UFood Restaurant Group, Inc. (fka UFFCQ)

[poopy]

http://www.tmronline.com/A55951/tmrarticles.nsf/b2d8cb9dc8ff27d286256916006c8c74/fb7d16616c884475852573920013a711!OpenDocument

* I got an invite to a reception for UFoodGrill which I printed in Monday's report, October 22nd. I thought it was for a local firm that just got funding, so I went. It was held in a room at the Drake and the shrimp dim sum was good as were the lamb chops.

But that isn't what the meeting was about at all. It was actually the last leg of a "road show" presentation for a private equity offering for UFoodGrill (or formally UFood Franchise Company) for somewhere between $5.5MM and possibly $13MM if they are oversubscribed.

The so-called "new money" will be worth 25% of the firm, if I understood correctly, and the post-money valuation will be $32MM. Each share of common stock is $1.00.

They expect to have 600 units of the store sold by 2009 with a valuation of $300MM, according to one guy I talked to.

They have 64 committed stores sold thus far and each store is sold to the franchisee $35,000, but they are not selling just one or two stores per franchisee. They are selling entire territories with exclusive rights.

The franchisee pays the corporate office 5% of the gross store revenue for the license and 3% of the gross for advertising. All training and quality standards come from a "university" in Boston that franchisees are required to attend. Food is distributed through approved vendors. I don't know how the chefs are trained, but one can only assume that they will be trained by the corporate folks.

The private equity offering is for a minimum of 5.5 million shares and a maximum of 8.0 million shares with an oversubscribe blueshoe provision allowing up to 13 million shares. According to Tim Etter of Kingsbury Capital, they will probably hit the 13 million level.

The room was filled with suits. Lots of guys from Spencer Trask (www.spencertrask.com) in New York wearing very expensive suits. The head guy from Spencer appeared to be Adam Stern who can be reached at [e-mail]. There were also a number of guys from a local firm that is part of the syndicate, Kingsbury Capital Advisors, www.kingsburycap.com. Other firms there who may be part of the syndicate were: one called AOS, www.aosbroker.com , Capital Preservation Investors, LLC., www.capitalpreservationinvestors.com, GLL Investors, www.gllinvestors.com, Stern Investment Advisors, LLC., www.sternadvisors.com. What the heck. I will give you a list of the cards I collected.

The stock is currently trading on the pink sheets under the symbol uffc.pk on Yahoo! or you can go to www.pinksheets.com and type in UFFC.

The price of the stock is $1.80 a share on the pink sheets and the private equity offering is for $1.00 a share. Also, if you buy through the private equity offering, you get 50% warrant coverage at $1.25 per warrant for each share of your stock purchase. So, if you own 10 shares of stock, you have five warrants at $1.25.

The shares in the private equity offering are being sold in units of $25K.

One thing I found out is that there is something called a cashless exercise. So, let's say that you have warrants at $1.25 and you want to exercise them when the stock is at $3.25, you can buy the stock without cash and you would be paid the $2.00 difference between the stock price minus the commissions on the transaction, of course.

George Naddaff, the founder of UFoodGrill, gave a very interesting presentation which was diminished only by the PowerPoint not working as well as they had hoped.

George is 77 and he is fit as a fiddle, with lots of energy and youth. George also made a lot of money with Boston Market and he was one of the founders. See this article for more details: http://www.restaurant-hospitality.com/article/9679

The model for UFoodGrill emulates Boston Market in that they are not selling franchises to one store owners. They are franchising exclusive rights to territories and giving the franchisee the right and obligation to build out a certain number of stores within five years. So, if you buy the rights to Cleveland, you will have to build out, say ten stores in five years.

They are also emulating the Cracker Barrel model in that the food store is combined with a retail outlet selling supplements. The margins for the supplements are 40% and the margins for the food served are 15-18%. So, if you are doing 75% food and 25% supplements, you are looking at gross margins in the 20% range which makes this a more attractive proposition than just having a restaurant. At Cracker Barrel the ratio of food service to tchotchkes is 3:1, and that appears to be what they are expecting for UFoodGrill.

George is also firmly on board with the heart healthy food movement. They don't fry anything and no butter is used. They offer food for just about every healthy taste, including vegan food.

Each store is only about 2,500 square feet and George was adamant that they will be tied to strip malls and not stand-alone stores. Each restaurant does have sit down space. George feels that you have to leverage off of incoming traffic and he also said that they want to place the stores within a one to two mile radius of three exercise facilities that each have 3,500 subscribers.

George said that the time between order and food delivered is four minutes and they are what you might call a fast casual restaurant franchise --- fast for lunch and casual for dinner. A lot of "gym rats" go to the nine stores that are in operation now. George said that the typical per store revenue is $1.1MM to $1.4MM.

He sees a huge opportunity in airports and apparently has some connections to make that happen, maybe even in a city like Chicago. Also, hospitals are a big possible opportunity. How can your doctor tell you to eat heart healthy and then you go to eat in the hospital cafeteria where they serve pizza? That is his logic with respect to why hospitals might be interested.

Looking over the private placement memorandum, I see that George owns 2,234,308 shares of common stock which will be 7.1% of the company if the maximum raise is completed. Eric Spitz, the next largest shareholder, will own 2.9% with 899,888 shares of stock. Directors and executive officers as a group will own 11.2% after the maximum raise in the offering.

George's salary is currently $300K and in 2006 it was $209K; in 2005 it was $150K. Heck, at that price he was making less than David Weinstein and Al Wasserberger. Hey, I wrote this almost two weeks ago, so Al is making nothing right now. George also has another $125K in annual compensation but I don't know what that is.

Eric makes $175K and he is currently the Executive Vice President of Business Development. Actually in one place the memorandum says that he is the former EVP of Biz Dev and in another place it says that he is currently in that job. Something happened here that we don't really know about, and it happened in September 2007. Eric was the Co-Chief CEO and President until September. Huh, a demotion? He was making 200,924 in 2006 so his salary appears to be going down.

It would appear that they brought in Charles Cocotas to take Eric's place as co-CEO and President. Charles is making $200K currently and he had been President and CEO of Boston Chicken. So I gather that Cocotas was made co-CEO because he is 72 and an old buddy of George's, whereas Eric Spitz is just 37 years old.

If the maximum is raised, there will be 31 million shares of common stock outstanding after the raise.

What about George Foreman who has been hired to promote the brand? As George Naddaff pointed out, Foreman usually wants cash on the barrel head, but here he was willing to take stock. They gave Foreman 900,000 shares of common stock to use his name and likeness and an additional 100,000 shares of stock will be forthcoming if the franchise has sold 600 stores by December 31, 2009. On top of that, Foreman will get 0.2% of the aggregate net sales of the franchise and Company owned stores.

There are four company owned stores right now and nine stores total. The fast-casual restaurant market is highly competitive and fragmented, the memorandum states. Some competitors in the "better for you" and quick- serve environment are:

Better Burger (NYC)
Energy Kitchen (NYC)
The Pump (NYC)
Topz (California)
Evo's (Florida)
B. Good (Boston)
Soma Grill (Arizona)
Healthy Bites (Florida)

None of these chains has more than six stores.

UFood has 14 corporate employees and about 100 employees at its four company stores. They own no real estate. They have franchise development agreements in Boston, Naples, Sacramento, Houston, Miami, San Jose, and some Texas airports. The airport card could be very promising and George Naddaff seems to have connections there to make it happen.

Spencer Trask was paid $200,000 in cash compensation for handling all the transactions which include some dealings with Pubco and Axxent, two related companies, as well. Additionally, Spencer Trask was paid a warrant to purchase 800,000 shares of common stock at $1.00 a share and Spencer Trask can exercise those warrants for a period of seven years. They also got $75K for expenses.

After the raise, Spencer Trask will own 3,700,000 shares of stock or 11.9% of the firm if the raise is the maximum.

UFood will cut a bit of a deal for franchisees who have larger territories, but in general they want 50% of the $35K per store fee up front. They estimate that the cost of opening one store is between $560K and $760K. They provide a five week training program for all franchisees and their employees.

Currently, 70% of the restaurant supplies come from US Foodservice, Inc. and on the supplement or retail side, over 70% of the supplies come from KCF Nutrition Distributors of Milford, CT; and Dynamic Marketing of Cranston, RI. Both firms supply sports nutrition and vitamin products. I believe that George said that they have now cut a deal with GNC as well.

One name that may sound familiar is that of Stuart Fuchs who used to be with the investment firm Gryffindor and that name comes from the Harry Potter books. They did Priva and Lasershield and I have Priva in the TMR archives.

Fuchs and Tim Etter are involved in a new firm, Kingsbury Capital Advisors. I spoke to Tim and he can be reached at 312-380-5304.

Now we have a small world coincidence and a bit of a mystery. Nick Iavarone called me and he is the lawyer representing several former brokers from Advanced Equities, Larry R. Bishop, Dan A. Camphausen, and Judith Meyers. Nick is also currently representing a woman named Denise Kappel who has claims against Advanced Equities for more than $400K in warrants having to do with INFN and more than $100K in punitive damages.

Nick called me while I was in the hospital and I called Joe Baffo over at Chicago Investment Group to let him know about what was going on and he put Richard Lynch on the line. I mentioned to Joe that I had spoken to a buddy of his, Tim Etter, and Joe and Richard seemed quite curious to know where Tim and Stuart Fuchs are. I told them I had the info. at home, but I tried to reach a guy at Spencer Trask to find the number for Tim.

This was all while I was miserable in the hospital.

The guy at Spencer Trask told me that he would check on it and find out about these guys. I found his reaction rather strange. Why didn't he just give me the number for Tim? I had the feeling that he was somehow trying to block me from contacting Tim and I figured that was because of moola. The Spencer Trask guy had no idea that I am a reporter and so I figured that it had to do with the sale of stock for UFood Grill.

Who knows what goes on in these brokerage relationships. But I can tell you this. According to Joe Baffo, Fuchs and company raided a number of the brokers at Chicago Investment Group and that raid came from New Century Bank which owns Kingsbury Capital and New Century was a client of CIG. My, my, these guys play hardball.