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 MAY 2, 1999
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
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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 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 April 30, 1999
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Common Stock, $.01 par value 4,488,369
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CHEFS INTERNATIONAL, INC.
I N D E X
PART I FINANCIAL INFORMATION PAGE NO.
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Consolidated Balance Sheet - 1 - 2
May 2, 1999
Consolidated Statements of Operations - 3
Three Months Ended May 2, 1999 and
April 26, 1998
Consolidated Statements of Cash Flows - 4
Three Months Ended May 2, 1999 and
April 26, 1998
Notes to Consolidated Financial Statements 5
Management's Analysis of Three Months' Income 6 - 7
Statement
PART II OTHER INFORMATION 8
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PART I - FINANCIAL INFORMATION
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MAY 2, 1999 (Unaudited)
ASSETS
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CURRENT ASSETS:
Cash and cash equivalents $ 950,842
Investments 250,000
Miscellaneous receivables 78,166
Inventories 1,052,744
Due on sale of discontinued operations
from related party 71,311
Assets held for sale 135,000
Prepaid expenses 214,065
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TOTAL CURRENT ASSETS 2,752,128
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PROPERTY, PLANT AND EQUIPMENT, at cost 19,873,342
Less: Accumulated depreciation 7,565,101
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PROPERTY, PLANT AND EQUIPMENT, net 12,308,241
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OTHER ASSETS:
Investments 695,000
Goodwill - net 496,565
Liquor licenses - net 538,999
Due on sale of discontinued operations
from related party 192,498
Equity in life insurance policies 458,600
Due from related party 2,064
Other 24,880
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TOTAL OTHER ASSETS 2,408,606
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$17,468,975
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The accompanying notes are an integral part of these financial statements.
1
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CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (CONTINUED)
MAY 2, 1999 (Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
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CURRENT LIABILITIES:
Notes and mortgages payable $ 586,395
Accounts payable 704,483
Accrued payroll 121,974
Accrued expenses 462,290
Other Liabilities 236,563
Income taxes payable 4,500
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TOTAL CURRENT LIABILITIES 2,116,105
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NOTES AND MORTGAGES PAYABLE 1,381,788
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OTHER LIABILITIES 484,877
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STOCKHOLDERS' EQUITY:
Capital stock - common $.01 par value,
Authorized 15,000,000 shares,
Issued and outstanding 4,488,369 44,884
Additional paid-in capital 32,304,485
Accumulated deficit (18,863,164)
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TOTAL STOCKHOLDERS' EQUITY 13,486,205
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$17,468,975
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The accompanying notes are an integral part of these financial statements.
2
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CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED May 2, 1999 AND APRIL 26, 1998 (Unaudited)
1999 1998
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SALES $ 4,399,715 $ 4,528,418
COST OF GOODS SOLD 1,399,575 1,455,016
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GROSS PROFIT 3,000,140 3,073,402
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OPERATING EXPENSES:
Payroll and related expenses 1,285,890 1,361,073
Other operating expenses 918,762 1,029,036
Depreciation and amortization 254,180 251,519
General and administrative expenses 471,967 465,104
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TOTAL OPERATING EXPENSES 2,930,799 3,106,732
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INCOME (LOSS) FROM OPERATIONS 69,341 (33,330)
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OTHER INCOME (EXPENSE):
Interest expense (38,840) (29,967)
Interest income 34,887 34,442
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OTHER INCOME (EXPENSE), NET (3,953) 4,475
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INCOME (LOSS) BEFORE INCOME TAXES 65,388 (28,855)
PROVISION FOR INCOME TAXES 4,500 --
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NET INCOME (LOSS) $ 60,888 $ (28,855)
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BASIC INCOME (LOSS) PER COMMON SHARE $ .01 $ (.01)
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Number of shares outstanding 4,488,369 4,488,347
The accompanying notes are an integral part of these financial statements.
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CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED May 2, 1999 AND APRIL 26, 1998 (Unaudited)
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 60,888 $ (28,855)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 254,180 251,519
Increase (decrease) in cash attributable to
changes in assets and liabilities:
Miscellaneous receivables (6,888) (1,871)
Inventories (57,097) (19,323)
Prepaid expenses (56,593) (67,956)
Accounts payable 47,120 (139,178)
Accrued expenses and other liabilities 36,061 34,215
Income taxes payable (15,200) --
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Total Adjustments 201,583 57,406
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NET CASH PROVIDED BY OPERATING ACTIVITIES 262,471 28,551
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INVESTING ACTIVITIES:
Capital expenditures (125,610) (223,725)
Sale or redemption of investments 250,000 96,000
Purchase of investments (261,000) (100,000)
Proceeds from notes receivable -
discontinued operations - related party 15,695 53,445
Other assets (2,035) 26,589
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NET CASH USED IN INVESTING ACTIVITIES (122,950) (147,691)
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FINANCING ACTIVITIES:
Repayment of debt (60,629) (66,129)
Proceeds from debt -- --
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NET CASH USED IN FINANCING ACTIVITIES (60,629) (66,129)
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NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 78,892 (185,269)
CASH AND CASH EQUIVALENTS at beginning 871,950 1,136,063
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CASH AND CASH EQUIVALENTS at end $ 950,842 $ 950,794
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 37,235 $ 27,702
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Income taxes paid $ 19,700 $ 0
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</TABLE>
The accompanying notes are an integral part of these financial statements.
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CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1: BASIS OF PRESENTATION
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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 three month periods ended May 2,
1999 and April 26, 1998 are not necessarily indicative of the results to be
expected for the full year.
NOTE 2: EARNINGS PER SHARE
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Earnings per share have been computed based on the weighted average
of outstanding common shares.
NOTE 3: INCOME TAXES
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At May 2,1999 the Company had net deferred tax assets of
approximately $3,502,000 arising principally from net operating loss
carryforwards. However, due to the uncertainty that the Company will generate
income in the future sufficient to fully or partially utilize these
carryforwards, an allowance of $3,502,000 has been established to offset these
assets.
NOTE 4: DISCONTINUED OPERATIONS
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On February 20, 1997 (as of January 26, 1997), the Company sold 95%
of the common stock of Mr. Cookie Face ("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 first note
for $100,000 was due on or before March 24, 1997 and was paid in full on a
timely basis. The second note for $500,000, is due in installments through July
1, 2000, and the third note for $500,000 is due on or before February 20, 2004,
with mandatory prepayments based on MCF's cash flow. The notes are secured by a
first lien on all of MCF's assets, however, the Company has agreed to
subordinate the notes 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. During fiscal 1999,
MCF requested a restructuring of the terms of the second and third notes. As of
May 2, 1999 management has not yet agreed to the restructuring terms but has
permitted MCF to make partial payments until a restructured agreement is
finalized.
Cash receipts for these notes are applied to principal and interest based on the
discounted note payment schedules, which resulted in an additional $6,500 of
interest income being recognized during the quarter ended May 2, 1999. The 5% of
MCF capital stock retained by the Company has been valued at $35,000.
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CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF THREE MONTH INCOME STATEMENT (unaudited)
Overview
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The Company currently operates eight restaurants in Florida and New Jersey. At
the end of the third quarter of the fiscal year ended January 31,1999, the
Company closed its Belmar, New Jersey restaurant due to unsatisfactory operating
results. The Company operated nine restaurants, including Belmar, during the
quarter ended April 26, 1998.
Results of Operations
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Sales for the first quarter ended May 2,1999 were $4,399,700, a decrease of
$128,700 or 2.8 %, as compared to $4,528,400 for the quarter ended April
26,1998. Last year's first quarter sales included $216,500 at the Belmar
restaurant. As a result, sales for the restaurants that operated during the
comparable quarters were $87,800 or 2% higher this year primarily due to a mild
winter. The number of customers served in the eight restaurants declined by 1%
during the first quarter this year and there was an increase of approximately 3%
in the average check paid per customer.
Gross profit was 68.2% of sales for the first quarter ended May 2, 1999 compared
to 67.9% for the corresponding quarter of the previous year. The improvement can
be attributed to the addition of lower cost menu items and the closure of
Belmar, which had a lower gross profit margin than the combined results of the
other eight restaurants.
Payroll and related expenses for the first quarter were 29.2% of sales versus
30.1% for the corresponding quarter of the previous year. Higher health
insurance benefit costs were offset by improved payroll performance at the
restaurants and the closure of Belmar with its higher payroll costs. The Vero
Beach, Florida restaurant real property, which was previously rented at $10,000
per month, was purchased during the fourth quarter last year. As a result of the
reduced occupancy costs at the Vero Beach restaurant, lower operating expenses
of maintaining the corporate food freezers and the closure of Belmar, other
operating expenses were reduced by approximately $110,000 this year.
Depreciation and amortization expenses were approximately $2,600 higher during
this year's first quarter. Higher depreciation associated with fiscal 1999
capital expenditures, primarily at the Toms River, New Jersey and Vero Beach
restaurants was offset by the elimination of depreciation costs at Belmar.
General and administration costs were $6,900 higher for the quarter ended May 2,
1999 primarily due to salary increases of $10,600 offset by reductions of $6,000
in travel expenses and other services.
Interest expense was $8,900 higher during this year's first quarter as a result
of the interest expenses associated with a $880,000 first mortgage used to
partially fund the Vero Beach real property purchase and with a $124,000 loan
used to partially fund the purchase of a property next to the Toms River
restaurant. Interest income was essentially the same for the comparable periods.
Liquidity and Capital Resources
The Company's ratio of current assets to current liabilities was 1.30:1 at May
2, 1999 compared to
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1.32:1 at the year ended January 31, 1999. Working capital was $636,000 at the
end of the quarter compared to $653,000 at the year-end. During the first
quarter, net cash increased by $78,900. The primary components of the quarterly
cash flow were net income of $60,900, capital expenditures of $125,000 for
routine restaurant improvements and debt repayment of $60,600. For the quarter
ended April 26, 1998, net cash decreased by $185,200. The primary components of
the decrease were a reduction in accounts payable of $139,100, capital
expenditures of $223,700, primarily for renovations at the Toms River
restaurant, and debt repayment of $66,100.
Subsequent to May 2, 1999, the Company sold the Belmar liquor license to an
unaffiliated buyer for $150,000 cash.
Management believes that funds from operations, the liquor license sale proceeds
and its $500,000 bank line of credit will be sufficient to meet obligations for
the balance of fiscal 2000, including projected capital expenditures of
approximately $475,000 in addition to those expenditures incurred during the
first quarter. The projected capital expenditures include approximately $75,000
for Year 2000 ("Y2K") expenses, which are expected to be incurred during the
second and third quarters.
Year 2000
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Commencing in 1997, the Company began a review of its restaurant and corporate
computer systems to identify potential problems with the Y2K issue. As a result
of that review, it was determined that certain systems would require
remediation, specifically, the corporate mainframe computer, various restaurant
point of sale systems ("POS") and personal computers ("PC"s) used throughout the
Company.
At May 2, 1999, the Company was at various stages of completion of the
remediation process. The mainframe software programming changes were completed
and successfully tested in May 1999. Mainframe Y2K software expenditures to date
have not been material and have been expensed as incurred. The restaurant POS
remediation process, including those systems not affected by Y2K issues, is 63%
compliant and vendors for the impacted systems indicate that fixes should be
available during the second and third quarters of calendar 1999. It is
anticipated that the cost of such fixes will not be material and will be
expensed as incurred and funded from operating cash flows. Additionally, the
Company is at the final stage of the process of replacing the non-compliant PCs
and software. It is anticipated that the new PCs will be installed sometime
during the third quarter ending October 31, 1999 and the cost estimate has been
increased to $60,000, which will also be funded out of operating cash flows.
The Company has been in contact with its various suppliers of goods and services
regarding their compliance with Y2K issues. Although the Company is unable to
verify the Y2K readiness of all third party vendors, the Company believes that
there are multiple vendors of goods and services it receives from its suppliers
and the risk of non-compliance with Y2K by any of its suppliers is minimal. To
date, several key vendors such as payroll / human resources, credit card
processors, the major food and liquor vendors, and various public utility
companies have indicated that they are or will be compliant. At least 50% of the
remaining vendors contacted have indicated in writing that they will be Y2K
compliant or that they will not be affected.
Inflation
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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 future projections vary and are dependent upon a
complex set of factors.
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CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
PART II
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
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(b) Reports on Form 8-K. During the quarter ended May 2, 1999, the
Company filed a current report on Form 8-K for April 1, 1999 and Amendment No. 1
thereto on Form 8-K/A reporting in Item 4 thereto, the replacement of Moore
Stephens P.C. as the Company's independent accountants with Edward Isaacs &
Company LLC and the retaining by the Company of Edward Isaacs & Company LLC to
audit the Company's financial statements for the year ended January 31, 1999 and
if necessary, to reaudit its financial statements for the year ended January 25,
1998.
On June 4, 1999 (after completion of the quarter), the Company filed
a current report on Form 8-K for May 20, 1999 reporting in Item 1 therein, a
change in control through the ownership by "Lombardi related persons and
entities" (the "Lombardi Group") of in excess of 50% of the Company's issued and
outstanding shares of common stock. Robert M. Lombardi, M.D. was elected a
director of the Company and Frank "Doc" Koenemund resigned from the board. The
four "holdover" directors agreed to elect four additional Lombardi Group
nominees to the board and to resign from the board at such time as such nominees
are able to serve as directors in accordance with applicable law.
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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
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ANTHONY C. PAPALIA
Principal Executive and Financial Officer
DATED: June 14, 1999
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