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 27, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE EXCHANGE ACT
For the transition period from _________________ to _______________
Commission file number 0-8513
CHEFS INTERNATIONAL, INC.
(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
--------------
--------------------------------------------------------------------------------
(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 1, 2003
---------------------------- ------------------------------------
Common Stock, $.01 par value 3,926,045
CHEFS INTERNATIONAL, INC.
I N D E X
PAGE NO.
PART I FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets - 1 - 2
July 27, 2003 (unaudited) and January 26, 2003
Consolidated Statements of Operations - 3
Six and Three Months Ended July 27, 2003 and
July 28, 2002 (unaudited)
Consolidated Statements of Cash Flows - 4
Six Months Ended July 27, 2003 and
July 28, 2002 (unaudited)
Notes to Consolidated Financial Statements (unaudited) 5 - 6
ITEM 2. Management's Discussion and Analysis 7-11
of Financial Condition and Results of Operations
ITEM 3. Controls and Procedures 12
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 13
SIGNATURE 14
CERTIFICATION 15 - 17
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM I - CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
ASSETS
------
JULY 27, JANUARY 26,
2003 2003
----------- -----------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,760,668 $ 1,069,857
Investments 100,000 151,000
Available-for-sale securities 1,889,970 1,668,531
Receivable - related party 40,000 40,000
Miscellaneous receivables 136,588 62,173
Inventories 1,285,271 1,128,992
Prepaid expenses 181,605 107,988
----------- -----------
TOTAL CURRENT ASSETS 5,394,102 4,228,541
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, at cost 21,066,104 21,411,079
Less: Accumulated depreciation 9,358,812 9,164,376
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, net 11,707,292 12,246,703
----------- -----------
OTHER ASSETS:
Asset held for sale 50,180 --
Intangibles - not subject to amortization 839,733 889,913
Other intangibles 46,292 52,605
Receivable - related party 58,523 77,563
Equity in life insurance policies 602,822 602,822
Deferred income taxes 1,017,000 1,064,000
Other 27,978 34,635
----------- -----------
TOTAL OTHER ASSETS 2,642,528 2,721,538
----------- -----------
$19,743,922 $19,196,782
=========== ===========
The accompanying notes are an integral part of these financial statements.
1
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
JULY 27, JANUARY 26,
2003 2003
----------- -----------
(Unaudited)
CURRENT LIABILITIES:
Notes and mortgages payable, current maturities $ 264,793 $ 271,490
Accounts payable 1,031,412 702,233
Accrued payroll 148,747 157,637
Accrued expenses 878,343 493,450
Gift certificates 337,057 511,955
----------- -----------
TOTAL CURRENT LIABILITIES 2,660,352 2,136,765
----------- -----------
NOTES AND MORTGAGES PAYABLE 1,832,297 1,960,438
----------- -----------
OTHER LIABILITIES 724,577 747,559
----------- -----------
STOCKHOLDERS' EQUITY:
Capital stock - common $.01 par value,
Authorized 15,000,000 shares,
Issued 3,926,045 39,260 39,695
Additional paid-in capital 31,488,832 31,549,492
Accumulated deficit (16,821,123) (16,854,010)
Accumulated other comprehensive (loss) (180,273) (379,272)
Treasury stock -- (3,885)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 14,526,696 14,352,020
----------- -----------
$19,743,922 $19,196,782
=========== ===========
The accompanying notes are an integral part of these financial statements.
2
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
SIX MONTHS ENDED THREE MONTHS ENDED
----------------------------------- ---------------------------------
JULY 27, JULY 28, JULY 27, JULY 28,
2003 2002 2003 2002
----------- ----------- ---------- ----------
SALES $12,126,530 $12,584,137 $6,447,736 $6,941,008
COST OF GOODS SOLD 3,792,601 3,882,377 2,018,282 2,147,319
----------- ----------- ---------- ----------
GROSS PROFIT 8,333,929 8,701,760 4,429,454 4,793,689
----------- ----------- ---------- ----------
OPERATING EXPENSES:
Payroll and related expenses 3,672,202 3,919,387 1,890,195 2,092,691
Other operating expenses 2,690,147 2,675,666 1,321,097 1,423,952
Depreciation and amortization 574,646 590,933 280,989 300,108
General and administrative expenses 936,935 986,342 470,170 497,914
Loss on closing restaurant 410,024 -- 410,024 --
----------- ----------- ---------- ----------
TOTAL OPERATING EXPENSES 8,283,954 8,172,328 4,372,475 4,314,665
----------- ----------- ---------- ----------
INCOME FROM OPERATIONS 49,975 529,432 56,979 479,024
----------- ----------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest expense (82,668) (90,562) (40,395) (46,806)
Investment income 75,580 79,333 38,949 36,141
----------- ----------- ---------- ----------
OTHER INCOME (EXPENSE), NET (7,088) (11,229) (1,446) (10,665)
----------- ----------- ---------- ----------
INCOME FROM OPERATIONS
BEFORE INCOME TAXES 42,887 518,203 55,533 468,359
PROVISION FOR INCOME TAXES 10,000 184,000 19,000 170,000
----------- ----------- ---------- ----------
INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 32,887 334,203 36,533 298,359
CUMULATIVE EFFECT OF AN
ACCOUNTING CHANGE (Note 2)
- GOODWILL ACCOUNTING METHOD -- (430,403) -- --
----------- ----------- ---------- ----------
NET INCOME (LOSS) $ 32,887 (96,200) $ 36,533 $ 298,359
=========== =========== ========== ==========
INCOME PER COMMON SHARE
BEFORE CUMULATIVE EFFECT
OF AN ACCOUNTING CHANGE $ .01 $ .08 $ .01 $ .08
CUMULATIVE EFFECT OF AN
ACCOUNTING CHANGE
- GOODWILL ACCOUNTING METHOD -- (.11) -- --
----------- ----------- ---------- ----------
NET INCOME (LOSS) PER
COMMON SHARE $ .01 $ (.03) $ .01 $ .08
=========== =========== ========== ==========
Number of shares outstanding 3,926,045 3,965,975 3,926,045 3,965,975
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 27, 2003 AND JULY 28, 2002 (Unaudited)
2003 2002
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 32,887 (96,200)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 574,646 590,933
Cumulative effect of an accounting change -- 430,403
Deferred income taxes -- 151,000
Gain on sale of assets and investments (5,187) (5,154)
Loss on closing restaurant 350,024 --
Changes in assets and liabilities:
Miscellaneous receivables (55,375) (114,224)
Inventories (156,279) (105,988)
Prepaid expenses (73,617) 116,936
Accounts payable 329,179 164,934
Accrued expenses and other liabilities 74,105 89,433
Income taxes payable -- 5,557
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,070,383 1,227,630
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (258,946) (869,122)
Acquisition of restaurant assets -- (882,681)
Sale or redemption of investments 73,950 409,820
Purchase of investments (9,185) (173,520)
Other 6,657 19,311
---------- ----------
NET CASH (USED IN) INVESTING ACTIVITIES (187,524) (1,496,192)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (134,838) (179,390)
Proceeds from debt -- 500,000
Purchase of treasury stock (59,200) --
Additional paid in capital 1,990 --
---------- ----------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (192,048) 320,610
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 690,811 52,048
CASH AND CASH EQUIVALENTS:
Beginning 1,069,857 1,408,062
---------- ----------
Ending $1,760,668 $1,460,110
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payment for:
Interest paid $ 82,729 $ 89,593
========== ==========
Income taxes paid $ 4,000 $ 14,240
========== ==========
Noncash Transactions:
Increase (decrease) in fair value of securities
available for sale $ 230,017 $ (294,154)
========== ==========
Change in fair value of derivatives accounted
for as hedges $ 15,982 $ (76,927)
========== ==========
The accompanying notes are an integral part of these financial statements.
4
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1: BASIS OF PRESENTATION
The accompanying financial statements have been prepared by Chefs International,
Inc. (the "Company") and are unaudited. In the opinion of the Company's
management, all adjustments (consisting solely of normal recurring adjustments)
necessary to present fairly the Company's consolidated financial position,
results of operations and cash flows for the periods presented have been made.
Certain information and footnote disclosures required under generally accepted
accounting principles have been condensed or omitted from the consolidated
financial statements pursuant to the rules and regulations of the SEC. The
consolidated financial statements and notes thereto should be read in
conjunction with the Company's audited consolidated financial statements for the
year ended January 26, 2003 and notes thereto included in the Company's Annual
Report on Form 10-KSB filed with the SEC. The results of operations and the cash
flows for the six and three month periods ended July 27, 2003 presented in the
consolidated financial statements are not necessarily indicative of the results
to be expected for any other interim period or the entire fiscal year.
NOTE 2: ACCOUNTING FOR BUSINESS COMBINATIONS
In July 2001, the FASB issued Statements of Financial Accounting Standards
("Statement") No. 141. "Business Combinations" and No. 142, "Goodwill and Other
Intangible Assets" ("FAS 142"). These standards change the accounting for
business combinations by, among other things, prohibiting the prospective use of
pooling-of-interests accounting and requiring companies to stop amortizing
goodwill and certain intangible assets with an indefinite useful life. Instead,
goodwill and intangible assets deemed to have an indefinite useful life will be
subject to an annual review for impairment. The new standards were effective for
the Company in the first quarter of Fiscal 2003 and for purchase business
combinations consummated after June 30, 2001. The Company completed its initial
goodwill impairment testing during the first quarter of Fiscal 2003 and
determined that there was impairment of goodwill solely because the aggregate
market capitalization of the Company was less than its book value (market
capitalization at January 28, 2002 was $8,923,406 versus a book value of
$15,756,445). Therefore, the Company recorded a one-time, noncash charge of
$430,403 to reduce the carrying value of its goodwill. Such charge is reflected
as a cumulative effect of an accounting change in the accompanying consolidated
statement of operations.
NOTE 3: ACQUISITION
On April 1, 2002, the Company acquired for $882,681 the inventory, furniture,
fixtures, equipment, liquor license and franchising rights of a restaurant
business located in Florida known as Mr. Manatee's Casual Grille. In connection
with the acquisition, the Company entered into a five-year lease, effective
April 1, 2002, which requires minimum annual rentals of $96,000. The lease
contains three five-year renewal options and includes an option for the Company
to purchase the property during the first term of the lease for $1,075,000.
NOTE 4: EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number of shares
of common stock outstanding during the period.
5
NOTE 5: INVENTORIES
JULY 27, JANUARY 26,
Inventories consist of the following: 2003 2003
---------- ----------
Food $ 606,902 $ 512,058
Beverages 192,963 152,269
Supplies 485,406 464,665
---------- ----------
$1,285,271 $1,128,992
========== ==========
NOTE 6: INCOME TAXES
At July 27, 2003, the Company had net deferred tax assets of approximately
$2,115,000 arising principally from net operating loss carryforwards. However,
due to the uncertainty that the Company will generate sufficient income in the
future to fully or partially utilize these carryforwards, an allowance of
$1,098,000 has been established to 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
The Company depreciates its property and equipment using the straight-line
method over the estimated useful lives of the assets, ranging from three to
forty years.
NOTE 8: RESTAURANT CLOSING
In June 2003 the Company closed one of its Mexican theme restaurants. In
connection with the closing, the Company wrote off leasehold improvements and
other equipment of $230,024 and entered into a Surrender Agreement with the
restaurant's landlord which requires the Company to pay $180,000, of which
$60,000 was paid prior to July 27, 2003 with the balance due October 2003. The
remaining balance is included in accrued expenses in the accompanying
Consolidated Balance Sheet.
The loss of $410,024 is shown as "Loss on closing restaurant" in the
accompanying Consolidated Statement of Operations for the three and six months
ended July 27, 2003. Additionally, the Company granted the landlord an option,
exercisable through October 31, 2003, to purchase the closed restaurant's liquor
license. The liquor license is shown in the accompanying July 27, 2003
Consolidated Balance Sheet as "Asset held for sale".
NOTE 9: HEDGING INSTRUMENTS
The Company has interest rate swap agreements relating to a portion of its
variable rate debt. The interest rate swap agreements are designated as cash
flow hedges and are reflected at fair value in the consolidated balance sheet
and the related losses on these contracts are deferred in shareholders' equity
as a component of accumulated other comprehensive (loss).
6
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements regarding future performance in this Quarterly Report on Form
10-QSB constitute forward-looking statements under the Private Securities
Litigation Reform Act of 1995. No assurance can be given that the future results
covered by the forward-looking statements will be achieved. The Company cautions
readers that important factors may affect the Company's actual results and could
cause those results to differ materially from the forward-looking statements.
Such factors include, but are not limited to, changing market conditions,
weather, the state of the economy, substantial increases in insurance costs (in
addition to those substantial increases which commenced in April 2002), the
impact of competition to the Company's restaurants, pricing and acceptance of
the Company's food products.
SIGNIFICANT TRANSACTIONS AND NONRECURRING ITEMS
As more fully described herein and in the related footnotes to the accompanying
consolidated financial statements, the comparability of Chefs International,
Inc.'s operating results has been affected by a significant transaction and
nonrecurring item for the three months ended April 28, 2002. During 2001, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting standards No. 142 "Goodwill and Other Intangible Assets"("FAS 142"),
which requires that, effective for years beginning on or after January 1, 2002,
goodwill, and certain other intangible assets deemed to have an indefinite
useful life, cease amortizing. Under the new rules, goodwill and certain
intangible assets must be assessed for impairment using fair value measurement
techniques. The Company completed its initial goodwill impairment testing during
the first quarter of Fiscal 2003, and determined that there was impairment of
goodwill solely because the aggregate market capitalization of the Company was
exceeded by its book value. Therefore, the Company recorded a $430,403
impairment of goodwill. The charge is reflected as a cumulative effect of an
accounting change in the accompanying consolidated financial statements.
OVERVIEW
The Company's principal source of revenue is from the operations of its
restaurants. The Company's cost of sales includes food and liquor costs.
Operating expenses include labor costs, supplies and occupancy costs (rent,
insurance and utilities), marketing and maintenance costs. General and
administrative expenses include costs incurred for corporate support and
administration, including the salaries and related expenses of personnel and the
costs of operating the corporate office at the Company's headquarters in Point
Pleasant Beach, New Jersey.
The Company currently operates ten restaurants on a year-round basis. The
Company closed its Escondido's Mexican Restaurant in the Monmouth Mall during
the second quarter of calendar year 2003. The Company opened its first seafood
restaurant in November 1978 and currently has seven free-standing seafood
restaurants in New Jersey and Florida operating under the names "Jack Baker's
Lobster Shanty" or "Baker's Wharfside." The Company opened its first Mexican
theme restaurant, located in New Jersey, in April 1996,
7
under the name "Garcia's." 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").
The Company closed this restaurant during the second quarter of calendar year
2003. On April 1, 2002, the Company acquired the operations of its eleventh
restaurant, Mr. Manatee's Casual Grille ("Manatee's"), a casual theme restaurant
primarily featuring seafood items, located in Vero Beach, Florida near the
Company's Vero Beach, Florida Lobster Shanty.
Generally, the Company's New Jersey seafood restaurants derive a significant
portion of their sales from May through September. The Company's Florida seafood
restaurants derive a significant portion of their sales from January through
April. Moore's experiences a seasonality factor similar to but not as dramatic
as the seasonality factor of the New Jersey seafood restaurants. The Company's
Freehold Escondido's experiences a seasonality factor similar to Moore's.
Manatee's follows the seasonality pattern of the other Florida restaurants.
The Company operated ten restaurants in February and March 2002 and eleven
restaurants in April, May, June and July 2002.
RESULTS OF OPERATIONS
SALES
Sales for the six months ended July 27, 2003 ("fiscal 2004") were
$12,126,500, a decrease of $457,600 or 3.6 %, as compared to $12,584,100 for the
six months ended July 28, 2002 ("fiscal 2003"). For the second quarter ended
July 27, 2003, sales were $6,447,700, a decrease of $493,300 or 7.1%, as
compared to the second quarter of fiscal 2003. The decreases include increased
sales of $464,100 and $23,600 for the six and three month periods at Manatee's
which opened on April 1, 2002 and therefore, was in operation during one month
of last year's first quarter and the entire second quarter as compared to six
months of operation this year, and decreased sales of $131,300 and $81,300 at
the Monmouth Escondido's which was closed in June 2003. The other nine
restaurants combined had decreased sales of $790,400 or 6.9% and $435,600 or
6.9% for the six and three month periods versus last year. The three Florida
restaurants that operated during the comparable periods realized decreased sales
of $83,900 or 2.3% and $25,300 or 1.8% versus last year primarily due to the
continued softness in air travel, including a substantial reduction in foreign
visitation and the Columbia Space Shuttle tragedy which negatively impacted the
Cocoa Beach location. The six New Jersey restaurants had lower sales of $706,500
or 9.4% and $410,300 or 8.3% for the six and three month periods compared to
last year primarily due to the dismal winter weather that included a major snow
storm over the Valentine's/Presidents' Day weekend and an extremely rainy
summer, whereby beginning with the Memorial Day holiday, it rained ten out of
eleven weekends. Additionally, customer traffic at all of the restaurants
continues to be negatively impacted by the slow economy, terrorism concerns post
9/11 and the Iraq war. The number of customers served in the nine restaurants
which operated during the comparable six and three month periods fell by 7.9%
and 7.8% respectively, while the average check paid per customer increased by
1.1% and 1.0% versus last year. The check average at Manatee's is less than at
the nine restaurants and is less than it was last year due to the introduction
of lower priced dinner specials.
8
GROSS PROFIT; GROSS MARGIN
Gross profit was $8,333,900 or 68.7% of sales for the six month period
and $4,429,500 or 68.7% of sales for the second quarter ended July 27, 2003,
compared to $8,701,000 or 69.1% and $4,793,700 or 69.1% for the comparable
periods of fiscal 2003. The primary reasons for the decline were the higher cost
of lobster and closing of the Monmouth Escondido's restaurant with its lower
cost Mexican fare.
OPERATING EXPENSES
Total operating expenses increased by 1.4% from $8,172,300 during the
first six months of fiscal 2003 to $8,284,000 during the first six months of
fiscal 2004, and by 1.3% from $4,314,700 for the second quarter of fiscal 2003
to $4,372,500 for the second quarter of the current year. Payroll and related
expenses were 30.3% of sales for the six months and 29.3% for the second quarter
this year compared to 31.1% and 30.1% respectively for the comparable periods
last year. The improvement is directly attributable to productivity improvements
at the restaurants and lower health and worker's compensation insurance costs.
Other operating expenses increased to 22.2% of sales versus 21.3% of sales for
the six month comparison and remained unchanged at 20.5% of sales for the second
quarter comparisons. The primary reasons for the six month increase were the
inclusion of Manatee's for the full thirteen weeks of this year's first quarter
versus four weeks last year, higher occupancy costs due to increase in real
estate taxes and rent costs and the decrease in sales.
Depreciation and amortization expenses were lower by approximately
$16,300 and $19,100 over last year for the six and three month periods ended
July 27, 2003 due to the inclusion (for the entire six months) of depreciation
expenses associated with the purchase of furniture, fixtures and equipment of
Manatee's offset by the expiration of fully depreciated assets at the other
restaurants and the closing of Monmouth.
General and administrative expenses were lower by approximately $49,400
and $27,700 versus last year for the six and three month periods due primarily
to reductions in salaries and payroll taxes and an approximate $10,000
settlement with an insurance carrier pertaining to a business interruption claim
stemming from the closure of the main access road near the Cocoa Beach, Florida
restaurant due to security concerns of an Air Force base subsequent to 9/11/01.
As a result of continuing operating losses at its Monmouth Mall Mexican
theme restaurant, management decided to close this restaurant. On April 30,
2003, management executed a Surrender Agreement with the mall landlord to
terminate the lease prior to its expiration date and agreed to give the landlord
an option to purchase the restaurant's liquor license at a specified price until
October 31, 2003, after which the liquor license can be sold to any independent
purchaser. Management believes that the net proceeds from the sale of the liquor
license will exceed the $180,000 paid to the landlord for the early termination
of the lease. The restaurant was closed in June 2003 and the Company recorded a
loss of approximately $410,000 on the closing which includes the early
termination fee of $180,000 and disposal of unusable assets.
9
OTHER INCOME AND EXPENSE
Interest expense decreased by $7,900 and $6,400 for the six and three
month periods ended July 27, 2003 as compared to comparable periods last year
due to debt reduction and lower interest rates which reduced the interest
expense on the Company's variable debt. Investment income was lower by $3,800
for the six month comparisons due to lower interest rates and higher by $2,800
for the second quarter this year due to a $5,200 gain on the sale of
investments.
NET INCOME (LOSS)
The Company realized net income of $32,900 or $.01 per share for the six
months ended July 27, 2003 as compared to net income before the $430,400 change
for goodwill impairment, of $334,200 or $.08 per share for the six months ended
July 28, 2002. For the quarter ended July 27, 2003, net income was $36,500 or
$.01 per share as compared to net income of $298,400 or $.08 per share. The
primary components of the lower income this year are the reduced sales due to
economic, terrorism and weather issues and the $410,000 loss associated with the
closing of the Monmouth Mall restaurant.
LIQUIDITY AND CAPITAL RESOURCES
The Company's ratio of current assets to current liabilities was 2.03:1
at July 27, 2003 compared to 1.98:1 at the year ended January 26, 2003. Working
capital was $2,733,800 at July 27, 2003 versus $2,091,800 at the year end, an
increase of $642,000. During the six months ended July 27, 2003, net cash
increased by $690,800. Net cash provided by operating activities was $1,070,400.
The primary components were net income after adjustment for depreciation and the
loss on closing of the Monmouth Mall restaurant, totalling $957,600, an increase
in inventories of $156,300 related to the usual buildup for the New Jersey
summer season, and an increase of $329,200 in accounts payable primarily due to
the inventory increase.
Investing activities during the first six months of fiscal 2004 resulted
in a net cash outflow of $187,500. Capital expenditures were $258,900 used
primarily for routine restaurant improvements. Other investing activities
included investment purchases of available-for-sale securities totaling $9,200
offset by $74,000 from the sale of investments and the proceeds of a maturing
certificate of deposit.
Financing activities for the six months ended July 27, 2003 resulted in a
net cash outflow of $192,000 and included debt repayment of $134,800 and $59,200
for the repurchase of 40,000 shares of the Company's Common Stock pursuant to a
December 24, 2002 Board of Directors authorization to repurchase up to 100,000
shares of the Company's stock on or before January 29, 2004 at prevailing market
prices. During the second quarter ended July 27, 2003, the Company canceled a
total of 43,550 of the repurchased shares, including repurchases incurred during
fiscal 2002.
During the corresponding six month period ended July 28, 2002, there was
a reduction in working capital of $184,500 and net cash increased by $52,000.
The primary components of last year's cash flow were net income, after
adjustment for depreciation, deferred income taxes and a cumulative effect of an
accounting change, of $1,076,100, a decrease in prepaid expenses of $116,900 due
to the revised billing policy of the Company's insurance carrier, an increase in
accounts payable of
10
$164,900 related to the summer sales volume, capital expenditures of $1,727,300
including $882,700 for the purchase of Manatee's assets and $452,000 for
restaurant improvements, investment purchases totaling $173,500 offset by
$409,800 from the sale of investments and proceeds of maturing certificates of
deposit, $179,400 in debt repayment and bank loan proceeds of $500,000 to
partially finance the purchase of the Manatee's assets.
During the second quarter ended July 27, 2003, the Company's $500,000
bank line of credit was renewed for two years. The interest rate is variable,
equal to the monthly LIBOR Market Index Rate plus 2%. The entire $500,000 is
currently available for use.
Management anticipates that funds from operations will be sufficient to
meet obligations for the restaurants for the balance of fiscal 2004, including
planned capital expenditures of approximately $270,000 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 has had to absorb over
the last two years.
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CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 3 - CONTROLS AND PROCEDURES
(a) EXPLANATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company's
principal executive and principal financial officer after evaluating the
effectiveness of the Company's disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14(c) and 15d-14(c) as of a date within 90 days of the
filing date of this quarterly report (the "Evaluation Date")) has concluded that
as of the Evaluation Date, the Company's disclosure controls and procedures were
adequate and effective to ensure that material information relating to the
Company and its consolidated subsidiaries would be made known to him by others
within those entities, particularly during the period in which this quarterly
report was being prepared.
(b) CHANGES IN INTERNAL CONTROLS. There were no significant changes in
the Company's internal controls or in other factors that could significantly
affect the Company's disclosure controls and procedures subsequent to the
Evaluation Date, nor any significant deficiencies or material weaknesses in such
disclosure controls and procedures requiring corrective actions. As a result, no
corrective actions were taken.
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CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
31 Certification of Principal Executive and Principal Financial
Officer.
32 Certification of Principal Executive and Principal Financial
Officer of the Company pursuant to 18 United States Code Section
1350.
(b) REPORTS OF FORM 8-K
No reports on Form 8-K were filed during the quarter ended July
27, 2003.
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CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHEFS INTERNATIONAL, INC.
/s/ ANTHONY C. PAPALIA
------------------------
ANTHONY C. PAPALIA
Principal Executive and Financial Officer
DATED: SEPTEMBER 10, 2003
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