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 OCTOBER 25, 1998
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
-------------------
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(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 December 3, 1998
- ---------------------------------- ---------------------------------------
Common Stock, $.01 par value 4,488,461
1
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CHEFS INTERNATIONAL, INC.
I N D E X
PART I FINANCIAL INFORMATION PAGE NO.
Consolidated Balance Sheets - 1 - 2
October 25, 1998 and January 25, 1998
Consolidated Statements of Operations - 3
Nine Months Ended October 25, 1998 and
October 26, 1997
Consolidated Statements of Cash Flows - 4
Nine Months Ended October 25, 1998 and
October 26, 1997
Notes to Consolidated Financial Statements 5 - 6
Management's Analysis of Nine Months' Income 7 - 9
Statement
PART II OTHER INFORMATION 10
2
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PART I - FINANCIAL INFORMATION
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEETS
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October 25, 1998 January 25, 1998
(Unaudited)
Assets:
Current Assets:
Cash and Cash Equivalents $ 1,067,500 $ 1,136,063
Investments 300,000 196,000
Miscellaneous Receivables 59,924 66,228
Inventories 1,008,315 1,039,203
Due on Sale of Discontinued Operations
from Related Party - Current 87,500 297,441
Prepaid Expenses 106,140 98,547
Other Assets 100,000 ---
------------ -----------
Total Current Assets 2,729,379 2,833,482
---------- ----------
Property, Plant and Equipment - At Cost 19,351,330 18,591,633
Less: Accumulated Depreciation 7,951,142 7,234,384
---------- ----------
Property, Plant and Equipment - Net 11,400,188 11,357,249
---------- ----------
Other Assets:
Investments 585,000 685,000
Goodwill - Net 509,428 529,972
Liquor Licenses - Net 684,466 702,979
Due on Sale of Discontinued Operations
from Related Party - Long-Term 173,807 222,866
Cash Surrender Value of Life Insurance 442,438 406,438
Due from Related Party 3,143 4,702
Other 24,845 62,144
------------ ----------
Total Other Assets 2,423,127 2,614,101
---------- ----------
Total Assets $16,552,694 $16,804,832
========== ==========
The accompanying notes are an integral part of these financial statements.
1
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CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEETS
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October 25, 1998 January 25, 1998
(Unaudited)
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 560,994 $ 945,067
Accrued Payroll 98,276 120,470
Accrued Expenses 528,023 305,688
Notes and Mortgages Payable to Banks 329,800 630,000
Capital Lease Obligations - Current --- 85,727
Other Liabilities 158,993 281,435
------------ ------------
Total Current Liabilities 1,676,086 2,368,387
----------- -----------
Long-Term Debt:
Notes and Mortgages Payable to Banks 632,531 819,998
Capital Lease Obligations - Long-Term --- 23,916
------------ -------------
Total Long-Term Debt 632,531 843,914
------------ ------------
Other Liabilities 481,980 457,806
------------ ------------
Stockholders' Equity:
Capital Stock - Common, $.01 Par Value,
Authorized 15,000,000 Shares; Issued and
Outstanding 4,488,461 and 4,488,347,
Respectively 44,884 44,883
Additional Paid-in Capital 32,304,485 32,304,486
Accumulated [Deficit] (18,587,272) (19,214,644)
------------ ------------
Total Stockholders' Equity 13,762,097 13,134,725
----------- -----------
Total Liabilities and Stockholders' Equity $16,552,694 $16,804,832
========== ==========
The accompanying notes are an integral part of these financial statements.
2
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CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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<TABLE>
Nine Months Ended Three Months Ended
October 25, 1998 October 26, 1997 October 25, 1998 October 26, 1997
<S> <C> <C> <C> <C>
Sales $15,213,143 $14,808,673 $ 5,218,873 $ 4,970,149
Cost of Goods Sold 5,000,752 4,848,063 1,744,395 1,636,330
---------- ---------- ---------- ----------
Gross Profit $10,212,391 $ 9,960,610 $ 3,474,478 $ 3,333,819
---------- ---------- ---------- ----------
Operating Expenses:
Payroll and Related Expenses $ 4,362,161 $ 4,264,641 $ 1,452,851 $ 1,423,015
Other Operating Expenses 3,130,031 3,099,324 1,029,865 1,015,725
Depreciation and Amortization 762,804 748,966 256,723 252,361
General and Administrative
Expenses 1,344,321 1,355,210 453,960 475,683
---------- ---------- ---------- -----------
Total Operating Expenses $ 9,599,317 $ 9,468,141 $ 3,193,399 $ 3,166,784
---------- ---------- ---------- ----------
Income from Operations $ 613,074 $ 492,469 $ 281,079 $ 167,035
----------- ----------- ----------- -----------
Other Income [Expense]:
Interest Expense $ (84,391) $ (69,529) $ (22,104) $ (20,255)
Interest Income 98,689 113,228 32,182 46,550
----------- ---------- ----------- -----------
Other Income - Net $ 14,298 $ 43,699 $ 10,078 $ 26,295
----------- ----------- ----------- -----------
Income from Operations
Before Income Taxes 627,372 536,168 291,157 193,330
Provision for Income Taxes --- --- --- ---
----------- ------------ ------------ -----------
Net Income $ 627,372 $ 536,168 $ 291,157 $ 193,330
========== ========== ========== =========
Net Income Per Share $ .14 $ .12 $ .06 $ .04
============== ============== ============== =============
Weighted Average Shares 4,488,461 4,488,347 4,488,461 4,488,347
The accompanying notes are an integral part of these financial statements.
</TABLE>
3
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CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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Nine Months Ended
October 25, 1998 October 26, 1997
Operating Activities:
Income from Continuing Operations $ 627,372 $ 536,168
---------- -----------
Cash Provided by Operating Activities:
Depreciation and Amortization 762,804 748,966
Change in Assets and Liabilities:
[Increase] Decrease in:
Inventories 30,888 (215,686)
Prepaid Expenses (7,593) (8,109)
Other Assets (97,142) (708)
Miscellaneous Receivables 6,304 22,838
Increase [Decrease] in:
Accounts Payable (384,073) (181,969)
Accrued Expenses and Other Liabilities 101,873 (31,465)
---------- ------------
Total Adjustments 413,062 333,867
---------- -----------
Net Cash from Operations 1,040,434 870,035
---------- -----------
Investing Activities
Capital Expenditures (766,686) (497,649)
Sale or Redemption of Investments (4,000) 10,000
Due on Sale of Discontinued Operations -
Payments Received 259,000 658,770
---------- ----------
Net Cash - Investing Activities (511,686) 171,121
---------- ----------
Financing Activities
Repayment of Debt (721,310) (1,032,853)
Proceeds from Debt 124,000 100,000
---------- ----------
Net Cash - Financing Activities (597,310) (932,853)
---------- ----------
Net Increase [Decrease] in Cash and
Cash Equivalents (68,563) 108,303
Cash and Cash Equivalents - Beginning of Periods 1,136,063 951,668
--------- ---------
Cash and Cash Equivalents - End of Periods $1,067,500 $1,059,971
========= =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ 80,707 $ 67,763
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 nine month periods ended October
25, 1998 and October 26, 1997 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 deferred tax asset of approximately
$4,230,700 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 $4,230,700 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 set the aggregate value of the consideration at $998,950.
An additional amount of $188,797 was due from MCF representing the balance due
on two capital leases. The Company agreed to continue to pay these lease
payments and MCF agreed to reimburse the Company for the payments. The equipment
subject to the lease was transferred by the Company as part of the sale. MCF
paid off the capital leases during the quarter ended October 25, 1998 so that no
further amounts are being paid by the Company pursuant to these leases. The
total net amount due from MCF at October 25, 1998 was $261,307. At the present
time MCF is in arrears in the payment of approximately $42,800 of its
indebtedness to the Company but is continuing to make partial payments of such
indebtedness. The 5% of MCF capital stock retained by the Company is valued at
$35,000.
5
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CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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NOTE 6: SUBSEQUENT EVENT
On August 31, 1998, the Court ordered acceptance of the Company's
bid of $1,100,000 to purchase the Vero Beach, Florida real property where it
currently operates a Lobster Shanty restaurant, from the Chapter 11 Trustee of
the Bankruptcy Estate of Robert E. Brennan. On October 30, 1998, the Company
completed the purchase of this property for $1,100,000. To fund the purchase,
the Company obtained an $880,000 first mortgage loan from its principal lending
bank, First Union National Bank, and paid the balance of the purchase price from
working capital. The Company's successful bid was based upon an independent
appraisal of the property and was equal to the appraised value. The mortgage
loan is repayable with annual interest of 7.82% in monthly installments of
principal and interest based upon a 15-year amortization schedule with the
balance of the loan being due and payable on November 3, 2008.
6
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CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
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MANAGEMENT'S ANALYSIS OF NINE MONTH INCOME STATEMENT
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RESULTS OF OPERATIONS
Sales for the nine months ended October 25, 1998, were $15,213,100 as
compared with $14,808,700 for the nine months ended October 26, 1997, an
increase of $404,400 or 2.7%. The Company's sales for the third quarter ended
October 25, 1998, were $5,218,900 as compared with $4,970,100 for last year's
third quarter, an increase of $248,800 or 5%. The increase in sales this year
occurred in the New Jersey restaurants primarily as a result of good weather and
the successful renovation of the Toms River restaurant which has experienced a
13% sales increase this year. Overall, customer counts are about the same as
last year while this year's average check paid per customer was approximately 3%
higher. The Company operated the same nine restaurants during the comparable
periods.
The Company had net earnings of $627,400 for the nine months this year
compared to $536,200 for the same period last year. For the third quarter ended
October 25, 1998, net earnings were $291,100 compared to net earnings of
$193,300 for last year's third quarter.
Gross profit was 67.1% of sales for the nine months and 66.6% for the quarter
compared with 67.3% and 67.1% respectively for the fiscal 1998 periods. The
lower gross profit in both periods can be attributed to increases in the cost of
liquor and increases in food costs primarily in dairy and poultry products.
Management instituted a modest liquor price increase in August in order to
offset some of the higher liquor costs. Additionally, restaurant menus were
modified to promote lower cost items.
Payroll and related expenses were 28.7% of sales for the nine months and
27.8% for the quarter compared to 28.8% and 28.6% respectively for the prior
year's periods. The increase in sales accounts for the improvement in the third
quarter. Other operating expenses were 20.6% for the nine months and 19.7% for
the quarter versus 20.9% and 20.4% last year. Depreciation and amortization
expenses were higher in both periods this year primarily due to capital
expenditures of approximately $650,000 at the Vero Beach, Florida and Toms
River, New Jersey restaurants during the last 12 months. General and
administrative expenses were lower by approximately $11,000 for the nine months
and $21,700 for the quarter compared to last year. Lower property and group
health insurance costs offset higher legal fees.
Interest expense was $15,000 and $2,000 higher for the comparable periods
this year primarily as a result of the interest expense associated with a
December 1997 loan used to partially fund the Toms River restaurant renovation
and with a May 1998 loan used to purchase a property next to the Toms River
restaurant. Interest income was approximately $14,500 lower this year for both
of the comparable periods primarily due to less interest received on notes
associated with the sale of the Company's wholly-owned Mister Cookie Face, Inc.
("MCF") subsidiary which was sold on February 20, 1997 (effective January 26,
1997.) During the third quarter of last year, MCF paid an additional $10,700 in
interest due to a calculation associated with cash flows in accordance with
terms of the sale.
Liquidity and Capital Resources
The ratio of current assets to current liabilities was 1.63:1 at October 25,
1998, compared to 1.20:1 at the year ended January 25, 1998. Working capital
increased by $588,200 primarily due to operational profits. The primary
components of the nine month cash flow statement were an increase in other
assets of approximately $100,000 reflecting a deposit made toward the purchase
of the Vero Beach, Florida restaurant, a decrease in accounts payable of
$384,000, an increase in accrued expenses of $101,000 due primarily to accrued
legal expenses, capital expenditures
7
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of $766,600, primarily at the Toms River, New Jersey restaurant, debt repayment
of $721,300, new debt of $124,000 used for the purchase of the property adjacent
to the Toms River restaurant and payments of $259,000 on notes receivable from
the MCF sale. During the corresponding nine month period in fiscal 1998, working
capital increased by $630,000. The major components of last year's cash flow
were operational profits, capital expenditures of approximately $500,000,
$125,000 of which was used to build an outdoor dining area at the Vero Beach,
Florida restaurant, debt repayment of $1,032,800 and payments of $658,700
received from MCF.
During the second quarter of the current fiscal year, the Company's bank line
of credit was renewed for another year and was increased from $350,000 to
$500,000.
During the third quarter MCF paid off the two capital leases due the Company.
The equipment subject to the lease was transferred by the Company as part of the
February 20, 1997 sale.
Subsequent to the quarter ended October 25, 1998, the Company completed the
purchase of the Vero Beach, Florida restaurant real property for $1,100,000 from
the Chapter 11 Trustee of the Bankruptcy Estate of Robert E. Brennan. To fund
the purchase, the Company obtained an $880,000 first mortgage from its principal
lending bank and paid the balance of the purchase price from working capital.
Additionally, the Company closed its Belmar, New Jersey restaurant because of
unsatisfactory operating results. The Company had leased the restaurant since
October 1994 and will continue to make monthly lease payments until February 28,
1999.
In November 1998, the Company borrowed $175,000 for inventory on its bank
line of credit leaving an available balance of $325,000.
Management anticipates that funds from operations and the line of credit will
be sufficient to meet obligations for the balance of fiscal 1999, including
routine capital expenditures.
Year 2000
The "Year 2000 Problem" ("Y2K") arose because many existing computer programs
use only the last two digits to refer to a year. If not addressed, computer
programs that are date sensitive may not have the ability to properly recognize
dates in year 2000 and beyond. The result could be a temporary disruption of
operations and the processing of transactions.
Beginning in 1997, the Company began a review of all its restaurant and
corporate computer systems to identify compliance with Y2K. As a result of the
review, the Company determined that certain systems would require remediation,
specifically, the corporate mainframe computer, some of the restaurant point of
sale systems (POS) and personal computers (PCs) used throughout the Company. The
mainframe required software changes and as of October 25, 1998 the changes were
near completion with final testing to take place by the end of 1998. POS
manufacturers are being contacted to determine Y2K compliance and systems will
be replaced if necessary. The Company recently surveyed all corporate PCs and
anticipates that a majority of them will need to be upgraded or replaced.
Additionally, the Company has contacted third party vendors regarding their
compliance with Y2K issues. Beginning in January 1999, this monitoring will
occur on a monthly basis. To date, several key vendors such as payroll/human
resources, major food service companies, and credit card processors have
indicated in writing that they are Y2K compliant. The Company is also contacting
vendors as to the issue of embedded chips which may effect the operations of
such systems as freezers, HVAC, fire sprinklers and alarms. The Company believes
there are multiple
8
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vendors of the goods and services it receives from its suppliers and this risk
of non-compliance with Y2K by any of its suppliers is minimal.
To date, the Company has incurred expenses of approximately $11,000 to become
Y2K compliant. The current estimate to complete the Y2K compliance plan is not
expected to exceed an additional $100,000.
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..
9
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CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
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PART II - OTHER INFORMATION
ITEM 5: OTHER INFORMATION
(a) Potential Change of Control - At the conclusion of competitive bidding
conducted in Trenton, New Jersey on August 31, 1998 at the United States
Bankruptcy Court for the District of New Jersey, the Court ordered the sale of
the 1,766,557 shares of the Company's Common Stock (the "Brennan Shares") owned
by the Bankruptcy Estate of Robert E. Brennan (comprising approximately 39% of
the Company's outstanding Common Stock) to the highest bidder, JES Management
Corp. ("JES"). The successful bid was $2.5625 per share or $4,526,802.30 in the
aggregate. Subsequent to the auction, JES demanded that the Trustee of the
Bankruptcy Estate satisfy certain additional conditions before it would close
the purchase. The Trustee has taken the position that he was not required to
satisfy such conditions and that by failing to close the purchase, JES is in
breach of its contractual obligation.
On October 28, 1998, the Trustee filed an application with the Bankruptcy
Court for an order declaring that JES is in breach of its stock purchase
obligation thereby disqualifying JES as the purchaser of the Brennan Shares and
declaring that JES has forfeited its $100,000 good faith escrow deposit. The
Court recently signed an order granting the Trustee's application so that JES
has now been disqualified as a purchaser. Presumably, the Trustee will attempt
another auction although the timing of same cannot be predicted.
(b) Purchase of Vero Beach Property - Also on August 31, 1998, the Court
ordered acceptance of the Company's bid of $1,100,000 to purchase the Vero
Beach, Florida real property where it currently operates a Lobster Shanty
restaurant, from the Chapter 11 Trustee of the Bankruptcy Estate of Robert E.
Brennan. On October 30, 1998, the Company completed the purchase of this
property for $1,100,000. To fund the purchase, the Company obtained an $880,000
first mortgage loan from its principal lending bank, First Union National Bank,
and paid the balance of the purchase price from working capital. The Company's
successful bid was based upon an independent appraisal of the property and was
equal to the appraised value. The mortgage loan is repayable with annual
interest of 7.82% in monthly installments of principal and interest based upon a
15-year amortization schedule with the balance of the loan being due and payable
on November 3, 2008.
(c) Closing of the Belmar, New Jersey Restaurant - During the third quarter
of fiscal 1999, the Company closed its Belmar, New Jersey Lobster Shanty
restaurant due to unsatisfactory operating results. The Company had been leasing
and operating this restaurant since October 1994 and will continue to make
monthly lease payments through February 1999 when the lease expires.
10
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CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
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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: December 9, 1998
--------------------
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and the consolidated statement of operations
and is qualified in its entirety by reference to such schedules.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> Jan-25-1998
<PERIOD-END> Oct-25-1998
<CASH> 1,067,500
<SECURITIES> 885,000
<RECEIVABLES> 59,924
<ALLOWANCES> 0
<INVENTORY> 1,008,315
<CURRENT-ASSETS> 2,729,379
<PP&E> 19,351,330
<DEPRECIATION> 7,951,142
<TOTAL-ASSETS> 16,552,694
<CURRENT-LIABILITIES> 1,676,086
<BONDS> 0
0
0
<COMMON> 44,884
<OTHER-SE> 13,717,213
<TOTAL-LIABILITY-AND-EQUITY> 16,552,694
<SALES> 15,213,143
<TOTAL-REVENUES> 15,213,143
<CGS> 5,000,752
<TOTAL-COSTS> 5,000,752
<OTHER-EXPENSES> 9,599,317
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 84,391
<INCOME-PRETAX> 627,372
<INCOME-TAX> 0
<INCOME-CONTINUING> 627,372
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 627,372
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
