restaurant, Mr. Manatee's Casual Grille ("Manatee's"), a casual theme restaurant primarily featuring seafood items, located in Vero Beach, Florida near the Company's Vero Beach, Florida Lobster Shanty. Generally, the Company's New Jersey seafood restaurants derive a significant portion of their sales from May through September. The Company's Florida seafood restaurants derive a significant portion of their sales from January through April. The Company's Monmouth Escondido's restaurant derives a significant portion of its sales during the holiday season from Thanksgiving through Christmas. Moore's experiences a seasonality factor similar to but not as dramatic as the seasonality factor of the New Jersey seafood restaurants. The Company anticipates that Freehold Escondido's will experience a seasonality factor similar to Moore's and that Manatee's will follow the seasonality pattern of the other Florida restaurants. 20 The Company operated nine restaurants during the year ended January 28, 2001. The statements of operations are comprised of a 52-week period for both the year ended January 27, 2002 ("fiscal 2002") and the year ended January 28, 2001 ("fiscal 2001"). RESULTS OF OPERATIONS SALES Sales for the year ended January 27, 2002 were $20,798,300, an increase of $641,400 or 3.2%, as compared to $20,156,900 for the year ended January 28, 2001. The increase includes increases in sales of $321,400 or 13.9% at the Vero Beach, Florida restaurant ("Vero") attributable in part to the completion of a municipal park ("Vero Park") adjacent to the restaurant and a sales increase of $356,000 or 18.7% at Moore's. Moore's operated for the entire thirteen weeks of the first quarter of fiscal 2002 as compared to ten weeks for fiscal 2001's first quarter, whereas the last three quarters of the year include thirty-nine weeks of operations for each year. The remaining seven restaurants combined had decreased sales of $36,000 versus last year primarily due to the September 11, 2001 ("9/11") tragedy and the weak national economy. The 9/11 tragedy had the greatest impact on the Cocoa Beach, Florida restaurant ("Cocoa") because the location of Patrick Air Force Base, a military base south of the restaurant, resulted in the closure of Route A1A, the sole access highway to the restaurant from the south. A1A was closed for approximately four months. During the A1A closure, Cocoa sales dropped approximately 29% versus last year. The number of customers served during fiscal 2002 in the nine restaurants increased by .6% versus fiscal 2001 while the average check paid per customer increased by 2.6%. GROSS PROFIT; GROSS MARGIN Gross profit was 68.4% of sales for fiscal 2002 as compared to 67.8% of sales for fiscal 2001. The primary reason for the improvement was lower costs of high volume seafood items including shrimp, flounder, lobster and scallops which are primary components of the Company's menus. Additionally, Moore's gross profit percentage improved compared to the prior year. OPERATING EXPENSES Total operating expenses increased by 5.5% from $13,053,500 for fiscal 2001 to $13,766,200 for fiscal 2002. Payroll and related expenses were 30.1% of gross sales for fiscal 2002 compared to 29.8% of sales for fiscal 2001. The primary reasons for the increase were salary increases, higher health insurance premiums, and to a lesser extent, the 9/11 impact at Cocoa where management maintained salaries despite the substantial decrease in sales. Other operating expenses increased to 21% of sales for fiscal 2002 21 versus 20.5% in 2001 primarily due to increases in utility costs, higher occupancy costs due to higher property insurance premiums and rent expenses, a one-time special property assessment of $62,700 at Vero for the restaurant's portion of the Vero Park project and approximately $22,000 in rent and insurance costs at Freehold incurred during construction of Escondido's (Freehold) in the fourth quarter. Depreciation and amortization increased by $4,200 during fiscal 2002 versus the prior year. Increases include $5,800 in increased depreciation associated with the purchase of Company vehicles in fiscal 2002 offset by the expiration of fully depreciated assets at the existing restaurants. General and administrative expenses were $244,400 higher in fiscal 2002 versus 2001. The primary components of the increase were increases in workers compensation and group health insurance costs of $33,000, higher salaries and payroll taxes of $49,000 and $67,500 more in training and recruiting costs, the majority of which was spent on training the management team and employees for Escondido's (Freehold) which opened during the week following the year ended January 27, 2002. Salaries for fiscal 2002 included $63,900 attributed to the Company's Executive Incentive Bonus Plan ("Bonus Plan") (see "Notes" to Consolidated Financial Statements - Note 9) while salaries in fiscal 2001 attributed to the Bonus Plan were $79,900. Additionally, the Company incurred costs of $80,000 to terminate an agreement with Garcimex of New Jersey and approximately $26,000 in market research and legal costs to develop the trade name Escondido's Mexican Restaurant ("Escondido's"). In 1995 the Company entered into an agreement with Garcimex to open Mexican restaurants in New Jersey under the trade name of Garcia's in exchange for royalty payments of 3% of gross sales. The Company opened its only Garcia's at the Monmouth Mall in Eatontown, New Jersey in April 1996. The Company operated the Monmouth Mall restaurant as a Garcia's and paid the royalty fees through the year end, and on February 1, 2002, the Monmouth Mall restaurant began operating as Escondido's. Trademark applications have been filed to register federal service marks for Escondido's Mexican Restaurant. The $2,100 gain on disposal of assets in fiscal 2001 was realized on the disposal of a Company vehicle. OTHER INCOME AND EXPENSE Interest expense was $9,400 higher in fiscal 2002 due to interest expenses associated with $1,200,000 in bank loans the Company borrowed from its primary bank to finance the renovation of the Freehold Escondido's. The loans are repayable in various monthly installments of principal with interest at an annual rate of 7.57% through September 2011. Investment income increased by approximately $48,000 due primarily to dividend income received on investments and capital gains on the sale of investments (see Note 7). Investment income for fiscal 2001 included approximately 22 $44,700 in interest income associated with notes receivable from the February 1997 sale of discontinued operations (see Note 12). NET INCOME For the year ended January 27, 2002, income from continuing operations was $1,727,000 or $.42 per share, which includes the recognition of a deferred tax asset of $1,166,000 relating to the Company's net operating loss carryforwards (see Note 14). For the previous year, income from continuing operations was $632,600 or $.15 per share and net income was $954,800 or $.22 per share which included a gain of $322,200 realized on the disposal of a discontinued business (see Note 12). LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations primarily from revenues derived from its restaurants. The Company's ratio of current assets to current liabilities was 1.90:1 at January 27, 2002, compared to 2.15:1 at January 28, 2001. Working capital was $2,301,500 at the end of fiscal 2002, an increase of $192,600 over the prior year. During fiscal 2002, net cash increased by $248,500. Net cash provided from operating activities was $1,882,000. The primary changes in assets and liabilities included an increase in accounts payable of $173,100 due primarily to payables associated with the opening of Escondido's in Freehold, an increase in accrued expenses and other liabilities of $68,800 resulting primarily from additional rent of $15,700 due to the percentage rent requirements of the Moore's lease (see Note 10) and in an increase of $45,200 in the amount of unredeemed gift certificates held at the year end. Investing activities during fiscal 2002 resulted in a net cash outflow of $2,069,100. Capital expenditures were $1,444,600 with the major components including approximately $883,000 for design, construction, furniture and equipment costs at Escondido's in Freehold, $66,800 for new Company vehicles and $494,800 for routine improvements at the other nine restaurants. Other investing activities included the purchase of various investments totaling $1,116,900 offset by $525,700 from the sale of investments and proceeds from maturing certificates of deposit. Financing activities for fiscal 2002 generated a net cash flow of $435,200 and included debt repayment of $177,700, bank loan proceeds of $1,200,000 used to finance the construction of Escondido's, and $569,900 to repurchase a block of an aggregate 262,603 shares of the Company's outstanding common stock from three shareholders and their affiliates at $2.10 per share, for cash. The repurchase was authorized by the Company's' Board of Directors and the shares were subsequently canceled. Additionally, approximately $17,200 was paid by the Company to repurchase 17,916 shares of the Company's outstanding stock pursuant to a Stock Repurchase Plan ("Stock Plan") authorized by the Board in May 2000. 23 During the year ended January 27, 2002, the Company cancelled a total of 24,641 of the repurchased shares, including repurchases incurred during fiscal 2001 (see Note 11). During the third quarter ended October 28, 2001, the Company's $500,000 bank line of credit ("bank line") was modified to extend the termination date from June 30, 2002 to June 30, 2003. The interest rate is variable, equal to the monthly LIBOR Market Index Rate plus 2.00%. At the year ended January 27, 2002 the entire $500,000 was available for use (see Recent Developments below). During fiscal 2001, net cash decreased by $154,700. Net cash provided from operating activities was $1,697,000. The primary changes in assets and liabilities were an increase in inventories of $165,100 due to the addition of Moore's and bulk seafood purchases and an increase in accrued expenses resulting primarily from an increase of $98,200 in accrued payroll costs, including the incentive bonus plan charge, additional rent of $30,200 at Moore's pursuant to percentage rent requirements and an increase of $27,200 in accrued health insurance costs. Investing activities for fiscal 2001 resulted in a net outflow of $1,304,600. Capital expenditures were $949,300 which included $339,000 for the acquisition of furniture, fixtures, and equipment and improvements at Moore's, $40,500 for Company vehicles, $93,100 for improvements at the Hightstown, New Jersey restaurant, $106,600 for significant improvements at the Florida restaurants and $369,600 for routine restaurant improvements. Additionally, Moore's liquor license was purchased for $357,900. Other investing activities include payments of $570,300 attributed to the sale of a discontinued business and the purchase of various investments totaling $947,900 offset by $459,500 from the sale of investments and proceeds from maturing certificates of deposit. Financing activities in fiscal 2001 resulted in a net cash outflow of $547,100 and include debt repayment of $370,100, the repurchase of 233,334 shares of Chefs' common stock for $168,000 (see Note 12) and approximately $9,000 to repurchase 10,275 shares of Chefs' outstanding stock pursuant to the Stock Plan. At the end of fiscal 2002, the Company was in compliance with all of the covenants under its loan agreements with its primary bank, First Union. The Company was also in full compliance at the year ended January 28, 2001. RECENT DEVELOPMENTS On January 29, 2002, the Company opened its tenth restaurant, Escondido's Mexican Restaurant ("Escondido's") in Freehold, New Jersey. Escondido's is open for lunch and dinner on a daily basis. Sales have exceeded management expectations and in addition, sales at Moore's, a Company restaurant adjacent to Escondido's, have continued to increase versus last year on a weekly basis. On February 1,2002, Garcia's, the Company's other Mexican theme restaurant located in the Monmouth Mall in Eatontown, New Jersey, began operating under the trade name Escondido's. 24 On April 1, 2002, the Company, after a three month due diligence period, purchased the furniture, fixtures, equipment, liquor license, business name and franchise rights of Mr. Manatee's Casual Grille, a restaurant located in Vero Beach, Florida, for $800,000. The purchase was paid for by a combination of $300,000 in cash and $500,000 in bank financing by drawing down the Company's bank credit line. Management and the bank have agreed in principle to restructure the $500,000 as a five-year term loan. In addition, Management negotiated a five year triple net lease of the real property at an $8,000 per month rental with three five year renewal options and an option to purchase the real property at the end of the first five year term. Mr. Manatee's features a casual menu primarily offering seafood items; has been in business for twelve years in Vero Beach and is located approximately a quarter of a mile from the Company's Lobster Shanty restaurant. Mr. Manatee's has also experienced an increase in sales as a result of the completion of the Vero Park and management is pleased to add the Manatee's concept to the Company's other ten restaurants. Mr. Manatee's serves lunch and dinner, seven days a week and began operations as a Company restaurant on April 1, 2002. Management anticipates that Mr. Manatee's will not negatively impact sales at the Vero Beach Lobster Shanty. During the month of April 2002, management negotiated the annual renewals for group health ("health") and property and casualty ("property") insurance coverages. Following a nationwide trend which started before the 9/11 tragedy, the Company renewed both coverages at higher rates than were previously in force. The health renewal resulted in a 20% increase in premiums, despite increased co-pays and deductibles, based primarily on medical inflation running about 15% nationwide and medical claims paid on behalf of Chefs' employees. The property coverage was renewed at an overall increase of 26%. Factors influencing the property increases included the 9/11 tragedy which had a tremendous impact on all insurance companies and the investment losses they experienced in the stock markets. Consequently, the insurance companies have raised premiums and reduced the amount and type of coverages that they are willing to provide while insisting on larger deductibles. Management expects that the insurance increases will have a negative impact on Company operating results for fiscal 2003. Management anticipates that funds from operations will be sufficient to meet obligations in fiscal 2003, including projected capital expenditures of approximately $475,000 for routine capital expenditures. A majority of the capital expenditures are expected to occur during the first and second quarters of fiscal 2003. INFLATION It is not possible for the Company to predict with any accuracy the effect of inflation upon the results of its operations in future years. In general, the Company is able to increase menu prices to counteract the majority of the inflationary effects of increasing costs with the exception of the substantial increase in 25 insurance costs that the Company will have to absorb in fiscal 2003. ITEM 7. FINANCIAL STATEMENTS Attached. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE 26 CHEFS INTERNATIONAL, INC. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT The following table sets forth certain information with respect to each of the current directors of the Company: Date First Name Age Position Elected a Director - ---- --- -------- ------------------ Robert M. Lombardi(a) 50 Chairman of the Board May 1999 Nicholas B. Boxter 54 Director December 1999 Kenneth Cubelli 48 Director December 1999 Raymond L. Dademo 44 Director December 1999 Anthony M. Lombardi(a) 46 Director July 1999 Joseph S. Lombardi(a) 51 Director July 1999 Michael F. Lombardi(a) 53 Director July 1999 Stephen F. Lombardi(a) 46 Director July 1999 - ---------- (a) The five Lombardis who serve as directors are brothers. The following table sets forth certain information regarding the executive officers of the Company. NAME AGE OFFICE Anthony C. Papalia 44 President, Treasurer, Chief Executive Officer, Chief Financial Officer and Director Martin W. Fletcher 49 Secretary The Company does not have an Executive Committee. The term of office of each director and executive officer expires when his successor is elected and qualified. Executive officers are elected by and hold office at the discretion of the Board of Directors. The following is a brief account of the business experience of each director and executive officer of the Company during the past five years. 27 DIRECTORS Robert M. Lombardi, M.D. is, and for more than the past five years has been principally engaged as a physician and orthopedic surgeon with the Edison-Metuchen Orthopedic Group, a medical practice group located in Edison, New Jersey, where he also serves as a senior officer. He is also an officer of Moore's Inn, Inc. and a partner in Moore's Realty. Nicholas B. Boxter, C.P.A. is, and for more than the past five years has been principally engaged in the practice of accountancy with his own firm in Whitehouse, New Jersey. Kenneth Cubelli, M.D. is, and for more than the past five years has been principally engaged as a physician and orthopedic surgeon with the Morris County Orthopedic Group in Denville, New Jersey. Raymond L. Dademo, Esq. is, and for more than the past five years has been principally engaged as a practicing attorney with his own law firm in Brick, New Jersey. Anthony M. Lombardi, D.D.S. is, and for more than the past five years has been principally engaged in the practice of dentistry in Edison, New Jersey. He is also an officer of Moore's Inn, Inc. Joseph S. Lombardi, M.D. is, and for more than the past five years has been principally engaged as a physician and orthopedic surgeon with the Edison-Metuchen Orthopedic Group, where he is a senior officer. He is also an officer of Moore's Inn, Inc. and a partner in Moore's Realty. Michael F. Lombardi, Esq. is, and for more than the past five years has been principally engaged as a practicing attorney and a senior officer of Lombardi & Lombardi, P.A., an Edison, New Jersey law firm. He is also an officer of Moore's Inn, Inc. and a partner in Moore's Realty. Stephen F. Lombardi, Esq. is, and for more than the past five years has been principally engaged as a practicing attorney and a senior officer of Lombardi & Lombardi, P.A., an Edison, New Jersey law firm. He is also an officer of Moore's Inn, Inc. and a partner in Moore's Realty. EXECUTIVE OFFICERS Anthony C. Papalia has been continuously employed by the Company for the preceding five years. He has served as a manager of various New Jersey Lobster Shanty restaurants and as an area supervisor. Mr. Papalia, who was elected senior vice president and a director of the Company in September 1985 and president and treasurer in March 1988, is currently devoting all of his working 28 time to the business of the Company. He resigned as a director of the Company in July 1999. Martin W. Fletcher has been continuously employed by the Company for the preceding five years in various capacities. He has served as general manager of the Company's Toms River, New Jersey Lobster Shanty, as area supervisor for its Florida west coast restaurants, as assistant controller, since September 1987 as controller and since March 1988 as secretary and a director of the Company. He resigned as a director of the Company in July 1999. He is currently devoting all of his working time to the business of the Company. COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT Based solely upon a review of Forms 3, 4 and 5 the Company believes that with respect to fiscal 2002, all Section 16(a) filing requirements applicable to its officers, directors and beneficial owners of more than 10% of its equity securities were timely complied with except for a late filing made in June 2001 by Michael F. Lombardi regarding his May 2001 purchase of 2,000 shares, late filings made in June 2001 and July 2001 by Robert M. Lombardi regarding his May 2001 and June 2001 purchases of 6,000 shares and 5,300 shares respectively, a late filing made in July 2001 by Stephen F. Lombardi regarding his June 2001 purchase of 4,000 shares, and a late filing made in April 2002 by Raymond L. Dademo regarding his October 2001 purchase of 1,000 shares. 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 27, 2002 to its Chief Executive Officer as well as to any other executive officer of the Company or a subsidiary who earned at least $100,000 during fiscal 2002. During the three-year period ended January 27, 2002, the Company did not grant any restricted stock awards or have any long-term incentive plan in effect. The Company maintains a non-qualified Supplemental Employee Benefit Program for its officers, supervisors, restaurant managers and assistant managers paying annual contributions ranging from $1,000 to approximately $3,000 per individual. The Program provides life insurance death benefits, disability income benefits and retirement income benefits. A former officer and director, James Fletcher, the father of Martin W. Fletcher, is not covered under this Program but the Company agreed that if he remained in its employ until age 65 and left such employ at any time thereafter, the Company would pay him $20,000 annually for the ten year period following such termination of employment or until his death, if he dies prior thereto. To date, the Company has made annual payments over a five year period pursuant to this agreement. 29 SUMMARY COMPENSATION TABLE Annual Compensation ------------------- Name and Fiscal Other Annual Principal Position Year Salary Bonus(a) Compensation(b) - ------------------ ------ ------ ----- ------------ Anthony Papalia 2002 $169,497 $8,429 $2,008 President and 2001 $164,557 $14,000 $2,088 Chief Executive 2000 $159,975 $-0- $2,088 Martin Fletcher 2002 $98,308 $8,500 $2,908 Controller and 2001 $95,398 $10,910 $2,902 Secretary 2000 $92,674 $-0- $2,902 - ---------- (a) In May 2000, the Company's Board of Directors adopted an executive incentive bonus plan providing for an annual cash bonus to be paid to Company employees performing executive type functions with respect to each fiscal year (commencing with fiscal 2001) in which the Company achieved certain specified levels of earnings before deducting interest, income taxes, depreciation and amortization. Extraordinary items are excluded for purposes of the computation. The bonus pool for fiscal 2002 aggregated $63,900 and was distributed to seven employees including Anthony Papalia who received $8,429 and Martin Fletcher who received $8,500. (b) Represents contributions under the Supplemental Employee Benefit Program. EMPLOYMENT AGREEMENTS At the annual meeting of the Company's stockholders held on December 19, 1995, stockholders ratified employment contracts between the Company and Anthony Papalia as chief executive officer and chief financial officer and between the Company and Martin Fletcher as controller. Each contract expired at the conclusion of the Company's 1999 fiscal year and was automatically renewed on a year by year basis for up to five consecutive additional one-year terms unless either party gave at least six months' prior notice that he or it did not desire such renewal. As no such notice was given during fiscal 1999, each contract was extended for a first renewal year. Mr. Papalia's annual salary under the contract was $150,000 and Mr. Fletcher's annual salary under the contract was $87,000 but each individual's salary was made subject to automatic increase in each Renewal Year based on increases in the Consumer Price Index. If the employment of either individual is terminated other than for cause, he will become entitled to a Severance Payment equal to the amount of his compensation over the balance of the contract term. Each individual is also entitled to terminate his employment and receive a Severance Payment equal to six months' salary in the event of a "change of control" of the 30 Company. Amendments to each employment contract executed in June 1999 and August 1999 extended the first renewal year through March 31, 2000, renewed each contract for a second renewal year through March 31, 2001 and recast each renewal year so as to commence on April 1 of each year and to expire on March 31 of the following year. Notice of intention not to renew must now be given no later than September 30 of the year preceding the year in which the renewal term commences. In November 2001, each employment contract was further amended to renew the term through March 31, 2005. The amendments retained the automatic salary increase provision based on increases in the Consumer Price Index and provided for an automatic one year renewal in the absence of prior notice not to renew. During fiscal 2002, Mr. Papalia's annual salary was increased to $169,497 and Mr. Fletcher's annual salary was increased to $98,308. STOCK OPTIONS At January 28, 2001 and at January 27, 2002 there were no outstanding employee or non-employee stock options exercisable to purchase shares of Chefs' Common Stock. DIRECTORS' COMPENSATION During fiscal 2002, no compensation was paid to any of the Company's directors for serving in such capacity. Furthermore, no method of compensation has been established at this date for the current directors. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information as of March 28, 2002 with respect to their ownership of Chefs' Common Stock by (i) each person known by the Company to be the beneficial owner of more than 5% of Chefs' outstanding Common Stock, (ii) each director of the Company, (iii) each executive officer of the Company, and (iv) all directors and executive officers as a group. Name and Address of Shares of Common Stock Percentage Beneficial Owner Beneficially Owned Ownership - ------------------- ---------------------- ---------- DIRECTORS* Robert M. Lombardi 1,333,326(1) 34% Nicholas B. Boxter -- -- Kenneth Cubelli -- -- Raymond L. Dademo 2,000 -- Anthony Lombardi 111,001 3% Joseph S. Lombardi 685,633 17% Michael F. Lombardi 246,010(1)(2)(3) 6% Stephen F. Lombardi 111,384(1)(2)(3) 3% EXECUTIVE OFFICER* Anthony C. Papalia 5,000 -- 31 All executive officers and directors as a group (ten persons) 2,494,354(1)(2)(3) 63% - ---------- * The address of each director and executive officer is c/o the Company, 62 Broadway, Point Pleasant Beach, New Jersey 08742. (1) Robert M. Lombardi, Anthony Lombardi, Joseph S. Lombardi, Michael F. Lombardi and Stephen F. Lombardi, Lombardi & Lombardi, P.A. and the Lombardi & Lombardi, P.A. Defined Benefit Pension Plan previously filed a report on Schedule 13D and amendments thereto indicating that they were acting separately and not as a group but subsequently filed amendments to the Schedule 13D indicating that they are acting as a "group". The five individual Lombardis are brothers and for purposes of this report, they and the above entities are deemed the "Lombardi Group." (2) Includes 24,500 shares comprising one-half of the 49,000 shares owned by Lombardi & Lombardi, P.A., of which Michael F. Lombardi and Stephen F. Lombardi are each senior officers. (3) Includes 55,883 shares comprising one-half of the 111,666 shares owned by the Lombardi & Lombardi, P.A. Defined Benefit Pension Plan. Michael F. Lombardi and Stephen Lombardi each have voting and dispositive power with respect to all 111,666 of such shares. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See Item 1 herein, "Developments Since the Beginning of the Last Fiscal Year" as to the leasing by the Company from an affiliate of the Lombardi Group of Building B in Freehold, New Jersey and opening by the Company of an Escondido's Mexican Restaurant at the site. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS 3.1 Restated Certificate of Incorporation of the Company(A) 3.2 By-Laws of the Company, as amended(B) 4.1 Specimen Common Stock Certificate(C) 10.1 Monmouth Mall Shopping Center Lease for Garcia's restaurant(D) 10.2 Employment Agreement dated as of December 19, 1995 between Chefs and Anthony Papalia(D) 10.3 Employment Agreement dated as of December 19, 1995 between Chefs and Martin Fletcher(D) 32 10.4 Loan Agreement dated October 30, 1998 between the Company and First Union National Bank ("First Union")and the Company's $880,000 Promissory Note issued pursuant thereto for funding utilized by the Company to purchase the Vero Beach, Florida Lobster Shanty Restaurant(A) 10.4.1 Loan Agreement dated September 7, 2001 between the Company and First Union containing the Company's affirmative and negative covenants. 10.5 Lease Agreement executed in January 2000 for Moore's Inn facility, between Moore's Realty Associates ("Moore's Realty") as Landlord and the Company as Tenant(B) 10.5.1 Lease Agreement dated October 1, 2001 for Building B in Freehold, New Jersey between Moore's Realty as Landlord and the Company as Tenant (opened as Escondido's Mexican Restaurant). 10.6 Liquor License Sale/Purchase Agreement executed in January 2000 between Moore's Inn, Inc. as Transferor and the Company as Transferee(B) 10.7 Sale/Purchase Agreement for Furniture, Fixtures and Equipment executed in January 2000 between Moore's Inn, Inc. as Seller and the Company as Purchaser(B) 10.8 Stock and Note Purchase/Sale Agreement as of June 29, 2000 by and among Chefs, Mister Cookie Face, Inc. and Frank Koenemund(G) 10.9 Chefs International Executive Incentive Bonus Plan(G) 10.10 Asset Purchase Agreement dated January 25, 2002 for personal property, furnishings, fixtures and equipment, liquor license, 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. 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. 16.1 Letter of the Company's former auditors, Moore Stephens, P.C. dated April 6, 1999 as required by Item 304(a)(3) of Regulation S-B(E) 16.2 Letter of the Company's former auditors, Edward Isaacs & Company LLP dated October 6, 2000 as required by Item 304 (a) (3) of Regulation S-B(F) 33 16.3 Independent auditor's report of Edwards Isaacs & Company LLP dated March 27, 2000 with respect to the financial statements for the year ended January 30, 2000(G) 21 Subsidiaries - The following table indicates the wholly owned subsidiaries of the Company, their respective states of incorporation and the restaurants operated by each State of Name Incorporation Restaurants - ---- ------------- ----------- Chefs International Florida Jack Baker's Palm Beach, Inc. Lobster Shantys Vero Beach and Jensen Beach, Florida Hightstown REB, Inc. New Jersey Jack Baker's Lobster Shantys Pt. Pleasant Beach, Toms River and Hightstown, New Jersey - ---------- (A) Incorporated by reference to exhibit filed with the Company's annual report on Form 10-KSB for the fiscal year ended January 31, 1999. (B) Incorporated by reference to exhibit filed with the Company's annual report on Form 10-KSB for the fiscal year ended January 30, 2000. (C) Incorporated by reference to exhibit filed with the Company's Registration Statement on Form SB-2 (File No. 33-66936). (D) Incorporated by reference to exhibit filed with the Company's annual report on Form 10-K for the fiscal year ended January 28, 1996. (E) Incorporated by reference to exhibit filed with Amendment No. 1 to the Company's current report on Form 8-K/A for April 1, 1999. (F) Incorporated by reference to exhibit filed with the Company's current report on Form 8-K for October 6, 2000. (G) Incorporated by reference to exhibit filed with the Company's annual report on Form 10-KSB for the fiscal year ended January 28, 2001 (B) REPORTS ON FORM 8-K The Company did not file any reports on Form 8-K during the last quarter of the fiscal year ended January 27, 2002. 34 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) CHEFS INTERNATIONAL, INC. By /s/ ANTHONY C. PAPALIA ---------------------------------- Anthony C. Papalia, President, Principal Executive, Financial and accounting officer Date: April 25, 2002 In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. By /s/ ROBERT M. LOMBARDI By /s/ MICHAEL F. LOMBARDI ---------------------------- ---------------------------- Robert M. Lombardi, Chairman Michael F. Lombardi, Of the Board of Directors Director Date: April 25, 2002 Date: April 25, 2002 By /s/ ANTHONY LOMBARDI By /s/ STEPHEN F. LOMBARDI ---------------------------- ---------------------------- Anthony Lombardi, Director Stephen F. Lombardi, Director Date: April 25, 2002 Date: April 25, 2002 By /s/ JOSEPH S. LOMBARDI ---------------------------- Joseph S. Lombardi, Director Date: April 25, 2002 35 INDEPENDENT AUDITOR'S REPORT To the Board of Directors Chefs International, Inc. and Subsidiaries Point Pleasant, New Jersey We have audited the accompanying consolidated balance sheet of Chefs International, Inc. and subsidiaries as of January 27, 2002, and the related consolidated statements of income, stockholders' equity and cash flows for each of the two fiscal years in the period ended January 27, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the 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 27, 2002, and the results of their operations and their cash flows for each of the two fiscal years in the period ended January 27, 2002 in conformity with accounting principles generally accepted in the United States of America. /s/ McGladrey & Pullen, LLP --------------------------- New York, New York March 28, 2002 F-1 CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET JANUARY 27, 2002 - -------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 1,408,062 Investments 355,825 Available-for-sale securities 1,720,802 Miscellaneous receivables 62,468 Inventories 1,144,189 Prepaid expenses 181,459 ------------ TOTAL CURRENT ASSETS 4,872,805 ------------ Property and Equipment, at cost 21,229,149 Less: Accumulated depreciation 8,559,539 ------------ PROPERTY AND EQUIPMENT, NET 12,669,610 ------------ Other Assets: Investments 151,000 Goodwill - net 430,403 Liquor licenses - net 821,788 Equity in life insurance policies 589,862 Deferred income taxes 1,166,000 Other 61,492 ------------ TOTAL OTHER ASSETS 3,220,545 ------------ $ 20,762,960 ============ See notes to consolidated financial statements. F-2 CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (CONTINUED) JANUARY 27, 2002 - -------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes and mortgages payable $ 277,745 Accounts payable 1,172,442 Accrued payroll 196,675 Accrued expenses 462,806 Gift certificates 461,610 ------------ TOTAL CURRENT LIABILITIES 2,571,278 ------------ Notes and Mortgages Payable 1,816,930 ------------ Other Liabilities 618,307 ------------ Stockholders' Equity: Capital stock - common $.01 par value, Authorized 15,000,000 shares, Issued 3,969,508 39,695 Additional paid-in capital 31,549,492 Accumulated deficit (15,739,658) Accumulated other comprehensive (loss) (89,199) Treasury stock (3,885) ------------ TOTAL STOCKHOLDERS' EQUITY 15,756,445 ------------ $ 20,762,960 ============ See notes to consolidated financial statements. F-3 CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED JANUARY 27, 2002 AND JANUARY 28, 2001 2002 2001 - -------------------------------------------------------------------------------- Sales $20,798,333 $20,156,890 Cost of Goods Sold 6,570,094 6,487,675 ----------- ----------- GROSS PROFIT 14,228,239 13,669,215 ----------- ----------- Operating Expenses: Payroll and related expenses 6,253,547 6,016,792 Other operating expenses 4,367,445 4,142,225 Depreciation and amortization 1,108,482 1,104,254 General and administrative expenses 2,036,725 1,792,320 (Gain) on disposal of assets -- (2,089) ----------- ----------- TOTAL OPERATING EXPENSES 13,766,199 13,053,502 ----------- ----------- INCOME FROM OPERATIONS 462,040 615,713 ----------- ----------- Other Income (Expense): Interest expense (115,378) (105,958) Investment income 256,054 208,097 ----------- ----------- OTHER INCOME, NET 140,676 102,139 ----------- ----------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 602,716 717,852 Provision (Credit) for Income Taxes (1,124,293) 85,243 ----------- ----------- INCOME FROM CONTINUING OPERATIONS 1,727,009 632,609 Gain on Disposal of Discontinued Ice Cream Business -- 322,212 ----------- ----------- NET INCOME $ 1,727,009 $ 954,821 =========== =========== Income Per Common Share From Continuing Operations $ 0.42 $ 0.15 =========== =========== Basic Income Per Common Share $ 0.42 $ 0.22 =========== =========== See notes to consolidated financial statements. F-4 CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JANUARY 27, 2002 AND JANUARY 28, 2001
- ------------------------------------------------------------------------------------------------------------------------------------ Accumulated Other Capital Additional Comprehensive Total Number Stock Paid-in Accumulated Income Treasury Stockholders' of Shares Par Value Capital Deficit (Loss) Stock Equity ---------- --------- ------------ ------------ ------------ -------- ------------ Balance at January 30, 2000 4,488,162 $ 44,882 $ 32,304,487 $(18,421,488) $ -- $ -- $ 13,927,881 ------------ Comprehensive Income: Net income -- -- -- 954,821 -- -- 954,821 Net unrealized gains on available-for-sale securities -- -- -- -- 51,043 -- 51,043 ------------ TOTAL COMPREHENSIVE INCOME -- -- -- -- -- -- 1,005,864 ------------ Repurchase and retirement of common stock (233,334) (2,333) (165,667) -- -- -- (168,000) ------------ Stock repurchase program -- -- -- -- -- (8,980) (8,980) ------------ Fractional shares conversion 2,257 22 (22) -- -- -- -- ---------- -------- ------------ ------------ -------- ------- ------------ Balance at January 28, 2001 4,257,085 42,571 32,138,798 (17,466,667) 51,043 (8,980) 14,756,765 ------------ Comprehensive Income: Net income -- -- -- 1,727,009 -- -- 1,727,009 Net unrealized (loss) on available-for-sale securities arising during period -- -- -- -- (52,703) -- (52,703) Reclassification adjustment for gains realized on available-for- sale securities -- -- -- -- (32,117) -- (32,117) Change in fair value of derivatives accounted for as hedges -- -- -- -- (55,422) -- (55,422) ------------ TOTAL COMPREHENSIVE INCOME -- -- -- -- -- -- 1,586,767 ------------ Repurchase and retirement of common stock (262,603) (2,626) (567,270) -- -- -- (569,896) ------------ Stock repurchase program (24,641) (246) (22,040) -- -- 5,095 (17,191) ------------ Fractional shares conversion (333) (4) 4 -- -- -- -- ---------- -------- ------------ ------------ -------- ------- ------------ Balance at January 27, 2002 3,969,508 $ 39,695 $ 31,549,492 $(15,739,658) $(89,199) $(3,885) $ 15,756,445 ========== ======== ============ ============ ======== ======= ============
See notes to consolidated financial statements. F-5 CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JANUARY 27, 2002 AND JANUARY 28, 2001
2002 2001 - ----------------------------------------------------------------------------------------------- Cash Flows From Operating Activities: Net income $ 1,727,009 $ 954,821 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,108,482 1,104,254 Deferred income taxes (1,166,000) -- Gain on sale of assets and investments (55,852) (2,089) Gain on disposal of discontinued business -- (322,212) Changes in assets and liabilities: (Increase) decrease in: Miscellaneous receivables 47,024 (46,455) Inventories (14,929) (165,126) Prepaid expenses (5,272) (23,171) Increase (decrease) in: Accounts payable 173,066 (16,826) Accrued expenses and other liabilities 68,800 268,082 Income taxes payable -- (54,300) ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,882,328 1,696,978 ----------- ----------- Cash Flows From Investing Activities: Purchase of property and equipment (1,444,530) (949,340) Liquor license purchase -- (357,873) Net proceeds from sale of assets -- 2,089 Sale or redemption of investments 525,696 459,500 Purchase of investments (1,116,928) (947,920) Due on sale of discontinued operations - payments -- 570,330 Equity in life insurance policies (44,747) (39,511) Other 11,457 (41,853) ----------- ----------- NET CASH (USED IN) INVESTING ACTIVITIES (2,069,052) (1,304,578) ----------- ----------- Cash Flows From Financing Activities: Proceeds from debt 1,200,000 -- Repayment of debt (177,707) (370,087) Purchase of common stock (569,896) (168,000) Purchase of treasury stock (17,191) (8,980) ----------- ----------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 435,206 (547,067) ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 248,482 (154,667) Cash and Cash Equivalents: Beginning 1,159,580 1,314,247 ----------- ----------- Ending $ 1,408,062 $ 1,159,580 =========== =========== Supplemental Disclosure of Cash Flow Information: Cash payment for: Interest $ 111,629 $ 107,522 =========== =========== Income taxes $ 58,626 $ 136,826 =========== =========== Noncash Transactions: Increase (decrease) in fair value of securities available for sale $ (84,820) $ 51,043 =========== =========== Change in fair value of derivatives accounted for as hedges $ (55,422) $ -- =========== =========== Accounts payable for purchase of property and equipment $ 417,100 $ -- =========== ===========
See notes to consolidated financial statements. F-6 CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business: Chefs International, Inc. and its subsidiaries (the "Company") operate seven seafood restaurants, located in New Jersey and Florida, generally under the trade name, "Lobster Shanty". The Company also operates Escondido's Mexican Restaurant and Moore's Tavern and Restaurant, an eclectic American restaurant. Escondido's and Moore's Tavern are both located in New Jersey. Segment information is not presented since all of the Company's revenue is attributable to a single reportable segment. Principles of Consolidation: The accompanying consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation. Concentrations of Credit Risk: The Company maintains cash balances at several financial institutions in New Jersey and Florida. The balances are insured by the Federal Deposit Insurance Corporation up to $100,000 at each financial institution. Uninsured cash balances totaled approximately $1,172,200. Cash and Cash Equivalents: Cash equivalents are comprised of certain highly liquid investments with a maturity of three months or less when purchased. Investments: Investments consist of certificates of deposit and are classified as current or long-term based on their maturities at the balance sheet date. Available-for-Sale Securities: At January 27, 2002, available-for-sale securities consist of convertible bonds, mutual funds, and equity securities. Available-for-sale securities are carried at fair value with unrealized gains or losses reported in a separate component of stockholders' equity. Realized gains or losses are determined based on the specific identification method. F-7 CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Available-for-Sale Securities (Continued): Details as to available-for-sale securities at January 27, 2002 are as follows: Gross Gross Gross Unrealized Unrealized Fair Cost Gains (Losses) Value ---------- --------- ----------- ---------- Convertible bonds $ 33,450 $ 11,235 $ (1,200) $ 43,485 Mutual funds 1,251,534 9,941 (98,270) 1,163,205 Equity securities 469,595 68,871 (24,354) 514,112 ---------- --------- ----------- ---------- $1,754,579 $ 90,047 $ (123,824) $1,720,802 ========== ========= =========== ========== Inventories: Inventories consist of food, beverages and supplies. Inventories are stated at the lower of cost (determined by the first-in, first-out method) or market. Property and Equipment and Depreciation: Property and equipment are carried at cost. Depreciation is computed over the estimated useful lives of the assets using the straight-line method ranging from 3 to 40 years. Goodwill and Liquor Licenses: Goodwill represents cost in excess of fair value of businesses acquired. Goodwill and liquor licenses are being amortized over an estimated useful life of 40 years under the straight-line method. Impairment: Certain long-term assets of the Company, including goodwill, liquor licenses and property and equipment, are reviewed on a restaurant by restaurant basis at least annually as to whether their carrying value has become impaired. This evaluation is done by comparing the carrying value of the asset to the value of the projected undiscounted 10 year estimate of net cash flow from related operations. Impairment, if any, is measured by the amount that the carrying value of the asset exceeds the fair value usually measured by projected undiscounted net cash flow. Management also re-evaluates annually the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. As of January 27, 2002, management expects these assets to be fully recoverable. F-8 CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Income Taxes: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Advertising: The Company expenses advertising costs as incurred. Advertising costs for fiscal 2002 and 2001 were $471,172 and $500,932, 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. 52-53 Week Period: The Company's year-end is the last Sunday in January. The statements of operations are comprised of a 52-week period both for fiscal 2002 and 2001. 2. NEW ACCOUNTING STANDARDS Effective January 29, 2001, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. Under this guidance, all derivative instruments are recognized as assets or liabilities in the consolidated balance sheet at fair value. The Company has entered into interest rate swap contracts under which the Company agrees to pay fixed-rates of interest. The contracts are considered to be a hedge against changes in the amount of future cash flows associated with the Company's interest payments on variable-rate debt obligations. Accordingly, the interest rate swap contracts are designated as cash flow hedges and are reflected at fair value in the consolidated balance sheet and the related gains or losses on these contracts are deferred in shareholders' equity (as a component of accumulated other comprehensive income (loss)). To the extent that any of these contracts are not considered to be perfectly effective in offsetting the change in the value of the interest payments being hedged, any changes in fair value relating to the ineffective portion of these contracts are immediately recognized in income. The net effect of this accounting on the Company's operating results is that interest expense on the portion of variable-rate debt being hedged is generally recorded based on fixed interest rates. F-9 CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 2. NEW ACCOUNTING STANDARDS (Continued) The value of the swaps upon initial application of SFAS 133 was not material. During 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." Effective January 28, 2002, the Company will no longer be required to amortize indefinite life goodwill and intangible assets (liquor licenses) as a charge to earnings. In addition, the Company will be required to conduct an annual review of goodwill and other intangible assets for potential impairment. The Company does not currently anticipate having to record a charge to earnings for the potential impairment of goodwill or other intangible assets as a result of adopting these new standards. 3. INVENTORIES Inventories consist of the following: Food $ 564,547 Beverages 149,735 Supplies 429,907 ----------- $ 1,144,189 =========== 4. PROPERTY AND EQUIPMENT Property and equipment consist of the following: Land $ 3,270,041 Buildings and improvements, including leaseholds 15,529,046 Furniture and equipment 2,224,453 Construction in progress 102,774 China, glassware and utensils(a) 102,835 ----------- $21,229,149 =========== (a) Carried at original cost for each restaurant. All replacement purchases are charged to expense as incurred. Depreciation expense was $1,054,739 and $1,050,495 for fiscal 2002 and 2001, respectively. 5. INTANGIBLE ASSETS Intangible assets consist of: Liquor Goodwill Licenses --------- ----------- Cost $ 949,820 $ 1,195,180 Less: Accumulated amortization 519,417 373,392 --------- ----------- $ 430,403 $ 821,788 ========= =========== Amortization expense was $53,743 and $53,758 for fiscal 2002 and 2001, respectively. F-10 CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 6. NOTES AND MORTGAGES PAYABLE Mortgages payable in various monthly installments to amortize the mortgages at the rate of $120,000 annually, through September 2011 with interest at LIBOR plus 2.00%, collateralized by real estate located in Pt. Pleasant Beach, New Jersey $1,195,000 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 773,609 Mortgage payable in various monthly installments to amortize the mortgage at the rate of $105,000 annually, through December 2002 with interest at LIBOR plus 1.50%, collateralized by real estate located in Toms River, New Jersey 93,000 Mortgage payable in monthly installments of $2,067 through May 2003, plus interest at LIBOR plus 2.25%, collateralized by real estate located in Toms River, New Jersey 33,066 ---------- 2,094,675 Less: Current maturities 277,745 ---------- $1,816,930 ========== Annual maturities for fiscal years 2004 through 2007 are $171,491, $166,346, $170,770 and $174,909, respectively. At January 27, 2002, the Company has a $500,000 line of credit which is collateralized by real estate located in Toms River, New Jersey. The line is due June 30, 2003 and bears interest at LIBOR plus 2.00%. At January 27, 2002, there were no amounts used under the line of credit. LIBOR was 1.86% at January 27, 2002. As of January 27, 2002, the Company had interest rate swap agreements relating to substantially all of the Company's variable rate debt. Unrealized net losses under the interest rate swap agreements totaled approximately $55,000 at January 27, 2002. These unrealized net losses are recorded in Accumulated Other Comprehensive Income (Loss) in the consolidated balance sheet. Since the Company does not intend to terminate the swap agreements during the upcoming year, the Company does not anticipate that any of these unrealized losses will be reclassified into earnings in the next twelve months. No gain or loss was recognized in earnings during the year ended January 27, 2002 as a result of hedge ineffectiveness. All of the Company's mortgages and loans are with the same financial institution. The loan covenant governing the borrowings includes, among other items, requirements relating to tangible net worth, capital expenditures and working capital components. F-11 CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 7. INVESTMENT INCOME The components of investment income are summarized as follows: 2002 2001 -------- -------- Interest income $ 68,718 $160,624 Dividends 131,484 45,214 Realized gain on sales of available-for-sale securities 55,852 2,259 -------- -------- $256,054 $208,097 ======== ======== 8. RETIREMENT PROGRAMS The Company has a non-qualified supplemental retirement program which provides life insurance to certain eligible employees. The Company is the owner of all cash values of the policies. The death benefit is split, reimbursing the Company for premiums paid with the balance paid to the beneficiary designated by the employee. Employees vest in the program after ten years, with the option to take ownership of the policy at that time or let the Company continue to fund the policy. The Company has recorded, as a long-term asset in the accompanying balance sheet, its equity in life insurance for premiums advanced and has included in other long-term liabilities the Company's estimated liability for the amount of the equity in life insurance which the Company will be required to turn over to employees. Additionally, the Company has an agreement with a former director/employee which provides for the payment of $20,000 per year through 2007. The discounted present value of this agreement is included in other long-term liabilities. The amount has been partially insured with a life insurance contract owned by the Company. The Company's expense for these plans was $44,521 and $42,840, for fiscal 2002 and 2001, respectively. 9. EXECUTIVE INCENTIVE BONUS PLAN In Fiscal 2001, the Board of Directors approved an executive incentive bonus plan which provides eligible employees an annual cash bonus if the Company achieves certain financial goals. The charge to operations applicable to the incentive plan for fiscal 2002 and 2001 was $63,929 and $79,910, respectively. 10. TRANSACTIONS WITH RELATED PARTIES In December 1999, the Company entered into an agreement with a company controlled by the principal shareholders of the Company. The agreement called for the Company to provide consulting to the officers and employees of the company concerning all matters relating to the operation of a restaurant and tavern known as Moore's Inn. The agreement provided for the Company to receive fees of $1,800 per week. Consulting income for fiscal 2001, pursuant to this agreement, was $6,093. The agreement terminated on February 23, 2000, when the Company acquired the assets of Moore's Inn. F-12 CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 10. TRANSACTIONS WITH RELATED PARTIES (Continued) Upon acquiring the assets of Moore's Inn the Company entered into a five-year lease for the restaurant property with a partnership owned by the principal shareholders of the Company. The lease requires minimum annual rentals of $90,000, plus percentage rent of 6% of sales exceeding $1.5 million. The lease contains three five-year renewal options. On October 1, 2001, the Company entered into a five-year lease for the property adjacent to Moore's Inn for the Company's new restaurant, Escondido's Mexican Restaurant (Note 16). The terms of this lease are the same as the lease for Moore's Inn. Rent expense paid pursuant to these leases for fiscal 2002 and 2001 was $150,859 and $114,497, respectively, which included percentage rent of $45,859 and $30,187, respectively. The Company has a retirement agreement with a former director/employee (see Note 8). 11. COMMITMENTS AND CONTINGENCIES Leases: The Company leases restaurants, parking lots and equipment under operating leases expiring at various times through fiscal 2009. Minimum future rental payments under noncancelable operating leases as of January 27, 2002 are as follows: 2003 $ 329,733 2004 311,572 2005 312,632 2006 313,692 2007 287,177 Thereafter 134,682 ----------- $ 1,689,488 =========== Total rent expense, including rent paid to related parties, was $352,481 and $296,926, for fiscal 2002 and 2001, respectively. F-13 CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 11. COMMITMENTS AND CONTINGENCIES (Continued) Employment Agreements: The Company has employment agreements through March 2005 with two employees for annual amounts ranging from $99,100 to $170,800. 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. Stock Repurchase Plan: On May 24, 2000 the Board of Directors authorized the Company to repurchase over a two-year period up to 400,000 shares of its outstanding stock at market price. Through January 27, 2002, the Company had repurchased 28,191 shares for $26,171, of which 24,641 shares had been retired. Additionally, on August 14, 2001 the Board of Directors authorized the Company to purchase a block of 262,603 common shares for $569,896. These common shares were purchased on August 29, 2001. 12. GAIN ON DISPOSAL OF DISCONTINUED ICE CREAM BUSINESS On February 20, 1997, the Company sold 95% of the common stock of Mister Cookie Face ("MCF"), its ice cream production segment, to a former director for an aggregate purchase price of $1,600,000, consisting of a $500,000 cash payment and three notes totaling $1,100,000. The first note for $100,000 was due on or before March 24, 1997, the second note for $500,000, was due in installments through July 1, 2000, and the third note for $500,000 was due on or before February 20, 2004, with mandatory prepayments based on MCF's cash flow. Based on the estimated present value of the payments, management recorded a valuation allowance of $601,050 against the second and third notes. The 5% of MCF common stock retained by the Company was valued at $35,000. On June 30, 2000, the Company sold both Notes B and C and its 5% holding of MCF common stock to MCF for a cash payment of $367,163 and the return of 233,334 shares of the Company's common stock owned by the president of MCF. These shares were subsequently cancelled by the Company. The Company recognized a gain from discontinued operations of approximately $322,000 in its financial statements for the year ended January 28, 2001, which represents partial recoveries of the valuation allowance previously provided for against Notes B and C. F-14 CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 12. GAIN ON DISPOSAL OF DISCONTINUED ICE CREAM BUSINESS (Continued) Cash received for Notes B and C prior to June 30, 2000 were applied to principal and interest based on the discounted note payment schedules, which resulted in an additional $5,848 of interest income being recognized in fiscal 2001 and was applied as follows: Interest income $ 44,698 ======== Average recorded investment in loans $ 93,565 ======== Cash basis interest income $ 46,667 ======== 13. EARNINGS PER SHARE The weighted average number of shares outstanding used to compute basic earnings per share for fiscal 2002 and 2001 was 4,129,205 and 4,350,799, respectively. 14. INCOME TAXES Provision (credit) for income taxes consist of the following: 2002 2001 ----------- -------- Current - Federal $ 3,338 $ 19,000 - State 38,369 66,243 Deferred (1,166,000) -- ----------- -------- $(1,124,293) $ 85,243 =========== ======== F-15 CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 14. INCOME TAXES (Continued) The significant components of deferred tax assets and liabilities as of January 27, 2002 are as follows: Deferred Tax Assets: Tax loss carryforwards $ 2,276,000 Alternative minimum tax credit carryforward 38,000 Other 94,000 ----------- Gross deferred tax assets 2,408,000 Valuation allowance 1,230,000 ----------- TOTAL DEFERRED TAX ASSETS 1,178,000 Deferred Tax Liability: Other 12,000 ----------- NET DEFERRED TAX ASSETS $ 1,166,000 =========== As of January 27, 2002, a valuation allowance of $1,230,000 has been provided for because, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. The net change in the valuation allowance for fiscal 2002 was a reduction of $1,742,000. During fiscal 2002, the Company recognized a deferred tax asset of $1,166,000 as management determined that it is more likely than not that future taxable income will be sufficient to partially utilize the net operating loss carryforwards. The remaining part of the reduction for 2002 was due to the utilization and expiration of tax loss carryforwards. The Company has available at January 27, 2002, operating loss carryforwards as follows: Year of Expiration ------------------ 2003 $ 2,072,345 2004 2,942,316 2005 472,062 2006 220,595 2007 215,047 2008 196,704 2009 155,075 2010 103,553 2011 144,559 2012 88,405 ----------- $ 6,610,661 =========== F-16 CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 14. INCOME TAXES (Continued) The difference between the tax provision at the statutory Federal income tax rate and the tax provision attributable to income from continuing operations before income tax for the years ended January 27, 2002 and January 28, 2001 are as follows: 2001 2000 ------ ----- Federal statutory rate 34.0% 34.0% State taxes net of Federal benefit 5.0 5.0 Valuation allowance change 11.2 23.5 Deferred tax asset recognized (193.4) -- Operating loss carryforwards (43.3) (50.7) ------ ----- EFFECTIVE RATE (186.5)% 11.8% ====== ===== 15. FINANCIAL INSTRUMENTS The carrying amounts reflected in the consolidated balance sheet for cash and cash equivalents, investments, receivables and notes and mortgages payable approximate their respective fair values. Fair values are based primarily on quoted prices for those or similar instruments. 16. SUBSEQUENT EVENTS On January 29, 2002, the Company opened its tenth restaurant, another Escondido's Mexican Restaurant. The Company had previously entered into a five-year lease for the restaurant property with a partnership owned by the principal shareholders of the Company (see Note 10). On January 25, 2002, the Company entered into an agreement to acquire for $800,000 the furniture, fixtures, equipment, liquor license and franchising rights of a restaurant business located in Florida known as Mr. Manatee's Casual Grille. The Company anticipates that the acquisition will be completed by April 2002. In connection with the acquisition, the Company entered into a five-year lease, effective April 1, 2002, which requires minimum annual rentals of $96,000. The lease contains three five-year renewal options and includes an option for the Company to purchase the property during the first term of the lease for $1,075,000. F-17 EX-10.4.1 3 c24241_ex10-41.txt LOAN AGREEMENT EXHIBIT 10.4.1 [FIRST UNION LOGO] LOAN AGREEMENT FIRST UNION NATIONAL BANK 190 RIVER ROAD SUMMIT, NEW JERSEY 07901 (Hereinafter referred to as the "Bank") CHEFS INTERNATIONAL, INC 62 BROADWAY POINT PLEASANT BEACH, NEW JERSEY 08742 (Individually and collectively "Borrower) This Loan Agreement ("Agreement) is entered into September 7, 2001, by and between Bank and Borrower. This Agreement amends and restates in its entirety that certain Loan Agreement dated June 23, 2000 and applies to the loan or loans (individually and collectively, the "Loan') evidenced by one or more promissory notes dated September 7, 2001 or other notes subject hereto, as modified from time to time (whether one or more, the "Note") and all Loan Documents. The terms "Loan Documents" and "Obligations," as used in this Agreement, are defined in the Note. Relying upon the covenants, agreements, representations and warranties contained in this Agreement, Bank is willing to extend credit to Borrower upon the terms and subject to the conditions set forth herein, and Bank and Borrower agree as follows: REPRESENTATIONS. Borrower represents that from the date of this Agreement and until final payment in full of the Obligations: ACCURATE INFORMATION. All information now and hereafter furnished to Bank is and will be true, correct and complete. Any such information relating to Borrower's financial condition will accurately reflect Borrower's financial condition as of the date(s) thereof, (including all contingent liabilities of every type), and Borrower further represents that its financial condition has not changed materially or adversely since the date(s) of such documents. AUTHORIZATION; NON-CONTRAVENTION. The execution, delivery and performance by Borrower and any guarantor, as applicable, of this Agreement and other Loan Documents to which it is a party are within its power, have been duly authorized as may be required and, if necessary, by making appropriate filings with any governmental agency or unit and are the legal, binding, valid and enforceable obligations of Borrower and any guarantors; and do not (i) contravene, or constitute (with or without the giving of notice or lapse of time or both) a violation of any provision of applicable law, a violation of the organizational documents of Borrower or any guarantor, or a default under any agreement, judgment, injunction, order, decree or other instrument binding upon or affecting Borrower or any guarantor, (ii) result in the creation or imposition of any lien (other than the lien(s) created by the Loan Documents) on any of Borrower's or any guarantors assets, or (iii) give cause for the acceleration of any obligations of Borrower or any guarantor to any other creditor. ASSET OWNERSHIP. Borrower has good and marketable title to all of the properties and assets reflected on the balance sheets and financial statements supplied Bank by Borrower, and all such properties and assets are free and clear of mortgages, security deeds, pledges, liens, charges, and all other encumbrances, except as otherwise disclosed to Bank by Borrower in writing and approved by Bank ("Permitted Liens"). To Borrower's knowledge, no default has occurred under any Permitted Liens and no claims or interests adverse to Borrower's present rights in its properties and assets have arisen. DISCHARGE OF LIENS AND TAXES. Borrower has duly filed, paid and/or discharged all taxes or other claims which may become a lien on any of its property or assets, except to the extent that such items are being appropriately contested in good faith and an adequate reserve for the payment thereof is being maintained. SUFFICIENCY OF CAPITAL. Borrower is not, and after consummation of this Agreement and after giving effect to all indebtedness incurred and liens created by Borrower in connection with the Note and any other Loan Documents, will not be, insolvent within the meaning of 11 U.S.C. ss. 101 (32). COMPLIANCE Page 1 of 7 WITH LAWS. Borrower is in compliance in all respects with all federal, state and local laws, rules and regulations applicable to its properties, operations, business, and finances, including, without limitation, any federal or state laws relating to liquor (including 18 U.S.C. ss. 3617, et seq.) or narcotics (including 21 U.S.C. ss. 801, et seq.) and/or any commercial crimes; all applicable, federal, state and local laws and regulations intended to protect the environment; and the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), if applicable. ORGANIZATION AND AUTHORITY. Each corporate or limited liability company Borrower and/or guarantor, as applicable, is duly created, validly existing and in good standing under the laws of the state of its organization, and has all powers, governmental licenses, authorizations, consents and approvals required to operate its business as now conducted. Each corporate or limited liability company Borrower and/or guarantor, as applicable, is duly qualified, licensed and in good standing in each jurisdiction where qualification or licensing is required by the nature of its business or the character and location of its property, business or customers, and in which the failure to so qualify or be licensed, as the case may be, in the aggregate, could have a material adverse effect on the business, financial position, results of operations, properties or prospects of Borrower or any such guarantor. NO LITIGATION. There are no pending or threatened suits, claims or demands against Borrower or any guarantor that have not been disclosed to Bank by Borrower in writing, and approved by Bank AFFIRMATIVE COVENANTS. Borrower agrees that from the date hereof and until final payment in full of the Obligations, unless Bank shall otherwise consent in writing, Borrower will: ACCESS TO BOOKS AND RECORDS. Allow Bank, or its agents, during normal business hours, access to the books, records and such other documents of Borrower at Bank shall reasonably require, and allow Bank to make copies thereof at Bank's expense. BUSINESS CONTINUITY. Conduct its business in substantially the same manner and locations as such business is now and has previously been conducted. CERTIFICATE OF FULL COMPLIANCE FROM ACCOUNTANT. Deliver to Bank, with the financial statements required herein, a certification by Borrower's independent certified public accountant that Borrower is in full compliance with the Loan Documents. COMPLIANCE WITH OTHER AGREEMENTS. Comply with all terms and conditions contained in this Agreement, and any other Loan Documents, and swap agreements, if applicable, as defined in the 11 U.S.C. ss. 101. ESTOPPEL CERTIFICATE. Furnish, within 15 days after request by Bank, a written statement duly acknowledged of the amount due under the Loan and whether offsets or defenses exist against the Obligations. INSURANCE. Maintain adequate insurance coverage with respect to its properties and business against loss or damage of the kinds and in the amounts customarily insured against by companies of established reputation engaged in the same or similar businesses including, without limitation, commercial general liability insurance, workers compensation insurance, and business interruption insurance; all acquired in such amounts and from such companies as Bank may reasonably require. MAINTAIN PROPERTIES. Maintain, preserve and keep its property in good, repair, working order and condition, making all needed replacements, additions and improvements thereto, to the extent allowed by this Agreement. NON-DEFAULT CERTIFICATE FROM BORROWER. Deliver to Bank, with the Financial Statements required below, a certificate signed by Borrower, in the form attached hereto as Exhibit A, if Borrower is an individual, or by a principal financial officer of Borrower warranting that no "Default' as specified in the Loan Documents nor any event which, upon the giving of notice or lapse of time or both, would constitute such a Default, has occurred and demonstrating Borrower's compliance with the financial covenants contained herein. NOTICE OF DEFAULT AND OTHER NOTICES. (A) NOTICE OF DEFAULT. Furnish to Bank immediately upon becoming aware of the existence of any condition or event which constitutes a Default (as defined in the Loan Documents) or any event which, upon the giving of notice or lapse of time or both, may become a Default, written notice specifying the nature and period of existence thereof and the action which Borrower is taking or proposes to take with respect thereto. (b) OTHER NOTICES. Promptly notify Bank in writing of (i) any material adverse change in its financial condition or its business; (ii) any default under any material agreement, contract or other instrument to which it is a party or by which any of its properties are bound, or any acceleration of the maturity of any indebtedness owing by Borrower; (iii) any material adverse claim against or affecting Borrower or any part of its properties; (iv) the commencement of, and any material determination in, any litigation with any third party or any proceeding before any governmental agency or unit affecting Borrower; and (v) at least 30 days prior thereto, any change in Borrower's name or address as shown above, and/or any change in Borrower's structure. OTHER FINANCIAL INFORMATION. Deliver promptly such other information regarding the operation, business affairs, and financial condition of Borrower which Bank may reasonably request. Page 2 of 7 PAYMENT OF DEBTS. Pay and discharge when due, and before subject to penalty or further charge, and otherwise satisfy before maturity or delinquency, all obligations, debts, taxes, and liabilities of whatever nature or amount, except those which Borrower in good faith disputes. REPORTS AND PROXIES. Deliver to Bank, promptly, a copy of all financial statements, reports, notices, and proxy statements, sent by Borrower to stockholders, and all regular or periodic reports required to be filed by Borrower with any governmental agency or authority. NEGATIVE COVENANTS. Borrower agrees that from the date of this Agreement and until final payment in full of the Obligations, unless Bank shall otherwise consent in writing, Borrower will not: CHANGE IN FISCAL YEAR. Change its fiscal year. CHANGE OF CONTROL. Borrower shall not make a material change of ownership that effectively changes control of Borrower or changes the current management structure and personnel. ENCUMBRANCES. Create, assume, or permit to exist any mortgage, security deed, deed of trust, pledge, lien, charge or other encumbrance on any of its assets, whether now owned or hereafter acquired, other than: (i) security interests required by the Loan Documents; (ii) liens for taxes contested in good faith; (iii) liens accruing by law for employee benefits; (iv) Permitted Liens; or (v) indebtedness not to exceed $150,000.00 in any fiscal year for the purpose of purchasing machinery and equipment. GUARANTEES. Guarantee or otherwise become responsible for obligations of any other person or persons other than the endorsement of checks and drafts for collection in the ordinary course of business. DEFAULT ON OTHER CONTRACTS OR OBLIGATIONS. Default on any material contract with or obligation when due to a third party or default in the performance of any obligation to a third party incurred for money borrowed. GOVERNMENT INTERVENTION. Permit the assertion or making of any seizure, vesting or intervention by or under authority of any government by which the management of Borrower or any guarantor is displaced of its authority in the conduct of its respective business or its such business is curtailed or materially impaired. JUDGMENT ENTERED. Permit the entry of any monetary judgment or the assessment against, the filing of any tax lien against, or the issuance of any writ of garnishment or attachment against any property of or debts due Borrower in an amount in excess of $50,000.00 which is not discharged or execution is not stayed within 30 days of entry. PREPAYMENT OF OTHER DEBT. Retire any long-term debt entered into prior to the date of this Agreement at a date in advance of its legal obligation to do so. RETIRE OR REPURCHASE CAPITAL STOCK. Retire or otherwise acquire any of its capital stock, with the exception of 400,000 shares at market value through May 15, 2002 approved under waiver letter dated May 15, 2000, and 270,000 shares at $2.10 per share (above market) as approved under waiver letter dated August 22,2001. ANNUAL FINANCIAL STATEMENTS Borrower shall deliver to Bank, within 120 days after the close of each fiscal year, audited financial statements reflecting its operations during such fiscal year, including, without limitation, a balance sheet, profit and loss statement and statement of cash flows, with supporting schedules and in reasonable detail, prepared in conformity with generally accepted accounting principles, applied on a basis consistent with that of the preceding year. If audited statements are required, all such statements shall be examined by an independent certified public accountant acceptable to Bank. The opinion of such independent certified public accountant shall not be acceptable to Bank if qualified due to any limitations in scope imposed by Borrower or any other person or entity. Any other qualification of the opinion by the accountant shall render the acceptability of the financial statements subject to Bank's approval. If audited statements are required, Borrower's accountant shall provide Bank with a written acknowledgment of the Bank's reliance upon the statements in accordance with N.J.S. 2A:53A-25. PERIODIC FINANCIAL STATEMENTS. Borrower shall deliver to Bank compiled semi-annually financial statements including, without limitation, a balance sheet, profit and loss statement and statement of cash flows, with supporting schedules, as soon as available and in any event within 60 days after the close of each such period; all in reasonable detail and prepared in conformity with generally accepted accounting principles, applied on a basis consistent with that of the preceding year. Such statements shall be certified as to their correctness by a principal financial officer of Borrower and in each case, if audited statements are required, subject to audit and year-end adjustments. FINANCIAL COVENANTS. Borrower agrees to the following provisions from the date hereof until final payment in full of the Obligations, unless Bank shall otherwise consent in writing, and the Tangible Net Worth covenant shall be calculated on a consolidated basis, using the financial information for Borrower, Page 3 of 7 its subsidiaries, affiliates and its holding or parent company, as applicable: FUNDS FLOW COVERAGE RATIO. Borrower shall, at all times, maintain a Funds Flow Coverage Ratio of not less than 1.20 to 1.00, measured at fiscal year-end. "Funds Flow Coverage Ratio" shall mean the sum of net profit, depreciation, amortization and interest expense minus all dividends and Maintenance Capital Expenditures divided by the sum of all current maturities of long-term debt, current maturities of capital lease obligations and interest expense. "Maintenance Capital Expenditures" is defined as those expenditures required on an annual basis to maintain existing restaurant locations. TANGIBLE NET WORTH. Borrower shall, from closing until the day before fiscal year-end 2002, maintain an Effective Tangible Net Worth of not less than $12,500,000.00, measured semi-annually. At all times thereafter, the minimum required Effective Tangible Net Worth shall increase by not less than $50,000.00 each fiscal year-end. "Tangible Net Worth" shall mean total assets minus total liabilities. For purposes of this computation, the aggregate amount of any intangible assets of Borrower including, without limitation, goodwill, franchises, licenses, patents, trademarks, trade names, copyrights, service marks, brand names and any amounts due from officers, affiliates and/or stockholders, shall be subtracted from total assets, and total liabilities shall exclude debt fully subordinated to Bank on terms and conditions acceptable to Bank. DEPOSIT RELATIONSHIP. Borrower shall maintain its primary depository account with Bank. REQUIRED HEDGE. Borrower shall hedge the Loan's floating interest expense for the full term of the Loan by maintaining an interest rate swap, cap or collar with Bank or other counterparty acceptable to Bank in a notional amount equal to the then principal balance of the Loan and providing for a fixed rate satisfactory to Bank, and containing such other items and conditions as shall be reasonably acceptable to Bank. SENIOR LIABILITIES TO EFFECTIVE TANGIBLE NET WORTH RATIO. Borrower shall, at all times, maintain a ratio of Senior Liabilities to Effective Tangible Net Worth of not more than 0.50 to 1.00, measured semi-annually. "Senior Liabilities" shall mean the sum of total liabilities, including capitalized leases and all reserves for deferred taxes and other deferred sums appearing on the liabilities side of a balance sheet, in accordance with generally accepted accounting principles applied on a consistent basis, excluding debt fully subordinated to Bank on terms and conditions acceptable to Bank. "Effective Tangible Net Worth" shall mean total assets minus Senior Liabilities. For purposes of this computation, the aggregate amount of any intangible assets of Borrower including without limitation, goodwill, franchises, licenses, patents, trademarks, trade names, copyrights, service marks, brand names and any amounts due from officers, affiliates and/or stockholders, shall be subtracted from total assets. "Total Liabilities" shall mean all liabilities of Borrower, including capitalized leases and all reserves for deferred taxes and other deferred sums appearing on the liabilities side of a balance sheet of Borrower, in accordance with generally accepted accounting principles applied on a consistent basis. LIQUIDITY REQUIREMENT. Borrower shall, at all times, maintain Liquid Assets of not less than $500,000.00. "Liquid Assets" shall mean the sum of all cash, time deposits and marketable securities. CONDITIONS PRECEDENT. The obligations of Bank to make the loan and any advances pursuant to this Agreement are subject to the following conditions precedent: ADDITIONAL DOCUMENTS. Receipt by Bank of such additional supporting documents as Bank or its counsel may reasonably request. IN WITNESS WHEREOF, Borrower and Bank, on the day and year first written above, have caused this Agreement to be executed under seal. CHEFS INTERNATIONAL, INC By: /s/ Anthony C. Papalia (SEAL) ----------------------------------- Anthony C. Papalia, President FIRST UNION NATIONAL BANK By: /s/ Joseph Lebel ----------------------------------- Joseph Lebel, Senior Vice President EXHIBIT A NON-DEFAULT CERTIFICATE Page 4 of 7 EXHIBIT A NON-DEFAULT CERTIFICATE In accordance with the terms of the Loan Documents dated September 7, 2001 by and between First Union National Bank and Chefs International, Inc ("Borrower"), I hereby certify that: 1. I am a principal financial officer of Borrower; 2. The enclosed financial statements are prepared in accordance with generally accepted accounting principles; 3. No Default (as defined in the Loan Documents) or any event which, upon the giving of notice or lapse of time or both, would constitute such a Default, has occurred. 4. Borrower is in compliance with the Financial Covenant(s) set forth in the Loan Documents, as demonstrated by the calculations contained in the Covenant Compliance Certificate attached hereto as Schedule 1. /s/ Anthony C. Papalia - ------------------------ Name: Anthony C. Papalia Title: President Page 5 of 7 SCHEDULE 1 COVENANT COMPLIANCE CERTIFICATE Borrower Name: Chefs International, Inc For the fiscal _______________ ended _______________ ALL CAPITALIZED TERMS USED BUT NOT DEFINED HEREIN SHALL HAVE THE MEANINGS GIVEN IN THE LOAN DOCUMENTS. COVENANT ACTUAL REQUIRED - -------- ------ -------- FUNDS FLOW COVERAGE RATIO NOT LESS THAN 1.20 TO 1.00 (a) net income ______ (b) depreciation ______ (c) Amortization ______ (d) interest expense ______ (e) dividends ______ (f) Maintenance Capital Expenditures ______ (g) CMLTD* (h) CMCLO** the sum of (a) plus (b) plus (c) plus (d) minus (e) minus (f) divided by the sum of (g) plus (h) plus (d) equals Funds Flow Coverage Ratio of ______ COMPLIANCE? YES NO TANGIBLE NET WORTH [$12,500,000.00, PLUS $50,000.00 (a) total assets ______ EACH FISCAL YEAR-END THEREAFTER] (b) intangible assets ______ (c) Total Liabilities ______ (d) CAOAS*** ______ the sum of (a) minus(b) minus (c) minus (d) equals Tangible Net Worth of _____ COMPLIANCE? YES NO LIQUIDITY REQUIREMENT (Not Pledged) NOT LESS THAN $500,000.00 (a) cash in Banks ______ (b) time deposit ______ (c) marketable securities (US Gov't) ______ Sum of (a) plus (b) plus (c) equals Liquid Assets of: ______ COMPLIANCE? YES NO - ---------- * Current Maturities of Long Term Debt ** Current Maturities of Capital Lease Obligations *** Current Amounts due from Officers, Affiliates, and/or Stockholders Page 6 of 7 SENIOR LIABILITIES TO EFFECTIVE TANGIBLE NET WORTH RATIO NOT MORE THAN .50 TO 1.00 (a) Senior Liabilities ______ (b) total assets ______ (c) intangible assets ______ (d) CAOAS* ______ (a) divided by the sum of (b) minus (a) minus (c) equals Senior Liabilities to Effective Tangible Net Worth of ______ COMPLIANCE? YES NO - ---------- * Current Amounts due from Officers, Affiliates, and/or Stockholders Page 7 of 7 EX-10.5.1 4 c24241_ex10-51.txt LEASE AGREEMENT Exhibit 10.5.1 LEASE AGREEMENT Prepared by: --------------------- Anthony Mancuso, Esq. This Agreement is made on October 1, 2001 BETWEEN Moore's Realty Associates, a New Jersey partnership residing or located at 1862 Oak Tree Road in the Township of Edison in the County of Middlesex and the State of New Jersey, herein designated as the Landlord, AND Chefs International, Inc. residing or located at 62 Broadway in the Borough of Pt. Pleasant Beach in the County of Ocean and the State of New Jersey, herein designated as the Tenant; WITNESSETH THAT, the Landlord does hereby lease to the Tenant and the Tenant does hereby rent from the Landlord the following described premises: That portion of Block 85.11, Lot 21 commonly known as "Building B", located at 402 West Main Street, Freehold Township, Monmouth County, upon which the tenant intends to construct a Mexican theme style restaurant, as well as the non-exclusive right to utilize common areas existing on and adjacent to the property and identified on the attached Schedule A as the parking areas, plaza, clocktower, reflecting pool, refuse area and raised planter. This lease shall be construed to allow tenant the non-exclusive right to utilize other, unnamed common areas existing upon Lot 21. The term is for five (5) years commencing on the date that a Certificate of Occupancy for Building B is issued by the Township. The premises are to be used and occupied only and for no other purpose than the operation of a restaurant and tavern. UPON THE FOLLOWING CONDITIONS AND COVENANTS: 1ST: The Tenant covenants and agrees to pay to the Landlord rent as set forth in paragraph 28. 2ND: The Tenant has entered into this lease without any representation on the part of the Landlord as to the condition of the land. The Tenant shall take good care of the premises when constructed and shall at the Tenant's own cost and expenses, make all repairs, including painting and decorating, and shall maintain the premises in good condition and state of repair, and at the end or other expiration of the term hereof, shall deliver up the rented premises in good order and condition, wear and tear from a reasonable use thereof, and damage by the elements not resulting from the neglect or fault of the Tenant, excepted. The Tenant shall neither encumber nor obstruct the sidewalks, driveway, yards, entrances, hallways and stairs, but shall keep and maintain the same in a clean condition, free from debris, trash, refuse, snow and ice. 3RD: The Tenant shall promptly comply with all laws, ordinances, rules, regulations, requirements and directives of the Federal, State and Municipal Governments or Public Authorities and of all their departments, bureaus and subdivisions, applicable to and affecting the said premises, their use and occupancy, for the correction, prevention and abatement of nuisances, violations or other grievances in, upon or connected with the said premises, during the term hereof; and shall promptly comply with all orders, regulations, requirements and directives of the Board of Fire Underwriters or similar authority and or any insurance companies which have issued or are about to issue policies of insurance covering the said premises and its contents, for the prevention of fire or other casualty, damage or injury, at the Tenant's own cost and expense. 4TH: The Tenant shall not assign, mortgage or hypothecate this lease, nor sublet or sublease the premises or any part thereof; nor occupy or use the leased premises or any part thereof, nor permit or suffer the same to be occupied or used for any purposes other than as herein limited, nor for any purpose deemed unlawful, or extra hazardous, on account of fire or other casualty. 5TH: No alterations, additions or improvements shall be made, and no climate regulation, air conditioning, cooling, heating or sprinkler systems, television or radio antennas, heavy equipment, apparatus and fixtures, shall be installed in or attached to the leased premises, without the written consent of the Landlord. Unless otherwise provided herein, all such alterations, additions or improvements and systems, when made, installed in or attached to the said premises, shall belong to and become the property of the Landlord and shall be surrendered with the premises and as part thereof upon the expiration or sooner termination of this lease, without hindrance, molestation or injury. The landlord consents to the alterations and improvements to be constructed by tenant as set forth in plans and specifications with revisions through September 10, 2001, consisting of 31 sheets and prepared by Barlo & Associates, PA. 6TH: Beginning on October 1, 2001 and throughout the term hereof, Tenant shall, at its own cost and expense, provide and keep in force General Liability Insurance insuring both Landlord and Tenant, as additional insured, against claims for death and bodily injury and property damage, fire, flood, wind, hurricane and other hazard and/or casualty coverage for the building and common areas, in amounts and of types acceptable to the Landlord. Liability coverage shall include occurrences occurring in the exterior common areas; including parking areas, the plaza, the clock tower, raised planter, the reflecting pool and the refuse area. All risk of loss to the Premises on and after October 1, 2001 shall be with Tenant. If any loss to the Premises occurs, the policy proceeds shall be payable to the Landlord and shall be made available to rebuild or repair the building. If the Premises shall be damaged by fire, the elements, or other casualty, then same shall be repaired as speedily as practicable. The policy of insurance shall be in a company approved by the State of New Jersey, and Tenant shall, prior to the start of construction, furnish Landlord with a Certificate of Insurance evidencing such coverage. Tenant shall have the right to provide coverage as set forth above by providing separate or multiple policies providing basic coverage and excess umbrella coverage, provided that the total insurance coverage is in an amount acceptable to the Landlord. Tenant shall also maintain business interruption insurance in an amount including, but not limited, to the annual base rent payable to Landlord. If the premises shall be partially damaged by fire, the elements, or other casualty, and in the opinion of the Tenant, the premises be so extensively and substantially damaged as to render them untenantable, then the rent shall cease until such time as the premises shall be made tenantable by the Landlord. However, if, in the opinion of the Tenant, the premises be totally destroyed or so extensively and substantially damaged as to require practically a rebuilding thereof, then the rent shall be paid up to the time of such destruction and then and from thenceforth this lease shall come to an end. In no event however, shall the provisions of this clause become effective or be applicable, if the fire or other casualty and damage shall be the result of the carelessness, negligence, or improper conduct of the Tenant or the Tenant's agents, employee, guests, licensees, invitees, subtenants, assignees, or successors. In such case, the Tenant's liability for the payment of rent and the performance of all the covenants, conditions and terms hereof on the Tenant's part to be performed shall continue and the Tenant shall be liable to the Landlord for the damage and loss suffered by the Landlord. 7TH: The Tenant agrees that the Landlord and the Landlord's agents, employees or other representatives, shall have the right to enter into and upon the said premises or any part thereof, at all reasonable hours, for the purpose of examining the same or making such repairs or alterations therein as may be necessary for the safety and preservation thereof. This clause shall not be deemed to be a covenant by the Landlord nor be construed to create an obligation on the part of the Landlord to make such inspection or repairs. 8TH: The Tenant agrees to permit the Landlord and the Landlord's agents, employees or other representatives to show the premises to person wishing to rent or purchase the same. A sale of the premises shall not disturb Tenant's right to use and occupy the premises in accordance with this Lease Agreement. 9TH: In case of the destruction of or any damage to the glass in the leased premises, or the destruction of or damage of any kind whatsoever to the said premises, caused by the carelessness, negligence or improper conduct on the part of the Tenant or the Tenant's agents, employees, guests, licensees, invitees, subtenants, assignee or successors, the Tenant shall repair the said damage or replace or restore any destroyed parts of the premises, as speedily as possible, at the Tenant's own cost and expense. 10TH: The Landlord consents to those exterior signs set forth in plans and specifications with revisions through September 10, 2001, consisting of 31 sheets and prepared by Barlo & Associates, P.A., (attached to this lease and labeled Exhibit A). The tenant shall be responsible for obtaining any and all required municipal approvals for such signs. The Tenant shall not place nor allow to be placed any other signs of any kind whatsoever, upon, in, or about the said premises or any part thereof, except of a design and structure and in or at such places as may be consented to by the Landlord in writing. In case the Landlord or the Landlord's agents, employees or representatives shall deem it necessary to remove any such signs in order to paint or make any repairs, alterations, or improvements in or upon said premises or any part thereof, they may be so removed, but shall be replaced at the Landlord's expense when the said repairs, alterations or improvements shall have been completed. Any signs permitted by the Landlord shall at all times conform with all municipal ordinances or other laws and regulations applicable thereto. 11TH: The Landlord shall not be liable for any damage or injury which may be sustained by the Tenant or any other person, as a consequence of the failure, breakage, leakage, or obstruction of the water, plumbing, steam, sewer, waste, or soil pipes, roof, drains, leaders, gutters, valleys, downspouts or the like or the electrical, gas, power, conveyor, refrigeration, sprinkler, air-conditioning or heating systems, elevators or hoisting equipment; or by reason of the element; or resulting from the carelessness, negligence or improper conduct on the part of any Tenant or of the Tenant's agents, employees, guests, licensees, invitees, subtenants, assignees or successors; or attributable to any interference with, interruption of or failure, beyond the control of the Landlord, of any services to be furnished or supplied by the Landlord. 12TH: This lease shall not be a lien against the said premises in respect to any mortgages that may hereafter be placed upon said premises. The recording of such mortgage or mortgages shall have preference and precedence and be superior and prior in lien to this lease, irrespective of the date of recording. Tenant agrees to execute any instrument, without cost, which may be deemed necessary or desirable to further effect the subordination of this lease to any such mortgage or mortgages. A refusal by the Tenant to execute such instruments shall entitle the Landlord to the option of canceling this lease, and the term hereof is hereby expressly limited accordingly. 13TH: The Landlord has waived the submission of a security deposit based upon the improvements being made to the property by the Tenant. However, if the Tenant defaults in the payment of rent or additional rent for more than thirty (30) days, in addition to satisfying any rent or additional rent due, Tenant shall deposit with the Landlord the sum of $7,500.00 as security for Tenant's performance of its obligations pursuant to this lease agreement. 14TH: If for any reason it shall be impossible to obtain fire or other hazard insurance on the building and improvements on the leased premises, in an amount and in the form and with insurance companies acceptable to the Landlord, the Landlord may, if the Landlord so elects at any time thereafter, terminate this lease and the term hereof, upon giving to the Tenant sixty (60) days' notice in writing of the Landlord's intention to do so. 15TH: The Tenant shall pay when due all the rents and charges for water, sewer, or other utilities used by the Tenant, which are or may be assessed or imposed upon the leased premises or which are or may be charged to the Landlord by the suppliers thereof during the term hereof, and if not paid, such rents or charges shall be added to and become payable as additional rent with the installment of rent next due or within 30 days of demand therefor, whichever occurs sooner. Tenant shall pay the entire cost of electricity to electrify the exterior lights illuminating and servicing the parking area, plaza, clock tower, reflecting pool, refuse area and other exterior common areas. If and when Building C is occupied, either the Landlord or the Tenant of Building C shall share in paying the cost of water, electricity and all other utilities used for the exterior common area based upon the square footage of each building. The tenant shall be responsible for payment of the aforesaid common area maintenance charges and the landlord shall be responsible for paying to tenant its share of such charges as defined above, if applicable. 16TH: If the land and premises leased herein, or of which the leased premises are a part, or any portion thereof, shall be taken under eminent domain or condemnation proceedings, or if suit or other action shall be instituted for the taking or condemnation thereof, or if in lieu of any formal condemnation proceedings or actions, the Landlord shall grant an option to purchase and or shall sell and convey the said premises or any portion thereof, to any governmental or other public authority, agency, body or public utility, seeking to take said land and premises or any portion thereof, then this lease, at the option of the Landlord, shall terminate, and the term hereof shall end as of such date as the Landlord shall fix by notice in writing; and the Tenant shall have no claim or right to claim or be entitled to any portion of any amount which may be awarded as damages or paid as the result of such condemnation proceedings or paid as the purchase price for such option, sale or conveyance in lieu of formal condemnation proceedings; and all right of the Tenant to damages, if any are hereby assigned to the Landlord. The Tenant agrees to execute and deliver any instruments, at the expense of the Landlord, as may be deemed necessary or required to expedite any condemnation proceedings or to effectuate a proper transfer of title to such governmental or other public authority, agency, body or public utility seeking to take or acquire the said lands and premises or any portion thereof. The Tenant covenants and agrees to vacate the said premises, remove all the Tenant's personal property therefrom and deliver up peaceable possession thereof to the Landlord or to such other partly designated by the Landlord in the aforementioned notice. Failure by the Tenant to comply with any provisions in this clause shall subject the Tenant to such costs, expenses, damages and losses as the Landlord may incur by reason of the Tenant's breach hereof. 17TH: If there should occur any default on the part of the Tenant in the performance of any conditions and covenants herein contained, or if during the term hereof the premises or any part thereof shall be or become abandoned or deserted, vacated or vacant, or should the Tenant be evicted by summary proceedings or otherwise, the Landlord, in addition to any prosecution therefor for damages, may re-enter the said premises and the same have and again possess and enjoy; and as agent for the Tenant or otherwise, relet the premises and receive the rents therefor and apply the same, first to the payment of such expenses, reasonable attorney fees and costs, as the Landlord may have been put to in reentering and repossessing the same and in making such repairs and alterations as may be necessary; and second to the payment of the rents due hereunder. The Tenant shall remain liable for such rents as may be in arrears and also the rents as may accrue subsequent to the re-entry by the Landlord to the extent of the difference between the rents reserved hereunder and the rents, if any, received by the Landlord during the remainder of the unexpired term hereof, after deducting the aforementioned expenses, fees and costs; the same to be paid as such deficiencies arise and are ascertained each month. 18TH: Upon the occurrence of any of the contingencies set forth in the preceding clauses, or should the Tenant be adjudicated a bankrupt, insolvent or placed in receivership, or should proceedings be instituted by or against the Tenant for bankruptcy, insolvency, receivership, agreement of composition or assignment for the benefit of creditors, or if this lease or the estate of the Tenant hereunder shall pass to another by virtue of any court proceedings, writ of execution, levy, sale, or by operation of law, the Landlord may, if the Landlord so elects, at any time thereafter, terminate this lease and the term hereof, upon giving to the Tenant or to any trustee, receiver, assignee or other person in charge or operating as custodian of the assets or property of the Tenant, five days' notice in writing of the Landlord's intention so to do. Upon the giving of such notice, this lease and the term hereof shall end on the date fixed in such notice as if the said date was the date originally fixed in this lease for the expiration hereof; and the Landlord shall have the right to remove all persons, goods, fixtures and chattels therefrom, by force or otherwise, without liability for damages. 19TH: Any equipment fixtures, goods, furniture, smallwares or other property of the Tenant, not removed by the Tenant upon the termination of this lease, or upon any quitting, vacating or abandonment of the premises by the Tenant, or upon the Tenant's eviction, shall be considered as abandoned and the Landlord shall have the right, without any notice to the Tenant, to sell or otherwise dispose of the same, at the expense of the Tenant for any part of the proceeds of such sale, if any. 20TH: If the Tenant shall fail or refuse to comply with and perform any conditions and covenants of the within lease, the Landlord may, if the Landlord so elects, carry out and perform such conditions and covenants, at the cost and expense of the Tenant, and the said cost and expense shall be payable on demand, or at the option of the Landlord shall be added to the installment of rent due immediately thereafter but in no case later than one month after such demand, whichever occurs sooner, and shall be due and payable as such. This remedy shall be in addition to such other remedies as the Landlord may have hereunder by reason of the breach by the Tenant of any of the covenants and conditions in this lease. 21ST: This lease and the obligation of the Tenant to pay the rent hereunder and to comply with the covenants and conditions hereof, shall not be affected, curtailed, impaired or excused because of the Landlord's inability to supply any service or material called for herein, by reason of any rule, order, regulation or preemption by any governmental entity, authority, department, agency or subdivision or for any delay which may arise by reason of negotiations for the adjustment of any fire or other casualty loss or because of strikes or other labor trouble or for any cause beyond the control of the Landlord. 22ND: The terms, conditions, covenants and provisions of this lease shall be deemed to be severable. If any clause or provision herein contained shall be adjudged to be invalid or unenforceable by a court of competent jurisdiction or by operation of any applicable law, it shall not affect the validity of any other clause or provision herein, but such other clauses or provisions shall remain in full force and effect 23RD: The various rights, remedies, options and elections of the Landlord expressed herein are cumulative, and the failure of the Landlord to enforce strict performance by the Tenant of the conditions and covenants of this lease or to exercise any election or option or to resort or have recourse to any remedy herein conferred or the acceptance by the Landlord or any installment of rent after any breach by the Tenant in any one or more instances, shall not be construed or deemed to be a waiver or relinquishment for the future by the Landlord of any such conditions and covenants, options, elections or remedies, but the same shall continue in full force and effect. 24TH: All notices required under the terms of this lease shall be given and shall be complete by mailing such notices by certified or registered mail, return receipt requested, to the address of the parties as shown at the head of this lease, or to such other address as may be designated in writing, which notice of change of address shall be given in the same manner. 25TH: The Landlord covenants and represents that the Landlord is the owner of the premises herein leased and has the right and authority to enter into, execute and deliver this lease; and does further covenant that the Tenant on paying the rent and performing the conditions and covenants herein contained, shall and may peaceably and quietly have, hold and enjoy the leased premise for the term aforementioned. 26TH: This lease contains the entire contract between the parties. No representative, agent or employee of the Landlord has been authorized to make any representations or promises with reference to the within letting or to vary, alter or modify the terms hereof No additions, changes or modifications, renewals or extensions hereof shall be binding unless reduced to writing and signed by the Landlord and Tenant. 27TH: The Landlord shall have the right to terminate this Lease Agreement upon twelve (12) months' written notice to the Tenant. Such notice may only be given if, for the preceding lease year, Landlord has not received as rent an amount greater than Ninety Thousand ($90,000.00) Dollars. The Tenant shall have the right to terminate this Lease Agreement upon six (6) months' written notice, however, such notice shall not be given until eighteen (18) months from the commencement of the initial term of this Lease Agreement. Landlord grants to Tenant three separate options to renew this Lease Agreement for a period of five (5) years per option after the expiration of the original term, on the same terms and conditions as contained in this Lease Agreement unless otherwise amended by this Lease Agreement. Tenant shall be deemed to have elected each such option period unless Tenant provides written notice to Landlord of its intent not to exercise such option at least six (6) months prior to the end of the original term or the current option period, whichever is applicable. "Lease year" shall be defined in this Lease as the twelve month period beginning on the commencement date of this Lease and ending twelve months thereafter. Notwithstanding any conflicting or unclear provision to the contrary, the following provisions shall apply during any of the three (3), five year options: (a) The annual rent figure, payment not greater than which shall trigger Landlord's right to terminate this lease, shall increase during each of the three option terms as follows: Years 6 thru 10 ......................... $100,000.00 per year Years 11 thru 15 ........................ $112,500.00 per year Years 16 thru 20 ........................ $125,500.00 per year (b) During the three (3), five (5) year renewal terms the tenant's right to terminate the lease can only be exercised upon giving landlord twelve (12) months' advance written notice of termination. Superseding all other termination provisions contained within this Lease Agreement shall be the following. There is currently in existence a Lease Agreement between Moore's Realty Associates and Chefs International, Inc. dated January 21, 2000 which pertains to 402 West Main Street, Freehold Township (Moore's Tavern) herein referred to as "Building A Lease." If "Building A Lease" is terminated in accordance with the terms and conditions of "Building A's Lease", and at the time of the actual termination of the "Building A Lease" Chefs International, Inc. has not been able to obtain a plenary consumption liquor license on terms acceptable to it which allows it to serve liquor at Building B, this lease between Moore's Realty Associates and Chefs International, Inc. pertaining to "Building B" shall also terminate as of the date that the Building A Lease terminates. The landlord and tenant may agree to amend or otherwise alter the date of termination of the Building B Lease. 28TH: Tenant agrees to pay Landlord as minimum annual rental for the term of this lease, at such place as Landlord may from time to time designate, the sum of Ninety Thousand ($90,000.00) Dollars payable in installments each month of Seven Thousand, Five Hundred ($7,500.00) Dollars. These payments shall constitute the minimum annual lease year rental, and may be supplemented by additional payments as provided below. In addition to the minimum guaranteed rental specified above, the Tenant shall also pay to the Landlord for each lease year during the term of this lease a percentage rental determined by (a) multiplying the total gross sales made in or from the demised premises during the particular lease year by the percentage rental rate of six (6%) percent and then (b) subtracting from the product thus obtained the minimum guaranteed rental paid by the Tenant to the Landlord for such lease year. The percentage rental, if any, shall be paid within ninety (90) days of the close of the particular lease year. In no event shall the rent to be paid by the Tenant and retained by the Landlord for any lease year be less than the annual lease year minimum guaranteed rental herein specified. "Gross sales" shall be defined as the aggregate amount of all sales (whether for cash, credit, or otherwise), of food, beverages, goods and articles, as well as all charges for services performed, made, or rendered in, about or in connection with the demised premises, including off-premises sales and monies derived at or away from the demised premises, as long as they are in connection with the restaurant and tavern operation conducted on the demised premises. Excluded from "gross sales" shall be any and all federal, state, municipal or other taxes levied or payable on any of Tenant's receipts; receipts from sales to employees, tips, gratuities or employee discounts for food. Notwithstanding anything to the contrary, during the three (3), five (5) year renewal term the minimum annual lease year rental shall increase as follows: Years 6 thru 10 ........................$100,000.00 per year Years 11 thru 15 .......................$112,500.00 per year Years 16 thru 20 .......................$125,500.00 per year 29TH: The obligations of the tenant hereunder are contingent upon the expansion of Plenary Retail Consumption Liquor License No. 1316-33-005-003 to the leased premises. 30TH: During the first year of the lease term, Landlord shall not sell or lease the pad site for proposed building "C" located on the demised premises to any entity other than the Tenant Such restriction shall not impose an obligation on the Tenant to purchase or lease the pad site for proposed building "C". Landlord may not sell or lease the pad site for proposed building "C" to any entity other than Tenant during the first year of the lease term even if the Tenant does not enter into an agreement with Landlord to purchase or lease the pad site for proposed building "C". Landlord may seek the appropriate approvals to convert the pad site for proposed building "C" to additional parking for Buildings A & B, both currently located on Lot 21, Block 85.11. If such approvals are sought and granted, the Tenant and Landlord shall enter into a Lease Addendum governing the Tenant's right to utilize such parking area and the cost of installing and leasing such parking area. 31ST: The Landlord may pursue the relief or remedy sought in any invalid clause by conforming the said clause with the provisions of the statutes or the regulations of any governmental agency in such case made and provided as if the particular provision of the applicable statutes or regulation were set forth herein at length. 32ND: In all references herein to any parties, persons, entities or corporations, the use of any particular gender or the plural or singular number is intended to include the appropriate gender or number as the text of the within instrument may require. All the terms, covenants and conditions herein contained shall be for and shall inure to the benefit of and shall bind the respective parties hereto, and their heirs, executors, administrators, personal or legal representatives, successors and assigns. 33RD: Landlord covenants that it will not operate, lease, rent or permit to be occupied as a restaurant and/or tavern any premises owned, leased, or occupied by it, its legal representatives, members of the Lombardi Family or their successors or assigns, not presently occupied as such, within ten (10) miles from the demised premises during the term of this lease. This restrictive covenant shall not prevent Landlord, if the tenant vacates Building 13, to enter into a lease agreement with a third party that permits a third party to utilize Building B as a restaurant which may serve alcoholic beverages and which may offer a menu line significantly dissimilar to that of Moore's Inn/Moore's Tavern. Further, such third party may serve alcoholic beverages only if it is able to procure its own liquor license. Furthermore, this covenant shall not prevent any member of the Lombardi family from acting as a shareholder, director and/or officer of Chefs International, Inc. or any affiliate thereof. 34TH: The parties acknowledge that tenant shall be occupying Buildings A and B of Lot 21, Block 85.11 and appurtenances thereto and tenant shall also utilize and enjoy in common with proposed Building C all exterior common areas including parking, brick paver Plaza, clock tower, reflecting pool, raised planter, refuse areas and other exterior common areas and appurtenances. Until such time as Building C is constructed, tenant shall pay 100% of the real estate taxes levied by the Township of Freehold upon the land and improvements of Lot 21. Upon Building C becoming constructed, the tenant of Building C shall pay its proportionate share of the real estate taxes levied by the Township of Freehold upon the land and improvements on Lot 21. Proportionate share shall be defined as the square footage of Building C divided by the total square footage of Building A, B and C. Tenant shall pay the said amounts when due to the Township of Freehold and provide proof of same to the landlord upon request. 35TH: Although this lease is intended to be a triple-net lease, under no circumstances shall it be construed that Tenant shall pay any monies for any charges, services, rents, bills or the like incurred prior to the commencement of the lease term, except as set forth in paragraph 38 of this lease. 36TH: Tenant shall pay the entire cost of the following exterior services: snow and ice removal in parking lot, plaza and walkways; spreading of salt or chemical for ice removal/melting; landscaping including grass cutting, weeding, mulching; cleaning of parking lot and plaza area; planting of raised flower bed; cleaning and maintenance of reflecting pool and other outside maintenance and cleaning. Upon the occupancy of Building C, the cost of the exterior services specified in the preceding paragraph shall be shared by the tenants of Buildings A, B and C based upon the square footage of each building. 37TH: Tenant shall pay for its own garbage removal and shall pay the lease/rental for any and all the compactors provided by Freehold Cartage. Upon the occupancy of Building C, the cost of garbage removal shall be shared by the tenants of Buildings A, B and C based upon the square footage of each building. 38TH: For the period beginning on October 1, 2001 and continuing to the day prior to the lease commencement date, the tenant shall pay the landlord $3,750.00 per month on the first day of each and every month, as reimbursement to landlord for landlord's carrying charges with respect to Building B and the pad site for Building C. The Landlord may pursue the relief or remedy sought in any invalid clause, by conforming the said clause with the provisions of the statutes or the regulations of any governmental agency in such case made and provided as if the particular provision of the applicable statues or regulation were set forth herein at length. In all references herein to any parties, persons, entitles or corporations the sue of any particular gender or the plural or singular number is intended to include the appropriate gender or number as the test of the within instrument may require. All the terms, covenants and conditions herein contained shall be for and shall inure to the benefit of and shall bind the respective parties hereto, and their heirs, executors, administrators, personal or legal representatives, successors and assigns. IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals, or caused these presents to be signed by their proper corporate officers ad their proper corporate seal to be hereto affixed, the day and year first above written. WITNESS: MOORE'S REALTY ASSOCIATES, A NEW JERSEY PARTNERSHIP, LANDLORD /s/ Claire M. Minnig /s/ Michael F. Lombardi - ----------------------------------- ---------------------------------------- Claire M. Minnig Michael F. Lombardi, Managing Partner ATTEST: CHEFS INTERNATIONAL INC. CORPORATION, TENANT /s/ Martin W. Fletcher /s/ Anthony Papalia - ----------------------------------- ---------------------------------------- Martin W. Fletcher, Secretary Anthony Papalia, President FIRST AMENDMENT TO LEASE AGREEMENT DATED JANUARY 21, 2000 BETWEEN MOORE'S REALTY ASSOCIATES, A NEW JERSEY PARTNERSHIP AND CHEFS INTERNATIONAL, INC., A CORPORATION OF THE STATE OF NEW JERSEY, FOR PREMISES KNOWN AS "MOORE'S TAVERN", BUILDING A, LOCATED ON A PORTION OF BLOCK 85.11, LOT 21, 402 WEST MAIN STREET, FREEHOLD TOWNSHIP, NEW JERSEY. Moore's Realty Associates, (hereinafter "Landlord") and Chefs International, Inc. (hereinafter "Tenant"), have previously entered in to a Lease Agreement on January 21, 2000 for premises known as Moore's Tavern, Building A, located on a portion of Block 85.11, Lot 21, 402 West Main Street, Freehold Township, New Jersey ("Building A Lease"); and WHEREAS, the Landlord and Tenant have entered into a separate and distinct Lease Agreement for premises known as "Building B" located on a portion of Block 85.11, Lot 21, 402 West Main Street, Freehold Township, New Jersey (hereinafter "Building B Lease"); and WHEREAS the terms and conditions of the Building B Lease are inexplicably intertwined with certain terms and conditions of the Building A Lease and accordingly, the parties have agreed to amend certain terms and conditions of the Building A Lease in order for it to coincide with certain terms and conditions of the Building B Lease, all as set forth below and agreed to by the parties; NOW, THEREFORE, in consideration of the mutual covenants and conditions contained herein and other good and valuable consideration, the parties agree to amend the Building A Lease as follows: 1. So that the natural expiration dates of both the Building A Lease Agreement and Building B Lease Agreement coincide, the original term expiration date of February 22, 2005 pertaining to the Building A Lease shall be extended to October 30, 2006. Even though having a duration in excess of five years, this extended original term beginning February 23, 2000 and ending on October 30, 2006 shall be considered "the original term" of the Building A Lease Agreement. All other terms and conditions of the Building A Lease Agreement pertaining to, among other things, the termination and extension of the lease (paragraph 27) and rent 1 due during the term of the lease and any extensions thereto (paragraph 28) shall be measured from the extended original term described in this paragraph. 2. The tenant, not the landlord, shall be responsible for the payment of those monies set forth in paragraph 15 of the Building A Lease Agreement (common area maintenance charges) and paragraph 34 (real estate tapes). Upon request of the Landlord, Tenant shall provide proof of such payment. IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals, or caused these presents to be signed by their proper corporate officers and their proper corporate seal to be hereto affixed, on this 31st day of October, 2001. WITNESS: MOORE'S REALTY ASSOCIATES, A NEW JERSEY PARTNERSHIP, LANDLORD /s/ Claire M. Minnig /s/ Michael F. Lombardi - ----------------------------------- ---------------------------------------- Claire M. Minnig Michael F. Lombardi, Managing Partner ATTEST: CHEFS INTERNATIONAL INC. CORPORATION, TENANT /s/ Martin W. Fletcher /s/ Anthony Papalia - ----------------------------------- ---------------------------------------- Martin W. Fletcher, Secretary Anthony Papalia, President 2 EX-10.10 5 c24241_ex10-10.txt ASSET PURCHASE AGREEMENT EXHIBIT 10.10 ASSET PURCHASE AGREEMENT THIS AGREEMENT, made and entered this 25th day of January, 2002, by and between CAUSEWAY FOODS, INC., A FLORIDA CORPORATION, d/b/a MR. MANATEE'S, with a principal place of business located at 30 Royal Palm Pointe Vero Beach, Florida, 32960, and MR. MANATEE'S FRANCHISE CORPORATION, A FLORIDA CORPORATION, whose address is (hereinafter collectively referred to as "Seller"), STEVEN C. LONG whose address is P. O. Box 3058 Vero Beach, Florida, 32964-3058, (hereinafter referred to as "Long") and CHEFS INTERNATIONAL, INC., A DELAWARE CORPORATION, whose address is c/o Post Office Box 1332 Point Pleasant Beach, NJ 08742, (hereinafter referred to as "Buyer"). WITNESSETH: WHEREAS, Seller is an active corporation organized and existing under the laws of the State of Florida; and WHEREAS, Buyer is an active corporation organized and existing under the laws of the State of Delaware; and WHEREAS, the parties have agreed that the Seller shall sell, and the Buyer shall buy the business known as "MR. MANATEE'S CASUAL GRILLE", together with the name, trademark, goodwill, franchising rights in Mr. Manatee's Franchise Corporation, a Florida Corporation, liquor license, and all furnishings, personal property, fixtures and equipment located at 30 Royal Palm Pointe Vero Beach, Florida 32960, subject to the terms and conditions as hereinafter set forth, and subject further to full performance of the covenants and contingencies expressed herein; and WHEREAS, Seller and Long have agreed to be bound by non-competition covenants as hereinafter set forth; NOW THEREFORE, in consideration of the mutual promises and covenants contained herein, and other good and valuable considerations, the receipt and adequacy of which is hereby acknowledged, the parties hereto covenant, stipulate and agree as follows: 1. SALE OF ASSETS: The Seller agrees to sell to Buyer free from all liabilities, liens, encumbrances and interests of others, the entire business interests known as "Mr. Manatee's" a/k/a Mr. Manatee's Casual Grille including without limitation, goodwill, the name (with legal transfer/assignment of all trademark, or other Federal/State protection) all personal property, furnishings, fixtures, and equipment, liquor license, franchising rights in Mr. Manatee's Franchise Corporation, a Florida Corporation, and the Business telephone number (collectively the "Assets"). Buyer agrees to purchase the same upon the terms and conditions of this Asset Purchase Agreement (hereinafter referred to as "Agreement"). 2. PURCHASE PRICE: The Purchase Price shall be EIGHT HUNDRED THOUSAND DOLLARS ($800,000.00), payable as follows: DEPOSIT FIVE THOUSAND DOLLARS ($5,000.00) by earnest money deposit in the form of a check to be held by Gould, Cooksey, Fennell, O'Neill, Marine, Carter & Hafner, P.A. Trust Account at execution of the Agreement. AN ADDITIONAL TWENTY THOUSAND DOLLARS ($20,000.00) due and payable at the end of the DUE DILIGENCE Period as described herein. CASH AT CLOSING SEVEN HUNDRED SEVENTY FIVE THOUSAND DOLLARS ($775,000.00) by Cashier's Check payable to Closing Agent at or before Closing. 3. ACCEPTANCE: Buyer's offer hereby made shall be open for Seller's written acceptance on or before January 17, 2002, and Seller shall deliver to Buyer written acceptance of such offer within 24 hours of such acceptance, or the deposit shall be returned to Buyer. 4. EFFECTIVE DATE: The Effective Date of this Agreement is the date on which the last of the Parties signs the latest offer. TIME IS OF THE ESSENCE of this Agreement. Time periods of 5 days or less shall be computed without including Saturday, Sunday, or national legal holidays and any time period ending on a Saturday, Sunday or national legal holiday shall be extended until 5:00 p.m. on the next business day. 5. CLOSING: (A) The closing shall take place on or before the April 1, 2002, at the law offices of Gould, Cooksey, Fennell, O'Neill, Marine, Carter, & Hafner, P.A., 979 Beachland Blvd. Vero Beach, Florida, at which time the Commercial Lease Option shall be executed. Any extension of this closing date must be in writing and signed by Buyer and Seller. (B) At the closing, the parties shall further execute the following documents and take the actions hereinafter described: (i) Seller shall execute and deliver to Buyer an Absolute Bill of Sale for all personal property, including furniture and fixtures, included in this sale, as per the Personal Property List attached hereto as per SCHEDULE "A," and by reference incorporated herein, for which Seller warrants that it has good and marketable title, free and clear of all liens and encumbrances, except any liens or encumbrances disclosed herein. Seller hereby agrees to provide Buyer with a final itemized inventory of the personal property within twenty (20) days of the Effective Date, defined above. Buyer specifically acknowledges that any outstanding municipal or governmental assessments related to the Royal Palm Pointe project shall be satisfied by Seller upon the subsequent settlement of the real property. (ii) Seller shall execute and deliver to Buyer an Assignment of name, franchising rights, and interests, and any other intangible personal property interests relating to the business. (iii) Seller shall transfer the Liquor License which he presently holds to Buyer. Buyer shall execute all appropriate documents with the Alcohol and Beverage Department of the State of Florida to effectuate this transfer. (iv) Seller shall transfer and assign to Buyer, effective with the Closing of this sale, all rights held by Seller in the trade name "Mr. Manatee's" and "Mr. Manatee's Casual Grille" and any derivations thereof, and hereby waives any rights thereto, and shall not after Closing, make use of such name, directly or indirectly. Seller has disclosed to Buyer a limited license to utilize trade secrets, trade name and logo in favor of David Knudsen ("Knudsen") as set forth in that certain Brevard Foods, Inc. General Manager Employment Agreement dated April 17, 1992, a copy of which has been furnished to the Buyer. Seller shall procure an executed modification to the General Manager Employment Agreement from David Knudsen prior to closing, satisfactory to Buyer, in Buyer's sole discretion. The modification shall provide for limitations upon geographic location, future expansion, relocation, name appropriation and use of proprietary rights and interests. The modification shall also provide that the limited license to utilize trade secrets, the trade name and the logo shall terminate upon the death of Knudsen, or any sale, transfer or conveyance of Knudsen's business interests in the existing Pensacola restaurant location, whether said sale, transfer or conveyance shall be effected by stock transfer, asset sale, gift, devise, lease, or any other form or manner whatsoever. (v) Seller shall transfer to Buyer, any and rights held by Seller in the Trademark Registration Number 2,088,906 registered August 19, 1997, and that Trademark Registration Number 1,686,932 registered May 12, 1992, with the United States Patent and Trademark Office. Seller shall further transfer, any rights held by Seller in the class 42 Service Mark number T14429, registered April 29, 1991, and as renewed February 22, 2001, with the State of Florida. Buyer shall execute all appropriate documents to effectuate this transfer, and Seller shall join in, in any application for transfer, as is necessary. (vi) Seller and Long shall execute and deliver a Covenant Not to Compete Agreement in the form set forth in Schedule "C", and further described herein. (vii) Each party shall execute and deliver Corporate Resolutions authorizing the transactions contemplated herein, and directing the appropriate officers to close the same. (viii) Each party shall provide a Certificate of Active Corporate Status from the Division of Corporations, State of Florida and State of Delaware. (C) Seller shall keep all cash located at the business and accounted for at midnight on March 31, 2002. (D) Buyer shall pay the cash required to close. (E) Seller shall deliver possession of the real and personal property indicated in Schedules "A" (Personal Property) and "B" (Real Property). (F) To the extent transferrable, Seller shall transfer any applicable business and/or occupational licenses at closing. 6. REPRESENTATIONS BY SELLER: The Seller warrants and represents, both as of the date hereof, and as a continuing warranty the following: (A) It is the owner of and has good and marketable title to all the Assets, free from all encumbrances and interests of others, other than those which shall be satisfied by the Seller at closing or those described herein. (B) It has complied with all laws, rules and regulations of the county, state and federal governments. (C) It has paid or will pay or make provision for payment of all Social Security, withholding, sales, income and unemployment insurance taxes to the county, state and federal governments to date which would become a lien on the Assets. (D) Seller has not entered in to any contract or other agreement, whether oral or written, that will survive closing. (E) There are no judgments, liens, actions or proceedings pending against Seller in any court. (F) Seller represents that all liquor charges to vendors have been paid and that the Liquor License is free from any violations or encumbrances. (G) Seller is a corporation, duly organized and validly existing and in good standing under the laws of the State of Florida, has all requisite power and authority to consummate the transactions contemplated by this Agreement, and has, by proper corporate proceedings, duly authorized the execution and delivery of this Agreement and the consummation of all transactions contemplated herein. (H) Seller shall take such steps as are required by Section 607.1202, Florida Statutes, in consideration of the sale by a corporation of all, or substantially all of its property otherwise than in the usual and regular course of business. Seller shall hold appropriate director/stockholder meetings, duly noticed as required by law, or with appropriate waiver(s) of notice, to approve the sale as contemplated herein. Each shareholder/director shall approve the sale as contemplated herein, closing of this transaction, release any claims against the corporation and waive any applicable dissenter's rights under Section 607.1301 and 607.1302, Florida Statutes. (I) No further action is necessary by Seller to make this Agreement valid and binding upon Seller and enforceable in accordance with the terms hereof, or to carry out the actions contemplated hereby. The execution, delivery, and performance of this Asset Purchase Agreement by the Seller will not (i) constitute a breach or a violation of the Sellers Certificate of Incorporation, By-Laws, or of any law, agreement, indenture, deed of trust, mortgage, loan agreement or other instrument to which it is a party, or by which it is bound; (ii) constitute a violation of any order, judgment or decree to which it is a party or by which its Assets or properties is bound or affected; or (iii) result in the creation of any lien, charge, or encumbrance upon its Assets or properties, except as stated herein. (J) Seller shall deliver to Buyer copies of the preceding three (3) years Tax returns and financial statements of the business, all of which are true and complete and have been prepared in accordance with generally accepted accounting principles, consistently followed throughout the period indicated. (K) No representation or warranty by the Seller in this Agreement, nor any statement or certificate furnished or to be furnished to the Buyer, pursuant to it, or in connection with the transaction contemplated by it, contains or will contain any untrue statement of a material fact, or omits or will omit to state a material fact necessary to make the statements contained in it not misleading. (L) Seller Shall deliver to Buyer copies of all proceedings to which Seller is or was a party as they pertain to violations of the Americans With Disabilities Act, 42 U.S.C. Section 12181. 7. COVENANTS OF SELLER: Seller covenants and represents, both as of the date hereof, and as a continuing warranty the following: (A) Seller shall, by Bill of Sale, convey all of the Assets set forth free and clear of all encumbrances and interest of others (except as otherwise herein provided) and will contain the usual warranties and covenants of title. (B) Seller hereby agrees, from the date of execution of this Agreement to the date of Closing, to carry on the business activities and operations Of the business diligently and in substantially the same manner as has been customary in the past, and shall not remove any item with exception of (i) product inventory sold in the normal course of business; and (ii) equipment and other tangible personal property which is retired in the normal course of business provided same is replaced with new equipment or tangible personal property. The business of the Seller will be conducted up to the date of closing in accordance with all laws, rules and regulations of the county, state and federal governments. (C) All Social Security, withholding, sales, income and unemployment insurance taxes to the county, state and federal governments will be paid or provided for up to the date of closing. (D) At the time of closing, Seller shall have no unpaid creditors including federal, state and local tax liabilities which would create a lien on the Assets or a claim against Buyer for the amount of their debt. Buyer assumes no liability, responsibility or obligations of Seller. (E) No judgments or liens will be outstanding at the time of closing against the Seller or against the Assets. (F) The Seller, up to the date of closing, will operate and maintain its business in the regular course, will not violate any contract connected with the business and will not remove any stock-in-trade (except as it may be consumed in the regular course of business) and Seller's equipment and other fixed Assets shall be maintained in their present condition, reasonable wear and tear excepted. No employee or owner salaries may be increased, or bonuses taken, prior to closing. (G) The Seller will use its best efforts (without making any commitment on Buyers behalf) to preserve the Seller's business organization intact; and to preserve the good will, of its customers and others having business relations with the Sellers business. (H) The Seller shall give to the Buyer and to the Buyer's counsel, accountants, or other representatives full access, during normal business hours, throughout the period prior to the closing, to all of the Seller's books, contracts, commitments and records, and shall furnish the Buyer during that period all information concerning the Seller's business operation as the Buyer may reasonably request. (I) Seller covenants with Buyer it will not divulge any confidential information, or make available to others any documents, files or other papers concerning the Seller's business or financial affairs, or remove any such documents, files, or other papers from the Sellers premises except with the prior consent and approval of Buyer. (J) Seller warrants to best of its knowledge there exist: no pending or threatened judgment, lien, suit, claim or proceeding against Seller not disclosed herein; no condition, act, or event which (with the giving of notice, passage of time, or both) would constitute a breach or default by the Seller under any contract executed by it; no other basis for the assertion against the Seller of any claim or liability not fully reflected or reserved against in its books. Further, there is no unfulfilled contract, agreement, or commitment made by Seller which pertains to the Assets or the Real Property and which is not disclosed herein. (K) Seller warrants the business and premises meet, at the time of Closing, all government regulations as to health, fire, zoning and other licensing laws, including all statutes, ordinances, rules, orders, regulations and requirements of the federal, state, county and city government and of any and all other agencies, departments and bureaus applicable to the use of the premises as intended by Buyer. This specifically includes compliance with the Americans With Disabilities Act, 42 U.S.C. Section 12181. (L) All representations and warranties made by the Seller shall be true at closing and shall survive the closing and the execution and delivery of any document or instrument in connection therewith. 8. INDEMNIFICATION: Seller shall indemnify, protect and hold harmless the Buyer, without the execution of any further documents, from and against all losses, damages, injuries, claims, demands and expenses, including reasonable attorneys' fees, for all proceedings, trials and appeals arising out of any breach of the representations and covenants set forth herein; including, without limitation any damage or deficiency from any misrepresentation, breach of warranty or nonfulfillment of any agreement on the part of the Seller or either of them under this Agreement, or from any misrepresentation in or omission from any certificate or other instrument to be furnished to the Buyer. 9. ITEMIZED INVENTORY: The parties acknowledge that the list of Assets referred to in Schedule "X" of this Asset Purchase Agreement is based upon the best information available to Buyer at the execution hereof. The Seller shall, within twenty (20) days of the execution of this Agreement, provide the Buyer with a comprehensive schedule of the personal property to be acquired, describing the same as necessary for accurate identification. The comprehensive inventory shall be attached to the Bill of Sale, Absolute, along with the merchandise inventory and transferred at closing. Buyer shall purchase the food, liquor, retail goods and paper supplies on hand at the time of closing for a price equal to Seller's cost. Buyer has the right to reject any unwanted inventory. Any payment shall be over and above the purchase price as referenced in paragraph 2 of this Agreement. 10. ALLOCATION: The undersigned agree that the allocation of the Seller's interest in this transaction is as follows: Covenant Not to Compete $ 60,000.00 Personal Property 125,000.00 Goodwill 555,000.00 Liquor License 60,000.00 TOTAL: $ 800,000.00 ============ 11. LEASE/OPTION TO PURCHASE: On the Closing Date, Chefs International, Inc., or its assignee (hereinafter "Buyer") will purchase the Assets and execute a five (5) year triple-net lease agreement in favor of Steven Craig Long (hereinafter "Owner") to lease the premises for operation of the Business at Royal Palm Pointe located at 30 Royal Palm Pointe, more particularly described in Schedule "B". Rent shall be payable in the amount of $8,000.00 per month together with all applicable taxes. The lease agreement shall include the use of any easements, boat slips or other appurtenances for the entire lease term. Buyer will be permitted to extend/renew the lease three additional five (5) year terms. Any renewal/extension of the lease shall result in an increase in rent of ten (10%) percent for the additional five (5) year term. Buyer shall have an option and right to purchase the real property and improvements at the end of the initial five (5) year lease term for $1,075,000.00. Terms and conditions of the purchase/sale shall be attached to and contained in the Commercial Lease Option Agreement attached hereto as Schedule "D". Conveyance shall be by General Warranty Deed, free and clear of liens, encumbrances, or defects in title, except taxes for the year of closing. 12. DUE DILIGENCE/INSPECTION: Buyer shall have sixty (60) days extending from the Effective Date to effect any and all inspections, investigations or examinations of the relevant documentation, including without limitation Business financial statements, records, tax returns, Business income and expense data, etc. Said documentation is to be provided by Seller within seven (7) days of execution of this Agreement and shall remain confidential. Diligence shall also include without limitation, procuring an environmental assessment, boundary, improvement survey, structural engineering analysis and regulatory compliance. Buyer shall have access to the property for performing diligence activities. In the event for any reason Buyer finds the Assets/property not to be satisfactory, Buyer may furnish written notice to Seller of such finding by no later than 5:00 p.m. on the sixtieth (60th) day after the Effective Date; in such event, the Deposit shall be immediately refunded to Buyer, and the Agreement deemed void. In the event Buyer does not furnish such written notice to Seller by 5:00 p.m. on the sixtieth (60th) day after the Effective Date, it shall be conclusively presumed that Buyer finds the property to be satisfactory for inspection purposes. Buyer shall further have a right to conduct a final compliance inspection and examination of all documents and records mentioned herein, prior to closing. Buyer agrees to defend, indemnify and hold harmless Seller from and against any claims, actions, damages, expenses, liabilities or losses arising from Buyer's activities conducted pursuant to this Section. 13. DEFAULT: In the event of a default of this Agreement by Buyer, the Seller shall be entitled to retain all sums paid to it by Buyer as agreed upon liquidated damages, consideration for the execution of this Agreement and in full settlement of any claims; whereupon all parties shall be fully released hereunder. Seller specifically waives the right to seek specific performance of this Asset Purchase Agreement. Should Seller fail, neglect or refuse to perform this Agreement, the Buyer may seek specific performance or elect to receive the return of the deposit without thereby waiving any action for damages resulting from Seller's breach. 14. CONDITION OF PERSONAL PROPERTY: All personal property included in this sale, as per attached SCHEDULE "A," is being purchased on an "as is" basis without warranties of merchantability or fitness for any particular purpose. However, at the Closing of this sale, all equipment shall be in working condition. Buyer shall be responsible for inspecting said equipment in order to determine that, as of the date of Closing, said equipment is in working condition and Seller shall be responsible for any cost or expense necessary to insure all equipment is delivered in working condition. After the date of closing, Buyer shall be responsible for the maintenance and repair of all equipment. 15. LOSS/DAMAGE: In the event there is any material loss or damage to the Business premises, or any of the improvements, systems, equipment or other Assets included in this sale at any time prior to the Closing of this sale, the risk of loss shall be upon Seller. Immediately from and after the Close of this sale, all risk of loss or damages shall be upon Buyer. If the destruction, loss or damage is such that the Assets are totally or partially destroyed, Buyer shall have the right to terminate this Agreement, and the rights of the Buyer and the Seller under this Agreement shall thereupon terminate. 16. BUSINESS DEPOSITS: Any and all amounts currently on deposit for the benefit of the business for utility services, leases, insurance, etc., together with all cash located at the business and accounted for at midnight on March 31, 2002, are and shall remain the sole property of Seller and are not included as part of this transaction. Buyer shall, effective with the Closing, deposit such amounts as are necessary to continue the operation of the business. 17. BUSINESS TELEPHONE: Seller agrees to transfer to Buyer at Closing, and Buyer agrees to accept, ownership of the Business telephone number(s) and yellow pages or other advertising that refers to said telephone numbers. 18. BUSINESS MAIL: Seller agrees that all mail relating to the Business shall be routed to Buyer, and Buyer agrees to promptly forward to Seller any mail personalized to Seller. 19. BUSINESS RECORDS: At the Closing of the sale, Seller shall deliver to Buyer copies of all documents pertinent to the operation of the Business which Seller may have. Such records shall include copies of those documents necessary to conduct business with suppliers and customers of the Business. 20. LICENSES AND PERMITS: Seller agrees to cooperate with Buyer in obtaining, at Buyer's expense, any licenses, permits, approvals, or certificates necessary for the continued operation of the Business. 21. TRANSITION: Seller shall assist Buyer in the transfer by permitting Buyer's personnel to visit the Business site between the time the Agreement is fully executed and the Closing Date. Seller agrees to assist in the transition by making himself available throughout weekends and evenings through May 30, 2002. 22. PRORATIONS: All transferrable taxes, insurance, licenses, rents, utilities, etc., shall be prorated as of the Closing Date. 23. FINANCIAL INFORMATION: Seller warrants that the financial information supplied to Buyer by Seller is true and correct and is a fair and accurate representation of the financial condition and results of the operation of the Business. 24. ACCOUNTS RECEIVABLE: It is agreed that Seller's accounts receivable, if any, are not included in the purchase price. 25. COVENANT NOT TO COMPETE: Seller and Steven C. Long shall be prevented from competing for a period of five (5) years from the Closing Date, in a geographical area defined as Indian River, Brevard, St. Lucie and Martin Counties, and shall further be precluded from soliciting existing customers or employees during said five (5) year term. Steven C. Long hereby agrees to join in this Agreement for purposes of indicating his assent and agreement to execute and be individually bound by the Covenant Not To Compete Agreement referred to herein, and attached hereto as Schedule "C". 26. CLOSING AGENT: The parties here appoint Christopher H. Marine, Esquire, of Gould, Cooksey, Fennell, O'Neill, Marine, Carter & Hafner, P.A., as Closing Agent to receive, deposit and distribute funds for the parties and acknowledge that Closing Agent shall prepare and obtain execution of escrow instructions, closing documents and instruments evidencing the terms and conditions of this transaction, as are required for the closing, conduct the closing, and provide for recording of the documents. Buyer and Seller agree to execute said documents as are reasonably requested by the Closing Agent and Seller agrees to pay Closing Agent's fees and expenses. Such expenses shall include a judgment and lien search. Such closing documents shall include Seller(s) and Buyer(s) Affidavits, Closing Agreement, Bill of Sale, and such other documents as may be necessary, in the opinion of the Closing Agent, to effectuate the transaction. Each party shall be responsible for their own attorneys fees. 27. PRE-CLOSING COVENANTS: Buyer and Seller agree not to divulge any business or financial information pertaining to the business or this transaction prior to Closing, except: (A) Such information may be divulged with the prior written consent of the other party; and (B) to the extent necessary, the parties may reveal such information to their attorneys and other professionals retained by them to assist them in this transaction. 28. ASSIGNMENT: Buyer may assign this Agreement. 29. BROKERS: Seller acknowledges and affirms unto Buyer that Seller has not contacted or dealt with a real estate broker and/or real estate salesperson in conjunction with the sale of the Property. Buyer acknowledges and affirms unto Seller that Buyer has not contacted or otherwise dealt with either a real estate broker or real estate salesperson. In the event a broker or salesperson makes a claim for a brokerage commission, finder's fee, or similar charge, the party who has contacted such broker or salesperson shall bear the full cost and expense of such brokerage commission, finder's fee, or similar charge. Each party does hereby fully indemnify and save and hold harmless the other party of and from any liability or obligation to pay a brokerage commission, finder's fee, or similar charge. 30. PARAGRAPH HEADLINES: Captions and paragraph headlines in this Agreement are for convenience and reference only and do not define, describe, extend or limit the scope or intent of this Agreement or any provision herein. 31. BINDING EFFECT: This Agreement shall bind and inure to the benefit of the successors, assigns, personal representatives, heirs and legatees of the parties hereto. The parties hereto acknowledge that this Agreement, including all covenants, representations, warranties and agreements, shall survive the Closing of this transaction. 32. NOTICE: If any party desires to give notice to the other, such notice shall be in writing and be deemed given when deposited in the U.S. mail, postage prepaid, certified mail, addressed to the party intended as follows, TO SELLER: WITH COPY TO: STEVEN CRAIG LONG STEVE HENDERSON, ESQ. P.O. Box 3058 Moss, Henderson, et al Vero Beach, FL 32964-3058 817 Beachland Blvd. Vero Beach, FL 32963 TO BUYER: WITH COPY TO: CHEFS INTERNATIONAL INC., CHRISTOPHER H. MARINE, ESQ. a Delaware corporation, Gould, Cooksey, et al Post Office Box 1332 979 Beachland Blvd. Point Pleasant Beach, NJ 08742 Vero Beach, FL 32963 33. ENTIRE AGREEMENT: This Agreement constitutes the entire agreement and understanding of the parties and cannot be modified except in writing executed by all parties. All representations made herein shall survive the closing. 34. SEVERABILITY: In the event that any of the terms, conditions, or covenants of this Agreement are held to be unenforceable or invalid by any court of competent jurisdiction, the validity and enforceability of the remaining provisions, or portions thereof, shall not be affected thereby and effect shall give rise to the intent manifested by the provisions, or portions thereof, held to be enforceable and valid. 35. GIFT CERTIFICATES: Seller has disclosed to Buyer that there are and will be, at the time of Closing, outstanding and unredeemed gift certificates. There will be no adjustment for promotional certificates and coupons. With respect to cash sale gift certificates, Buyer shall be entitled to setoff against the rent due under the commercial lease option, an amount equal to sixty-five percent (65%) of the face value of any such certificates that are redeemed within one (1) year from the date of Closing. Any reduced rental payments shall be accompanied by copies of the redeemed and cancelled gift certificates and a calculation of the setoff amount. 36. TYPEWRITTEN OR HANDWRITTEN PROVISIONS: Typewritten or handwritten provisions inserted in this form and acknowledged by the parties as evidenced by their initials shall control all printed provisions in conflict therewith. 37. MISCELLANEOUS: (A) This Agreement shall not become effective until it has been executed by all of the parties hereto, but shall be dated for purposes hereof as of the date and year first above written. (B) This Agreement shall be construed under the laws of the State of Florida. (C) Time is of the essence. (D) This Agreement shall be binding upon and inure to the benefit of, respectively, the parties, their successors, legal representatives, grantees and assigns, as applicable and appropriate, of all parties of this Agreement. (E) This Agreement shall not be construed more strongly against any party, regardless of preparation. (F) All rights, powers and remedies provided herein may be exercised only to the extent that the exercise thereof does not violate any applicable laws and are intended to be limited to the extent necessary so that they will not render this Agreement invalid or unenforceable. If any term of this Agreement shall be held to be invalid, illegal or unenforceable, the validity of the other terms of this Agreement shall in no way be affected thereby. (G) This Agreement may be executed in any number of counterparts, each of which, when so executed and delivered, shall be an original, but each counterpart shall together constitute one and the same instrument. (H) In the event it becomes necessary for either party herein to seek legal means to enforce the terms of this Agreement, the prevailing party will be eligible for all reasonable attorneys' fees and attorneys' fees on appeal, travel expenses, depositions costs, expert witness expenses and fees, and any other cost of whatever nature reasonable and necessarily incurred by the prevailing party as a necessary incident to the prosecution or defense of such action, plus court costs in all proceedings, trials and appeals. (I) No waiver of any breach of this Agreement shall be held to be a waiver of any other or subsequent breach. All remedies afforded in this Agreement shall be taken and construed as cumulative; this is, in addition to every other remedy provided therein or by law. The failure of either party to enforce at any time of the provisions of this Agreement, or to exercise any option which is herein provided, or to require at any time performance by the other party of any of the provisions hereof, shall in no way be construed to be a waiver or create an estoppel from enforcement of such provisions, nor in any way affect the validity of this Agreement or any part thereof, or the right of either party to thereafter enforce each and every such provision, or to seek relief as a result of the prior breach. (J) The covenants, warranties and representations herein contained shall survive the closing of the transaction contemplated hereby. (K) This Agreement contains the entire understanding of the parties and supersedes all previous verbal and written agreements; there are no other agreements, representations or warranties not set forth herein. The undersigned Buyer expressly acknowledges fully reading, understanding and receiving a true copy of this document. THIS IS A LEGALLY BINDING AND FULLY ENFORCEABLE DOCUMENT. A facsimile copy of this document and any signature shall be construed as original. DATED AND RECEIVED this 25th day of January, 2002 Witnesses By: BUYER: CHEFS INTERNATIONAL, INC. /s/ Martin W. Fletcher By: /s/ Anthony C. Papalia - -------------------------------- Anthony C. Papalia, President Address: Post Office Box 1332 Point Pleasant Beach, NJ 08742 Tel: SELLER'S ACCEPTANCE The undersigned accepts the foregoing offer and agrees to sell the above described Business and Assets on the terms and conditions of the foregoing Agreement. Seller acknowledges receipt of a true copy of this document. DATED AND ACCEPTED on the 25th day of January, 2002. CAUSEWAY FOODS, INC. /s/ Melissa A. [ILLEGIBLE] By: /s/ Steven C. Long --WITNESS-- Steven C. Long, President (CORPORATE SEAL) Address: 30 Royal Palm Pointe Vero Beach, FL 32966 Tel: MR. MANATEE'S FRANCHISE CORPORATION By: /s/ Steven C. Long Its: Address: 30 Royal Palm Pointe Vero Beach, FL 32966 Tel: JOINDER The undersigned, STEVEN C. LONG, hereby joins in this Agreement to indicate assent and agreement to be bound by the non-competition covenants contained herein, and hereby agrees to individually execute the attached Non-Competition Agreement /s/ Steven C. Long - ---------------------------------------- Steven C. Long SCHEDULE "A" ASSETS INCLUDED IN SALE All items, equipment, furniture, and personal property located at 30 Royal Palm Pointe, Vero Beach, Florida, as more particularly set forth on the 2001 Florida Tangible Personal Property Tax Return, including, but without limitation: Interior Signs Shelving Miscellaneous Lighting Miscellaneous Furniture Security System Cooler Walk-In 6 Paddle Fans Restaurant Equipment Miscellaneous Wall Accents Air Conditioner 2 two-drawer File Cabinets Cleveland Steamer 4 Booster Seats Sign Miscellaneous Decorations Cash Register Decor - Frame Computer Terminal Miscellaneous Decor Fixtures Leasehold Improvements 4 50 lb. Deep Fryers Miscellaneous Equipment 2 Stainless Hood Systems Computers Hand Sink with Cabinet Telephone System 3 ss. Work Tables Furniture & Fixtures 6 Burner Range Picture Fire System Kitchen Equipment Galvanized Hood System Restaurant Equipment Fire Extinguishers Stereo Miscellaneous CL Equipment Scales GK Miscellaneous Equipment Table SM Decor Equipment Equipment 10 Yr Life Miscellaneous Decor Equipment Beepers MC Decor Equipment EDW Coffee Machine Lighting Equipment Supplies SM Decor Fixtures Table Electrical System Music Equipment MC Installation Computer Upgrade MC Installation JW Prep Table Misc Decor Prep Station and Shelving Restaurant Equipment Supply Cooler Miscellaneous Restaurant Equipment Kitchen Equipment Copy Machine Convection Oven SCHEDULE "B" Beginning at the Southwest corner Of Government Lot 6,Section 31, Township 32 South, Range 40 East, Indian River County, Florida, run N. 0 degrees 23'43" W. along the West boundary of said Section 31, a distance of 485.66 feet to an intersection with a non-tangent curve, said curve being the North right of way line of State Road 502, a radial bearing to said curve bears S. 19 degrees 25'57" E. thence run N. 76 degrees 06'34" E. 198.05 feet to a point of tangency along the chord to said non-tangent curve having a radius of 1025.37 feet, a central angle of 11 degrees 05'02", an arc of 198.36 feet and being concave to the South; then continue N. 81 degrees 39'05" E. along the said right of way of State Road 502, a distance of 136.47 feet to a point of curvature; thence continue to a point on a curve of said right of way of State Road 502, N. 67 degrees 59'26" E. 508.41 feet on the chord of a 1076.28 foot radius curve having a central angle of 27 degrees 19'25", an arc distance of 513.26 feet and being concave to the Northwest, said point on a curve being the true point of beginning; thence N. 30 degrees 47/31" W. 127.49 feet to a point on the seawall of the Yacht basin as the same now exists; thence continue on said seawall N. 59 degrees, 38'49" E. 48.48 feet to an angle point; thence continue on said seawall N. 44 degrees 27'49" E. 196.65 feet; thence S. 56 degrees 20'46" E. 122.57 feet, to an intersection with a non-tangent curve on the North right of way of State Road 502; thence run 300.00 feet Southwesterly on the arc of a 1076.28 foot radius curve Concave to the Northwest, with a central angle of 15 degrees 58'14", and having a 299.03 foot chord bearing S. 46 degrees 20'33" W. to the true point Of beginning. SUBJECT TO that certain fifteen (15) foot Easement recorded in Official Records Book 581, Page 177, public records of Indian River County, Florida. As modified by Quit-Claim Deed recorded in Official Records Book 1056, page 2920, public records of Indian River County, Florida. EX-10.11 6 c24241_ex10-11.txt COMMERCIAL LEASE EXHIBIT 10.11 COMMERCIAL LEASE OPTION THIS LEASE AGREEMENT, is made and entered into this 1st day of April, 2002, by and between STEVEN CRAIG LONG, whose address is P.O. Box 3058, Vero Beach, Florida 32964-3058 (hereinafter referred to as "LESSOR") and CHEFS INTERNATIONAL, INC., A DELAWARE CORPORATION, whose address is Post Office Box 1332, Point Pleasant Beach, New Jersey 08742 (hereinafter referred to as "LESSEE"). WITNESSETH: WHEREAS, LESSEE is desirous of leasing from LESSOR and LESSOR is desirous of leasing to LESSEE certain Property hereinafter described, upon the terms, covenants and conditions set forth herein; NOW, THEREFORE, DEMISED PROPERTY: In consideration of the rents, covenants and agreements contained herein on the part of LESSEE to be observed and performed, LESSOR hereby demises and leases unto LESSEE, and LESSEE rents from LESSOR the following described real property located and situate in Indian River County, Florida, together with all the buildings, structures and improvements (hereinafter collectively referred to as the "Property") located thereupon: SEE EXHIBIT "A" ATTACHED HERETO, BY REFERENCE MADE A PART HEREOF The above Property is located at 30 Royal Palm Pointe, Vero Beach, Florida 32960. Page 1 of 19 2. TERM AND POSSESSION: The term of this Lease shall be five (5) years in length, commencing April 1, 2002, and ending at midnight on the 31st day of March, 2007. Possession of the Property shall commence upon execution of this Lease. 3. USE AND RESTRICTIONS: 1. LESSEE shall use and occupy the Property as a restaurant facility serving retail beverages, including beer, wine and liquor sales, for the entire term of this Lease, and for no other purposes whatsoever. 2. Any changes or alterations necessary to conform the Property and its fixtures to governmental laws and regulations shall be the responsibility of the LESSOR, including the obligation to make structural changes and to comply with future enactments not within the original contemplation of the parties. This includes compliance with accessibility standards in order to meet the statutory definition of "Public accommodation" and/or a "commercial facility", for the purposes of the Americans With Disabilities Act, 42 U. S.C. Section 12181. Any changes necessary to conform any of LESSEE's removals, alterations, or additions to such laws shall be the responsibility of LESSEE. Any structural change to be made by the LESSEE shall be approved by the LESSOR, but LESSOR's approval shall not affect LESSEE's responsibility for all such legal requirements relating to such changes. 3. LESSEE will neither use nor permit the Property to be used for any illegal or improper purposes, nor permit any disturbance, noise or annoyance whatsoever, detrimental to the Property. LESSEE shall promptly execute and comply with all statutes, ordinances, rules, orders, regulations and requirements of the Federal, State, and City government and of any and all their departments and bureaus applicable to said Property, for the correction, prevention, and abatement of nuisances or other grievances, in, upon, or connected with said Property during the Lease term. 4. Except as stated in this paragraph 3, LESSEE shall, at LESSEE'S sole cost and expense, comply with all regulations of all county, municipal, state, federal, and other applicable governmental authorities, now in force or which may hereafter be in force, pertaining to LESSEE or Page 2 of 19 its use of the leased Property, and shall faithfully observe in the use of the leased Property all municipal and county ordinances and state and federal statutes now in force or which may hereafter be in force. LESSEE shall indemnify, defend and save LESSOR harmless from penalties, fines, costs, expense suits, claims or damages resulting from LESSEE'S failure to perform its obligations in this Section. 4. Rent: In consideration of LESSOR'S demise of the Property to LESSEE for the period set forth above, LESSEE shall and hereby agrees to pay the agreed total rent of Four Hundred and Eighty Thousand ($480,000.00) Dollars, payable monthly to LESSOR at the rate of Eight Thousand ($8,000.00) Dollars. All payments shall be made to LESSOR on the first day of each and every month, in advance without demand, at the above address or at such other place and to such other person as LESSOR may from time to time designate in writing. In addition to the above stated rent, LESSEE agrees to pay any applicable sales tax on the rent, with each monthly rental payment. Upon the execution of this Lease, LESSEE shall pay to LESSOR the sum of Twelve Thousand Dollars ($12,000.00), representing the first month's rent due hereunder, along with Four Thousand Dollars ($4,000.00), representing a security deposit under this lease agreement. LESSOR shall hold said security deposit in an interest bearing account, and will return the security deposit, along with interest accrued, to the LESSEE, upon the termination of the Lease if the LESSEE is not in default under any provision of this Lease. LESSOR does not guarantee an amount of interest to be gained on the sums deposited. In addition, prior to the release of the security deposit, the LESSEE will return all keys to LESSOR and will furnish its forwarding address. Upon inspection by the LESSOR, or its agent, revealing that the premises are being returned by the LESSEE in as good condition as at the time of leasing, ordinary wear, decay and damage by the elements excepted, the security deposit, together with the interest, will be forwarded to LESSEE, within fifteen (15) days of termination of the Lease. 1. LESSEE covenants to make all payments hereunder promptly and without the necessity of notice or demand by LESSOR; to quietly and peaceably deliver and surrender the Page 3 of 19 Property at the end of the term of this Lease, or any extension thereof, and not to permit or cause any waste, impairment or deterioration of the real property or the improvements thereon at any time during the term of this Lease. 2. The first payment, including the first month's rent and security, shall be paid to LESSOR on or before April 1, 2002. 3. Any payment of rent not received by LESSOR within ten (10) days after becoming due shall bear a late charge of five (5%) percent of the amount due. 5. SUBORDINATION: This Lease is and shall be subordinate to all mortgages, which may now or in the future be a lien upon the real property of which the demised Property form a part and are recorded amongst the public records of Indian River County, Florida, and to any modifications, extensions, renewals and/or replacements thereof, provided, however, that during the initial five (5) year term of this Lease, LESSOR agrees not to encumber the leased property in an amount greater than $900,000.00. In the event any proceedings are brought for the foreclosure of, or in any event of exercise of the power of sale under, any mortgage covering the leased Property or in the event a deed is given in lieu of foreclosure of any such mortgage, LESSEE shall attorn to the purchaser, or grantee in lieu of foreclosure, upon any such foreclosure or sale and recognize such purchaser, or grantee in lieu of foreclosure, as the LESSOR under this Lease. Provided, however, that if this Lease is in full force and effect, the right to possession of LESSEE to the Property and LESSEE's rights arising out of this Lease shall not be affected or disturbed by the rights of the mortgagee in the exercise of any rights under the mortgage or note secured thereby, nor shall LESSEE be named as a party defendant to any foreclosure to the lien of the mortgage. In the event that the mortgagee, or any person, acquires title to the lease Property pursuant to the exercise of any remedy provided for in the mortgage, this Lease shall not be terminated or affected by said foreclosure or sale, or any such proceeding, and the mortgagee shall agree that any sale of the leased Property pursuant to the exercise of any rights and remedies under the mortgage, or otherwise, shall be made subject to this Page 4 of 19 Lease and the rights of LESSEE hereunder. Attached hereto and incorporated herein is the Exhibit "C", Subordination, Non-Disturbance and Attornment Agreement between LESSOR, LESSEE, and LENDER, as fully executed by the respective LESSOR, LESSEE, and LENDER, reflecting the provisions of this Paragraph 5. 6. CONDITION OF PROPERTY/ALTERATIONS, REPAIRS AND MAINTENANCE: 1. LESSEE hereby agrees to take the leased Property in "as is" condition. 2. No further or additional alterations or additions shall at any time be made by LESSEE without LESSOR's prior written consent. Said consent shall not be unreasonably withheld or delayed. If LESSOR shall give its consent, all work, repairs and alterations made by LESSEE shall be done in a good and workmanlike manner and in compliance with any applicable governmental rules and regulations and the cost thereof shall be paid by LESSEE, in cash or its equivalent, so that the demised Property shall at all times be free of liens, for labor and materials supplied or claimed to have been supplied to the demised Property. Any alterations shall immediately become the property of LESSOR, subject only to the use of same by LESSEE during the term of this Lease. 3. LESSOR shall, at its own expense, keep, maintain and repair the roof and structural components of the building, except that LESSEE shall be responsible for the repair of the roof and structural components if the damage thereto is caused by the willful or negligent acts of the LESSEE, LESSEE's employees, agents, or invitees. LESSEE agrees to make necessary repairs to the mechanical and electrical systems thereof, and the parking areas and sidewalks located on the leased property. LESSEE shall keep and maintain said Property and the immediate exterior thereof, including docks, sidewalks, and areas adjoining, in a clean, safe, secure, and wholesome condition and shall defend, indemnify and hold harmless the LESSOR against any loss, costs, damage, or expense by reason of any accident, loss, casualty, or damage resulting to any person or property through the use of said Property or by reason of any act or thing done or undone on or about the said Property. 4. LESSEE agrees to repair (and, if necessary, replace) and maintain in good and Page 5 of 19 operational order and condition the nonstructural interior portions of the leased Property, including without limitation doors, windows, plate and window glass, flooring, plumbing, heating, electrical, air conditioning, sewage facilities and appliances. 5. Nothing contained in this Lease shall be construed as a consent on the part of the LESSOR to subject the estate of the LESSOR to liability under the Construction Lien Law of the State of Florida, it being expressly understood that the LESSOR's estate shall not be subject to such liability. LESSEE shall strictly comply with the Construction Lien Law of the State of Florida as set forth in Florida Statutes, Chapter 713. In the event that a claim of lien is filed against the Property in connection with any work performed by or on behalf of the LESSEE (other than LESSOR's work), the LESSEE shall satisfy such claim, or shall transfer same to security, within thirty (30) days from the date of filing. In the event that the LESSEE fails to satisfy or transfer such claim, within said thirty (30) day period, the LESSOR may do so and thereafter charge the LESSEE, as additional rent, all costs incurred by the LESSOR in connection with the satisfaction or transfer of such claim, including attorneys' fees. Further, the LESSEE agrees to indemnify, defend and save the LESSOR harmless from and against any damage or loss incurred by LESSOR as a result of any such claim of lien. 7. INSURANCE: The LESSEE shall obtain at LESSEE's expense, a policy or policies of liability insurance for injuries or death of person or persons, or damage to property sustained the demised Property with minimum limits of Two Million Dollars ($2,000,000.00) for injury or death of any one person and Two Million Dollars ($2,000,000.00) for injuries to or death of more than one person, in any one accident or multiple accidents, and Five Hundred Thousand Dollars ($500,000.00) damage to property. Said policy or policies will be standard owner's, LESSOR's, and LESSEE's policies and will include the LESSOR as named insured and either the original or duplicate original of said policy or policies shall be delivered to the LESSOR and all premiums therefor will be paid by the LESSEE. LESSEE shall also obtain at LESSEE's expense, customary hazard and casualty insurance at the full insurable value of the improvements. Said policy shall be standard owner's, Page 6 of 19 LESSOR's, and LESSEE's policies, and will include the LESSOR as named insured and either the original or duplicate original of said policy or policies shall be delivered to the LESSOR and all premiums therefor will be paid by LESSEE. Except as specifically set forth herein, neither party shall be required to keep or maintain insurance for the benefit of the other party in respect to the said Property or any contents therein. 8. DAMAGE BY FIRE OR OTHER CASUALTY: Should the building or premises herein leased by the LESSOR unto the LESSEE, either prior to the beginning of the term hereof or during the term hereof, be damaged by fire or other casualty, then, provided insurance proceeds are available, the LESSOR shall restore, repair or rebuild the premises including any additions or improvements made by LESSOR or by LESSEE, on the same plan and design as existed immediately before such damage or destruction occurred, and the materials used in repair shall be as nearly like original materials as may then be reasonably procured in regular channels of supply. When the premises shall be sufficiently repaired and restored or rebuilt and in the condition that they were prior to said fire or other casualty, then the LESSEE shall be given possession thereof and from that time shall pay rent as hereinabove provided; provided, however, that from the date of such fire or other casualty until such time as said premises are rebuilt, repaired or restored, all rent and other expenses thereon shall be abated. 9. INDEMNIFICATION: LESSEE shall indemnify, defend, and hold harmless LESSOR, its successors and assigns, from and against any and all claims, demands, losses, liabilities, judgments and expenses of any nature whatsoever including reasonable attorneys' fees both at trial and appellate level and all costs of litigation, which may be asserted against or imposed upon LESSOR or LESSOR'S title to or interest in the leased Property and which may arise out of or be attributable to, directly or indirectly: (a) LESSEE'S interest in and possession of the leased Property under this Lease, (b) the ownership or operation by LESSEE of its business on the leased Property, (c) any negligent or willful Page 7 of 19 act or omission by LESSEE, or any of its agents, contractors, servants, employees, licensees, customers, or invitees, (d) injury to or death of any person (including without limitation, the public) or loss or damage to any property, including loss of use thereof, occurring on the leased Property as a result of any negligence or willful act or omission by LESSEE, or any of its agents, contractors, servants, employees, licensees, customers, or invitees, or (e) any failure by LESSEE to perform or comply with any of the covenants, agreements, terms, or conditions to be performed or complied with by LESSEE hereunder. 10. CONDEMNATION: The parties hereto agree that should the demised Property, or such portion thereof as will make the Property unusable for the purposes herein leased, be taken or condemned by competent authority for public or quasi-public use, then this Lease shall terminate from the date when possession of the part so taken shall be required for the use and purpose for which it had been taken. In the event any part of the building, or common area, or rights-of-way adjoining, or approaches thereto are taken in condemnation proceedings so that, in the reasonable judgment of LESSEE and LESSOR, the Property remaining substantially affects LESSEE'S business operation, LESSEE may cancel the Lease, or, at its option, retain the Property. If LESSOR agrees to restore the entire remaining building to proper tenantable condition, rental shall abate and this Lease shall continue in effect. If the Lease continues after a partial taking, the rent shall abate proportionately as to that taking. Although all damages in the event of any condemnation are to belong to LESSOR, whether such damages are awarded as compensation or diminution in value of the leasehold or the fee of the leased Property, LESSEE shall have the right to claim and recover from the condemning authority, but not from the LESSOR, such compensation as may be separately awarded or recoverable by LESSEE in LESSEE'S own right on account of any damage to LESSEE'S business by reason of the condemnation and for or on account of any cost or loss to which LESSEE might be put in removing LESSEE'S merchandise, furniture, fixtures, leasehold improvements and equipment from the leased Property. Page 8 of 19 11. ASSIGNMENT AND SUBLETTING: LESSEE, for it and its successors or assigns, expressly covenants that it shall not assign, mortgage or encumber this agreement, nor sublet or underlet, nor suffer or permit the demised Property, or any part thereof, to be used by others without the prior written consent of LESSOR in each instance, which cannot be unreasonably withheld or delayed. Notwithstanding any provision herein to the contrary, LESSEE may assign this Lease without LESSOR's consent to any corporation which is affiliated with LESSEE, or to any corporation with or into which LESSEE merges or consolidates, or which acquires substantially all of the assets of LESSEE's operations. If, with consent of LESSOR, this Lease be assigned, or the demised Property, or any part thereof, be underlet or occupied by anybody other than LESSEE, LESSOR may, after default by LESSEE, collect rent from the assignee, under-tenant or occupant, and apply the net amount collected to the rent herein reserved, but no such assignments, underletting, occupancy or collection shall be deemed to relieve LESSEE of any of its obligations hereunder nor be deemed a waiver of this covenant, or the acceptance of the assignee, under-tenant or occupant as tenant, or a release of LESSEE named herein from the further performance by such LESSEE of the covenants on the part of LESSEE herein contained, it being understood and agreed that the LESSEE named herein shall, at all times, remain the primary obligor under this Lease. The consent by LESSOR to an assignment or underletting shall not in anywise be construed to relieve LESSEE, or any other tenant or occupant of the demised Property, from obtaining the express consent, in writing, of LESSOR to any further assignment or underletting. 12. TAXES AND ASSESSMENTS: LESSEE shall pay before delinquency all personal property taxes on the furniture, fixtures, equipment and other property of LESSEE located in the leased Property, together with real property taxes attributable to the Property for the entire term of the Lease. 13. UTILITIES: LESSEE shall pay, in addition to the rent above specified, all charges for Page 9 of 19 gas, electricity, and water used on the Property, and for all other utilities furnished to the Property directly by separate meters serving only the Property leased herein. LESSOR shall not be liable to the LESSEE for any stoppage of either the water, sewage, heating, cooling, or electrical service for the leased Property, or any part of the mechanical plant of the leased Property not directly due to lack of ordinary care by the LESSOR or arising from riots, strikes, unavoidable accidents or casualty, or other like or unlike causes beyond the control of the LESSOR or for any stoppage thereof for needful repairs, or for improvements, provided the LESSOR uses reasonable diligence to resume such service. 14. REMEDIES OF LESSOR: 1. (i) If LESSEE shall default in the payment of the rent reserved herein, or in the payment of any item of additional rent or other monies due hereunder, or any part of same, or LESSEE shall default in the observance of any of the other terms, covenants and conditions of this Lease and such default continues for more than thirty (30) days after written notice of such default; or (ii) If the demised Property shall be abandoned, deserted or vacated, or if LESSEE shall sublet the demised Property or assign this Lease to an unapproved party as hereinabove provided; (iii) If LESSEE shall make an assignment for the benefit of creditors, of file a voluntary petition in bankruptcy, or be adjudicated as bankrupt by any court and such adjudication shall not be vacated within thirty (30) days, or LESSEE takes the benefit of any insolvency act, or LESSEE be dissolved voluntarily or involuntarily or have a receiver of LESSEE's property appointed in any proceedings other than bankruptcy proceedings, and such appointment shall not be vacated within thirty (30) days after it has been made, then, upon the happening of any one or more of the defaults or events specified above, this Lease, and the term hereof, shall, upon the date specified in a written notice from LESSOR, which date shall not be less than thirty (30) days after the date of mailing of such notice by LESSOR, wholly cease and terminate with the same force and effect as Page 10 of 19 though the date so specified were the date hereinabove first set forth as the date of expiration of the term of this Lease; and thereupon, or at any time thereafter, LESSOR may re-enter said Property and have possession of the same and/or may recover possession thereof by legal proceeding. b. In case of any such default, re-entry, expiration and/or dispossession by summary proceedings, or otherwise, LESSEE shall, nevertheless, remain and continue to be liable to LESSOR in a sum equal to all rent and additional rent herein reserved for the balance of the term herein demised as the same may become due and payable pursuant to the terms of this Lease. LESSOR may repair or alter the demised Property in such manner as LESSOR may deem necessary or advisable, and/or let or re-let the demised Property and any and all parts thereof for the whole or any part of the remainder of the original term hereof or for a longer period, in LESSOR's name, or as the agent of LESSEE, and, out of any rent so collected or received, LESSOR shall, first, pay to it the expense and cost of retaking, repossessing, repairing and/or altering the demised Property, and the expense of removing all persons and property therefrom, and second, pay to it any cost or expense sustained in securing any new tenant or tenants, and, third, pay to it any balance remaining on account of the liability of LESSEE to LESSOR for the sum equal to the rent reserved herein unpaid by LESSEE for the remainder of the term herein demised. Any entry or re-entry by LESSOR, whether had or taken under summary proceedings or therewith, shall not absolve or discharge LESSEE from liability hereunder. c. Should any rent so collected by LESSOR after the payment aforesaid be insufficient fully to pay to LESSOR a sum equal to all rent and additional rent herein reserved, the balance or deficiency shall be paid by LESSEE on the rent days herein specified, that is, upon each of such rent days, LESSEE shall pay to LESSOR the amount of the deficiency then existing and LESSEE shall be and remain liable for any such deficiency, and the right of LESSOR to recover from LESSEE the amount thereof, or a sum equal to the amount of all rent and additional rent herein reserved, if there shall be no re-letting, shall survive the issuance of any dispossessory warrant or other termination hereof. d. Suit or suits for the recovery of such deficiency or damage, or for a sum equal Page 11 of 19 to any installment or installments of rent or additional rent hereunder, may be brought by LESSOR from time to time at LESSOR's election, and nothing herein contained shall be deemed to require LESSOR to await the date wherein this Lease, or the term hereof, would have expired by limitation had there been no such default by LESSEE or no such termination or cancellation. LESSOR shall be entitled to reasonable attorney's fees plus costs. e. The LESSOR may apply the security deposit and all interest accrued thereon against any liability of the LESSEE arising by virtue of the LESSEE's default under this Lease. 15. ACCESS TO PROPERTY: LESSOR shall have the right to enter upon the Property during regular business hours upon twenty-four (24) hours advance written notice to LESSEE, (except that no such advance notice shall be required in cases of emergency) to examine the same, to make such repairs, additions or alterations as may be deemed necessary for the safety, comfort, or preservation thereof, and to confirm compliance with the provisions of this Lease. 16. Notices: All notices to be given pursuant to this Lease shall be in writing and shall be sent by prepaid certified or registered mail to the address of the parties below specified or at such other address as may be given by written notice in the manner prescribed in this paragraph. Any notices to LESSOR shall be sent to LESSOR at: P.O. Box 3058, Vero Beach, Florida 32964-3058, with a copy to Steve L. Henderson, Esq., 817 Beachland Boulevard, Vero Beach, Florida 32963; and LESSEE's address for notices shall be at the following address: Post Office Box 1332, Point Pleasant Beach, New Jersey 08742, with a copy to Christopher H. Marine, Esq., 979 Beachland Boulevard, Vero Beach, Florida 32963. 17. No Waiver: No delay or omission of the exercise of any right by either party hereto shall impair any such right or shall be construed as a waiver of any default or as acquiescence therein. One or more waivers of any covenant, term or condition of this Lease by either party shall not be construed by the other party as a waiver of a subsequent breach of the same covenant, term or Page 12 of 19 condition. No requirements whatsoever of this Lease shall be deemed waived or varied because of either party's failure to delay in taking advantage of any default, and LESSOR's acceptance of any payment from LESSEE with knowledge of any default shall not constitute a waiver of LESSOR's rights in respect to such default, nor of any subsequent or continued breach of any such default or any other requirement of this Lease. All remedies provided for herein shall be construed as cumulative and shall be in addition to every other remedy otherwise available to LESSOR. 18. END OF TERM: Upon the expiration or other termination of this Lease, LESSEE shall quietly surrender possession of the Property to LESSOR and return the Property to LESSOR in as good condition as when first occupied at the commencement hereof, reasonable wear and tear excepted. If the last day of the term of this Lease falls on a Sunday, this Lease shall expire on the business day immediately following. 19. RELATIONSHIP OF PARTIES: Nothing herein contained shall be deemed or construed by the parties hereto, nor by any third party, as constituting the LESSOR a partner of LESSEE in the conduct of LESSEE's business, or as creating the relationship of principal and agent or joint venturers between the parties hereto; it being the intention of the parties hereto that the relationship between them is and shall at all times during the term of this Lease be and remain that of LESSOR and LESSEE only. 20. NO BROKER: LESSOR acknowledges and affirms unto LESSEE that LESSOR has not contacted or dealt with a real estate broker and/or real estate salesperson in conjunction with the lease/option of the property. LESSEE acknowledges and affirms unto LESSOR that LESSEE has not contacted or otherwise dealt with either a real estate broker or real estate salesperson. In the event a broker or salesperson makes a claim for a brokerage commission, finder's fee, or similar charge, the party who has contacted such broker or salesperson shall bear the full cost and expense of such brokerage commission, finder's fee, or similar charge. Each party does hereby fully indemnify Page 13 of 19 and save and hold harmless the other party of and from any liability or obligation to pay a brokerage commission, finder's fee, or similar charge. 21. CAPTIONS: The paragraph captions contained herein are for convenience only and do not define, limit or construe the contents of such paragraphs and are in no way to be construed as a part of this Lease. 22. DEFINITIONS: Words of any gender used in this Lease shall be held to include any other gender and words in the singular number shall be held to include the plural when the sense requires. 23. AUTHORITY TO EXECUTE: LESSOR and LESSEE do each hereby represent to the other that it has the capacity and authority to enter into this agreement. LESSOR is the fee simple owner of the real property and improvements which are the subject of this Lease. 24. SUCCESSORS IN INTEREST: All provisions herein contained shall bind and inure to the benefit of the respective parties hereto, their heirs, personal representatives, successors and assigns. 25. QUIET ENJOYMENT: LESSOR agrees that it has lawful title and right to make this Lease for the term aforesaid and that it will provide LESSEE with evidence thereof prior to the time at which LESSEE takes possession of the Property, and that it will put the LESSEE into complete and exclusive possession of the Property, including use of the common area, free from all orders, restrictions, and notices of any public or quasi-public authority, and that if the LESSEE shall pay the rental and perform all the covenants and provisions of this Lease to be performed by the LESSEE, the LESSEE shall, during the term demised, freely, peaceably and quietly occupy and enjoy the full possession of the Property hereby leased, including the use of the common area, and the tenements, hereditaments and appurtenances thereunto belonging, and the rights and privileges herein granted, without molestation or hindrance, lawful or otherwise, and that if at any time during the term hereby Page 14 of 19 demised the title of the LESSOR shall fail or be discovered not to enable LESSOR to grant the term hereby demised, the LESSEE shall have the option to annul and void this Lease. 26. SURVIVABILITY OF WARRANTIES: The representations and warranties of LESSOR provided above shall be continuing in nature, and they shall survive the termination of this Lease. 27. RADON: Radon is a naturally occurring radioactive gas that, when it has accumulated in a building in sufficient quantifies, may present health risk to persons who are exposed to it over time. Levels of radon that exceed Federal and State Guidelines have been found in buildings in Florida. Additional information regarding radon and radon testing may be obtained from the county public health unit. 28. OPTION TO RENEW LEASE: So long as the LESSEE is not then in default in the payment rent, or in the performance of any of the terms of this Lease, the LESSOR hereby grants to LESSEE an option to renew this Lease for up to three (3) additional five (5) year terms. To exercise said option, LESSEE must notify LESSOR, in writing, on or before ninety (90) days prior to the date of expiration of the initial term, or ninety (90) days prior to expiration of any subsequent renewal term of this Lease, that LESSEE elects to exercise said option. The renewal terms will be subject to the same terms and conditions as provided herein, except that the rent due shall be adjusted as follows: the rental payment shall be increased by ten percent (10%) for the additional five-year renewal term. 29. PERSONAL PROPERTY: All personal property WHICH have been placed or moved in the leased Property by LESSEE during the period of LESSEE'S possession and occupancy shall remain LESSEE'S property, and LESSEE may remove the same upon the termination hereof, to the fullest extent permitted by Florida law; provided, however, LESSEE shall repair any damage to the leased Property occasioned or resulting from said removal. Page 15 of 19 30. RECORDING/MEMORANDUM OF LEASE: LESSOR and LESSEE shall execute a Memorandum of Lease in recordable form. Such Memorandum shall not disclose the monthly rent and may be recorded in the public records of Indian River County, Florida. The form of Memorandum of Lease is attached hereto as Exhibit "D". 31. OPTION TO PURCHASE: For and in consideration of the mutual covenants and conditions as contained herein, LESSOR hereby grants to the LESSEE the right to purchase the Property, upon the following terms and conditions, and those terms and conditions of the Contract for Sale and Purchase, attached hereto and incorporated herein (known as Exhibit "B"). a. The total purchase price shall be the sum of One Million Seventy Five Thousand Dollars ($1,075,000.00), and shall be a gross amount to the LESSOR. There shall be a standard division of closing costs as are generally applicable in transactions taking place in Vero Beach, Indian River County, Florida, and the provisions for division of closing costs as contained within Exhibit "A". b. If LESSEE elects to exercise this option, LESSEE shall do so by giving notice thereof in writing to LESSOR delivered by certified mail return receipt requested, no later than ninety (90) days prior to the expiration date of the first five (5) year term of this Lease, time being of the essence. Simultaneously therewith LESSEE shall post, $53,750.00 as an earnest money deposit, in escrow with Gould, Cooksey, Fennell, O'Neill, Marine, Carter, & Hafner, P.A., or such other escrow agent as may be mutually designated by LESSOR and LESSEE. c. This option shall remain in force to the expiration date of the first five (5) year term of this Lease, conditioned upon the faithful performance by the LESSEE of all the covenants, conditions, and agreements required to be performed by it as LESSEE under this Lease, and the payment by the LESSEE of all basic rent, additional rent, and other special payments as provided in this Lease to the date of the completion of the purchase of the property by LESSEE. In the event this Lease is terminated, then, in that event, the option to purchase hereunder shall terminate. Page 16 of 19 d. Notice: The notice of exercise of the option, the notice required to extend the option, or any other notices required under this agreement, shall be given by certified mail/return receipt requested, and shall be deemed delivered as of the postmark date. Notices shall be directed to the parties, as follows: TO SELLER: WITH COPY TO: STEVEN CRAIG LONG STEVE HENDERSON, ESQ. P. 0. Box 3058 Moss, Henderson, et al Vero Beach, Florida 32964-3058 817 Beachland Blvd. Vero Beach, FL 32963 TO BUYER: WITH COPY TO: CHEFS INTERNATIONAL, INC., CHRISTOPHER H. MARINE, ESQ. a Delaware corporation, Gould, Cooksey, et al Post Office Box 1332 979 Beachland Blvd. Point Pleasant Beach, New Jersey 08742 Vero Beach, FL 32963 e. The closing shall take place at the offices of Gould, Cooksey, Fennell, O'Neill, Marine, Carter & Hafner, P.A., 979 Beachland Blvd., Vero Beach, Florida 32963, or such other place as the parties may agree, within fifteen (15) days following expiration of the initial five (5) year term of this Lease, provided, however, that if said date is a Saturday, Sunday or legal holiday, the closing shall occur on the next ensuing business day. Not later than thirty (30) days prior to the closing date, LESSOR shall provide to LESSEE a title insurance commitment to the Property in an amount equal to the purchase price. At the time of closing, LESSOR shall convey title to the demised Property to the LESSEE, by good and sufficient General Warranty Deed, warranting title to be free and clear of all liens, charges, encumbrances, clouds or defects, whatsoever, except easements of record, and taxes for the current year, not yet due and payable. Real estate taxes shall not be prorated Rent due under this Lease shall be pro-rated for the fifteen (15) days subsequent to the expiration of the Lease, and an appropriate adjustment made. Any outstanding municipal or governmental assessments, including but not limited to those relating to the Royal Palm Pointe project shall be satisfied by LESSOR. 7. Provided that the option is exercised, the terms and provisions of the Exhibit "B" Contract shall govern the parties with respect to closing of the transaction. The Effective Date Page 17 of 19 under the terms of the Contract shall be deemed the date on which the Notice of Exercise of the Option is delivered. h. Buyer hereby agrees to purchase the property in its present condition at closing. Standards D and N of the Standards for Real Estate Transactions of the Contract are hereby deleted, it being agreed that this purchase shall be on an "as is" basis. i. This Option to Purchase shall be assignable by LESSEE, but only to an assignee approved or exempted from approval under Section 11 of this Lease. 32. ENTIRE AGREEMENT: This instrument of lease contains the entire and only agreement between the parties concerning the demised Property and no prior oral or written statements or representations, if any, of any party hereto or any representative of a party hereto not contained in this instrument, shall have any force or effect. This Lease shall not be modified in any way except by a writing executed by LESSOR and LESSEE, and no oral agreement or representations for rental shall be deemed to constitute a lease other than this agreement. This agreement shall not be binding until it shall have been executed by LESSEE and LESSOR. 33. COUNTERPARTS: This Lease may be executed in two (2) or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have hereunto set their hands and seals the day first above written. Witnesses: LESSOR: As to LESSOR /s/ Sandra Rennick /s/ Steven Craig Long - ------------------- --------------------- SANDRA RENNICK STEVEN CRAIG LONG /s/ Steve Henderson - ----------------------------------- STEVE HENDERSON Page 18 of 19 LESSEE: CHEFS INTERNATIONAL, As to LESSEE: INC., a Delaware corporation /s/ Martin W. Fletcher /s/ Anthony C. Papalia - ----------------------------------- By: Anthony C. Papalia, President /s/ Cynthia L. Harter - ----------------------------------- Page 19 of 19 -----END PRIVACY-ENHANCED MESSAGE-----