SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB/A
AMENDMENT NO. 1
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JULY 28, 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
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CHEFS INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 22-2058515
--------------------------------- ---------------------------------
(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 of 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 August 7, 2002
---------------------------- ------------------------------------
Common Stock, $.01 par value 3,965,975
CHEFS INTERNATIONAL, INC.
I N D E X
PAGE NO.
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EXPLANATORY STATEMENT 1
PART I FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets - 2-3
July 28, 2002 (unaudited) and January 27, 2002
Consolidated Statements of Operations - 4
Six and Three Months Ended July 28, 2002 and
July 29, 2001 (unaudited)
Consolidated Statements of Cash Flows - 5
Six Months Ended July 28, 2002 and
July 29, 2001 (unaudited)
Notes to Consolidated Financial Statements (unaudited) 6-8
ITEM 2. Management's Discussion and Analysis 9-13
of Financial Condition and Results of Operations
ITEM 3. Controls and Procedures 14
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 15
SIGNATURE 16
CERTIFICATION 17-18
EXPLANATORY STATEMENT
Chefs International, Inc. (the "Company") is amending its Quarterly Report on
Form 10-QSB for the quarter ended July 28, 2002. The Company completed its
initial goodwill impairment testing under FAS 142 during the first quarter of
fiscal 2003, and initially determined that there was no impairment of goodwill.
However, based solely on the fact that at the commencement of Fiscal 2003, the
aggregate market capitalization of the Company was less than its book value
(market capitalization of $8,923,406 versus a book value of $15,756,445), the
Company determined to restate its financial statements for the first and second
quarters of Fiscal 2003. The effect of the restatement as detailed in Note 2 to
the Financial Statements, has resulted in a non-cash charge of $430,403, to the
carrying value of the Company's goodwill. The charge had no impact on the
Company's previously reported operating income prior to the first quarter of
fiscal 2003. The change is reflected on the Financial Statements as a cumulative
effect of an accounting change in the Company's consolidated statement of
operations as amended below.
The following sections of the Company's second quarter fiscal 2003 Form 10-QSB/A
differ from its second quarter Form 10-QSB filed on September 11, 2002:
Item 1. Financial Statements
Consolidated Balance Sheets, Consolidated Statements of Operations, and
Consolidated Statement of Cash Flows
Note 2: Accounting for Business Combinations
Note 7: Depreciation and Amortization
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Company will provide a version of this second quarter Form 10-QSB/A that is
marked to show changes upon request at no charge. Requests should be directed in
writing to: Chefs International, Inc., 62 Broadway, Point Pleasant Beach, NJ
08742, Attention: Martin W. Fletcher.
1
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM I - CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
ASSETS
JULY 28, 2002 JANUARY 27, 2002
------------- ----------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,460,110 $ 1,408,062
Investments 51,000 355,825
Available-for-sale securities 1,551,327 1,720,802
Miscellaneous receivables 176,692 62,468
Inventories 1,274,652 1,144,189
Prepaid expenses 64,523 181,459
----------- -----------
TOTAL CURRENT ASSETS 4,578,304 4,872,805
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, at cost 21,825,886 21,229,149
Less: Accumulated depreciation 9,146,275 8,559,539
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, net 12,679,611 12,669,610
----------- -----------
OTHER ASSETS:
Investments 100,000 151,000
Goodwill - net 583,922 430,403
Liquor licenses - net 889,764 821,788
Non-competition agreement - net 58,778 --
Equity in life insurance policies 589,862 589,862
Deferred income taxes 1,015,000 1,166,000
Other 42,181 61,492
----------- -----------
TOTAL OTHER ASSETS 3,279,507 3,220,545
----------- -----------
TOTAL ASSETS $20,536,040 $20,762,960
=========== ===========
The accompanying notes are an integral part of these financial statements.
2
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
JULY 28, 2002 JANUARY 27, 2002
------------- ----------------
(Unaudited)
CURRENT LIABILITIES:
Notes and mortgages payable $ 318,194 $ 277,745
Accounts payable 920,276 1,172,442
Accrued payroll 155,992 196,675
Accrued expenses 757,316 462,806
Income taxes payable 5,557 --
Gift Certificates 304,006 461,610
------------ ------------
TOTAL CURRENT LIABILITIES 2,461,341 2,571,278
------------ ------------
NOTES AND MORTGAGES PAYABLE 2,097,091 1,816,930
------------ ------------
OTHER LIABILITIES 688,444 618,307
------------ ------------
STOCKHOLDERS' EQUITY:
Capital stock - common $.01 par value,
Authorized 15,000,000 shares,
Issued 3,969,525 and 3,969,508 respectively 39,695 39,695
Additional paid-in capital 31,549,492 31,549,492
Accumulated (deficit) (15,835,858) (15,739,658)
Accumulated other comprehensive (loss) (460,280) (89,199)
Treasury stock (3,885) (3,885)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 15,289,164 15,756,445
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,536,040 $ 20,762,960
============ ============
The accompanying notes are an integral part of these financial statements.
3
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
SIX MONTHS ENDED THREE MONTHS ENDED
------------------------------ ------------------------------
JULY 28, 2002 JULY 29, 2001 JULY 28, 2002 JULY 29, 2001
------------- ------------- ------------- -------------
SALES $ 12,584,137 $ 11,510,381 $ 6,941,008 $ 6,391,758
COST OF GOODS SOLD 3,882,377 3,642,714 2,147,319 2,005,199
------------ ------------ ------------ ------------
GROSS PROFIT 8,701,760 7,867,667 4,793,689 4,386,559
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Payroll and related expenses 3,919,387 3,327,039 2,092,691 1,764,013
Other operating expenses 2,675,666 2,272,685 1,423,952 1,197,704
Depreciation and amortization 590,933 552,277 300,108 274,116
General and administrative expenses 986,342 915,768 497,914 479,391
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 8,172,328 7,067,769 4,314,665 3,715,224
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 529,432 799,898 479,024 671,335
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (90,562) (42,262) (46,806) (20,282)
Investment income 79,333 86,696 36,141 44,741
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE), NET (11,229) 44,434 (10,665) 24,459
------------ ------------ ------------ ------------
INCOME FROM BEFORE
INCOME TAXES 518,203 844,332 468,359 695,794
PROVISION FOR INCOME TAXES 184,000 91,000 170,000 71,000
------------ ------------ ------------ ------------
INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING
CHANGE 334,203 753,332 298,359 624,794
CUMULATIVE EFFECT OF AN
ACCOUNTING CHANGE (Note 2)
- GOODWILL ACCOUNTING METHOD (430,403) -- -- --
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (96,200) $ 753,332 $ 298,359 $ 624,794
============ ============ ============ ============
INCOME PER COMMON SHARE
BEFORE CUMULATIVE EFFECT
OF AN ACCOUNTING CHANGE $ .08 $ .18 $ .08 $ .15
CUMULATIVE EFFECT OF AN
ACCOUNTING CHANGE
- GOODWILL ACCOUNTING METHOD (.11) -- -- --
------------ ------------ ------------ ------------
NET INCOME (LOSS) PER
COMMON SHARE $ (.03) $ .18 $ .08 $ .15
============ ============ ============ ============
Number of shares outstanding 3,965,975 4,230,537 3,965,975 4,234,620
The accompanying notes are an integral part of these financial statements.
4
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JULY 28, 2002 AND JULY 29, 2001 (Unaudited)
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (96,200) $ 753,332
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 590,933 552,277
Cumulative effect of an accounting change 430,403 --
Deferred income taxes 151,000 --
Gain on sale of assets and investments (5,154) --
Changes in assets and liabilities:
Miscellaneous receivables (114,224) 3,835
Inventories (105,988) (69,203)
Prepaid expenses 116,936 (27,356)
Accounts payable 164,934 225,875
Accrued expenses and other liabilities 89,433 90,209
Income taxes payable 5,557 54,386
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,227,630 1,583,355
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (869,122) (517,759)
Acquisition of restaurant assets (882,681) --
Sale or redemption of investments 409,820 132,125
Purchase of investments (173,520) (545,653)
Other 19,311 38,854
----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES (1,496,192) (892,433)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (179,390) (93,752)
Proceeds from debt 500,000 --
Purchase of treasury stock -- (14,793)
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 320,610 (108,545)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 52,048 582,377
CASH AND CASH EQUIVALENTS:
Beginning 1,408,062 1,159,580
----------- -----------
Ending $ 1,460,110 $ 1,741,957
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payment for:
Interest paid $ 89,593 $ 42,649
=========== ===========
Income taxes paid $ 14,240 $ 33,750
=========== ===========
Noncash Transactions:
Increase (decrease) in fair value of securities available for sale $ (294,154) $ 18,211
=========== ===========
Change in fair value of derivatives accounted for as hedges $ (76,927) $ --
=========== ===========
The accompanying notes are an integral part of these financial statements.
5
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 six month period ended July 28, 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 6-months ended July 29, 2001:
Quarter Ended
July 28, 2002 July 29, 2001
------------- -------------
Reported net income $ 298,359 $ 624,794
Add back: Amortization of intangibles 0 13,435
--------- ---------
Adjusted net income $ 298,359 $ 638,229
========= =========
Basic and Diluted earnings per share
Reported net income per share $ .08 $ .15
Amortization of intangibles -- --
--------- ---------
Adjusted net income per share - basic $ .08 $ .15
========= =========
6
6-months Ended
July 28, 2002 July 29, 2001
------------- -------------
Reported net (loss) income $ (96,200) $ 753,332
Add back: Amortization of intangibles 0 26,872
--------- ---------
Adjusted net (loss) income $ (96,200) $ 780,204
Add back: Cumulative effect of change in
accounting principle 430,403 --
--------- ---------
Adjusted earnings before cumulative effect of
change in accounting principle $ 334,203 $ 780,204
========= =========
Basic and Diluted earnings per share
Reported net (loss) income per share $ (.03) $ .18
Amortization of intangibles -- .01
--------- ---------
Adjusted net (loss) income per share - basic $ (.03) $ .19
Add back: Cumulative effect of change in
accounting principle .11 --
--------- ---------
Adjusted earnings per share before cumulative
effect of change in accounting principle - basic $ .08 $ .19
========= =========
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.
NOTE 5: INVENTORIES
Inventories consist of the following: JULY 28, 2002 JANUARY 27, 2002
------------- ----------------
Food $ 599,415 $ 564,547
Beverages 204,189 149,735
Supplies 471,048 429,907
------------ ------------
$ 1,274,652 $ 1,144,189
============ ============
NOTE 6: INCOME TAXES
At July 28, 2002, the Company had net deferred tax assets of approximately
$2,245,000 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.
NOTE 7: DEPRECIATION AND AMORTIZATION
7
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).
8
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 items for the six months ended July 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 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 the name "Garcia's." The Company
opened its first seafood restaurant in November 1978
9
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 six months ended July 29, 2001.
RESULTS OF OPERATIONS
SALES.
Sales for the six months ended July 28, 2002 ("fiscal 2003") were $12,584,100,
an increase of $1,073,800 or 9.3%, as compared to $11,510,400 for the six months
ended July 29, 2001 ("fiscal 2002"). For the second quarter ended July 28, 2002,
sales were $6,941,000, an increase of $549,300 or 8.6% , as compared to last
year's second quarter. The increases include sales of $870,000 and $444,500 for
the six and three month periods at the Freehold Escondido's which opened on
January 29, 2002 and sales of $610,100 and $429,100 at Manatee's, which opened
on April 1, 2002. The other nine restaurants combined had decreased sales of
approximately $406,300 or 3.5% and $324,300 or 5.1% for the six 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 $283,700 or
7% and $137,200 or 9% for the six and three month periods, due to public
concerns about air travel safety after September 11 (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 in July which impacted
discretionary spending and consumer confidence, and, similar to the Florida
tourist season, a slow June and July at the New Jersey restaurants, where sales
were lower by $122,700 or 1.6% and $187,300 or 3.8% for the six and three month
periods ended July 28, 2002. Despite recording a slight increase in sales for
the first quarter ended April 28, 2002, the New Jersey restaurants recorded
lower sales during the summer tourist season this year. The number of customers
served in the nine restaurants which operated during the comparable six and
three month periods fell by 5.1% and 6.6% respectively, while the average check
paid per customer increased by 1.7% and 1.6% 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.
GROSS PROFIT; GROSS MARGIN.
Gross profit was $8,701,800 or 69.1% of sales for the six month period and
$4,793,700 or
10
69.1% of sales for the second quarter ended July 28, 2002, compared to
$7,867,700 or 68.4% and $4,386,600 or 68.6% 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 15.6% from $7,067,800 during the first six
months of fiscal 2002 to $8,172,300 during the first six months of fiscal 2003,
and by 16.1% from $3,715,200 during the second quarter of fiscal 2002 to
$4,314,700 during the second quarter of fiscal 2003. Payroll and related
expenses were 31.1% of sales for the six months and 30.1% for the second quarter
this year compared to 28.9% and 27.6% 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 21.3% of sales versus 19.7% of sales for the six
month comparison and to 20.5% versus 18.7% 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. 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 $38,700 and
$26,000 over last year for the six and three month periods ended July 28, 2002
due to the depreciation expenses associated with the $1,334,200 renovation of
the Freehold Escondido's and the $858,200 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 increased by approximately $70,600 and
$18,500 versus last year for the six and three month periods. The primary
components of the increase were an increase of approximately $8,500 in property
and casualty insurance, higher group health insurance costs of $25,700, higher
salaries of $12,700 and $15,700 more in training and recruiting costs associated
with the opening of the two new restaurants.
OTHER INCOME AND EXPENSE.
Interest expense increased by $48,300 and $26,500 for the six and three month
periods ended July 28, 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 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
11
income was $7,400 and $8,600 less for the six and three month periods ended July
28, 2002 due to the substantially lower rates of interest available for
investments.
NET INCOME.
Net income, before the $430,403 change for goodwill impairment, for the six
months ended July 28, 2002 was $334,200 or $.08 per share compared to net income
of $753,300 or $.18 per share for the six months ended July 29, 2001. For the
quarter ended July 28, 2002, net income was $298,400 or $.08 per share as
compared to net income of $624,800 or $.15 per share for last year's second
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, 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 six and three
months ended July 28, 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 1.86:1 at July
28, 2002 compared to 1.90:1 at the year ended January 27, 2002. Working capital
was $2,117,000 at July 28, 2002 versus $2,301,500 at the year-end, a reduction
of $184,500. During the six months ended July 28, 2002, net cash increased by
$52,000. Net cash provided by operating activities was $1,227,600. The primary
components were net income, after adjustment for depreciation, deferred income
taxes and a cumulative effect of an accounting change, of $1,076,000, a decrease
in prepaid expenses of $116,900 primarily due to the financing of the Company's
property insurance renewal over a twelve month period, an increase of $114,200
in miscellaneous receivables primarily due to health insurance receivables paid
by the Company's health insurance carrier subsequent to July 28, 2002 and an
increase in accounts payable of $164,900 related to the summer sales volume.
Investing activities during the first six months of fiscal 2003 resulted in a
net cash outflow of $1,496,200. Capital expenditures were $1,727,300 with the
major components including $858,200 for the April 1, 2002 acquisition of the
furniture, fixtures, equipment, liquor license and franchising rights of
Manatee's, approximately $452,000 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 $173,500 offset by $409,800 from the sale of investments and proceeds
of maturing certificates of deposit. At July 28, 2002, the fair value of the
Company's holdings of available-for-sale securities resulted in net unrealized
losses of $327,000 compared to the investment cost of those securities,
primarily due to the dismal performances of the US stock markets during July
2002. The resulting losses are reported in stockholders' equity as a component
of accumulated other comprehensive (loss).
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Financing activities for the first six months of fiscal 2003 generated a net
cash flow of $320,600 and included debt repayment of $179,400 and bank loan
proceeds of $500,000 which were used to partially finance the purchase of assets
of Manatee's.
During the corresponding six month period ended July 29, 2001, working capital
increased by $877,900 and net cash increased by $582,400. The primary components
of last year's cash flow were net income, after adjustment for depreciation, of
$1,305,600, an increase of $225,900 in accounts payable due to sales, capital
expenditures of $517,800 for restaurant improvements, company vehicles and
design and construction costs at the Freehold Escondido's, investment purchases
totaling $545,700 for available-for-sale securities and approximately $14,800 to
repurchase 15,916 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.
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
$306,800 in addition to those incurred during the first six 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.
13
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 the 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 July 28, 2002.
15
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: January 15, 2003
16
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/A of the
Company for the quarterly period ended July 28, 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:
17
(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: January 15, 2003
/s/ Anthony C. Papalia
-------------------------
Anthony C. Papalia
Principal Executive and
Principal Financial Officer
Chefs International, Inc.
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