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 JULY 29, 2001
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 August 3 , 2001
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Common Stock, $.01 par value 4,230,537
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
July 29, 2001 and January 28, 2001
Consolidated Statements of Operations - 3
Six and Three Months Ended July 29, 2001 and
July 30, 2000
Consolidated Statements of Cash Flows - 4
Six Months Ended July 29, 2001 and
July 30, 2000
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
5
PART I - FINANCIAL INFORMATION
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
July 29, 2001 January 28, 2001
------------- ----------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,741,957 $ 1,159,580
Investments 431,210 385,711
Available-for-sale securities 1,514,892 978,652
Miscellaneous receivables 105,657 109,492
Inventories 1,198,463 1,129,260
Prepaid expenses 203,543 176,187
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TOTAL CURRENT ASSETS 5,195,722 3,938,882
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PROPERTY, PLANT AND EQUIPMENT, at cost 20,560,677 20,045,070
Less: Accumulated depreciation 8,705,604 8,182,351
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PROPERTY, PLANT AND EQUIPMENT, net 11,855,073 11,862,719
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OTHER ASSETS:
Investments 151,000 301,000
Goodwill - net 442,432 454,462
Liquor licenses - net 836,630 851,472
Equity in life insurance policies 545,115 545,115
Other 34,095 72,949
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TOTAL OTHER ASSETS 2,009,272 2,224,998
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TOTAL ASSETS $19,060,067 $18,026,599
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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
------------------------------------
JULY 29, 2001 JANUARY 28, 2001
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(Unaudited)
CURRENT LIABILITIES:
Notes and mortgages payable $ 168,345 $ 166,707
Accounts payable 808,151 582,276
Accrued payroll 168,138 186,687
Accrued expenses 736,918 477,825
Income taxes payable 54,386 ---
Gift certificates 272,852 416,430
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TOTAL CURRENT LIABILITIES 2,208,790 1,829,925
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NOTES AND MORTGAGES PAYABLE 810,285 905,675
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OTHER LIABILITIES 527,477 534,234
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STOCKHOLDERS' EQUITY:
Capital stock - common $.01 par value,
Authorized 15,000,000 shares,
Issued 4,232,087 and 4,257,085 respectively 42,321 42,571
Additional paid-in capital 32,116,760 32,138,798
Accumulated deficit (16,713,335) (17,466,667)
Accumulated other comprehensive income 69,254 51,043
Treasury stock (1,485) (8,980)
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TOTAL STOCKHOLDERS' EQUITY 15,513,515 14,756,765
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $19,060,067 $18,026,599
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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
(Unaudited)
SIX MONTHS ENDED THREE MONTHS ENDED
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JULY 29, 2001 JULY 30, 2000 JULY 29, 2001 JULY 30, 2000
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SALES $ 11,510,381 $ 11,042,488 $ 6,391,758 $ 6,151,134
COST OF GOODS SOLD 3,642,714 3,559,678 2,005,199 1,985,525
-------------- --------------- -------------- --------------
GROSS PROFIT 7,867,667 7,482,810 4,386,559 4,165,609
-------------- --------------- -------------- --------------
OPERATING EXPENSES:
Payroll and related expenses 3,327,039 3,175,562 1,764,013 1,717,694
Other operating expenses 2,272,685 2,153,852 1,197,704 1,143,756
Depreciation and amortization 552,277 547,116 274,116 276,710
General and administrative expenses 915,768 882,519 479,391 444,035
-------------- --------------- -------------- --------------
TOTAL OPERATING EXPENSES 7,067,769 6,759,049 3,715,224 3,582,195
-------------- --------------- -------------- --------------
INCOME FROM OPERATIONS 799,898 723,761 671,335 583,414
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OTHER INCOME (EXPENSE):
Interest expense (42,262) (57,270) (20,282) (27,639)
Interest income 86,696 101,113 44,741 53,844
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OTHER INCOME (EXPENSE), NET 44,434 43,843 24,459 26,205
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INCOME FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES 844,332 767,604 695,794 609,619
PROVISION FOR INCOME TAXES 91,000 83,000 71,000 62,000
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INCOME FROM CONTINUING
OPERATIONS 753,332 684,604 624,794 547,619
GAIN ON DISPOSAL OF
DISCONTINUED ICE
CREAM BUSINESS --- 322,212 --- 322,212
-------------- --------------- -------------- --------------
NET INCOME $ 753,332 $ 1,006,816 $ 624,794 $ 869,831
============== =============== ============== ==============
INCOME PER COMMON SHARE FROM
CONTINUING OPERATIONS $ .18 $ .15 $ .15 $ .12
============== =============== ============== ==============
BASIC INCOME PER COMMON SHARE $ .18 $ .23 $ .15 $ .20
============== =============== ============== ==============
Number of shares outstanding 4,230,537 4,449,273 4,234,620 4,410,384
The accompanying notes are an integral part of these financial statements.
3
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JULY 29, 2001 AND JULY 30, 2000 (Unaudited)
2001 2000
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OPERATING ACTIVITIES:
Net income $ 753,332 $ 1,006,816
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 552,277 547,116
Gain on disposal of discontinued business --- (322,212)
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CASH PROVIDED BY OPERATIONS 1,305,609 1,231,720
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Increase (decrease) in cash attributable to
changes in assets and liabilities:
Miscellaneous receivables 3,835 (16,353)
Inventories (69,203) (344,685)
Prepaid expenses (27,356) (34,331)
Accounts payable 225,875 318,800
Accrued expenses and other liabilities 90,209 238,931
Income taxes payable 54,386 (22,138)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 1,583,355 1,371,944
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INVESTING ACTIVITIES:
Capital expenditures (517,759) (747,728)
Liquor License Purchase --- (357,873)
Sale or redemption of investments 132,125 349,000
Purchase of investments (545,653) (420,200)
Due on sale of discontinued operations - payments --- 570,330
Other assets 38,854 48
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NET CASH USED IN INVESTING ACTIVITIES (892,433) (606,423)
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FINANCING ACTIVITIES:
Repayment of debt (93,752) (203,059)
Purchase of treasury stock (14,793) ---
Purchase of common stock --- (168,000)
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NET CASH USED IN FINANCING ACTIVITIES (108,545) (371,059)
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NET INCREASE IN CASH AND
CASH EQUIVALENTS 582,377 394,462
CASH AND CASH EQUIVALENTS at beginning 1,159,580 1,314,247
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CASH AND CASH EQUIVALENTS at end $ 1,741,957 $1,708,709
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payment for:
Interest paid $ 42,649 $ 49,961
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Income taxes paid $ 33,750 $ 105,138
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Noncash Transactions:
Increase in fair value of securities available for sale $ 18,211 $ ---
=========== ==========
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 28, 2001 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 29, 2001 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: EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number of shares
of common stock outstanding during the period.
NOTE 3: INVENTORIES
Inventories consist of the following: JULY 29, 2001 JANUARY 28, 2001
------------- ----------------
Food $ 606,917 $ 597,161
Beverages 180,275 127,820
Supplies 411,271 404,279
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$ 1,198,463 $ 1,129,260
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NOTE 4: INCOME TAXES
At July 29, 2001, the Company had net deferred tax assets of approximately
$2,628,000 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
$2,628,000 has been established to offset these assets.
NOTE 5: DUE ON SALE OF DISCONTINUED OPERATIONS FROM RELATED PARTY
On February 20, 1997 the Company sold 95% of the common stock of Mr. Cookie Face
("MCF"), its ice cream production segment, to a former director for an aggregate
purchase price of $1,600,000, consisting of a $500,000 cash payment and three
notes totaling $1,100,000. The first note (Note A) for $100,000 was due on or
before March 24, 1997 and was paid in full on a timely basis. The second note
(Note B) for $500,000 was due in installments through July 1, 2000, and the
third note (Note C) for $500,000 was due on or
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before February 20, 2004, with mandatory prepayments based on MCF's cash flow.
The notes were secured by a first lien on all of MCF's assets. However, the
Company agreed to subordinate the notes to up to $1,750,000 of additional
financing for MCF. Based on the estimated present value of the payments,
management recorded a valuation allowance of $601,050 against the second and
third notes. The 5% of MCF capital stock retained by the Company was valued at
$35,000. During fiscal 1999, MCF requested a restructuring of the terms of the
second and third notes. During the quarter ended October 31, 1999, the Company's
Board of Directors ("Board") was advised by MCF that MCF had achieved a positive
cash flow during its second quarter and pursuant to the requirements of Note C,
owed the Company approximately $41,800 in interest. The Board agreed to allow
MCF to make monthly payments of the said Note C interest amount with the final
payment due June 1, 2000. Additionally, the Board agreed to allow MCF to
continue making monthly partial payments on Note B. During the quarter ended
July 30, 2000, the Note C interest was paid off as per the payment schedule.
At the May 24, 2000 Board of Director's meeting, the Board authorized management
to negotiate and execute a settlement and satisfaction of the debt owed by MCF
to the Company.
On June 30, 2000, the Company sold both Notes B and C and its 5% holding of MCF
capital stock to MCF for a cash payment of $379,836 and the return of 233,334
shares of the Company's common stock owned by the president of MCF. The Company
subsequently canceled these shares. The Company recognized a gain from
discontinued operations of approximately $322,000 in its financial statements
for the quarter ended July 30, 2000. The gain represented partial recoveries of
the valuation allowance provided for against Notes B and C when MCF was sold in
1997.
6
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited)
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, 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 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 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 "Lobster Shanty" or "Baker's Wharfside." The
Company also operates 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 its ninth restaurant, Moore's Tavern and Restaurant
("Moore's"), a free standing restaurant in Freehold, New Jersey serving an
eclectic American food type menu. Segment information is not presented since all
of the Company's revenue is attributable to a single reportable segment.
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 Garcia's restaurant derives a significant portion of its
sales during the holiday season from Thanksgiving through Christmas. During the
first year of operation, Moore's experienced a seasonality factor similar to but
not as dramatic as the seasonality factor of the New Jersey seafood restaurants.
The Company operated nine restaurants including Moore's, during the six months
ended July 30, 2000.
7
RESULTS OF OPERATIONS
SALES.
Sales for the six months ended July 29, 2001 ("fiscal 2002") were $11,510,400,
an increase of $467,900 or 4.2%, as compared to $11,042,500 for the six months
ended July 30, 2000 ("fiscal 2001"). For the second quarter ended July 29, 2001,
sales were $6,391,800, an increase of $240,600 or 3.9% , as compared to last
year's second quarter. The increases include increases in sales of $179,400 or
12.8% and $79,400 or 16% for the six and three month periods at the Vero Beach,
Florida restaurant due to the completion of a municipal park adjacent to the
restaurant and sales increases of $258,400 or 30.5% and $79,200 or 15.7% at
Moore's compared to the same periods for fiscal 2001. Moore's operated for the
entire thirteen weeks of the first quarter this year as compared to ten weeks
for last year's first quarter, whereas the comparable second quarter periods
each include thirteen weeks of operations. The other seven restaurants combined
had increased sales of approximately $30,100 and $82,100 for the six and three
month periods versus last year. The number of customers served in the nine
restaurants increased by 1.5% for the six months and 1.4% for the second
quarter, while the check average paid per customer increased this year by 2.7%
and 2.5% for the respective six and three month periods.
GROSS PROFIT; GROSS MARGIN.
Gross profit was $7,867,700 or 68.4% of sales for the six month period and
$4,386,600 or 68.6% of sales for the quarter ended July 29, 2001, compared to
$7,482,800 or 67.8% and $4,165,600 or 67.7% for the comparable periods of fiscal
2001. The primary reason for the improvement was the reduction in prices paid
for high volume seafood items including shrimp, scallops and flounder, which are
prominent components of the Company's menus. Management was able to secure
favorable pricing on bulk shrimp purchases for the balance of fiscal 2002 which
should translate into improved gross profit margins during the third and fourth
quarters. Additionally, Moore's gross profit improved versus last year and new
menus were inserted in May 2001 into the New Jersey restaurants which included
some price increases and featured lower cost menu items.
OPERATING EXPENSES.
Total operating expenses increased by 4.6% from $6,759,000 during the first six
months of fiscal 2001 to $7,067,800 during the first six months of fiscal 2002,
and by 3.7% from $3,582,200 during the second quarter of fiscal 2001 to
$3,715,200 during the second quarter of fiscal 2002. Payroll and related
expenses were 28.9% of sales for the six months and 27.6% for the second quarter
this year compared to 28.8% and 27.9% respectively for the comparable periods
last year. The decrease in payroll expenses as a percent of sales during the
second quarter this year is primarily attributable to the company-wide increase
in sales and to payroll cost improvements at Moore's. Other operating expenses
increased slightly to 19.7% of sales versus 19.5% of sales for the six month
comparison and to 18.7% versus 18.6% for the three month comparison primarily
because of increases in utility costs, and higher occupancy costs due to higher
property insurance premiums and higher rent expenses. Depreciation and
amortization expenses were essentially unchanged from last year for both
periods. The increase in general and administrative expenses of $33,200 for the
six months of fiscal 2002 occurred during the second quarter primarily due to
increased worker compensation costs.
8
OTHER INCOME AND EXPENSE.
Interest expense decreased by $15,000 and $7,400 for the six and three month
periods ended July 29, 2001 as compared to the comparable periods last year due
to debt reduction. Investment income was lower by $14,400 and $9,100 versus last
year primarily because last year's investment income included approximately
$44,700 and $23,600 for the respective periods in interest income associated
with notes receivable from the February 1997 sale of discontinued operations
(see Note 5.)
NET INCOME.
For the six months ended July 29, 2001, net income from continuing operations
was $753,300 or $.18 per share compared to net income from continuing operations
of $684,600 or $.15 per share and net income of $1,006,800 or $.23 per share for
the six months ended July 30, 2000. For the quarter ended July 29, 2001, net
income from continuing operations was $624,800 or $.15 per share as compared to
net income from continuing operations of $547,600 or $.12 per share and net
income or $869,800 or $.20 for last year's second quarter. Last year's net
income included a gain of approximately $322,200 from discontinued operations
(see note 5).
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 2.35:1 at July
29, 2001 compared to 2.15:1 at the year ended January 28, 2001. Working capital
was $2,986,900 at July 29, 2001 versus $2,109,000 at the year-end, an increase
of $877,900. During the six months ended July 29, 2001, net cash increased by
$582,400. The primary components of this year's cash flow were net income of
$753,300, an increase of $225,900 in accounts payable due to higher sales,
capital expenditures of $432,800 for restaurant improvements and Company
vehicles and approximately $85,000 in design and construction costs associated
with a building adjacent to Moore's ("Building B"), which management expects to
open during the fourth quarter this year as a Mexican theme type restaurant, and
investment purchases of $545,700 for available-for-sale securities consisting of
convertible bonds, mutual funds and equity securities. Additionally,
approximately $14,800 was paid by the Company to repurchase 15,916 shares of the
Company's outstanding stock pursuant to a Stock Repurchase Plan ("Stock Plan")
authorized by the Company's Board of Directors in May, 2000. During the six
months ended July 29, 2001, the Company canceled a total of 24,641 of the
repurchased shares, including repurchases incurred during fiscal 2001.
During the corresponding six month period in fiscal 2001, working capital
increased by $460,800 and net cash increased by $394,500. The primary components
of last year's cash flow statement were net income of $1,006,800, (including
$322,200 from discontinued operations - see note 5), an increase in inventories
of $344,700 resulting from bulk seafood purchases due to favorable market
pricing, an increase in accounts payable of $318,800 due to higher sales and
inventory purchases, capital expenditures of $1,105,600, including approximately
$636,400 for the purchase of a liquor license and furniture, fixtures and
equipment for Moore's and debt repayment of $203,100. Additionally, last year's
cash flow included $570,300 of payments attributable to the February 1997 sale
of MCF (see note 5).
Subsequent to the quarter ended July 29, 2001, the Company completed the
repurchase of a
9
block of an aggregate 262,603 shares of its outstanding common stock from three
stockholders and their affiliates at a repurchase price of $2.10 per share for
cash. The repurchase was authorized by the Company's Board of Directors. It was
the Board's opinion that although the repurchase price was greater than the
current market price for the stock, the size of the block and the fact that the
per share repurchase was substantially below the per share book value of Chefs'
common stock made the repurchase an appropriate investment for the benefit of
Chefs' stockholders.
The Company has agreed in principle to lease Building B from Moore's Realty
Associates, a New Jersey partnership whose partners are members of a group who
are the principal shareholders of the Company. (The Company currently leases the
premises on which Moore's operates from Moore's Realty Associates). In September
2001, the Company borrowed $1,200,000 from its primary bank to finance the
renovation of Building B. The loan is repayable in monthly installments of
principal with interest at an annual rate of 7.57% through September 2011.
Management believes that funds from operations and the Company's $500,000 bank
line of credit will be sufficient to meet obligations for the nine restaurants
for the balance of fiscal 2002, including planned capital expenses of
approximately $238,000 in addition to those incurred during the first six months
and any additional common stock repurchases pursuant to the Stock Plan.
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. The price of food
is extremely volatile and projections as to its performance in the future vary
and are dependent upon a complex set of factors.
10
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
PART II
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
----------------------
ANTHONY C. PAPALIA
Principal Executive and Financial Officer
DATED: September 12, 2001
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