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 26, 2003 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE EXCHANGE ACT For the transition period from _________________ to _______________ Commission file number 0-8513 CHEFS INTERNATIONAL, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 22-2058515 --------------------------------- ----------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 62 Broadway, Point Pleasant Beach, NJ 08742 ------------------------------------------- (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 14, 2003 ---------------------------- --------------------------------------- Common Stock, $.01 par value 3,926,112 CHEFS INTERNATIONAL, INC. I N D E X PART I FINANCIAL INFORMATION PAGE NO. --------------------- -------- ITEM 1. Consolidated Financial Statements Consolidated Balance Sheets - 1 - 2 October 26, 2003 (unaudited) and January 26, 2003 Consolidated Statements of Operations - 3 Nine and Three Months Ended October 26, 2003 and October 27, 2002 (unaudited) Consolidated Statements of Cash Flows - 4 Nine Months Ended October 26, 2003 and October 27, 2002 (unaudited) Notes to Consolidated Financial Statements 5 - 6 ITEM 2. Management's Discussion and Analysis 7 - 11 of Financial Condition and Results of Operations ITEM 3. Controls and Procedures 12 PART II OTHER INFORMATION ----------------- ITEM 6. Exhibits and Reports on Form 8-K 13 SIGNATURE 14 CERTIFICATION 15 - 17 CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ CONSOLIDATED BALANCE SHEETS ASSETS ------ October 26, 2003 January 26, 2003 ---------------- ---------------- (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 1,885,857 $ 1,069,857 Investments --- 151,000 Available-for-sale securities 1,951,749 1,668,531 Receivable - related party 40,000 40,000 Miscellaneous receivables 65,179 62,173 Inventories 1,152,045 1,128,992 Prepaid expenses 143,454 107,988 ----------- ----------- TOTAL CURRENT ASSETS 5,238,284 4,228,541 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT, at cost 21,135,829 21,411,079 Less: Accumulated depreciation 9,626,869 9,164,376 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT, net 11,508,960 12,246,703 ----------- ----------- OTHER ASSETS: Asset held for sale 50,180 --- Intangibles - not subject to amortization 839,733 889,913 Other intangibles 43,136 52,605 Receivable - related party 48,523 77,563 Equity in life insurance policies 602,822 602,822 Deferred income taxes 916,000 1,064,000 Other 28,813 34,635 ----------- ----------- TOTAL OTHER ASSETS 2,529,207 2,721,538 ----------- ----------- $19,276,451 $19,196,782 =========== =========== The accompanying notes are an integral part of these financial statements. 1 CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) LIABILITIES AND STOCKHOLDERS' EQUITY October 26, 2003 January 26, 2003 ---------------- ---------------- (Unaudited) CURRENT LIABILITIES: Notes and mortgages payable, current maturities $ 265,694 $ 271,490 Accounts payable 544,223 702,233 Accrued payroll 144,193 157,637 Accrued expenses 815,750 493,450 Gift certificates 299,271 511,955 ----------- ----------- TOTAL CURRENT LIABILITIES 2,069,131 2,136,765 ----------- ----------- NOTES AND MORTGAGES PAYABLE 1,720,603 1,960,438 ----------- ----------- OTHER LIABILITIES 703,546 747,559 ----------- ----------- STOCKHOLDERS' EQUITY: Capital stock - common $.01 par value, Authorized 15,000,000 shares, Issued 3,926,112 39,261 39,695 Additional paid-in capital 31,488,831 31,549,492 Accumulated deficit (16,632,111) (16,854,010) Accumulated other comprehensive (loss) (112,810) (379,272) Treasury stock --- (3,885) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 14,783,171 14,352,020 ----------- ----------- $19,276,451 $19,196,782 =========== =========== The accompanying notes are an integral part of these financial statements. 2 CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Nine Months Ended Three Months Ended ----------------- ------------------ October 26, 2003 October 27, 2002 October 26, 2003 October 27, 2002 ---------------- ---------------- ---------------- ---------------- SALES $ 17,966,680 $ 18,550,308 $ 5,840,150 $ 5,966,171 COST OF GOODS SOLD 5,629,933 5,740,775 1,837,332 1,858,398 ------------ ------------ ----------- ----------- GROSS PROFIT 12,336,747 12,809,533 4,002,818 4,107,773 ------------ ------------ ----------- ----------- OPERATING EXPENSES: Payroll and related expenses 5,416,202 5,795,477 1,744,000 1,876,090 Other operating expenses 3,921,573 4,007,213 1,231,426 1,331,547 Depreciation and amortization 845,859 892,983 271,213 302,050 General and administrative expenses 1,396,088 1,492,464 459,153 506,122 Loss on closing restaurant 410,024 --- --- --- ------------ ------------ ----------- ----------- TOTAL OPERATING EXPENSES 11,989,746 12,188,137 3,705,792 4,015,809 ------------ ------------ ----------- ----------- INCOME FROM OPERATIONS 347,001 621,396 297,026 91,964 ------------ ------------ ----------- ----------- OTHER INCOME (EXPENSE): Interest expense (121,248) (135,288) (38,580) (44,726) Investment income 111,146 120,593 35,566 41,260 ------------ ------------ ----------- ----------- OTHER INCOME (EXPENSE), NET (10,102) (14,695) (3,014) (3,466) ------------ ------------ ----------- ----------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 336,899 606,701 294,012 88,498 PROVISION FOR INCOME TAXES 115,000 227,000 105,000 43,000 ------------ ------------ ----------- ----------- INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 221,899 379,701 189,012 45,498 CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE (Note 2) - GOODWILL ACCOUNTING METHOD --- (430,403) --- --- ------------ ------------ ----------- ----------- NET INCOME (LOSS) $ 221,899 $ (50,702) $ 189,012 $ 45,498 ============ ============ =========== =========== INCOME PER COMMON SHARE BEFORE CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE $ .06 $ .10 $ .05 $ .01 CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE - GOODWILL ACCOUNTING METHOD --- (.11) --- --- ------------ ------------ ----------- ----------- NET INCOME (LOSS) PER COMMON SHARE $ .06 $ (.01) $ .05 $ .01 ============ ============ =========== =========== Number of shares outstanding 3,926,112 3,965,579 3,926,112 3,965,579 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 26, 2003 AND OCTOBER 27, 2002 (Unaudited) 2003 2002 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 221,899 $ (50,702) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 845,859 892,983 Cumulative effect of an accounting change --- 430,403 Deferred income taxes 85,000 164,000 Gain on sale of assets and investments (7,312) (5,154) Loss on closing restaurant 350,024 --- Changes in assets and liabilities: Miscellaneous receivables 26,034 (129,193) Inventories (23,053) 68,230 Prepaid expenses (35,466) 94,088 Accounts payable (158,010) (170,684) Accrued expenses and other liabilities (35,443) 13,511 Income taxes payable --- 28,296 ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,269,532 1,335,778 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (328,671) (960,107) Acquisition of restaurant assets --- (891,190) Sale or redemption of investments 186,451 409,820 Purchase of investments (14,293) (226,645) Other 5,822 20,782 ----------- ----------- NET CASH (USED IN) INVESTING ACTIVITIES (150,691) (1,647,340) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of debt (245,631) (331,546) Proceeds from debt --- 500,000 Purchase and retirement of treasury stock (59,200) --- Additional paid in capital 1,990 --- ----------- ----------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (302,841) 168,454 ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 816,000 (143,108) CASH AND CASH EQUIVALENTS: Beginning 1,069,857 1,408,062 ----------- ----------- Ending $ 1,885,857 $ 1,264,954 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash payment for: Interest paid $ 122,063 $ 135,207 =========== =========== Income taxes paid $ 4,000 $ 21,506 =========== =========== Noncash Transactions: Increase (decrease) in fair value of securities available for sale $ 297,064 $ (311,006) =========== =========== Change in fair value of derivatives accounted for as hedges $ 32,398 $ (107,554) =========== =========== The accompanying notes are an integral part of these financial statements. 4 CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1: BASIS OF PRESENTATION The accompanying financial statements have been prepared by Chefs International, Inc. (the "Company") and are unaudited. In the opinion of the Company's management, all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the Company's consolidated financial position, results of operations and cash flows for the periods presented have been made. Certain information and footnote disclosures required under generally accepted accounting principles have been condensed or omitted from the consolidated financial statements pursuant to the rules and regulations of the SEC. The consolidated financial statements and notes thereto should be read in conjunction with the Company's audited consolidated financial statements for the year ended January 26, 2003 and notes thereto included in the Company's Annual Report on Form 10-KSB filed with the SEC. The results of operations and the cash flows for the nine and three month periods ended October 26, 2003 presented in the consolidated financial statements are not necessarily indicative of the results to be expected for any other interim period or the entire fiscal year. NOTE 2: ACCOUNTING FOR BUSINESS COMBINATIONS In July 2001, the FASB issued Statements of Financial Accounting Standards ("Statement") No. 141. "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). These standards change the accounting for business combinations by, among other things, prohibiting the prospective use of pooling-of-interests accounting and requiring companies to stop amortizing goodwill and certain intangible assets with an indefinite useful life. Instead, goodwill and intangible assets deemed to have an indefinite useful life will be subject to an annual review for impairment. The new standards were effective for the Company in the first quarter of Fiscal 2003 and for purchase business combinations consummated after June 30, 2001. The Company completed its initial goodwill impairment testing during the first quarter of Fiscal 2003 and determined that there was impairment of goodwill solely because the aggregate market capitalization of the Company was less than its book value (market capitalization at January 28, 2002 was $8,923,406 versus a book value of $15,756,445). Therefore, the Company recorded a one-time, noncash charge of $430,403 to reduce the carrying value of its goodwill. Such charge is reflected as a cumulative effect of an accounting change in the accompanying consolidated statement of operations. NOTE 3: ACQUISITION On April 1, 2002, the Company acquired for $882,681 the inventory, furniture, fixtures, equipment, liquor license and franchising rights of a restaurant business located in Florida known as Mr. Manatee's Casual Grille. In connection with the acquisition, the Company entered into a five-year lease, effective April 1, 2002, which requires minimum annual rentals of $96,000. The lease contains three five-year renewal options and includes an option for the Company to purchase the property during the first term of the lease for $1,075,000. NOTE 4: EARNINGS PER SHARE Basic earnings per share is computed using the weighted average number of shares of common stock outstanding during the period. 5 NOTE 5: INVENTORIES Inventories consist of the following: October 26, 2003 January 26, 2003 ---------------- ---------------- Food $ 535,689 $ 512,058 Beverages 156,054 152,269 Supplies 460,302 464,665 ------------ ----------- $ 1,152,045 $ 1,128,992 =========== =========== NOTE 6: INCOME TAXES At October 26, 2003, the Company had net deferred tax assets of approximately $2,014,000 arising principally from net operating loss carryforwards. However, due to the uncertainty that the Company will generate sufficient income in the future to fully or partially utilize these carryforwards, an allowance of $1,098,000 has been established to partially offset these assets. Management has determined that it is more likely than not that future taxable income will be sufficient to partially realize the benefit of the net operating loss carryforwards. NOTE 7: DEPRECIATION AND AMORTIZATION The Company depreciates its property and equipment using the straight-line method over the estimated useful lives of the assets, ranging from three to forty years. NOTE 8: RESTAURANT CLOSING In June 2003 the Company closed one of its Mexican theme restaurants. In connection with the closing, the Company wrote off leasehold improvements and other equipment of $230,024 and entered into a Surrender Agreement with the restaurant's landlord which requires the Company to pay $180,000, of which $60,000 was paid during the second quarter ended July 27, 2003. The remaining balance of $120,000 is included in accrued expenses in the accompanying Consolidated Balance Sheet. The loss of $410,024 is shown as "Loss on closing restaurant" in the accompanying Consolidated Statement of Operations for the nine months ended October 26, 2003. Additionally, the Company granted the landlord an option to purchase the closed restaurant's liquor license. The landlord exercised the option on October 31, 2003 for an agreed upon price of $400,000. The agreement is subject to government approval of the license transfer. The closing is expected to take place by February 15, 2004. The liquor license is shown in the accompanying October 26, 2003 Consolidated Balance Sheet as "Asset held for sale". NOTE 9: HEDGING INSTRUMENTS The Company has interest rate swap agreements relating to a portion of its variable rate debt. The interest rate swap agreements are designated as cash flow hedges and are reflected at fair value in the consolidated balance sheet and the related losses on these contracts are deferred in shareholders' equity as a component of accumulated other comprehensive (loss). 6 CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements regarding future performance in this Quarterly Report on Form 10-QSB constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. No assurance can be given that the future results covered by the forward-looking statements will be achieved. The Company cautions readers that important factors may affect the Company's actual results and could cause those results to differ materially from the forward-looking statements. Such factors include, but are not limited to, changing market conditions, weather, the state of the economy, substantial increases in insurance costs (in addition to those substantial increases which commenced in April 2002), the impact of competition to the Company's restaurants, pricing and acceptance of the Company's food products. SIGNIFICANT TRANSACTIONS AND NONRECURRING ITEMS As more fully described herein and in the related footnotes to the accompanying consolidated financial statements, the comparability of Chefs International, Inc.'s operating results has been affected by a significant transaction and nonrecurring item for the three months ended April 28, 2002. During 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting standards No. 142 "Goodwill and Other Intangible Assets"("FAS 142"), which requires that, effective for years beginning on or after January 1, 2002, goodwill, and certain other intangible assets deemed to have an indefinite useful life, cease amortizing. Under the new rules, goodwill and certain intangible assets must be assessed for impairment using fair value measurement techniques. The Company completed its initial goodwill impairment testing during the first quarter of Fiscal 2003, and determined that there was impairment of goodwill solely because the aggregate market capitalization of the Company was exceeded by its book value. Therefore, the Company recorded a $430,403 impairment of goodwill. The charge is reflected as a cumulative effect of an accounting change in the accompanying consolidated financial statements. OVERVIEW The Company's principal source of revenue is from the operations of its restaurants. The Company's cost of sales includes food and liquor costs. Operating expenses include labor costs, supplies and occupancy costs (rent, insurance and utilities), marketing and maintenance costs. General and administrative expenses include costs incurred for corporate support and administration, including the salaries and related expenses of personnel and the costs of operating the corporate office at the Company's headquarters in Point Pleasant Beach, New Jersey. The Company currently operates ten restaurants on a year-round basis. The Company closed its Escondido's Mexican Restaurant in the Monmouth Mall during the second quarter of calendar year 2003. The Company opened its first seafood restaurant in November 1978 7 and currently has seven free-standing seafood restaurants in New Jersey and Florida operating under the names "Jack Baker's Lobster Shanty" or "Baker's Wharfside." The Company opened its first Mexican theme restaurant, located in New Jersey, in April 1996, under the name "Garcia's." In February 2000, the Company commenced the operation of its ninth restaurant, Moore's Tavern and Restaurant, ("Moore's"), a free-standing restaurant in Freehold, New Jersey serving an eclectic American food type menu. On January 29, 2002, the Company commenced operation of its tenth restaurant, Escondido's Mexican Restaurant ("Freehold"), a Mexican theme restaurant located in Freehold, New Jersey, adjacent to Moore's. On February 1, 2002, Garcia's began to operate under the trade name Escondido's ("Monmouth"). The Company closed this restaurant during the second quarter of fiscal 2004. On April 1, 2002, the Company acquired the operations of its eleventh restaurant, Mr. Manatee's Casual Grille ("Manatee's"), a casual theme restaurant primarily featuring seafood items, located in Vero Beach, Florida near the Company's Vero Beach, Florida Lobster Shanty. Generally, the Company's New Jersey seafood restaurants derive a significant portion of their sales from May through September. The Company's Florida seafood restaurants derive a significant portion of their sales from January through April. Moore's experiences a seasonality factor similar to but not as dramatic as the seasonality factor of the New Jersey seafood restaurants. The Company's Freehold Escondido's experiences a seasonality factor similar to Moore's. Manatee's follows the seasonality pattern of the other Florida restaurants. The Company operated ten restaurants in February and March 2002 and eleven restaurants in the months of April through October 2002. RESULTS OF OPERATIONS --------------------- SALES. Sales for the nine months ended October 26, 2003 ("fiscal 2004") were $17,966,700, a decrease of $583,600 or 3.1%, as compared to $18,550,300 for the nine months ended October 27, 2002 ("fiscal 2003"). For the third quarter ended October 26, 2003, sales were $5,840,200, a decrease of $126,000 or 2.1% , as compared to the third quarter of fiscal 2003. Increased sales of $481,900 and $17,800 for the nine and three month periods at Manatee's which opened on April 1, 2002 and therefore, was in operation during one month of last year's first quarter and the entire second and third quarters as compared to nine months of operation this year, were offset by decreased sales of $341,800 and $210,500 at the Monmouth Escondido's which was closed in June 2003. The other nine restaurants combined had decreased sales of $723,700 or 4.3% and increased sales of $66,700 or 1.2% for the nine and three month periods versus last year. The three Florida restaurants that operated during the comparable periods realized decreased sales of $62,800 or 1.3% and increased sales of $21,100 for the nine and three month periods versus last year primarily due to the continued softness in air travel, including a substantial reduction in foreign visitation and the Columbia Space Shuttle tragedy which negatively impacted the Cocoa Beach location. The six New Jersey restaurants had lower sales of $661,000 or 5.4% and increased sales of $45,500 or 1.1% for the nine and three month periods compared to last year primarily due to the dismal winter weather that included a major snow storm over the Valentine's/Presidents' Day weekend and an extremely rainy summer, whereby beginning with the Memorial Day holiday, it rained ten out of eleven weekends. Additionally, traffic at all of the restaurants was negatively impacted by the slow economy, terrorism concerns post 9/11 and the Iraq war. However, both the Florida and New Jersey restaurants realized positive sales gains in the third quarter in fiscal 2004 due to 8 favorable weather and a positive uptick in the national economy. The number of customers served in the nine restaurants which operated during the comparable nine and three month periods fell by 5.3% and 1.0% respectively, while the average check paid per customer increased by 1.0% and 2.2% versus last year. The check average at Manatee's is less than at the other nine restaurants and is less than it was last year due to the introduction of lower priced dinner specials. GROSS PROFIT; GROSS MARGIN. Gross profit was $12,336,700 or 68.7% of sales for the nine month period and $4,002,800 or 68.5% of sales for the third quarter ended October 26, 2003, compared to $12,809,500 or 69.1% and $4,107,800 or 68.9% for the comparable periods of fiscal 2003. The primary reasons for the decline were the record-setting increase in the cost of beef and closing of the Monmouth Escondido's restaurant with its lower cost Mexican fare. OPERATING EXPENSES. Total operating expenses decreased by 1.6% from $12,188,100 during the first nine months of fiscal 2003 to $11,989,700 during the first nine months of fiscal 2004, and by 7.7% from $4,015,800 for the third quarter of fiscal 2003 to $3,705,800 for the third quarter of the current year. Payroll and related expenses were 30.1% of sales for the nine months and 29.9% for the third quarter this year compared to 31.2% and 31.4% respectively for the comparable periods last year. The improvement is directly attributable to productivity improvements at the restaurants and lower health and worker's compensation insurance costs. Other operating expenses increased to 21.8% of sales versus 21.6% of sales for the nine month comparison and decreased to 21.1% versus 22.3% of sales for the third quarter comparisons. The primary reasons for the nine month increase were the inclusion of Manatee's for the full thirteen weeks of this year's first quarter versus four weeks last year, higher occupancy costs due to increases in real estate taxes and rent costs and the decrease in sales. The decrease in the third quarter is directly attributable to the closing of Monmouth Escondido's in June 2003. Depreciation and amortization expenses were lower by approximately $47,100 and $30,800 versus last year for the nine and three month periods ended October 26, 2003 due to the inclusion (for the entire nine months) of depreciation expenses associated with the purchase of furniture, fixtures and equipment of Manatee's offset by the expiration of fully depreciated assets at the other restaurants and the closing of Monmouth. General and administrative expenses were lower by approximately $96,400 and $47,000 versus last year for the nine and three month periods due primarily to reductions in salaries and payroll taxes and an approximate $10,000 settlement with an insurance carrier pertaining to a business interruption claim stemming from the closure of the main access road near the Cocoa Beach, Florida restaurant due to security concerns at the nearby Air Force base subsequent to 9/11/01. As a result of continuing operating losses at its Monmouth Mall Mexican theme restaurant, management decided to close this restaurant. On April 30, 2003, management executed a Surrender Agreement with the mall landlord to terminate the lease prior to its expiration date and agreed to give the landlord an option to purchase the restaurant's liquor license at a specified price until October 31, 2003, since extended to March 15, 2004, after which the liquor license can be sold to any independent purchaser. Management believes that the net proceeds from the sale of the liquor license will exceed the $180,000 paid to the landlord for the early termination of the lease, however, any gain on the sale of the liquor license will not be recognized until realized. The restaurant was closed in June 2003 and the 9 Company recorded a loss of approximately $410,000 on the closing which includes the early termination fee of $180,000 and disposal of unusable assets. OTHER INCOME AND EXPENSE Interest expense decreased by $14,000 and $6,100 for the nine and three month periods ended October 26, 2003 as compared to comparable periods last year due to debt reduction and lower interest rates which reduced the interest expense on the Company's variable debt. Investment income was lower by $9,400 and $5,700 for the nine and six month comparisons due to lower interest rates. NET INCOME (LOSS) The Company realized income of $221,900 or $.06 per share for the nine months ended October 26, 2003 as compared to income before the cumulative effect of the accounting change related to goodwill, of $379,700 or $.10 per share for the nine months ended October 27, 2002. As indicated in the Significant Transactions and Nonrecurring Items section, the Company recorded a $430,403 charge related to goodwill impairment in fiscal 2003 which resulted in a net loss for the nine months ended October 27, 2002 of $50,700 compared to net income of $221,900 for the nine months ended October 26, 2003. For the quarter ended October 26, 2003, net income was $294,000 or $.07 per share as compared to net income of $45,500 or $.01 per share in the corresponding quarter of fiscal 2003. The primary components of the lower income this year are the reduced sales due to economic, terrorism and weather issues and the $410,000 loss associated with the closing of the Monmouth Mall restaurant. LIQUIDITY AND CAPITAL RESOURCES The Company's ratio of current assets to current liabilities was 2.53:1 at October 26, 2003 compared to 1.98:1 at the year ended January 26, 2003. Working capital was $3,169,200 at October 26, 2003 versus $2,091,800 at the year end, an increase of $1,077,400. During the nine months ended October 26, 2003, net cash increased by $816,000. Net cash provided by operating activities was $1,269,500. The primary components were net income after adjustment for depreciation, deferred taxes and the loss on closing of the Monmouth Mall restaurant, totaling $1,502,800 and a decrease of $158,000 in accounts payable. Investing activities for the nine months of fiscal 2004 resulted in a net cash outflow of $150,700. Capital expenditures were $328,700 used primarily for routine restaurant improvements. Other investing activities included investment purchases of available-for-sale securities totaling $14,300 offset by $186,500 from the sale of investments and the proceeds of maturing certificates of deposit. Financing activities for the nine months ended October 26, 2003 resulted in a net cash outflow of $302,800 and included debt repayment of $245,600 and $59,200 for the repurchase of 40,000 shares of the Company's Common Stock pursuant to a December 24, 2002 Board of Directors authorization to repurchase up to 100,000 shares of the Company's stock on or before January 29, 2004 at prevailing market prices. During the second quarter ended July 27, 2003, the Company canceled a total of 43,550 of the repurchased shares, including repurchases effected during fiscal 2002. During the corresponding nine month period ended October 27, 2002, there was a reduction in working capital of $41,500 and net cash decreased by $143,100. The primary 10 components of last year's cash flow were net income, after adjustment for depreciation, deferred income taxes and a cumulative effect of an accounting change, of $1,436,700, an increase of $129,200 in miscellaneous receivables primarily due to credits for costs associated with the construction of a paved parking area for the two Freehold, New Jersey restaurants, a decrease in prepaid expenses of $94,100 due to the revised billing policy of the Company's insurance carrier, a decrease in accounts payable of $170,700, capital expenditures of $1,826,800 including $866,700 for the purchase of Manatee's assets and $543,000 for restaurant improvements, investment purchases totaling $226,600 offset by $409,800 from the sale of investments and proceeds of maturing certificates of deposit, $331,500 in debt repayment and bank loan proceeds of $500,000 used to partially finance the purchase of the Manatee's assets. During the second quarter ended July 27, 2003, the Company's $500,000 bank line of credit was renewed for two years. The interest rate is variable, equal to the monthly LIBOR Market Index Rate plus 2%. The entire $500,000 is currently available for use. Management anticipates that funds from operations will be sufficient to meet obligations for the restaurants for the balance of fiscal 2004, including planned capital expenditures of approximately $90,000 in addition to those incurred during the first nine months. INFLATION It is not possible for the Company to predict with any accuracy the effect of inflation upon the results of its operations in future years. In general, the Company is able to increase menu prices to counteract the majority of the inflationary effects of increasing costs with the exception of the substantial increase in insurance costs that the Company has had to absorb over the last two years. 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 officer after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c) as of a date within 90 days of the filing date of this quarterly report (the "Evaluation Date")) has concluded that as of the Evaluation Date, the Company's disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to him by others within those entities, particularly during the period in which this quarterly report was being prepared. (b) Changes in internal controls. There were no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's disclosure controls and procedures subsequent to the Evaluation Date, nor any significant deficiencies or material weaknesses in such disclosure controls and procedures requiring corrective actions. As a result, no corrective actions were taken. 12 CHEFS INTERNATIONAL, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION --------------------------- ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 31 - Certification of Principal Executive and Principal Financial Officer 32 - Certification pursuant to 18 U.S.C. Section 1350 of Principal Executive and Principal Financial Officer (b) REPORTS ON FORM 8-K On November 21, 2003, the Company filed a current report on Form 8-K with the Securities and Exchange Commission attaching its press release of the same date announcing that it had received an offer from the five Lombardi Brothers and their affiliates (the "Lombardi Group") who own approximately 61% of the Company's outstanding common stock, to acquire all of the outstanding shares of common stock not owned by the Lombardi Group for a cash purchase price of $1.75 per share. The press release stated that the Company's Board of Directors had appointed a Special Committee consisting of the three non-Lombardi Brother directors to review and analyze the proposal. 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/ Anthony C. Papalia ------------------------ ANTHONY C. PAPALIA Principal Executive and Principal Financial Officer DATED: December 10, 2003 14