SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(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, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT
OF 1934
For the transition period from _________________ to _______________
Commission file number 0-8513
CHEFS INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 22-2058515
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
62 Broadway, Point Pleasant Beach, NJ 08742 (Address of
principal executive offices)
(Registrant's telephone number, including area code) (732) 295-0350
-------------------------
- ------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changes 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 September 2, 1997
- ----------------------------------- ---------------------------------------
Common Stock, $.01 par value 4,489,569
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CHEFS INTERNATIONAL, INC.
I N D E X
PART I FINANCIAL INFORMATION PAGE NO.
Consolidated Balance Sheets - 1 - 2
July 27, 1997 and January 26, 1997
Consolidated Statements of Operations - 3
Six Months Ended July 27, 1997 and
July 28, 1996
Consolidated Statements of Cash Flows - 4
Six Months Ended July 27, 1997 and
July 28, 1996
Notes to Consolidated Financial Statements 5
Management's Analysis of Six Months' Income 6 - 7
Statement
PART II OTHER INFORMATION 8 - 9
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<TABLE>
PART I - FINANCIAL INFORMATION
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEETS
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July 27, 1997 January 26, 1997
<S> <C> <C>
Assets: (Unaudited)
Current Assets:
Cash and Cash Equivalents $ 1,180,143 $ 951,668
Investments 156,000 160,000
Miscellaneous Receivables 226,061 147,101
Due on Sale of Discontinued Operations - Current 182,376 679,154
Inventories 1,016,261 925,463
Prepaid Expenses 175,164 88,509
----------- ------------
Total Current Assets 2,936,005 2,951,895
---------- ----------
Property, Plant and Equipment - At Cost 18,477,172 18,200,415
Less: Accumulated Depreciation 7,134,487 6,676,718
---------- -----------
Property, Plant and Equipment - Net 11,342,685 11,523,697
----------- ----------
Other Assets:
Investments 685,000 631,000
Goodwill - Net 543,668 557,364
Liquor Licenses - Net 715,321 727,663
Due on Sale of Discontinued Operations - Long-Term 366,583 508,593
Due from Related Parties 5,539 6,524
Other Assets 38,631 38,333
------------- -------------
Total Other Assets 2,354,742 2,469,477
----------- -----------
Total Assets $16,633,432 $16,945,069
=========== ===========
The accompanying notes are an integral part of these financial statements.
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<TABLE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEETS
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July 27, 1997 January 26, 1997
<S> <C> <C>
Liabilities and Stockholders' Equity: (Unaudited)
Current Liabilities:
Accounts Payable $ 1,046,474 $ 967,245
Accrued Payroll 212,390 134,954
Accrued Expenses 454,019 337,897
Notes and Mortgages Payable to Banks 458,500 1,008,500
Capital Lease Obligations - Current 82,375 79,154
Other Liabilities 152,173 246,304
----------- -----------
Total Current Liabilities 2,405,931 2,774,054
---------- ----------
Long-Term Debt:
Notes and Mortgages Payable to Banks 570,082 807,999
Capital Lease Obligations - Long-Term 67,634 109,643
------------ -----------
Total Long-Term Debt 637,716 917,642
----------- -----------
Other Liabilities 75,970 82,396
------------ ------------
Stockholders' Equity:
Capital Stock - Common, $.01 Par Value,
Authorized 15,000,000 Shares; Issued and
Outstanding 4,489,569 and 4,488,291
Respectively 44,896 44,883
Additional Paid-in Capital 32,304,473 32,304,486
Accumulated [Deficit] (18,835,554) (19,178,392)
----------- -----------
Total Stockholders' Equity 13,513,815 13,170,977
---------- ----------
Total Liabilities and Stockholders' Equity $16,633,432 $16,945,069
=========== ===========
The accompanying notes are an integral part of these financial statements.
2
</TABLE>
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<TABLE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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Six Months Ended Three Months Ended
July 27, 1997 July 28, 1996 July 27, 1997 July 28, 1996
<S> <C> <C> <C> <C>
Sales $ 9,838,524 $ 9,257,155 $ 5,484,207 $ 5,422,254
Cost of Goods Sold 3,211,733 3,041,691 1,790,726 1,752,039
---------- ---------- ---------- ----------
Gross Profit 6,626,791 6,215,464 3,693,481 3,670,215
---------- ---------- ---------- ----------
Operating Expenses:
Payroll and Related Expenses 2,841,626 2,749,410 1,539,736 1,541,884
Other Operating Expenses 2,083,599 1,994,247 1,106,969 1,090,526
Depreciation and Amortization 496,605 476,345 249,698 246,810
General and Administrative
Expenses 879,527 863,442 441,716 422,075
-------------------- ---------- ----------
Total Operating Expenses 6,301,357 6,083,444 3,338,119 3,301,295
---------- ---------- ---------- ----------
Income from Operations 325,434 132,020 355,362 368,920
---------- ---------- ---------- ----------
Other Income [Expense]:
Interest Expense (49,274) (25,110) (21,694) (13,397)
Interest Income 66,678 43,290 33,408 17,814
---------- ---------- ---------- ----------
Other Income - Net 17,404 18,180 11,714 4,417
---------- ---------- ---------- ----------
Income from Continuing
Operations Before Taxes 342,838 150,200 367,076 373,337
Provision for Income Taxes - - - -
---------------------------- -------------- ---------
Income from Continuing Oper. 342,838 150,200 367,076 373,337
Income from Operations of
Discontinued Ice Cream
Business 0 28,297 0 164,228
-------- ----------- ------------- ----------
Net [Loss] $ 342,838 $ 178,497 $ 367,076 $ 537,565
=========== =========== =========== ===========
Net Income Per Share
from Continuing
Operations $ .08$ .03$ .08$ .08
=============================================================
Net Income Per Share $ .08$ .04$ .08$ .12
============================================================
Weighted Average Shares 4,489,569 4,486,525 4,489,569 4,486,525
The accompanying notes are an integral part of these financial statements.
3
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<TABLE>
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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Six Months Ended
July 27, 1997 July 28, 1996
<S> <C> <C>
Operating Activities:
Income from Continuing Operations $ 342,838 $ 150,200
----------- -----------
Adjustments to Reconcile Net [Loss] to Net Cash
Provided by Continuing Operating Activities:
Depreciation and Amortization 496,605 476,345
Change in Assets and Liabilities:
[Increase] Decrease in:
Inventories (90,798) (268,278)
Prepaid Expenses (86,655) (20,041)
Other Assets 687 47,729
Miscellaneous Receivable (78,960) (119,140)
Increase [Decrease] in:
Accounts Payable 79,229 491,187
Accrued Expenses and Other Liabilities 93,001 156,532
---------- ----------
Total Adjustments 413,109 764,334
---------- ----------
Net Cash - Continuing Operations 755,947 914,534
---------- ----------
Discontinued Operations:
Income from Discontinued Operations --- 28,297
Depreciation and Amortization --- 146,622
[Increse] Decrease in Net Assets --- (599,499)
-------------- ----------
Net Cash - Discontinued Operations --- (424,580)
-------------- ---------
Investing Activities - Continuing Operations:
Capital Expenditures (289,555) (761,187)
Sale or Redemption of Investments (50,000) 100,000
Due on Sale of Discontinued Operations -
Payments Received 638,788 ---
Net Cash - Investing Activities - Continuing
Operations 299,233 (661,187)
Investing Activities - Discontinued Operations:
Capital Expenditures --- (99,052)
--------------- ---------
Financing Activities - Continuing Operations:
Repayment of Debt (876,705) (273,731)
Proceeds from Debt 50,000 100,000
---------- ----------
Net Cash - Financing Activities - Continuing
Operations (826,705) (173,731)
--------- ----------
Financing Activities - Discontinued Operations:
Repayment of Debt --- (12,940)
Proceeds from Debt --- 375,000
Net Cash - Financing Activities - Discontinued
Operations --- 362,060
Net Increase [Decrease] in Cash and Cash
Equivalents 228,475 (81,956)
Cash and Cash Equivalents - Beginning of Periods 951,668 1,378,814
Cash and Cash Equivalents - End of Periods $1,180,143 $1,296,858
========== ==========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 47,416 $ 23,756
The accompanying notes are an integral part of
these financial statements.
4
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CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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NOTE 1: BASIS OF PRESENTATION
The financial information included herein is unaudited, however,
such information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results of the interim period.
The results of operations for the six month periods ended July 27,
1997 and July 28, 1996 are not necessarily indicative of the results to be
expected for the full year.
NOTE 2: EARNINGS PER SHARE
Earnings per share have been computed based on the weighted average
of outstanding common shares. (See note 4.)
NOTE 3: INCOME TAXES
Effective January 1, 1993, the Company adopted FAS 109 "Accounting
for Income Taxes." The Company has a net deferred tax asset of approximately
$5,189,300 arising from net operating loss carry forwards. However, due to the
uncertainty that the Company will generate income in the future sufficient to
fully or partially utilize these carry forwards, an allowance of $5,189,300 has
been established to offset this asset. The effect of adoption on current and
prior financial statements is immaterial.
NOTE 4: CAPITAL STRUCTURE
On November 7, 1996, the Company's stockholders approved a
one-for-three reverse stock split of the outstanding shares of the Company's
Common Stock, $.01 par value, without changing the par value of the Common
Stock. The one-for-three reverse split was effected at the close of business on
November 22, 1996. All share data has been adjusted to reflect this change.
NOTE 5: DISCONTINUED OPERATIONS
On February 20, 1997 (as of January 26, 1997), the Company sold 95%
of the Common Stock of Mister Cookie Face, Inc. (MCF), its ice cream production
segment to a 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 notes are
secured by a first lien on all of MCF's assets, however, the Company has agreed
to subordinate its lien to any liens subsequently granted by MCF to its Senior
Bank or Institutional Lender but only with respect to a maximum aggregate
$1,750,000 of indebtedness. Based on the estimated present value of the
payments, management has set the aggregate value of the consideration at
$998,950. An additional amount of $188,797 is due from MCF representing the
balance due on two capital leases which the Company will continue to pay. MCF
has agreed to reimburse the Company for the payments. The equipment subject to
the lease was transferred by the Company as part of the sale. The 5% of MCF
capital stock retained by the Company has been valued at $35,000.
5
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CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
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MANAGEMENT'S ANALYSIS OF SIX MONTH INCOME STATEMENT
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RESULTS OF OPERATIONS
On February 20, 1997 (as of January 26, 1997) Chefs sold 95% of the
outstanding stock of its wholly-owned Mister Cookie Face, Inc. ("MCF")
subsidiary to a Chefs' director, Frank Koenemund. The statement of operations
for the six months and quarter ended July 28, 1996 has been restated to reflect
this transaction as discontinued operations for comparative purposes.
Company sales were $9,838,500 for the six months and $5,484,200 for the
second quarter ended July 27, 1997 compared to $9,257,100 and $5,422,200 for the
comparable periods in fiscal 1997. The majority of the $581,300 increase for the
year occurred during the first quarter primarily due to this year's mild winter
and sales of $234,300 at "Garcia's", the Company's Mexican restaurant which
opened during the second quarter of last year. The Company operated the same
nine restaurants during the comparative second quarters with sales this year
resulting in an increase of $61,900.
The Company had net earnings of $342,800 for the six months ended July 27,
1997 compared to net earnings of $178,500 for the same period last year. The
earnings for last year includes earnings of $28,300 for MCF. The continuing
restaurant operations had net earnings of $342,800 for the six months compared
to net earnings of $150,200 for the same period last year. For the quarter ended
July 27, 1997 the Company realized net earnings of $367,100 compared to $537,600
for last year which includes net earnings of $164,200 for MCF. The restaurants
had earnings of $367,100 for this year's second quarter compared to earnings of
$373,300 for last year.
Gross profit was 67.4% of sales for the six month period and 67.3% for the
quarter compared to 67.1% and 67.7% respectively for the fiscal 1997 periods.
The year to date improvement primarily resulted from the addition of Garcia's
which has a lower cost of sales than the seafood restaurants. During the second
quarter this year the lower gross profit reflects the effect of higher seafood
prices. Management was able to offset some of the increased costs with modest
menu price increases and lower cost dinner specials.
Payroll and related expenses were 28.9% of sales for six months and 28.1% for
the quarter compared to 29.7% and 28.4% last year. The increase in sales was the
primary reason for the improvement. Other operating expenses were 21.2% for six
months and 20.2% for the quarter versus 21.5% and 20.1% last year. Depreciation
and amortization expenses were higher by $20,300 and $2,900 respectively for the
six months and quarter compared to last year, primarily as a result of
depreciation expenses charged to Garcia's. Administrative expenses were $16,100
higher for the six months and $19,600 for the quarter compared to last year's
periods. Higher legal expenses account for most of the increase.
Interest expense was $24,200 and $8,300 higher for the comparable periods
this year primarily as a result of the interest expense associated with a bank
term loan previously allocated to MCF operations. Interest income was $23,400
and $15,600 higher in this year's periods due to interest on notes from the MCF
sale.
Liquidity and Capital Resources
The ratio of current assets to current liabilities was 1.22:1 at July 27,
1997, compared to 1.06:1 at the year ended January 26, 1997. Working capital
increased by $352,200 primarily as a result of operational profits. The primary
components of the six month cash flow statement were capital expenditures of
$289,500, debt repayment of $876,700 and payments of $638,800 received from MCF.
As per the terms of the sale, MCF paid the Company $500,000 in February at the
closing and $100,000 in March in addition to monthly interest and lease
payments. The Company used the $600,000 to pay off Chefs' outstanding
indebtedness under its revolving line of credit and the outstanding balance on
the Company's $350,000 line of credit secured by the Toms River, New Jersey
restaurant. During the
6
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corresponding six month period in fiscal 1997 working capital decreased by
$707,200 due to capital expenditures of $761,200, primarily for the Garcia's
renovations and debt repayment of $273,700 offset by profits of $150,200.
During the second quarter the Company's $350,000 line of credit was renewed
for another year. The Company borrowed $50,000 on the line during the second
quarter for inventory purchases leaving an available balance of $300,000.
Management anticipates that funds from operations and the line of credit will
be sufficient to meet obligations for the balance of fiscal 1998, including
routine capital expenditures.
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. The Company is currently
experiencing higher seafood costs due to supply shortages.
The federal minimum wage increased to $5.15 an hour on September 1, 1997.
Management anticipates that the increase will have a minimal impact on the
Company's payroll costs because the federal law freezes the cash wages of tipped
employees which represent the bulk of the Company's minimum wage earners.
7
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CHEFS INTERNATIONAL, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In May 1997, a lawsuit was filed in the Superior Court of New
Jersey, Chancery Division, Middlesex County (Docket No. C-133-97) by Michael F.
Lombardi, various Lombardi relatives, the law firm of Lombardi & Lombardi, P.A.
and the Lombardi & Lombardi, P.A. Defined Benefit Pension Plan (collectively the
"Lombardi Group") as plaintiffs, against the Company's five individual
directors, Anthony C. Papalia, James Fletcher, Martin Fletcher, Frank Koenemund
and Jack Mariucci (the "Director Group") and the Company's former wholly-owned
subsidiary, Mister Cookie Face, Inc. ("MCF") as defendants. Because the lawsuit
is a purported shareholder derivative action brought on behalf of the Company,
the Company is named as a nominal defendant.
The complaint alleges that certain corporate actions including the
Company's purchase of MCF in July 1993 from Frank Koenemund, the subsequent
increase in Mr. Koenemund's salary, a bonus payment made to Mr. Koenemund during
fiscal 1996 and the February 1997 sale (as of January 26, 1997) by the Company
of 95% of the stock of MCF back to Mr. Koenemund constituted a waste of the
Company's assets. Among other remedies sought by the plaintiffs is a judgment
finding that the defendants "wasted" the Company's assets in violation of their
fiduciary duties and ordering them to account for damages incurred and profits
lost by the Company; a judgment declaring the Stock Purchase/Sale Agreement by
which the Company sold 95% of MCF to Mr. Koenemund in February 1997 to be null
and void "ab initio"; a judgment enjoining borrowings, fund raising or loan
transactions on behalf of MCF; a judgment enjoining Mr. Koenemund and MCF from
transferring, encumbering, hypothecating or diluting the 950 shares of MCF stock
transferred to Mr. Koenemund in the February 1997 sale and placing a
constructive trust on said shares; a judgment enjoining Mr. Koenemund from
transferring, encumbering, hypothecating or diluting his approximately 7% stock
ownership in the Company; and in the alternative, a judgment awarding
compensatory and/or punitive damages against the defendants, jointly and
severally in an amount to be determined at trial. The plaintiffs have also asked
for an award of costs and disbursements in the lawsuit including a reasonable
allowance for their attorneys' and experts' fees, and such other or further
relief as "may be just and proper under the circumstances."
Although management intends to respond at an appropriate time to the
substance of the complaint, if required, the suit appears to be legally
deficient for several reasons and management filed a motion with respect
thereto. Management notes that subsequent to the Company's 1993 acquisition of
MCF, the terms of which were fully disclosed, the Lombardi Group continued to
accumulate a substantial position in the Company's Common Stock through
purchases of same and according to the most recently filed amendment to its
Schedule 13D, the Lombardi Group appears to be the beneficial owner of
approximately 7.4% of the Company's outstanding Common Stock. In addition, in
October 1996, in an apparent effort to gain control of the Company, Michael F.
Lombardi wrote to the Company's attorneys stating a wish to explore with the
Company's Board of Directors, the possibility of the Lombardi Group purchasing
2,000,000 shares of the Company's Common Stock. Management rejected such
possibility. Furthermore, by letter dated December 27, 1996, Michael F.
Lombardi, presumably on behalf of the Lombardi Group, wrote to counsel for
Robert E. Brennan offering to buy Mr. Brennan's 1,766,557 shares of the
Company's Common Stock for $1,095,264.72, which purchase, if made, would have
given the Lombardi Group ownership of approximately 46.4% of the Company's
outstanding Common Stock and practical control. To date, such offer has not been
accepted.
The summary judgment motion filed by management with respect to the
complaint asked for dismissal of the complaint, disqualification of plaintiffs'
counsel, an award of expenses and for other relief. The plaintiffs in turn,
cross-moved for disqualification of defendants' counsel and for other relief.
After conferring in Chambers with the Court, the parties stipulated and agreed
effective September 4, 1997 to a dismissal of the complaint without prejudice
and without costs, and also agreed that the plaintiffs may not institute another
action in any court relating in any way to the subject matter of this lawsuit
except upon a refusal by the Board of Directors of a demand, if any, made by the
plaintiffs to the Board in accordance with applicable law.
8
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No assurances can be given at this time that proceedings relating to
this matter will not be reinstituted at some future date.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company's Annual Meeting of Stockholders was held on August
26, 1997.
(b) At said meeting, the following five incumbent directors of the
Company were elected by the following vote to serve as directors until the next
annual meeting of stockholders and until their successors are elected and
qualified.
FOR WITHHELD
Anthony Papalia 3,168,804 89,006
Martin Fletcher 3,169,312 88,498
James Fletcher 3,169,488 88,322
Frank Koenemund 3,162,390 95,420
Jack Mariucci 3,167,473 90,337
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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 Financial Officer
DATED: September 8, 1997
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and the consolidated statement of operations filed
as part of the quarterly report on Form 10-Q and is qualified in its entirety
by reference to such quarterly report on Form 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-28-1997
<PERIOD-END> JUL-27-1997
<CASH> 1,180,143
<SECURITIES> 0
<RECEIVABLES> 226,061
<ALLOWANCES> 0
<INVENTORY> 1,016,261
<CURRENT-ASSETS> 2,936,005
<PP&E> 18,477,172
<DEPRECIATION> 7,134,487
<TOTAL-ASSETS> 16,633,432
<CURRENT-LIABILITIES> 2,405,931
<BONDS> 0
0
0
<COMMON> 44,896
<OTHER-SE> 13,468,919
<TOTAL-LIABILITY-AND-EQUITY> 16,633,432
<SALES> 9,838,524
<TOTAL-REVENUES> 9,838,524
<CGS> 3,211,733
<TOTAL-COSTS> 6,301,357
<OTHER-EXPENSES> (66,678)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 49,274
<INCOME-PRETAX> 342,838
<INCOME-TAX> 0
<INCOME-CONTINUING> 342,838
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 342,838
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
