SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended OCTOBER 26, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE EXCHANGE ACT
For the transition period from _________________ to _______________
Commission file number 0-8513
CHEFS INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 22-2058515
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
62 Broadway, Point Pleasant Beach, NJ 08742
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(Address of principal executive offices)
(Registrant's telephone number, including area code) (732) 295-0350
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(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date:
Class Outstanding Shares at November 14, 2003
---------------------------- ---------------------------------------
Common Stock, $.01 par value 3,926,112
CHEFS INTERNATIONAL, INC.
I N D E X
PART I FINANCIAL INFORMATION PAGE NO.
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ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets - 1 - 2
October 26, 2003 (unaudited) and January 26, 2003
Consolidated Statements of Operations - 3
Nine and Three Months Ended October 26, 2003 and
October 27, 2002 (unaudited)
Consolidated Statements of Cash Flows - 4
Nine Months Ended October 26, 2003 and
October 27, 2002 (unaudited)
Notes to Consolidated Financial Statements 5 - 6
ITEM 2. Management's Discussion and Analysis 7 - 11
of Financial Condition and Results of Operations
ITEM 3. Controls and Procedures 12
PART II OTHER INFORMATION
-----------------
ITEM 6. Exhibits and Reports on Form 8-K 13
SIGNATURE 14
CERTIFICATION 15 - 17
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
CONSOLIDATED BALANCE SHEETS
ASSETS
------
October 26, 2003 January 26, 2003
---------------- ----------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,885,857 $ 1,069,857
Investments --- 151,000
Available-for-sale securities 1,951,749 1,668,531
Receivable - related party 40,000 40,000
Miscellaneous receivables 65,179 62,173
Inventories 1,152,045 1,128,992
Prepaid expenses 143,454 107,988
----------- -----------
TOTAL CURRENT ASSETS 5,238,284 4,228,541
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, at cost 21,135,829 21,411,079
Less: Accumulated depreciation 9,626,869 9,164,376
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, net 11,508,960 12,246,703
----------- -----------
OTHER ASSETS:
Asset held for sale 50,180 ---
Intangibles - not subject to amortization 839,733 889,913
Other intangibles 43,136 52,605
Receivable - related party 48,523 77,563
Equity in life insurance policies 602,822 602,822
Deferred income taxes 916,000 1,064,000
Other 28,813 34,635
----------- -----------
TOTAL OTHER ASSETS 2,529,207 2,721,538
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$19,276,451 $19,196,782
=========== ===========
The accompanying notes are an integral part of these financial statements.
1
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
October 26, 2003 January 26, 2003
---------------- ----------------
(Unaudited)
CURRENT LIABILITIES:
Notes and mortgages payable, current maturities $ 265,694 $ 271,490
Accounts payable 544,223 702,233
Accrued payroll 144,193 157,637
Accrued expenses 815,750 493,450
Gift certificates 299,271 511,955
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TOTAL CURRENT LIABILITIES 2,069,131 2,136,765
----------- -----------
NOTES AND MORTGAGES PAYABLE 1,720,603 1,960,438
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OTHER LIABILITIES 703,546 747,559
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STOCKHOLDERS' EQUITY:
Capital stock - common $.01 par value,
Authorized 15,000,000 shares,
Issued 3,926,112 39,261 39,695
Additional paid-in capital 31,488,831 31,549,492
Accumulated deficit (16,632,111) (16,854,010)
Accumulated other comprehensive (loss) (112,810) (379,272)
Treasury stock --- (3,885)
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TOTAL STOCKHOLDERS' EQUITY 14,783,171 14,352,020
----------- -----------
$19,276,451 $19,196,782
=========== ===========
The accompanying notes are an integral part of these financial statements.
2
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended Three Months Ended
----------------- ------------------
October 26, 2003 October 27, 2002 October 26, 2003 October 27, 2002
---------------- ---------------- ---------------- ----------------
SALES $ 17,966,680 $ 18,550,308 $ 5,840,150 $ 5,966,171
COST OF GOODS SOLD 5,629,933 5,740,775 1,837,332 1,858,398
------------ ------------ ----------- -----------
GROSS PROFIT 12,336,747 12,809,533 4,002,818 4,107,773
------------ ------------ ----------- -----------
OPERATING EXPENSES:
Payroll and related expenses 5,416,202 5,795,477 1,744,000 1,876,090
Other operating expenses 3,921,573 4,007,213 1,231,426 1,331,547
Depreciation and amortization 845,859 892,983 271,213 302,050
General and administrative expenses 1,396,088 1,492,464 459,153 506,122
Loss on closing restaurant 410,024 --- --- ---
------------ ------------ ----------- -----------
TOTAL OPERATING EXPENSES 11,989,746 12,188,137 3,705,792 4,015,809
------------ ------------ ----------- -----------
INCOME FROM OPERATIONS 347,001 621,396 297,026 91,964
------------ ------------ ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (121,248) (135,288) (38,580) (44,726)
Investment income 111,146 120,593 35,566 41,260
------------ ------------ ----------- -----------
OTHER INCOME (EXPENSE), NET (10,102) (14,695) (3,014) (3,466)
------------ ------------ ----------- -----------
INCOME BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 336,899 606,701 294,012 88,498
PROVISION FOR INCOME TAXES 115,000 227,000 105,000 43,000
------------ ------------ ----------- -----------
INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING
CHANGE 221,899 379,701 189,012 45,498
CUMULATIVE EFFECT OF AN
ACCOUNTING CHANGE (Note 2)
- GOODWILL ACCOUNTING METHOD --- (430,403) --- ---
------------ ------------ ----------- -----------
NET INCOME (LOSS) $ 221,899 $ (50,702) $ 189,012 $ 45,498
============ ============ =========== ===========
INCOME PER COMMON SHARE
BEFORE CUMULATIVE EFFECT
OF AN ACCOUNTING CHANGE $ .06 $ .10 $ .05 $ .01
CUMULATIVE EFFECT OF AN
ACCOUNTING CHANGE
- GOODWILL ACCOUNTING METHOD --- (.11) --- ---
------------ ------------ ----------- -----------
NET INCOME (LOSS) PER
COMMON SHARE $ .06 $ (.01) $ .05 $ .01
============ ============ =========== ===========
Number of shares outstanding 3,926,112 3,965,579 3,926,112 3,965,579
The accompanying notes are an integral part of these financial statements.
3
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED OCTOBER 26, 2003 AND OCTOBER 27, 2002 (Unaudited)
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 221,899 $ (50,702)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 845,859 892,983
Cumulative effect of an accounting change --- 430,403
Deferred income taxes 85,000 164,000
Gain on sale of assets and investments (7,312) (5,154)
Loss on closing restaurant 350,024 ---
Changes in assets and liabilities:
Miscellaneous receivables 26,034 (129,193)
Inventories (23,053) 68,230
Prepaid expenses (35,466) 94,088
Accounts payable (158,010) (170,684)
Accrued expenses and other liabilities (35,443) 13,511
Income taxes payable --- 28,296
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NET CASH PROVIDED BY OPERATING ACTIVITIES 1,269,532 1,335,778
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (328,671) (960,107)
Acquisition of restaurant assets --- (891,190)
Sale or redemption of investments 186,451 409,820
Purchase of investments (14,293) (226,645)
Other 5,822 20,782
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NET CASH (USED IN) INVESTING ACTIVITIES (150,691) (1,647,340)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (245,631) (331,546)
Proceeds from debt --- 500,000
Purchase and retirement of treasury stock (59,200) ---
Additional paid in capital 1,990 ---
----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (302,841) 168,454
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 816,000 (143,108)
CASH AND CASH EQUIVALENTS:
Beginning 1,069,857 1,408,062
----------- -----------
Ending $ 1,885,857 $ 1,264,954
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payment for:
Interest paid $ 122,063 $ 135,207
=========== ===========
Income taxes paid $ 4,000 $ 21,506
=========== ===========
Noncash Transactions:
Increase (decrease) in fair value of securities available for sale $ 297,064 $ (311,006)
=========== ===========
Change in fair value of derivatives accounted for as hedges $ 32,398 $ (107,554)
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1: BASIS OF PRESENTATION
The accompanying financial statements have been prepared by Chefs International,
Inc. (the "Company") and are unaudited. In the opinion of the Company's
management, all adjustments (consisting solely of normal recurring adjustments)
necessary to present fairly the Company's consolidated financial position,
results of operations and cash flows for the periods presented have been made.
Certain information and footnote disclosures required under generally accepted
accounting principles have been condensed or omitted from the consolidated
financial statements pursuant to the rules and regulations of the SEC. The
consolidated financial statements and notes thereto should be read in
conjunction with the Company's audited consolidated financial statements for the
year ended January 26, 2003 and notes thereto included in the Company's Annual
Report on Form 10-KSB filed with the SEC. The results of operations and the cash
flows for the nine and three month periods ended October 26, 2003 presented in
the consolidated financial statements are not necessarily indicative of the
results to be expected for any other interim period or the entire fiscal year.
NOTE 2: ACCOUNTING FOR BUSINESS COMBINATIONS
In July 2001, the FASB issued Statements of Financial Accounting Standards
("Statement") No. 141. "Business Combinations" and No. 142, "Goodwill and Other
Intangible Assets" ("FAS 142"). These standards change the accounting for
business combinations by, among other things, prohibiting the prospective use of
pooling-of-interests accounting and requiring companies to stop amortizing
goodwill and certain intangible assets with an indefinite useful life. Instead,
goodwill and intangible assets deemed to have an indefinite useful life will be
subject to an annual review for impairment. The new standards were effective for
the Company in the first quarter of Fiscal 2003 and for purchase business
combinations consummated after June 30, 2001. The Company completed its initial
goodwill impairment testing during the first quarter of Fiscal 2003 and
determined that there was impairment of goodwill solely because the aggregate
market capitalization of the Company was less than its book value (market
capitalization at January 28, 2002 was $8,923,406 versus a book value of
$15,756,445). Therefore, the Company recorded a one-time, noncash charge of
$430,403 to reduce the carrying value of its goodwill. Such charge is reflected
as a cumulative effect of an accounting change in the accompanying consolidated
statement of operations.
NOTE 3: ACQUISITION
On April 1, 2002, the Company acquired for $882,681 the inventory, furniture,
fixtures, equipment, liquor license and franchising rights of a restaurant
business located in Florida known as Mr. Manatee's Casual Grille. 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.
NOTE 4: EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number of shares
of common stock outstanding during the period.
5
NOTE 5: INVENTORIES
Inventories consist of the following: October 26, 2003 January 26, 2003
---------------- ----------------
Food $ 535,689 $ 512,058
Beverages 156,054 152,269
Supplies 460,302 464,665
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$ 1,152,045 $ 1,128,992
=========== ===========
NOTE 6: INCOME TAXES
At October 26, 2003, the Company had net deferred tax assets of approximately
$2,014,000 arising principally from net operating loss carryforwards. However,
due to the uncertainty that the Company will generate sufficient income in the
future to fully or partially utilize these carryforwards, an allowance of
$1,098,000 has been established to partially offset these assets. Management has
determined that it is more likely than not that future taxable income will be
sufficient to partially realize the benefit of the net operating loss
carryforwards.
NOTE 7: DEPRECIATION AND AMORTIZATION
The Company depreciates its property and equipment using the straight-line
method over the estimated useful lives of the assets, ranging from three to
forty years.
NOTE 8: RESTAURANT CLOSING
In June 2003 the Company closed one of its Mexican theme restaurants. In
connection with the closing, the Company wrote off leasehold improvements and
other equipment of $230,024 and entered into a Surrender Agreement with the
restaurant's landlord which requires the Company to pay $180,000, of which
$60,000 was paid during the second quarter ended July 27, 2003. The remaining
balance of $120,000 is included in accrued expenses in the accompanying
Consolidated Balance Sheet. The loss of $410,024 is shown as "Loss on closing
restaurant" in the accompanying Consolidated Statement of Operations for the
nine months ended October 26, 2003.
Additionally, the Company granted the landlord an option to purchase the closed
restaurant's liquor license. The landlord exercised the option on October 31,
2003 for an agreed upon price of $400,000. The agreement is subject to
government approval of the license transfer. The closing is expected to take
place by February 15, 2004. The liquor license is shown in the accompanying
October 26, 2003 Consolidated Balance Sheet as "Asset held for sale".
NOTE 9: HEDGING INSTRUMENTS
The Company has interest rate swap agreements relating to a portion of its
variable rate debt. 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).
6
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements regarding future performance in this Quarterly Report on Form
10-QSB constitute forward-looking statements under the Private Securities
Litigation Reform Act of 1995. No assurance can be given that the future results
covered by the forward-looking statements will be achieved. The Company cautions
readers that important factors may affect the Company's actual results and could
cause those results to differ materially from the forward-looking statements.
Such factors include, but are not limited to, changing market conditions,
weather, the state of the economy, substantial increases in insurance costs (in
addition to those substantial increases which commenced in April 2002), the
impact of competition to the Company's restaurants, pricing and acceptance of
the Company's food products.
SIGNIFICANT TRANSACTIONS AND NONRECURRING ITEMS
As more fully described herein and in the related footnotes to the accompanying
consolidated financial statements, the comparability of Chefs International,
Inc.'s operating results has been affected by a significant transaction and
nonrecurring item for the three months ended April 28, 2002. During 2001, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting standards No. 142 "Goodwill and Other Intangible Assets"("FAS 142"),
which requires that, effective for years beginning on or after January 1, 2002,
goodwill, and certain other intangible assets deemed to have an indefinite
useful life, cease amortizing. Under the new rules, goodwill and certain
intangible assets must be assessed for impairment using fair value measurement
techniques. The Company completed its initial goodwill impairment testing during
the first quarter of Fiscal 2003, and determined that there was impairment of
goodwill solely because the aggregate market capitalization of the Company was
exceeded by its book value. Therefore, the Company recorded a $430,403
impairment of goodwill. The charge is reflected as a cumulative effect of an
accounting change in the accompanying consolidated financial statements.
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,
insurance and utilities), marketing and maintenance costs. General and
administrative expenses include costs incurred for corporate support and
administration, including the salaries and related expenses of personnel and the
costs of operating the corporate office at the Company's headquarters in Point
Pleasant Beach, New Jersey.
The Company currently operates ten restaurants on a year-round basis. The
Company closed its Escondido's Mexican Restaurant in the Monmouth Mall during
the second quarter of calendar year 2003. The Company opened its first seafood
restaurant in November 1978
7
and currently has seven free-standing seafood restaurants in New Jersey and
Florida operating under the names "Jack Baker's Lobster Shanty" or "Baker's
Wharfside." The Company opened its first Mexican theme restaurant, located in
New Jersey, in April 1996, under the name "Garcia's." In February 2000, the
Company commenced the operation of its 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"). The Company closed this restaurant during
the second quarter of fiscal 2004. On April 1, 2002, the Company acquired the
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. Moore's experiences a seasonality factor similar to but not as dramatic
as the seasonality factor of the New Jersey seafood restaurants. The Company's
Freehold Escondido's experiences a seasonality factor similar to Moore's.
Manatee's follows the seasonality pattern of the other Florida restaurants.
The Company operated ten restaurants in February and March 2002 and eleven
restaurants in the months of April through October 2002.
RESULTS OF OPERATIONS
---------------------
SALES.
Sales for the nine months ended October 26, 2003 ("fiscal 2004") were
$17,966,700, a decrease of $583,600 or 3.1%, as compared to $18,550,300 for the
nine months ended October 27, 2002 ("fiscal 2003"). For the third quarter ended
October 26, 2003, sales were $5,840,200, a decrease of $126,000 or 2.1% , as
compared to the third quarter of fiscal 2003. Increased sales of $481,900 and
$17,800 for the nine and three month periods at Manatee's which opened on April
1, 2002 and therefore, was in operation during one month of last year's first
quarter and the entire second and third quarters as compared to nine months of
operation this year, were offset by decreased sales of $341,800 and $210,500 at
the Monmouth Escondido's which was closed in June 2003. The other nine
restaurants combined had decreased sales of $723,700 or 4.3% and increased sales
of $66,700 or 1.2% for the nine and three month periods versus last year. The
three Florida restaurants that operated during the comparable periods realized
decreased sales of $62,800 or 1.3% and increased sales of $21,100 for the nine
and three month periods versus last year primarily due to the continued softness
in air travel, including a substantial reduction in foreign visitation and the
Columbia Space Shuttle tragedy which negatively impacted the Cocoa Beach
location. The six New Jersey restaurants had lower sales of $661,000 or 5.4% and
increased sales of $45,500 or 1.1% for the nine and three month periods compared
to last year primarily due to the dismal winter weather that included a major
snow storm over the Valentine's/Presidents' Day weekend and an extremely rainy
summer, whereby beginning with the Memorial Day holiday, it rained ten out of
eleven weekends. Additionally, traffic at all of the restaurants was negatively
impacted by the slow economy, terrorism concerns post 9/11 and the Iraq war.
However, both the Florida and New Jersey restaurants realized positive sales
gains in the third quarter in fiscal 2004 due to
8
favorable weather and a positive uptick in the national economy. The number of
customers served in the nine restaurants which operated during the comparable
nine and three month periods fell by 5.3% and 1.0% respectively, while the
average check paid per customer increased by 1.0% and 2.2% versus last year. The
check average at Manatee's is less than at the other nine restaurants and is
less than it was last year due to the introduction of lower priced dinner
specials.
GROSS PROFIT; GROSS MARGIN.
Gross profit was $12,336,700 or 68.7% of sales for the nine month
period and $4,002,800 or 68.5% of sales for the third quarter ended October 26,
2003, compared to $12,809,500 or 69.1% and $4,107,800 or 68.9% for the
comparable periods of fiscal 2003. The primary reasons for the decline were the
record-setting increase in the cost of beef and closing of the Monmouth
Escondido's restaurant with its lower cost Mexican fare.
OPERATING EXPENSES.
Total operating expenses decreased by 1.6% from $12,188,100 during the
first nine months of fiscal 2003 to $11,989,700 during the first nine months of
fiscal 2004, and by 7.7% from $4,015,800 for the third quarter of fiscal 2003 to
$3,705,800 for the third quarter of the current year. Payroll and related
expenses were 30.1% of sales for the nine months and 29.9% for the third quarter
this year compared to 31.2% and 31.4% respectively for the comparable periods
last year. The improvement is directly attributable to productivity improvements
at the restaurants and lower health and worker's compensation insurance costs.
Other operating expenses increased to 21.8% of sales versus 21.6% of sales for
the nine month comparison and decreased to 21.1% versus 22.3% of sales for the
third quarter comparisons. The primary reasons for the nine month increase were
the inclusion of Manatee's for the full thirteen weeks of this year's first
quarter versus four weeks last year, higher occupancy costs due to increases in
real estate taxes and rent costs and the decrease in sales. The decrease in the
third quarter is directly attributable to the closing of Monmouth Escondido's in
June 2003.
Depreciation and amortization expenses were lower by approximately
$47,100 and $30,800 versus last year for the nine and three month periods ended
October 26, 2003 due to the inclusion (for the entire nine months) of
depreciation expenses associated with the purchase of furniture, fixtures and
equipment of Manatee's offset by the expiration of fully depreciated assets at
the other restaurants and the closing of Monmouth.
General and administrative expenses were lower by approximately $96,400
and $47,000 versus last year for the nine and three month periods due primarily
to reductions in salaries and payroll taxes and an approximate $10,000
settlement with an insurance carrier pertaining to a business interruption claim
stemming from the closure of the main access road near the Cocoa Beach, Florida
restaurant due to security concerns at the nearby Air Force base subsequent to
9/11/01.
As a result of continuing operating losses at its Monmouth Mall Mexican
theme restaurant, management decided to close this restaurant. On April 30,
2003, management executed a Surrender Agreement with the mall landlord to
terminate the lease prior to its expiration date and agreed to give the landlord
an option to purchase the restaurant's liquor license at a specified price until
October 31, 2003, since extended to March 15, 2004, after which the liquor
license can be sold to any independent purchaser. Management believes that the
net proceeds from the sale of the liquor license will exceed the $180,000 paid
to the landlord for the early termination of the lease, however, any gain on the
sale of the liquor license will not be recognized until realized. The restaurant
was closed in June 2003 and the
9
Company recorded a loss of approximately $410,000 on the closing which includes
the early termination fee of $180,000 and disposal of unusable assets.
OTHER INCOME AND EXPENSE
Interest expense decreased by $14,000 and $6,100 for the nine and three
month periods ended October 26, 2003 as compared to comparable periods last year
due to debt reduction and lower interest rates which reduced the interest
expense on the Company's variable debt. Investment income was lower by $9,400
and $5,700 for the nine and six month comparisons due to lower interest rates.
NET INCOME (LOSS)
The Company realized income of $221,900 or $.06 per share for the nine
months ended October 26, 2003 as compared to income before the cumulative effect
of the accounting change related to goodwill, of $379,700 or $.10 per share for
the nine months ended October 27, 2002. As indicated in the Significant
Transactions and Nonrecurring Items section, the Company recorded a $430,403
charge related to goodwill impairment in fiscal 2003 which resulted in a net
loss for the nine months ended October 27, 2002 of $50,700 compared to net
income of $221,900 for the nine months ended October 26, 2003. For the quarter
ended October 26, 2003, net income was $294,000 or $.07 per share as compared to
net income of $45,500 or $.01 per share in the corresponding quarter of fiscal
2003. The primary components of the lower income this year are the reduced sales
due to economic, terrorism and weather issues and the $410,000 loss associated
with the closing of the Monmouth Mall restaurant.
LIQUIDITY AND CAPITAL RESOURCES
The Company's ratio of current assets to current liabilities was 2.53:1
at October 26, 2003 compared to 1.98:1 at the year ended January 26, 2003.
Working capital was $3,169,200 at October 26, 2003 versus $2,091,800 at the year
end, an increase of $1,077,400. During the nine months ended October 26, 2003,
net cash increased by $816,000. Net cash provided by operating activities was
$1,269,500. The primary components were net income after adjustment for
depreciation, deferred taxes and the loss on closing of the Monmouth Mall
restaurant, totaling $1,502,800 and a decrease of $158,000 in accounts payable.
Investing activities for the nine months of fiscal 2004 resulted in a
net cash outflow of $150,700. Capital expenditures were $328,700 used primarily
for routine restaurant improvements. Other investing activities included
investment purchases of available-for-sale securities totaling $14,300 offset by
$186,500 from the sale of investments and the proceeds of maturing certificates
of deposit.
Financing activities for the nine months ended October 26, 2003
resulted in a net cash outflow of $302,800 and included debt repayment of
$245,600 and $59,200 for the repurchase of 40,000 shares of the Company's Common
Stock pursuant to a December 24, 2002 Board of Directors authorization to
repurchase up to 100,000 shares of the Company's stock on or before January 29,
2004 at prevailing market prices. During the second quarter ended July 27, 2003,
the Company canceled a total of 43,550 of the repurchased shares, including
repurchases effected during fiscal 2002.
During the corresponding nine month period ended October 27, 2002,
there was a reduction in working capital of $41,500 and net cash decreased by
$143,100. The primary
10
components of last year's cash flow were net income, after adjustment for
depreciation, deferred income taxes and a cumulative effect of an accounting
change, of $1,436,700, an increase of $129,200 in miscellaneous receivables
primarily due to credits for costs associated with the construction of a paved
parking area for the two Freehold, New Jersey restaurants, a decrease in prepaid
expenses of $94,100 due to the revised billing policy of the Company's insurance
carrier, a decrease in accounts payable of $170,700, capital expenditures of
$1,826,800 including $866,700 for the purchase of Manatee's assets and $543,000
for restaurant improvements, investment purchases totaling $226,600 offset by
$409,800 from the sale of investments and proceeds of maturing certificates of
deposit, $331,500 in debt repayment and bank loan proceeds of $500,000 used to
partially finance the purchase of the Manatee's assets.
During the second quarter ended July 27, 2003, the Company's $500,000
bank line of credit was renewed for two years. The interest rate is variable,
equal to the monthly LIBOR Market Index Rate plus 2%. The entire $500,000 is
currently available for use.
Management anticipates that funds from operations will be sufficient to
meet obligations for the restaurants for the balance of fiscal 2004, including
planned capital expenditures of approximately $90,000 in addition to those
incurred during the first nine months.
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 insurance costs that the Company has had to absorb over the last two
years.
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CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 3 - CONTROLS AND PROCEDURES
--------------------------------
(a) Explanation of disclosure controls and procedures. The
Company's principal executive and principal financial officer after evaluating
the effectiveness of the Company's disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14(c) and 15d-14(c) as of a date within 90
days of the filing date of this quarterly report (the "Evaluation Date")) has
concluded that as of the Evaluation Date, the Company's disclosure controls and
procedures were adequate and effective to ensure that material information
relating to the Company and its consolidated subsidiaries would be made known to
him by others within those entities, particularly during the period in which
this quarterly report was being prepared.
(b) Changes in internal controls. There were no significant
changes in the Company's internal controls or in other factors that could
significantly affect the Company's disclosure controls and procedures subsequent
to the Evaluation Date, nor any significant deficiencies or material weaknesses
in such disclosure controls and procedures requiring corrective actions. As a
result, no corrective actions were taken.
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CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
---------------------------
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
31 - Certification of Principal Executive and Principal Financial
Officer
32 - Certification pursuant to 18 U.S.C. Section 1350 of Principal
Executive and Principal Financial Officer
(b) REPORTS ON FORM 8-K
On November 21, 2003, the Company filed a current report on Form 8-K
with the Securities and Exchange Commission attaching its press release of the
same date announcing that it had received an offer from the five Lombardi
Brothers and their affiliates (the "Lombardi Group") who own approximately 61%
of the Company's outstanding common stock, to acquire all of the outstanding
shares of common stock not owned by the Lombardi Group for a cash purchase price
of $1.75 per share. The press release stated that the Company's Board of
Directors had appointed a Special Committee consisting of the three non-Lombardi
Brother directors to review and analyze the proposal.
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CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHEFS INTERNATIONAL, INC.
/s/ Anthony C. Papalia
------------------------
ANTHONY C. PAPALIA
Principal Executive and Principal Financial Officer
DATED: December 10, 2003
14