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 APRIL 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
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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 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 May 6, 2002
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Common Stock, $.01 par value 3,965,966
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
April 28, 2002 and January 27, 2002
Consolidated Statements of Operations - 3
Three Months Ended April 28, 2002 and
April 29, 2001
Consolidated Statements of Cash Flows - 4
Three Months Ended April 28, 2002 and
April 29, 2001
Notes to Consolidated Financial Statements 5 - 6
ITEM 2. Management's Discussion and Analysis 7-10
of Financial Condition and Results of Operations
PART II OTHER INFORMATION 11
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PART I - FINANCIAL INFORMATION
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
April 28, January 27,
2002 2002
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(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 727,842 $ 1,408,062
Investments 256,825 355,825
Available-for-sale securities 1,793,959 1,720,802
Miscellaneous receivables 75,824 62,468
Inventories 1,200,926 1,144,189
Prepaid expenses 89,768 181,459
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TOTAL CURRENT ASSETS 4,145,144 4,872,805
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PROPERTY, PLANT AND EQUIPMENT, at cost 21,641,333 21,229,149
Less: Accumulated depreciation 8,849,314 8,559,539
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PROPERTY, PLANT AND EQUIPMENT, net 12,792,019 12,669,610
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OTHER ASSETS:
Investments 100,000 151,000
Goodwill - net 1,012,942 430,403
Liquor licenses - net 884,764 821,788
Non-competition agreement - net 61,927 --
Equity in life insurance policies 589,862 589,862
Deferred income taxes 1,158,000 1,166,000
Other 58,735 61,492
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TOTAL OTHER ASSETS 3,866,230 3,220,545
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$20,803,393 $20,762,960
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The accompanying notes are an integral part of these financial statements.
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CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
April 28, January 27,
2002 2002
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(Unaudited)
CURRENT LIABILITIES:
Notes and mortgages payable $ 266,516 $ 277,745
Accounts payable 717,165 1,172,442
Accrued payroll 236,141 196,675
Accrued expenses 550,392 462,806
Gift certificates 342,427 461,610
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TOTAL CURRENT LIABILITIES 2,112,641 2,571,278
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NOTES AND MORTGAGES PAYABLE 2,279,893 1,816,930
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OTHER LIABILITIES 630,576 618,307
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STOCKHOLDERS' EQUITY:
Capital stock - common $.01 par value,
Authorized 15,000,000 shares,
Issued 3,969,516 39,695 39,695
Additional paid-in capital 31,549,492 31,549,492
Accumulated deficit (15,703,814) (15,739,658)
Accumulated other comprehensive (loss) (101,205) (89,199)
Treasury stock (3,885) (3,885)
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TOTAL STOCKHOLDERS' EQUITY 15,780,283 15,756,445
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$20,803,393 $20,762,960
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The accompanying notes are an integral part of these financial statements.
2
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED APRIL 28, 2002 AND APRIL 29, 2001 (Unaudited)
2002 2001
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SALES $5,643,129 $5,118,623
COST OF GOODS SOLD 1,735,058 1,637,515
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GROSS PROFIT 3,908,071 3,481,108
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OPERATING EXPENSES:
Payroll expenses 1,826,696 1,563,026
Other operating expenses 1,251,714 1,074,981
Depreciation and amortization 290,825 278,161
General and administrative expenses 488,428 436,377
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TOTAL OPERATING EXPENSES 3,857,663 3,352,545
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INCOME FROM OPERATIONS 50,408 128,563
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OTHER INCOME (EXPENSE):
Interest expense (43,756) (21,980)
Investment income 43,192 41,955
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OTHER INCOME, NET (564) 19,975
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INCOME BEFORE INCOME TAXES 49,844 148,538
PROVISION FOR INCOME TAXES 14,000 20,000
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NET INCOME $ 35,844 $ 128,538
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BASIC INCOME PER COMMON SHARE $ .01 $ .03
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Number of shares outstanding 3,965,966 4,245,469
The accompanying notes are an integral part of these financial statements.
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CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED APRIL 28, 2002 AND APRIL 29, 2001 (Unaudited)
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 35,844 $ 128,538
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 290,825 278,161
Deferred income taxes 8,000 --
Gain on sale of assets and investments (5,900) --
Changes in assets and liabilities:
(Increase) decrease in:
Miscellaneous receivables (13,356) 47,901
Inventories (32,262) 63,347
Prepaid expenses 91,691 (132,371)
Increase (decrease) in:
Accounts payable (38,177) 187,374
Accrued expenses and other liabilities 6,464 (32,703)
Income taxes payable -- 13,636
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NET CASH PROVIDED BY OPERATING ACTIVITIES 343,129 553,883
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (694,425) (284,497)
Acquisition of restaurant assets (867,826) --
Sale or redemption of investments 176,053 121,250
Purchase of investments (91,642) (236,798)
Other 2,757 43,853
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NET CASH (USED IN) INVESTING ACTIVITIES (1,475,083) (356,192)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt 500,000 --
Repayment of debt (48,266) (33,373)
Purchase of treasury stock -- (6,302)
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NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 451,734 (39,675)
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NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (680,220) 158,016
CASH AND CASH EQUIVALENTS:
Beginning 1,408,062 1,159,580
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Ending $ 727,842 $1,317,596
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payment for:
Interest $ 41,562 $ 21,954
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Income taxes $ 240 $ 3,500
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Noncash Transactions:
Increase (decrease) in fair value of securities
available for sale $ 1,668 $ (2,608)
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Change in fair value of derivatives accounted
for as hedges $ (13,674) $ --
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The accompanying notes are an integral part of these financial statements.
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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 three month period ended April 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: ACQUISITION
On April 1, 2002, the Company acquired for $867,826 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 3: EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number of shares
of common stock outstanding during the period.
NOTE 4: INVENTORIES
Inventories consist of the following: April 28, 2002 January 27, 2002
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Food $ 580,797 $ 564,547
Beverages 164,840 149,735
Supplies 455,289 429,907
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$1,200,926 $1,144,189
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NOTE 5: INCOME TAXES
At April 28, 2002, the Company had net deferred tax assets of approximately
$2,388,000 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.
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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 6: 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. Beginning January 28, 2002, the Company adopted Statement of
Financial Accounting Standard (SFAS) No. 142, "Goodwill and Other Intangible
Assets". Pursuant to this standard the Company no longer amortizes its goodwill
and liquor licenses. The Company will continue to review its goodwill and liquor
licenses for possible impairment of loss of value. No impairment provision was
required upon the adoption of this standard or as of April 28, 2002.
NOTE 7: 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 shareholders' equity as a component of accumulated other
comprehensive (loss).
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CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
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.
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 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
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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 three months ended April 29,
2001.
RESULTS OF OPERATIONS
SALES
Sales for the three months ended April 28, 2002 ("fiscal 2003") were
$5,643,100, an increase of $524,500 or 10.2 %, as compared to $5,118,600 for the
three months ended April 29, 2001 ("fiscal 2002"). The increase includes sales
of $425,600 at Freehold Escondido's which opened on January 29, 2002 and sales
of $181,000 at Manatee's which opened on April 1, 2002. The other nine
restaurants combined had decreased sales of approximately $82,100 or 1.6% as
compared to last year's first quarter. The primary reason for the decline in
sales was a weak tourist season in Florida, where sales were off by $146,500 or
6.1% versus last year, due to public concerns about travel safety after
September 11, 2001, and the weak national economy. The number of customers
served in the nine restaurants which operated during the comparable three month
periods decreased by 3.6% while the average check paid per customer increased by
2%. 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 $3,908,100 or 69.3% of sales for the first quarter ended
April 28, 2002 compared to $3,481,100 or 68% of sales for the quarter ended
April 29, 2001. The primary reason for the improvement was 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 Freehold Escondido's which offers a lower
cost Mexican fare. Manatee's operated for only four weeks during the first
quarter and had no effect on overall gross profit.
OPERATING EXPENSES
Total operating expenses increased by 15.1% from $3,352,500 for the first
quarter of fiscal 2002 to $3,857,700 for the first quarter of fiscal 2003.
Payroll and related expenses were 32.4% of sales versus 30.5% of sales for the
corresponding quarter of the previous year. The increase in payroll expenses as
a percentage of sales is attributable to several reasons: the substantial
decrease in sales in Florida, health insurance premiums which increased by 20%
on April 1, 2002, salary increases, and the overall higher payroll costs at
Freehold Escondido's. Historically, new restaurants have higher operating
expenses during the first few months of operation. Other operating expenses
increased to 22.2% of sales for the first quarter this year versus 21.0%
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 increased by approximately $12,700 over the
corresponding quarter due to the depreciation expenses associated with the
$1,334,200
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renovation of the Freehold Escondido's and the $834,400 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
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 (see Note 6).
General and administrative expenses were $52,100 higher in the first
quarter of fiscal 2003 versus the first quarter of fiscal 2002. The primary
components of the increase were increases of approximately $7,600 in group
insurance costs, higher salaries of $17,300 and $16,400 more in training and
recruiting costs associated with the opening of the two new restaurants.
OTHER INCOME AND EXPENSE
Interest expense was $21,800 higher for the three months ended April 28,
2002 compared to last year due to 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, whereas the Company is paying interest only on
the $500,000 line on a monthly basis of LIBOR plus 2% with the $500,000 due on
June 30, 2003. Management and the bank have agreed in principle to restructure
the $500,000 as a five-year term loan. Investment income for the quarter was
essentially the same as last year.
NET INCOME
For the three months ended April 28, 2002, net income was $35,800 or $.01
per share compared to net income of $128,500 or $.03 per share for the three
months ended April 29, 2001. The primary reasons for the decline in net income
this year are the reduced sales and profits of the Florida restaurants due
primarily to the weak tourist season, the higher operating expenses of the two
new restaurants, the substantial increase in insurance costs and the increase in
interest expense associated with the two new bank loans.
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 1.96:1 at
April 28, 2002 compared to 1.90:1 at the year ended January 27, 2002. Working
capital was $2,032,500 at April 28, 2002 versus $2,301,500 at the year-end, a
reduction of $269,000. During the first quarter ended April 28, 2002, net cash
decreased by $680,200. Net cash provided by operating activities was $343,100.
The primary components were net income, after adjustment for depreciation, of
$326,700 and a decrease in prepaid expenses of $91,700 primarily due to the
financing of the Company's property insurance renewal over a twelve month
period.
Investing activities during the first quarter of fiscal 2003 resulted in a
net cash outflow of $1,475,100. Capital expenditures were $1,537,800 with major
components including $843,400 for the April 1, 2002 acquisition of the
furniture, fixtures, equipment, liquor license and franchising rights of
Manatee's, approximately $277,300 for restaurant
9
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 $91,600 offset by $176,100 from the sale
of investments and proceeds of maturing certificates of deposit.
Financing activities for the quarter ended April 28, 2002 generated a net
cash flow of $451,700 and included debt repayment of $48,300 and bank loan
proceeds of $500,000 which were used to partially finance the purchase of the
assets of Manatee's.
During the corresponding three month period ended April 29, 2001, working
capital increased by $271,500 and net cash increased by $158,000. The primary
components of last year's cash flow were net income, after adjustment for
depreciation, of $406,700, an increase in prepaid expenses of $132,400 due to
increased insurance premium costs, an increase in accounts payable of $187,400
due to higher sales, capital expenditures of $284,500 for restaurant
improvements and company vehicles, investment purchases totaling $236,800 for
available-for-sale securities and approximately $6,300 to repurchase 6,841
shares of the Company's outstanding stock pursuant to a Stock Repurchase Plan
authorized by the Company's Board of Directors in May, 2000.
Management believes that funds from operations will be sufficient to meet
obligations for the restaurants for the balance of fiscal 2003, including
planned capital expenditures of approximately $375,800 in addition to those
incurred during the first three 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
PART II OTHER INFORMATION
None.
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
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ANTHONY C. PAPALIA
Principal Executive and Financial Officer
DATED: June 7, 2002
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