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 OCTOBER 24, 2004
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
-------------------------------------------
(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 for 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 November 12, 2004
---------------------------- ---------------------------------------
Common Stock, $.01 par value 3,926,105
CHEFS INTERNATIONAL, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
--------------------- --------
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets - 1 - 2
October 24, 2004 (unaudited) and January 25, 2004
Consolidated Statements of Operations - 3
Nine and Three Months Ended October 24, 2004 and
October 26, 2003 (unaudited)
Consolidated Statements of Cash Flows - 4
Nine and Three Months Ended October 24, 2004 and
October 26, 2003 (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 13
SIGNATURES 14
CERTIFICATIONS 15 - 20
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
ASSETS
------
October 24, 2004 January 25, 2004
---------------- ----------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 2,137,980 $ 1,410,899
Available-for-sale securities 2,521,321 2,435,090
Miscellaneous receivables 100,979 79,076
Receivable - related party 40,000 40,000
Inventories 1,141,878 1,240,054
Deferred income taxes 366,000 654,000
Prepaid expenses and other 103,376 197,976
----------- -----------
TOTAL CURRENT ASSETS 6,411,534 6,057,095
----------- -----------
PROPERTY AND EQUIPMENT, at cost 19,786,567 20,076,717
Less: Accumulated depreciation 8,793,666 8,714,945
----------- -----------
PROPERTY AND EQUIPMENT, net 10,992,901 11,361,772
----------- -----------
OTHER ASSETS:
Asset held for sale 50,181 50,181
Receivable - related party 8,522 38,523
Liquor Licenses 839,732 839,732
Non-Compete agreement 30,511 39,980
Equity in life insurance policies 641,024 641,024
Deferred income taxes 370,000 370,000
Other 279,610 138,656
----------- -----------
TOTAL OTHER ASSETS 2,219,580 2,118,096
----------- -----------
$19,624,015 $19,536,963
=========== ===========
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
------------------------------------
October 24, 2004 January 25, 2004
---------------- ----------------
(Unaudited)
CURRENT LIABILITIES:
Notes and mortgages payable, current maturities $ 269,348 $ 266,346
Accounts payable 573,940 822,590
Accrued payroll 132,939 124,293
Accrued expenses 832,756 633,863
Gift certificates 318,972 523,167
----------- -----------
TOTAL CURRENT LIABILITIES 2,127,955 2,370,259
----------- -----------
NOTES AND MORTGAGES PAYABLE 1,451,255 1,694,092
----------- -----------
OTHER LIABILITIES:
Accrued retirement 577,802 589,720
Interest rate swap agreements 115,715 149,602
----------- -----------
OTHER LIABILITIES 693,517 739,322
----------- -----------
STOCKHOLDERS' EQUITY:
Capital stock - common $.01 par value,
Authorized 15,000,000 shares,
Issued and outstanding 3,926,105 39,261 39,261
Additional paid-in capital 31,488,831 31,488,831
Accumulated deficit (16,178,871) (16,815,013)
Accumulated other comprehensive income 2,067 20,211
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 15,351,288 14,733,290
----------- -----------
$19,624,015 $19,536,963
=========== ===========
The accompanying notes are an integral part of these financial statements.
2
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended Three Months Ended
----------------- ------------------
October 24, 2004 October 26, 2003 October 24, 2004 October 26, 2003
---------------- ---------------- ---------------- ----------------
SALES $ 17,308,614 $ 17,966,680 $ 5,124,289 $ 5,840,150
COST OF GOODS SOLD 5,526,836 5,629,933 1,640,305 1,837,332
------------ ------------ ------------ ------------
GROSS PROFIT 11,781,778 12,336,747 3,483,984 4,002,818
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Payroll and related expenses 5,129,678 5,416,202 1,516,450 1,744,000
Other operating expenses 3,670,480 3,921,573 1,101,713 1,231,426
Depreciation and amortization 791,704 845,859 256,996 271,213
General and administrative expenses 1,314,977 1,396,088 393,938 459,153
(Gain) loss on closing restaurant (415,473) 410,024 --- ---
Hurricane property and inventory losses 320,366 --- 320,366 ---
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 10,811,732 11,989,746 3,589,463 3,705,792
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 970,046 347,001 (105,479) 297,026
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (109,303) (121,248) (35,364) (38,580)
Investment income 114,399 111,146 37,119 35,566
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE), NET 5,096 (10,102) 1,755 (3,014)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 975,142 336,899 (103,724) 294,012
PROVISION FOR (BENEFIT FROM) INCOME TAXES 339,000 115,000 (46,000) 105,000
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 636,142 $ 221,899 $ (57,724) $ 189,012
============ ============ ============ ============
BASIC AND DILUTED INCOME (LOSS)
PER COMMON SHARE $ .16 $ .06 $ (01) $ .05
============ ============ ============ ============
Weighted average number
of shares outstanding 3,926,105 3,926,112 3,926,105 3,926,112
The accompanying notes are an integral part of these financial statements.
3
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED OCTOBER 24, 2004 AND OCTOBER 26, 2003 (Unaudited)
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 636,142 $ 221,899
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 791,704 845,859
Deferred income taxes 288,000 85,000
Loss (gain) on sale of investments 9,546 (7,312)
(Gain) loss on closing restaurant (415,473) 410,024
Hurricane property loss 78,623 ---
Changes in assets and liabilities:
(Increase) decrease in:
Miscellaneous receivables 8,098 26,034
Inventories 98,176 (23,053)
Prepaid expenses 94,600 (35,466)
Increase (decrease) in:
Accounts payable (248,650) (158,010)
Accrued expenses and other liabilities 111,426 (35,443)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,452,192 1,329,532
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (924,152) (328,671)
Closing of restaurant (120,000) (60,000)
Sale of restaurant 842,192
Sale or redemption of investments 745,491 186,451
Purchase of investments (893,299) (14,293)
Other (135,508) 5,822
----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES (485,276) (210,691)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (239,835) (245,631)
Purchase and retirement of treasury stock --- (59,200)
Additional paid in capital --- 1,990
----------- -----------
NET CASH (USED IN) FINANCING ACTIVITIES (239,835) (302,841)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 727,081 816,000
CASH AND CASH EQUIVALENTS:
Beginning 1,410,899 1,069,857
----------- -----------
Ending $ 2,137,980 $ 1,885,857
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payment for:
Interest $ 110,386 $ 122,063
=========== ===========
Income taxes paid $ --- $ 4,000
=========== ===========
Noncash Transactions:
(Decrease) increase in fair value of securities available for sale $ (52,031) $ 297,064
=========== ===========
Change in fair value of derivatives accounted for as hedges $ 33,887 $ 32,398
=========== ===========
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 25, 2004 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 nine and three month periods ended October 24, 2004 presented in
the consolidated financial statements are not necessarily indicative of the
results to be expected for any other interim period or the entire fiscal year.
NOTE 2: EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number of shares
of common stock outstanding during the period. There are no common stock
equivalents.
NOTE 3: INVENTORIES
Inventories consist of the following: October 24, 2004 January 25, 2004
---------------- ----------------
Food $ 566,212 $ 644,547
Beverages 140,692 149,243
Supplies 434,974 446,264
----------- -----------
$ 1,141,878 $ 1,240,054
=========== ===========
NOTE 4: INCOME TAXES
At October 24, 2004, the Company had net deferred tax assets of approximately
$736,000 arising principally from net operating loss carryforwards. Management
has determined that it is more likely than not that future taxable income will
be sufficient to utilize the net operating loss carryforwards. Therefore, no
allowance has been established to offset these assets.
NOTE 5: 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 6: RESTAURANT CLOSINGS
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 required the Company to pay $180,000, of which
$60,000 was paid during the second quarter ended July 27, 2003. The remaining
balance of $120,000 was paid during the first quarter ended April 25, 2004. The
Company recorded a loss on closing this restaurant of $410,000 for the six
months ended July 27, 2003.
5
Additionally, the Company granted the landlord an option to purchase the closed
restaurant's liquor license. The landlord declined to exercise the right to
purchase the liquor license and subsequent to the quarter ended April 25, 2004,
the Company entered into an agreement with an unaffiliated buyer to sell the
license for approximately $675,000 pending government approval of the license
transfer. During the second quarter ended July 25, 2004, the buyer declined to
purchase the license. The license is currently for sale.
Subsequent to the year ended January 25, 2004, the Company entered into a
contract to sell the restaurant and property located in Jensen Beach, Florida.
Pursuant to the terms of the contract, the restaurant was sold on May 3, 2004
for $900,000 with the Company recognizing a gain of approximately $415,500 which
is included in the results of operations for the second quarter ended July 25,
2004.
NOTE 7: HURRICANE PROPERTY AND INVENTORY LOSESS
In September 2004, the Company's three Florida restaurants were damaged as a
result of Hurricanes Frances and Jeanne. A $320,366 pretax charge was recorded
in the current quarter for costs associated with the incident, including lost
inventory, clean-up expenditures and an estimate of the carrying value for the
property and equipment destroyed or damaged. In addition, the Company spent
approximately $295,000 during the quarter for capital expenditures related to
the hurricanes and expects to spend substantial additional amounts in the future
to complete the repairs.
Subsequent to the end of the quarter, the Company received interim payments of
$600,000 on its insurance claim. The Company is in discussions with its insurers
as to additional insurance proceeds that the Company believes it is entitled to.
The insurer has not yet determined its obligation for payments of the claims.
Additionally, the Company may be eligible for a claim under its business
interruption policy. The Company expects to record a non-recurring gain once
these claims are finalized.
NOTE 8: 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 stockholders' equity
as a component of accumulated other comprehensive (loss).
NOTE 9: OTHER
On November 21, 2003, the Company announced that it had received an offer from
the principal shareholders of the Company, who own approximately 61% of the
Company's outstanding common stock, to purchase all of the remaining outstanding
shares of common stock for a cash purchase price of $1.75 per share, subject to
various conditions. The Company's Board of Directors appointed a Special
Committee, consisting of the three non-principal shareholder directors, to
review and analyze the proposal. The initial purchase price of $1.75 was
rejected by the Special Committee which concluded that the offered price did not
adequately reflect the Company's value. A subsequent offer of $3.12 per share
was deemed acceptable by the Special Committee and accepted by the Board. In
view of the fact that the proposal is subject to various conditions, no
assurance can be given that the proposed purchase will be completed.
NOTE 10: RESIGNATION OF PRESIDENT, TREASURER, PRINCIPAL EXECUTIVE AND PRINCIPAL
FINANCIAL OFFICER
In April 2004, Anthony C. Papalia, the Company's president, treasurer, principal
executive and principal financial officer requested of the Board that he be
released from his employment contract effective at the close of business on June
28, 2004 "...in order to pursue personal interests ...." The Board agreed to
release Mr. Papalia from his employment contract at said date and he agreed to a
one year non-competition agreement with the Company. The Board elected Robert M.
Lombardi as the new president of the Company. Martin Fletcher, the Company's
controller, succeeded Mr. Papalia as the Company's treasurer and principal
financial officer.
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.
RECENT DEVELOPMENTS
On June 1, 2004, the Company announced that a Special Committee of its Board of
Directors, appointed to evaluate a proposal made by the Lombardi Restaurant
Group (owned by the principal stockholders of the Company) to purchase the
interests of the Company's minority stockholders at a cash purchase price of
$3.12 per share (increased from an initial offer of $1.75 per share), had
determined to recommend that the Board accept the proposal. The Board has
accepted the proposal. As the proposal is subject to various conditions, no
assurances can be given that the proposed purchase will be completed.
The Company reported in its Annual Report on Form 10-KSB for the year ended
January 25, 2004 that the employment of Anthony C. Papalia as the Company's
president, principal executive officer, treasurer and principal financial
officer, was ending effective at the close of business on June 28, 2004, at Mr.
Papalia's request, to enable him "...to pursue personal interests...." Robert M.
Lombardi, chairman of the board, succeeded Mr. Papalia as president and
principal executive officer. Martin Fletcher, the Company's controller,
succeeded Mr. Papalia as treasurer and principal financial officer.
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 nine 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 and sold its Jensen Beach, Florida
Lobster Shanty during the second quarter of calendar year 2004. The Company
opened its first seafood restaurant in November 1978 and currently has six
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." 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 fiscal 2004. In February 2000, the Company
commenced the operation of 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
Escondido's Mexican Restaurant ("Freehold"), a Mexican theme restaurant located
in Freehold, New Jersey, adjacent to Moore's. On April 1, 2002, the Company
acquired the operations of 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. The sale of the
Jensen Beach restaurant in May 2004 reduced the number of restaurants operated
by the Company to nine.
Due to the destruction caused by Hurricanes Frances ("Frances") and Jeanne
("Jeanne"), the Company was forced to close all three Florida restaurants in
September 2004. The Vero Beach Lobster Shanty and Manatee's suffered substantial
damage and did not reopen until the fourth quarter and were closed for
approximately 7 1/2 and 11 weeks respectively. Fortunately, the Cocoa Beach
Lobster Shanty ("Cocoa") was not in the direct path of either hurricane and
consequently, was closed for only 12 days.
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 during the third quarter of its prior
fiscal year.
RESULTS OF OPERATIONS
SALES.
Sales for the nine months ended October 24, 2004 ("fiscal 2005") were
$17,308,600, a decrease of $658,100 or 3.7%, as compared to $17,966,700 for the
nine months ended October 26, 2003 ("fiscal 2004"). For the third quarter ended
October 24, 2004, sales were $5,124,300, a decrease of $715,900 or 12.3%, as
compared to the third quarter of fiscal 2004. Last year's sales for the nine
months included $311,800 in sales at the Monmouth Escondido's ("Monmouth") which
was closed in June 2003 and $906,000 in sales at the Jensen Beach, Florida
Lobster Shanty ("Jensen Beach") which was sold in May 2004, compared to $526,900
for Jensen Beach this year, a decrease of $379,100 at Jensen Beach. Jensen Beach
sales of $202,600 were included in last year's third quarter. The three Florida
restaurants that operated during the comparable periods realized decreased sales
of $338,900 or 6.5% and $585,700 or 46.2% versus last year due to the closure of
the restaurants as a result of the devastating September hurricanes. Some
weather observers believe that this was the worse storm season ever and it is
unclear if Florida will suffer an extended tourism downturn as a result of the
storms. The six New Jersey restaurants that operated during the comparable
periods realized increased sales of $371,700 or 3.2% for the nine months and
$72,400 or 1.7% for the three months versus last year primarily due to a milder
winter and despite a lackluster summer tourist season due to a rainy July and
August when sales were down by $212,700 or 5.9% versus last summer. Sales in
both states continue to be under pressure due to concerns related to terrorism
threats, the Iraq war and the cost of gasoline. The number of customers served
in the nine restaurants which operated during the comparable nine and three
month periods, decreased by 5% and 16.5% respectively while the average check
paid per customer increased by 5.4% and 8.9% versus last year.
8
GROSS PROFIT; GROSS MARGIN.
Gross profit was $11,781,800 or 68.1% of sales for the nine month
period and $3,484,000 or 68.0% of sales for the third quarter ended October 24,
2004, compared to $12,336,700 or 68.7% and $4,002,800 or 68.5% for the
comparable periods of fiscal 2004. The primary reasons for the decline were
continued increases in commodity costs, particularly poultry, beef, dairy and
produce, the addition of fuel surcharges by suppliers, and the closing of the
Monmouth restaurant with its lower cost Mexican fare. The Florida storms and
Midwest droughts have dramatically impacted commodity costs and will continue to
do so for the foreseeable future. Management raised some menu prices and
introduced lower cost specials to compensate for the higher costs.
OPERATING EXPENSES.
Total operating expenses decreased by 9.8% from $11,989,700 for the
nine months of fiscal 2004 to $10,811,700 for the nine months of fiscal 2005,
and by 3.1% from $3,705,800 for the third quarter of fiscal 2004 to $3,589,500
for this year's third quarter. Payroll and related expenses were 29.6% of sales
for both the nine and three month periods this year compared to 30.1% and 29.9%
respectively for the comparable periods last year. The primary reason for the
improvement is the closure of the Monmouth and Jensen Beach restaurants which
operated with higher payroll costs. Other operating expenses decreased to 21.2%
of sales versus 21.8% of sales for the nine month comparison and increased to
21.5% of sales versus 21.1% of sales for the third quarter comparisons. The nine
month decrease is directly attributable to the closing of Monmouth and Jensen
Beach while the third quarter increase is primarily due to increased utility
costs related to higher fuel costs and the reduced sales in Florida.
Depreciation and amortization expenses were lower by approximately
$54,200 and $14,200 over last year for the nine and three month periods ended
October 24, 2004 due primarily to the closings of Monmouth and Jensen Beach.
General and administrative expenses were lower by approximately $81,100
and $65,200 versus last year for the nine and three month periods due primarily
to reductions in salaries, group health and liability insurance costs, and
recruiting costs.
During the second quarter ended July 25, 2004, the Company sold the
restaurant and property located in Jensen Beach, Florida for $900,000 in cash to
an unrelated third party. The sale resulted in a gain of approximately $415,000.
In June 2003, the Company closed the Monmouth Mall Mexican theme restaurant and
recorded a loss of approximately $410,000 which included an early lease
termination fee of $180,000.
During the third quarter ended October 24, 2004, the Company recorded a
loss of $320,400 for costs associated with the hurricanes. The loss includes
lost inventory, clean-up expenditures and an estimate for the carrying value for
the property and equipment destroyed or damaged.
OTHER INCOME AND EXPENSE
Interest expense decreased by $11,900 and $3,200 for the nine and three
months ended October 24, 2004 as compared to the same periods last year due to
debt reduction. Interest income was slightly higher for both periods this year
which includes a net loss of $9,500 realized on the sales of investments versus
last year which included a net gain of $7,300 on the sales of investments.
9
NET INCOME (LOSS)
The Company realized income of $636,100 or $.16 per share for the nine
months ended October 24, 2004 as compared to net income of $221,900 or $.06 per
share for the nine months ended October 26, 2003. For the third quarter ended
October 24, 2004, the Company realized a loss of $57,700 or $.01 per share as
compared to net income of $189,000 or $.05 per share for the prior corresponding
quarter. This year's third quarter results included a loss of $320,400
associated with the hurricanes. The primary components of the improvement in
income is the gain of $415,000 recognized on the sale of Jensen Beach versus
last year's loss of $410,000 associated with the closing of Monmouth.
LIQUIDITY AND CAPITAL RESOURCES
The Company's ratio of current assets to current liabilities was 3.01:1
at October 24, 2004 compared to 2.56:1 at the year ended January 25, 2004.
Working capital was $4,283,600 at October 24, 2004 versus $3,686,800 at the year
end, an increase of $596,800. During the nine months ended October 24, 2004, net
cash increased by $727,100. The primary components were net income after
adjustment for depreciation, deferred taxes, hurricane property loss, and the
gain on the sale of Jensen Beach, totaling $1,379,000, offset by a decrease in
inventories of $98,200 primarily related to unusable product damaged by the
hurricanes, a decrease in prepaid expenses of $94,600 as a result of a change in
the financing of the Company's annual property and casualty insurance program,
and a decrease of $248,600 in accounts payable.
Investing activities during the first nine months of fiscal 2005
resulted in a net cash outflow of $485,300. The primary components were capital
expenditures of $924,200 related to the hurricanes, restaurant improvements and
renovations, a final payment of $120,000 paid as per the Surrender Agreement
associated with the closing of Monmouth (see note 6), $842,200 in net cash
realized on the sale of Jensen Beach (note 6), investment purchases of $893,300
for available-for-sale securities offset by $745,500 from the sale of
investments and increase in other assets of $135,500 primarily due to a deposit
of $80,000 to purchase a liquor license in Edison, New Jersey and $36,200 in
costs related to the proposal by the principal shareholders of the Company to
purchase all of the remaining outstanding shares of common stock (note 9).
Financing activities for the nine months ended October 24, 2004
resulted in a net cash outflow of $239,800 for debt repayment.
During the corresponding nine month period ended October 26, 2003,
working capital increased by $1,077,400 and net cash increased by $816,000. The
primary components of last year's cash flow were net income, after adjustment
for depreciation, deferred taxes and the loss on closing Monmouth, of
$1,562,800, offset by a decrease in accounts payable of $158,000, capital
expenditures of $328,700 for restaurant improvements, debt repayment of $245,600
and $59,200 for the repurchase of 40,000 shares of the Company's Common Stock.
Subsequent to the third quarter ended October 24, 2004, the Company
reopened its Vero Beach and Mr. Manatee's restaurants. Additionally, the
Company's primary bank agreed to increase the Company's bank line of credit
("line") from $500,000 to $1,000,000 with all other terms remaining unchanged
including the maturity date of June 30, 2005. The Company intends to use the
line to cover short-term cash needs related to the hurricane losses. As of
November 12, 2004, the Company had drawn $250,000 on the line.
10
At the present time the Company is unable to predict the extent to
which the losses caused by the hurricanes will be covered by its existing
insurances. However, the Company received advances of $600,000 from its
insurance carriers in November 2004.
Management anticipates that funds from operations, the bank line of
credit, and insurance proceeds will be sufficient to meet obligations for the
balance of fiscal 2005, including planned capital expenditures of approximately
$229,300 in addition to those incurred during the first nine months and
rebuilding costs associated with the Florida losses.
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.
11
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 officers 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")) have 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 them 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.
12
CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS
EXHIBITS
31 - Certifications of Principal Executive and Principal
Financial Officer
32 - Certifications pursuant to 18 U.S.C. Section 1350 of
Principal Executive and Principal Financial
Officer
13
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/ Robert Lombardi
-------------------
ROBERT LOMBARDI
Principal Executive Officer
/s/ Martin W. Fletcher
----------------------
MARTIN W. FLETCHER
Principal Financial Officer
DATED: December 8, 2004
----------------
14