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 27, 2002
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 8, 2002
---------------------------- --------------------------------------
Common Stock, $.01 par value 3,969,579
CHEFS INTERNATIONAL, INC.
I N D E X
PART I FINANCIAL INFORMATION PAGE NO.
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets - 1 - 2
October 27, 2002 and January 27, 2002
Consolidated Statements of Operations - 3
Nine and Three Months Ended October 27, 2002 and
October 28, 2001 (unaudited)
Consolidated Statements of Cash Flows - 4
Nine Months Ended October 27, 2002 and
October 28, 2001 (unaudited)
Notes to Consolidated Financial Statements 5 - 7
ITEM 2. Management's Discussion and Analysis 8 - 12
of Financial Condition and Results of Operations
ITEM 3. Controls and Procedures 13
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 14
SIGNATURE 15
CERTIFICATION 16 - 17
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
ASSETS
OCTOBER 27, 2002 JANUARY 27, 2002
---------------- ----------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,264,954 $ 1,408,062
Investments 151,000 355,825
Available for sale securities 1,587,600 1,720,802
Miscellaneous receivables 65,073 62,468
Due from landlord- related party 40,000 ---
Inventories 1,100,434 1,144,189
Prepaid expenses 87,371 181,459
----------- -----------
TOTAL CURRENT ASSETS 4,296,432 4,872,805
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, at cost 21,923,699 21,229,149
Less: Accumulated depreciation 9,445,158 8,559,539
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, net 12,478,541 12,669,610
----------- -----------
OTHER ASSETS:
Investments --- 151,000
Due from landlord - related party 86,588 ---
Goodwill - net 583,922 430,403
Liquor licenses - net 889,913 821,788
Non-competition agreement - net 55,761 ---
Equity in life insurance policies 589,862 589,862
Deferred income taxes 1,002,000 1,166,000
Other 40,710 61,492
----------- -----------
TOTAL OTHER ASSETS 3,248,756 3,220,545
----------- -----------
TOTAL ASSETS $20,023,729 $20,762,960
=========== ===========
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 27, 2002 JANUARY 27, 2002
---------------- ----------------
(Unaudited)
CURRENT LIABILITIES:
Notes and mortgages payable $ 276,831 $ 277,745
Accounts payable 584,658 1,172,442
Accrued payroll 156,978 196,675
Accrued expenses 718,303 462,806
Income taxes payable 28,296 ---
Gift certificates 270,726 461,610
----------- -----------
TOTAL CURRENT LIABILITIES 2,035,792 2,571,278
----------- -----------
NOTES AND MORTGAGE PAYABLE 1,986,298 1,816,930
----------- -----------
OTHER LIABILITIES 714,456 618,307
----------- -----------
STOCKHOLDERS' EQUITY:
Capital stock - common $.01 par value,
Authorized 15,000,000 shares,
Issued 3,969,579 and 3,969,508 respectively 39,696 39,695
Additional paid-in capital 31,549,491 31,549,492
Accumulated (deficit) (15,790,360) (15,739,658)
Accumulated other comprehensive (loss) (507,759) (89,199)
Treasury stock (3,885) (3,885)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 15,287,183 15,756,445
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $20,023,729 $20,762,960
=========== ===========
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 27, 2002 OCTOBER 28, 2001 OCTOBER 27, 2002 OCTOBER 28, 2001
---------------- ---------------- ---------------- ----------------
SALES $ 18,550,308 $ 16,899,502 $ 5,966,171 $ 5,389,121
COST OF GOODS SOLD 5,740,775 5,352,406 1,858,398 1,709,692
------------ ----------- ----------- ----------
GROSS PROFIT 12,809,533 11,547,096 4,107,773 3,679,429
------------ ----------- ----------- ----------
OPERATING EXPENSES:
Payroll and related expenses 5,795,477 4,915,787 1,876,090 1,588,748
Other operating expenses 4,007,213 3,372,589 1,331,547 1,099,904
Depreciation and amortization 892,983 827,143 302,050 274,866
General and administrative expenses 1,492,464 1,525,027 506,122 609,259
------------ ----------- ----------- ----------
TOTAL OPERATING EXPENSES 12,188,137 10,640,546 4,015,809 3,572,777
------------ ----------- ----------- ----------
INCOME FROM OPERATIONS 621,396 906,550 91,964 106,652
------------ ----------- ----------- ----------
OTHER INCOME (EXPENSE):
Interest expense (135,288) (74,184) (44,726) (31,922)
Investment income 120,593 150,747 41,260 64,051
------------ ----------- ----------- ----------
OTHER INCOME, (EXPENSE) NET (14,695) 76,563 (3,466) 32,129
------------ ----------- ----------- ----------
INCOME BEFORE INCOME TAXES 606,701 983,113 88,498 138,781
PROVISION FOR INCOME TAXES 227,000 (1,117,000) 43,000 (1,208,000)
------------ ----------- ----------- ----------
INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING
CHANGE 379,701 2,100,113 45,498 1,346,781
CUMULATIVE EFFECT OF AN
ACCOUNTING CHANGE (Note 2)
- GOODWILL ACCOUNTING METHOD (430,403) --- --- ---
------------ ----------- ----------- ----------
NET INCOME (LOSS) $ (50,702) $2,100,113 $ 45,498 $1,346,781
============ =========== =========== ==========
INCOME PER COMMON SHARE
BEFORE CUMULATIVE EFFECT
OF AN ACCOUNTING CHANGE $ .10 $ .50 $ .01 $ .33
CUMULATIVE EFFECT OF AN
ACCOUNTING CHANGE
- GOODWILL ACCOUNTING METHOD (.11) --- --- ---
------------ ----------- ----------- ----------
NET INCOME (LOSS) PER
COMMON SHARE $ (.01) $ .50 $ .01 $ .33
============ =========== =========== ==========
Number of shares outstanding 3,969,579 4,211,947 3,969,579 4,143,557
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 27, 2002 AND OCTOBER 28, 2001 (Unaudited)
2002 2001
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (50,702) $ 2,100,113
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 892,983 827,142
Cumulative effect of an accounting change 430,403 ---
Deferred income taxes 164,000 (1,223,000)
Gain on sale of assets and investments (5,154) ---
Changes in assets and liabilities:
Miscellaneous receivables (129,193) 57,594
Inventories 68,230 (84,682)
Prepaid expenses 94,088 8,998
Accounts payable (170,684) 19,346
Accrued expenses and other liabilities 13,511 53,574
Income taxes payable 28,296 67,147
----------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,335,778 1,826,232
----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (960,107) (598,713)
Acquisition of restaurant assets (891,190) ---
Sale or redemption of investments 409,820 243,875
Purchase of investments (226,645) (832,185)
Other 20,782 (54,792)
----------- -------------
NET CASH (USED IN) INVESTING ACTIVITIES (1,647,340) (1,241,815)
----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (331,546) (150,305)
Proceeds from debt 500,000 1,200,000
Purchase of treasury stock --- (17,193)
Purchase of common stock --- (569,894)
----------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 168,454 462,608
----------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (143,108) 1,047,025
CASH AND CASH EQUIVALENTS:
Beginning 1,408,062 1,159,580
----------- -------------
Ending $ 1,264,954 $2,206,605
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payment for:
Interest paid $ 135,207 $ 70,136
=========== ============
Income taxes paid $ 21,506 $ 42,529
=========== ============
Noncash Transactions:
Other comprehensive (loss):
Decrease in fair value of securities available for sale $ (311,006) $ (81,111)
=========== ============
Change in fair value of derivatives accounted for as hedges $ (107,554) $ (81,747)
=========== ============
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 27, 2002 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 month period ended October 27, 2002 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
initially determined that there was no impairment of goodwill. However, the
Company subsequently revised its conclusion solely because the aggregate market
capitalization of the Company is 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 has restated its results for the first quarter of Fiscal
2003 and 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. The
Company is currently in the process of completing its annual impairment testing
and any further reduction in the value of its goodwill will be reflected in its
year-end results.
Had SFAS No. 142 been effective at the beginning of Fiscal 2002, the
non-amortization provisions would have had the following effect on the results
of the quarter and 9-months ended October 28, 2001:
Quarter Ended
OCTOBER 27, 2002 OCTOBER 28, 2001
---------------- ----------------
Reported net income $ 45,498 $ 1,346,781
Add back: Amortization of intangibles 0 13,435
------------ -----------
Adjusted net income $ 45,498 $ 1,360,216
============ ===========
Basic and Diluted earnings per share
Reported net income per share $ .01 $ .33
Amortization of intangibles --- ---
------------ -----------
Adjusted net income per share - basic $ .01 $ .33
============ ===========
5
9-months Ended
OCTOBER 27, 2002 OCTOBER 28, 2001
---------------- ----------------
Reported net (loss) income $ (50,702) $ 2,100,113
Add back: Amortization of intangibles 0 40,307
------------ -----------
Adjusted net (loss) income $ (50,702) $ 2,140,420
Add back: Cumulative effect of change in
accounting principle 430,403 ---
------------ -----------
Adjusted earnings before cumulative effect of
change in accounting principle $ 379,701 $ 2,140,420
============ ===========
Basic and Diluted earnings per share
Reported net (loss) income per share $ (.01) $ .50
Amortization of intangibles --- .02
------------ -----------
Adjusted net (loss) income per share - basic $ (.01) $ .52
Add back: Cumulative effect of change in
accounting principle .11 ---
------------ -----------
Adjusted earnings per share before cumulative
effect of change in accounting principle - basic $ .10 $ .52
============ ===========
NOTE 3: ACQUISITION
On April 1, 2002, the Company acquired for $891,190 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 a Company option 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.
NOTE 5: INVENTORIES
Inventories consist of the following: OCTOBER 27, 2002 JANUARY 27, 2002
----------------- ----------------
Food $ 479,678 $ 564,547
Beverages 163,230 149,735
Supplies 457,526 429,907
----------- -----------
$ 1,100,434 $ 1,144,189
=========== ===========
NOTE 6: INCOME TAXES
At October 27, 2002, the Company had net deferred tax assets of approximately
$2,232,000 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
$1,230,000 has been established to offset these assets. Management has
determined that it is more likely than not that future taxable income will be
sufficient to partially utilize the net operating loss carryforwards.
6
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: HEDGING INSTRUMENTS
As of January 29, 2001, the Company adopted the provisions of the new accounting
standard, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, 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. 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 stockholders' equity as a component of accumulated other
comprehensive (loss).
7
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 certain significant transactions
and nonrecurring items in each period. 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 initially determined that there was no impairment of goodwill.
However, the Company has subsequently revised its conclusion solely because the
aggregate market capitalization of the Company was exceeded by its book value.
Therefore, the Company has restated its results for the first quarter of Fiscal
2003, and 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. In order to enhance comparability, the Company compares
current year results to the prior year exclusive of this charge.
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 eleven restaurants on a year-round basis. At the
year ended 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
8
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.
The Company operated nine restaurants during the nine months ended October 28,
2001.
RESULTS OF OPERATIONS
SALES.
Sales for the nine months ended October 27, 2002 ("fiscal 2003") were
$18,550,300, an increase of $1,650,800 or 9.8%, as compared to $16,899,500 for
the nine months ended October 28, 2001 ("fiscal 2002"). For the third quarter
ended October 27, 2002, sales were $5,966,200, an increase of $577,100 or 10.7%
, as compared to last year's third quarter. The increases include sales of
$1,218,100 and $348,100 for the nine and three month periods at the Freehold
Escondido's which opened on January 29, 2002 and sales of $962,800 and $352,700
at Manatee's, which opened on April 1, 2002. The other nine restaurants combined
had decreased sales of approximately $530,100 or 3.1% and $123,700 or 2.3% for
the nine and three month periods versus last year. The primary reasons for the
decline in sales were the weak tourist and summer seasons in Florida, where
sales were off by $290,800 or 5.8% and $7,100 or .6% for the nine and three
month periods, due to public concerns about air travel safety after September
11, 2001 (see reduced customer traffic at Disney in Orlando), the slowing
economy and fears that it may result in another recession, a dismal stock market
performance during the second and third quarters which impacted discretionary
spending and consumer confidence, concerns about Iraq, and, similar to the
Florida tourist season, a slow summer and third quarter at the New Jersey
restaurants, where sales were lower by $239,300 or 2% and $116,600 or 2.7% for
the nine and three month periods ended October 27, 2002. Despite recording a
slight increase in sales for the first quarter ended April 28, 2002, the New
Jersey restaurants recorded lower sales during both the summer tourist season
and the third quarter this year. The number of customers served in the nine
restaurants which operated during the comparable nine and three month periods
fell by 4.7% and 3.8% respectively, while the average check paid per customer
increased by 1.6% for both periods versus last year. The average check paid per
customer at both Freehold Escondido's and Manatee's is less than at the seven
seafood restaurants and Moore's and higher than at Monmouth Escondido's.
9
GROSS PROFIT; GROSS MARGIN.
Gross profit was $12,809,500 or 69.1% of sales for the nine month period and
$4,107,800 or 68.9% of sales for the third quarter ended October 27, 2002,
compared to $11,547,100 or 68.3% and $3,679,400 or 68.3% for the comparable
periods of fiscal 2002. The primary reason for the improvement was the lower
costs of high volume seafood items including shrimp, scallops, flounder and
lobster, which are primary components of the Company's menus. Additionally, the
Company's gross profit was improved by the addition of both Freehold Escondido's
which offers a lower cost Mexican fare and Manatee's which offers a lower cost
seafood menu.
OPERATING EXPENSES.
Total operating expenses increased by 14.5% from $10,640,500 during the first
nine months of fiscal 2002 to $12,188,100 during the first nine months of fiscal
2003, and by 12.4% from $3,572,800 during the third quarter of fiscal 2002 to
$4,015,800 during the third quarter of fiscal 2003. Payroll and related expenses
were 31.2% of sales for the nine months and 31.4% for the third quarter this
year compared to 29.1% and 29.5% respectively for the comparable periods last
year. The increase in payroll expenses as a percent of sales is attributable to
several reasons: the substantial decrease in sales in the nine restaurants that
operated during the comparable periods, health insurance premiums which
increased by more than 30% on April 1, 2002, and the overall higher payroll
costs at the two new restaurants. Historically, new restaurants have higher
operating expenses during the first few months of operation. Other operating
expenses increased to 21.6% of sales versus 20% of sales for the nine month
comparison and to 22.3% versus 20.4% for the three month comparison primarily
due to the addition of the two new restaurants and higher occupancy costs
resulting from higher property insurance premiums and higher real estate taxes.
The Company's property and casualty insurance coverages renewed in April 2002 at
an overall increase of 26%. However, the property component of the insurance
package, which is included in the Company's occupancy costs, was renewed with a
56% rate increase.
Depreciation and amortization expenses increased by approximately $65,800 and
$27,200 over last year for the nine and three month periods ended October 27,
2002 due to the depreciation expenses associated with the $1,334,200 renovation
of the Freehold Escondido's and the $866,700 purchase of the furniture,
fixtures, equipment, liquor license and franchising rights of Manatee's offset
by the reduction in amortization costs due to the Company's adoption of SFAS No.
142. Effective January 28, 2002 the Company no longer amortizes indefinite life
goodwill and intangible assets (liquor licenses) as a charge to earnings.
General and administrative expenses were lower by approximately $32,600 and
$103,100 versus last year for the nine and three month periods. Despite an
increase of approximately $59,000 in insurance costs this year, total general
and administrative expenses were lower because the total for fiscal 2002
included higher salaries of approximately $35,000 and $80,000 to terminate an
agreement with Garcimex of New Jersey to operate the Company's Garcia's Mexican
Restaurant which now operates as Escondido's (Monmouth).
OTHER INCOME AND EXPENSE.
Interest expense increased by $61,100 and $12,800 for the nine and three month
periods ended October 27, 2002 as compared to the comparable periods last year
due to the interest expense associated with a $1,200,000 bank loan the Company
borrowed from its primary bank to finance the renovation of Freehold Escondido's
and the $500,000 bank line of credit which the Company used to partially finance
the acquisition of Manatee's. The $1,200,000
10
loan is repayable in monthly installments of principal with interest at an
annual rate of 7.57% through September 2011. In June 2002 the Company borrowed
$500,000 from the bank to paydown its $500,000 bank line of credit. The new loan
is repayable in monthly installments of principal with interest at a variable
rate of LIBOR plus 2% through May 2007. The entire $500,000 bank line of credit
is currently available for use through June 2003. Investment income was $30,200
and $22,800 less for the nine and three month periods ended October 27, 2002 due
to the substantially lower rates of interest available for investments.
NET INCOME.
Net income, before the $430,403 charge for goodwill impairment, for the nine
months ended October 27, 2002, was $379,700 or $.10 per share compared to net
income of $2,100,100 or $.50 per share for the nine months ended October 28,
2001. For the quarter ended October 27, 2002, net income was $45,500 or $.01 per
share as compared to net income of $1,346,800 or $.33 per share for last year's
third quarter. The primary reasons for the decline in net income this year are
the reduced sales and profits resulting from weak tourist seasons in both
Florida and New Jersey, the higher operating expenses of the two new
restaurants, the substantial increase in all insurance costs and the increase in
interest expense associated with the two new bank loans.
Additionally, last year's net income included the recognition of a deferred tax
asset of $1,223,000 or .30 per share related to the Company's net operating loss
carryforwards (see note 6). Prior to the third quarter of fiscal 2002, the
Company had fully reserved against the future benefits of its net operating loss
carryforwards as utilization of these losses was not assured. In the third
quarter of fiscal 2002, the Company recognized a deferred tax asset associated
with the benefit of utilizing the operating loss carryforwards as management
determined, at that time, that future taxable income would be sufficient to
partially utilize the loss carryforwards. Accordingly, the results of operations
for the nine and three months ended October 27, 2002 include a deferred tax
provision associated with the utilization of the Company's net operating loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily from revenues derived from its
restaurants.
The Company's ratio of current assets to current liabilities was 2.11:1 at
October 27, 2002 compared to 1.90:1 at the year ended January 27, 2002. Working
capital was $2,260,000 at October 27, 2002 versus $2,301,500 at the year-end, a
decrease of $41,500. During the nine months ended October 27, 2002, net cash
decreased by $143,100. Net cash provided by operating activities was $1,335,800.
The primary components were net income, after adjustment for depreciation,
deferred income taxes and a cumulative effect of an accounting change, of
$1,436,700, a decrease in prepaid expenses of $94,100 primarily due to the
financing of the Company's property insurance renewal over a twelve month
period, an increase of $129,200 in miscellaneous receivables primarily due to
costs associated with the construction of a paved parking area for the two
Freehold, New Jersey restaurants, and a decrease in accounts payable of
$170,700. On September 1, 2002, the Company entered into a five year agreement
with Moore's Realty (a partnership owned by the principal shareholders of the
Company), the landlord of the Company's Moore's Tavern Restaurant ("Moore's"),
and Escondido's Mexican Restaurant ("Escondido's"), to lease land for use as an
enlargement of the two restaurants' common parking area. The Company will pay a
minimum of $40,000 per year, payable in monthly installments of $3,333, during
the first five years of
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the agreement which also includes three (3) five (5) year extensions. The
landlord agreed to reimburse the Company up to a maximum of $150,000 for costs
associated with the construction of the parking area by providing credit against
the monthly rent. During the third quarter, the Company spent approximately
$133,200 to construct the parking area which has been classified as a receivable
on the balance sheet. At October 27, 2002, the landlord owed the Company
approximately $126,500 in future rent credits.
Investing activities during the first nine months of fiscal 2003 resulted in a
net cash outflow of $1,647,300. Capital expenditures were $1,826,800 with the
major components including $866,700 for the April 1, 2002 acquisition of the
furniture, fixtures, equipment, liquor license and franchising rights of
Manatee's, approximately $543,000 for restaurant improvements and company
vehicles, and the payment of $417,100 of accounts payable from January 27, 2002
associated with the renovation of Escondido's in Freehold. Other investing
activities included investment purchases of available-for-sale securities
totaling $226,600 offset by $409,800 from the sale of investments and proceeds
of maturing certificates of deposit. At October 27, 2002, the fair value of the
Company's holdings of available-for-sale securities resulted in net unrealized
losses of $344,800 compared to the investment cost of those securities,
primarily due to the dismal performances of the US stock markets. The resulting
losses are reported in stockholders' equity as a component of accumulated other
comprehensive (loss).
Financing activities for the first nine months of fiscal 2003 generated a net
cash flow of $168,500 and included debt repayment of $331,500 and bank loan
proceeds of $500,000 which were used to partially finance the purchase of assets
of Manatee's.
During the corresponding nine month period ended October 28, 2001, working
capital increased by $1,448,600 and net cash increased by $1,047,000. The
primary components of last year's cash flow were net income, after adjustment
for depreciation and deferred income taxes of $1,704,300, capital expenditures
of $598,700 for restaurant improvements, company vehicles and design and
construction costs at the Freehold Escondido's, investment purchases totaling
$832,200 for available-for-sale securities, debt repayment of $150,300, bank
loan proceeds of $1,200,000 which were used to finance the renovation of
Escondido's, and approximately $17,200 to repurchase 17,916 shares of the
Company's outstanding stock pursuant to a Stock Repurchase Plan authorized by
the Company's Board of Directors in May, 2000. The Stock Repurchase Plan expired
in May 2002. Additionally, during the third quarter of fiscal 2002, the Company
paid $569,900 to purchase a block of an aggregate 262,603 shares of the
Company's outstanding common stock from three stockholders and their affiliates
at $2.10 per share, for cash.
Management believes that funds from operations and the Company's $500,000 bank
line of credit will be sufficient to meet obligations for the restaurants for
the balance of fiscal 2003, including planned capital expenses of approximately
$75,000 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 will have to absorb in fiscal 2003.
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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
99.1 Certification of Principal Executive and Principal Financial
Officer of the Company pursuant to 18 United States Code
Section 1530.
(b) REPORTS OF FORM 8-K
No reports on Form 8-K were filed during the quarter ended
October 27, 2002.
14
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 Financial Officer
DATED: December 11, 2002
15
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
PRINCIPAL EXECUTIVE
AND PRINCIPAL FINANCIAL OFFICER
CERTIFICATION
-----------------------------------------------------------
I, Anthony C. Papalia, Principal Executive and Principal Financial Officer
of Chefs International, Inc. (the "Company") do hereby certify that:
(1) I have reviewed this quarterly report on Form 10-QSB of the Company
for the quarterly period ended October 27, 2002;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;
(3) Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all material
respects, the financial condition, results of operations and cash flows of the
Company as of, and for, the period presented in this quarterly report;
(4) I am responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the Company and I have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the Company, including
its consolidated subsidiaries, is made known to me by others
within those entities, particularly during the period in
which this quarterly report was being prepared;
(b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based
on my evaluation as of the Evaluation Date;
(5) I have disclosed, based on my most recent evaluation, to the
Company's auditors and the audit committee of the Company's board of directors:
16
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial
data and have identified for the Company's auditors any
material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls; and
(6) I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of my most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: December 11, 2002
/s/ ANTHONY C. PAPALIA
----------------------
Anthony C. Papalia
Principal Executive and
Principal Financial Officer
Chefs International, Inc.
17