-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KrlGkCLlM5QHrLhRvuEn42yhu+cowPXtDFK3CKUNOEY5bRZEECpbsGh5Xfu+0Ohl qHW9ZoCX0m6VwJqwpQexQg== 0000020041-99-000002.txt : 19990317 0000020041-99-000002.hdr.sgml : 19990317 ACCESSION NUMBER: 0000020041-99-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990131 FILED AS OF DATE: 19990316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHOCK FULL O NUTS CORP CENTRAL INDEX KEY: 0000020041 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FOOD PREPARATIONS & KINDRED PRODUCTS [2090] IRS NUMBER: 130697025 STATE OF INCORPORATION: NY FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04183 FILM NUMBER: 99566082 BUSINESS ADDRESS: STREET 1: 370 LEXINGTON AVE STREET 2: 11TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2125320300 MAIL ADDRESS: STREET 1: 370 LEXINGTON AVENUE STREET 2: 11TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10017 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended January 31, 1999 Commission File Number 1-4183 CHOCK FULL O' NUTS CORPORATION (Exact Name of Registrant As Specified In Its Charter) New York 13-0697025 (State or Other Jurisdiction of (I.R.S. Employer Incorporation of Organization) Identification No.) 370 Lexington Avenue, New York, N.Y. 10017 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, including Area Code (212) 532-0300 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 No. of Shares of Common Stock ($.25 par value) outstanding as of March 12, 1999 - 10,830,922 CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Unaudited Condensed Consolidated Balance Sheets - January 31, 1999 and July 31, 1998 1 & 2 of 16 Unaudited Condensed Consolidated Statements of Income- Three Months Ended January 31, 1999 and 1998 3 of 16 Unaudited Condensed Consolidated Statements of Income- Six Months Ended January 31, 1999 and 1998 4 of 16 Unaudited Condensed Consolidated Statements of Cash Flows - Six Months Ended January 31, 1999 and 1998 5 of 16 Unaudited Condensed Consolidated Statement of Stockholders' Equity - January 31, 1999 6 & 7 of 16 Notes to Unaudited Condensed Consolidated Financial Statements - January 31, 1999 8 & 9 of 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10, 11, 12, 13 and 14 of 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings 15 of 16 Item 4. Submission of Matters to a Vote of Shareholders 15 of 16 Item 5. Other Information 15 of 16 Item 6. Exhibits and Reports on Form 8-K 15 of 16 Signatures 16 of 16 PART I. FINANCIAL INFORMATION CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS January 31, July 31, 1999 1998 ASSETS (Unaudited) (Note) Current assets: Cash and cash equivalents $ 9,915,454 $ 6,148,068 Receivables, principally trade, less allowances for doubtful accounts and discounts of $1,328,000 37,430,040 40,559,581 and $1,329,000 Inventories 62,866,428 60,641,309 Prepaid expense and other 5,332,259 3,636,446 Total current assets 115,544,181 110,985,404 Property, plant and equipment - at cost $110,858,492 $105,327,427 Less allowances for depreciation and amortization (9,577,756) 51,280,736 (56,346,824) 49,025,603 Real estate held for development or sale, at cost 2,147,424 2,175,344 Other assets and deferred charges 21,858,066 23,223,366 Excess of cost over net assets acquired 15,714,262 15,773,875 $206,544,669 $201,183,592 Note: The balance sheet at July 31, 1998 has been derived from the audited financial statements at that date. See notes to unaudited condensed consolidated financial statements. 1 of 16 CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS January 31, July 31, 1999 1998 Unaudited) (Note) LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current installments of long-term debt $ 266,052 Accounts payable 13,702,743 $8,502,778 Accrued expenses 9,041,907 9,159,994 Income taxes 1,288,000 1,093,979 Total current liabilities 24,298,702 18,756,751 Long-term debt, excluding current installments 90,089,385 92,246,967 Other non-current liabilities 3,054,715 3,854,833 Deferred income taxes 8,770,000 8,770,000 Stockholders' equity: Common stock, par value $.25 per share; Authorized 50,000,000 shares: Issued 11,306,444 shares 2,826,611 2,826,611 Additional paid-in-capital 52,064,121 52,064,121 Retained earnings 33,462,044 30,848,452 Cost of 475,522 shares in treasury (6,573,719) (6,573,719) Deferred compensation under stock bonus plan and employees' stock ownership plan (1,447,190) (1,610,424) Total stockholders' equity 80,331,867 77,555,041 $206,544,669 $201,183,592 Note: The balance sheet at July 31, 1998 has been derived from the audited financial statements at that date. See notes to unaudited condensed consolidated financial statements. 2 of 16 CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME Three Months Ended January 31, Revenues: 1999 1998 Net Sales $ 89,450,701 $102,124,053 Rentals from real estate 510,176 551,135 89,960,877 102,675,188 Cost and expenses: Cost of sales 63,102,236 75,594,751 Selling, general and administrative expenses 23,170,767 21,720,183 Expenses of real estate 408,486 437,337 86,681,489 97,752,271 Operating profit 3,279,388 4,922,917 Gain on sale of real estate 1,281,698 Interest income 211,800 179,610 Interest expense (1,923,123) (1,942,453) Other (deductions) - net (150,091) (2,302) Income before income taxes 1,417,974 4,439,470 Income taxes 573,000 1,754,000 Net income $ 844,974 $2,685,470 Income per share: Basic $.08 $.26 Diluted $.08 $.17 See notes to unaudited condensed consolidated financial statements. 3 of 16 CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME Six Months Ended January 31, Revenues: 1999 1998 Net Sales $184,213,519 $210,399,348 Rentals from real estate 1,081,794 1,065,714 185,295,313 211,465,062 Cost and expenses: Cost of sales 131,874,323 157,129,834 Selling, general and administrative expenses 44,747,395 43,698,026 Expenses of real estate 812,639 830,889 177,434,357 201,658,749 Operating profit 7,860,956 9,806,313 Gain on sale of real estate 1,281,698 Interest income 421,048 241,686 Interest expense (3,754,860) (4,132,047) Other (deductions) - net (126,552) (36,289) Income before income taxes 4,400,592 7,161,361 Income taxes 1,787,000 2,908,000 Net income $2,613,592 $4,253,361 Income per share: Basic $.25 $.41 Diluted $.22 $.29 See notes to unaudited condensed consolidated financial statements. 4 of 16 CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended January 31, 1999 1998 Operating Activities: Net income $ 2,613,592 $4,253,361 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property, plant and equipment 3,230,932 3,297,167 Amortization of deferred compensation and deferred charges 1,465,234 2,181,653 Gain on sale of real estate (1,281,698) Other, net (928,815) (887,074) Changes in operating assets and liabilities: Decrease/(increase) in accounts receivable 3,130,843 (2,947,557) (Increase)/decrease in inventory (2,225,119) 8,645,646 (Increase) in prepaid expenses (1,813,438) (700,768) Increase/(decrease)in accounts payable, accrued expenses and income taxes 5,275,889 (1,619,781) NET CASH PROVIDED BY OPERATING ACTIVITIES 10,749,128 10,940,949 Investing Activities: Proceeds from sale of real estate 6,685,941 Sales /(purchases) of marketable securities 117,625 (8,859) Purchases of property, plant and equipment (4,327,272) (2,391,489) Proceeds from/(advances to) co-packer, net 278,228 (1,088,860) NET CASH (USED IN)/PROVIDED BY INVESTING ACTIVITIES (3,931,419) 3,196,733 Financing Activities: Proceeds from/(payments of) revolving credit and term loans, net (1,949,677) (6,001,916) (Payment of) convertible subordinated debentures (5,000,000) Loan to employees' stock ownership plan __________ (1,000,000) NET CASH (USED IN)FINANCING ACTIVITIES (3,050,323) (7,001,916) Increase in Cash and Cash Equivalents 3,767,386 7,135,766 Cash and Cash Equivalents at Beginning of Period 6,148,068 4,585,633 Cash and Cash Equivalents at End of Period $ 9,915,454 $11,721,399 See notes to unaudited condensed financial statements. 5 of 16 CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Common Stock Issued In Treasury Shares Amount Shares Amount In Thousands Balance at July 31, 1998 11,306 $2,827 476 $6,574 Net Income Deferred compensation under stock bonus plan and employees' stock ownership plan: Amortization Balance at January 31, 1999 11,306 $2,827 476 $6,574 See notes to unaudited condensed consolidated financial statements. 6 of 16 CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Deferred Compensation Under Stock Bonus Plan and Additional Employees' Stock Paid-In Retained Ownership Plan Capital Earnings In Thousands Balance at July 31, 1998 $1,610 $52,064 $30,848 Net income 2,614 Deferred compensation under stock bonus plan and employees' stock ownership plan: Amortization 163 ______ ________ Balance at January 31, 1999 $1,447 $52,064 $33,462 See notes to unaudited condensed consolidated financial statements. 7 of 16 CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS January 31, 1999 (A) The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended January 31, 1999 and 1998 are not necessarily indicative of the results that may be expected for a full fiscal year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended July 31, 1998. (B) Basic per share data is based on the weighted average number of common shares outstanding of 10,521,000 and 10,508,000 for the three and six months ended January 31, 1999, respectively, and 10,350,000 and 10,373,000 for the three and six months ended January 31, 1998, respectively. Diluted per share data, assuming conversion of debentures, is based on 21,181,000 and 21,374,000 shares outstanding for the three and six months ended January 31, 1999, respectively and 22,082,000 and 22,121,000 for the three and six months ended January 31, 1998, respectively. In addition, net income is increased due to a reduction of interest and amortization charges, net of income taxes, on the assumed conversion of debentures of $1,007,000 and $2,024,000 for three and six months ended January 31, 1999, respectively and $1,092,000 and $2,159,000 for the three and six months ended January 31, 1998, respectively. (C) Inventories are stated at the lower of cost (first-in, first-out) or market. The components of inventory consist of the following: January 31, July 31, 1999 1998 Finished goods $37,571,738 $35,775,998 Raw materials 18,734,752 17,539,666 Supplies 6,559,938 7,325,645 $62,866,428 $60,641,309 (D) Under the Company's amended and restated revolving credit and term loan agreements (collectively the "Loan Agreements") with Fleet Bank, N.A. and The Chase Manhattan Bank (the "Banks"), the Company may, from time to time, borrow funds from the Banks, provided that the total principal amount of all such loans outstanding through November 30, 1999 may not exceed $40,000,000 and after such date may not exceed $20,000,000. Interest on all such loans is equal to the prime rate or at the Company's option the London Interbank Offering Rate ("LIBOR") plus 1.25%, subject to adjustment based on the level of loans outstanding (7.75% at prime and 6.19% at LIBOR,at January 31, 1999). Outstanding borrowings under the Loan Agreements may not exceed certain percentages of and are collateralized by, among other things, the trade accounts receivable and inventories, and substantially all of the machinery and equipment and real estate of the Company and its subsidiaries. All loans made under the term loan agreement ($3,000,000 at January 31, 1999) are to be repaid in January 2003. Outstanding loans under the revolving credit agreements are to be repaid in January 2003. Pursuant to the terms of the Loan Agreements, the Company and its subsidiaries, among other things, must maintain a minimum net worth and meet ratio tests for liabilities to net worth and coverage of fixed charges and interest, all as defined. The Loan Agreements also provide, among other things, for restrictions on dividends (except for stock dividends) and require repayment of outstanding loans with excess cash flow, as defined. 8 of 16 (E) Prepaid expenses and other on the unaudited condensed consolidated balance sheets includes deferred income taxes of $951,000. (F) As of August 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). The adoption of this Statement had no impact on the Company's net income or stockholders' equity. This pronouncement sets forth requirements for disclosure of the Company's comprehensive income and accumulated other comprehensive items. Comprehensive income is defined as the change in equity during a period from transactions or other events and circumstances unrelated to net income (e.g., foreign currency translation gains and losses). In June 1997, the FASB also issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which is effective for the Company's fiscal year ending July 31, 1999. The statement changes the way public companies report information about segments of their business in their annual financial statements and requires them to report selected segment information in their quarterly reports. However, information is not to be presented for interim financial statements in the first year of implementation. Adoption of SFAS No. 131 is not expected to have a material effect on the Company's financial statement disclosures. In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective for the Company's fiscal year ending July 31, 2000. The Statement permits early adoption as of the beginning of any fiscal quarter after its issuance. The Company expects to adopt the new Statement effective August 1, 1999. The Statement will require the Company to recognize all derivatives, as defined, on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company has not yet determined what the effect of Statement No. 133 will be on the earnings and financial position of the Company. (G) On December 4, 1998, the Company redeemed $5,000,000 of its 8% Convertible Subordinated Debentures using existing invested funds. (H) The Company uses coffee futures and options for hedging purposes to reduce the effect of changing green coffee prices. The contracts that effectively meet the risk reduction and correlation criteria are recorded using hedge accounting. Effectiveness is measured based upon high correlation between commodity gains and losses on the futures and options and those on the firm commitment. Under hedge accounting, the gain or loss on the hedge is deferred and recorded as a component of the underlying inventory purchase. Gains and losses on hedges that are terminated prior to inventory purchases are recorded in inventory until the inventory is sold. (I) In November 1997, the Company sold one of its downtown Manhattan properties for approximately $6,900,000. The sale resulted in a pre-tax gain of $1,282,000 or on an after tax basis approximately $750,000, $.07 per basic share and $.03 per diluted share. The proceeds from such sale were used to reduce outstanding bank indebtedness. 9 of 16 CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-Q constitute "forward-looking statements" within the meaning of the Reform Act. See Other Information Item 5. Operations The following is Management's discussion and analysis of certain significant factors that have affected the Company's operations during the periods included in the accompanying unaudited condensed consolidated statements of operations. Net sales from beverage products decreased to $88,774,000 or 12.4% for the three months ended January 31, 1999 compared to $101,362,000 for the comparable period of the prior year. The decrease was primarily due to a decrease in the average selling price of coffee partially offset by a 10% increase in coffee pounds sold (primarily attributable to the Park Coffee Company ("Park")acquisition in July 1998). Operating profit from beverage products was $3,473,000 a decrease of 33.8% for the three months ended January 31, 1999 compared to the prior year's comparable period. The decrease for the three months resulted primarily from decreases in gross margins partially offset by decreases in selling, general and administrative expenses for operations other than Park. Decreased gross margins were primarily due to an increase in manufacturing costs resulting from labor and overhead inefficiencies in the manufacturing transition period for Park of approximately of $1.5 million and a decrease in the average selling price of coffee greater than the decrease in the average cost of green coffee. During the three months ended January 31, 1999 prices of green coffee ranged from a high of $1.29 to a low of $1.03 per pound. Selling, general and administrative expenses decreased, other than those applicable to Park, primarily due to decreased advertising, compensation costs and amortization of purchased intangibles, partially offset by increased delivery costs. Net sales from beverage products decreased to $182,641,000 or 12.4% for the six months ended January 31, 1999 compared to $208,546,000 for the comparable period of the prior year. The decrease was primarily due to a decrease in the average selling price of coffee partially offset by a 10.7% increase in coffee pounds sold (primarily attributable to the Park acquisition). Operating profit from beverage products was $8,180,000 a decrease of 22% for the six months ended January 31, 1999 compared to the prior year's comparable period. The decrease for the six months resulted primarily from decreases in gross margins partially offset by decreases in selling, general and administrative expenses for operations other than Park and further offset to lesser extent by the operating profit of Park. Decreased gross margins were primarily due an increase in manufacturing cost similar to that in the three month comparison and to a decrease in the average selling price of coffee greater than the decrease in the average cost of green coffee. During the six months ended January 31, 1999 prices of green coffee ranged from a high of $1.35 to a low of $1.02 per pound. Selling, general and administrative expenses decreased, other than those applicable to Park, primarily due to decreased advertising, compensation costs and amortization of purchased intangibles, partially offset by increased delivery costs. 10 of 16 Quikava's growth plans involve franchising the concept, thereby generating initial franchise fees and continuing royalty income to cover headquarters' expenses. Franchise operated shop sales were $2,269,000 for six months ended January 31, 1999 versus $1,379,000, an increase of 65%, in the comparable 1998 period. Quikava company-operated shop sales were $1,573,000 for the six months ended January 31, 1999 compared to $1,854,000 in the comparable period of the prior year. Company operated shops generate potential franchise interest and gain exposure to the concept. Operating losses amounted to $588,000 for the six months ended January 31, 1999 compared to $919,000 in the comparable period of the prior year. The operating losses consist primarily of headquarters' expenses (primarily payroll and related expenses for franchising infrastructure) and shop level losses, partially offset by initial franchise fee income and royalty income on franchisee sales. Net income was $845,000 ($.08 per basic and diluted share) for the three months ended January 31, 1999, compared to $2,685,000 ($.26 per basic share and $.17 per diluted share) for the comparable period of the prior year. The decrease was primarily due to decreased operating profits from beverage products and the gain on sale of real estate in fiscal 1998, partially offset by decreased income taxes (primarily attributable to decreased income before income taxes) and decreased operating losses from Quikava. Net income was $2,614,000 ($.25 per basic share and $.22 per diluted share) for the six months ended January 31, 1999, compared to $4,253,000 ($.41 per basic share and $.29 per diluted share) for the comparable period of the prior year. The decrease was primarily due to decreased operating profits from beverage products and the gain on sale of real estate in fiscal 1998, partially offset by decreased income taxes (primarily attributable to decreased income before income taxes), decreased interest expense (resulting from reduced amounts of debt outstanding, increased interest income (resulting from increased invested funds) and decreased operating losses from Quikava. Liquidity and Capital Resources As of January 31, 1999, working capital was approximately $91,250,000 and the ratio of current assets to current liabilities was 4.8 to 1. As of January 31, 1999, the Company had unused borrowing capacity of approximately $35 million under its credit facilities of $40 million with Fleet Bank, N.A. and The Chase Manhattan Bank (see Note D of Notes to Unaudited Condensed Consolidated Financial Statements). See Note G of Notes to Unaudited Condensed Consolidated Financial Statements relative to a partial redemption of the Company's 8% Convertible Subordinated Debentures. The Company plans on expanding its Quikava franchised operations, which are currently operating in 36 locations. The sales of Company operated and franchised units are not material to the Company's consolidated sales. Total Quikava store level operations are not currently profitable but are being partially offset by franchise fee and royalty income and, in addition, Quikava headquarters' expenses of approximately $1,000,000 on an annual basis are not being absorbed. The Company believes that its cash flow from operations, its cash equivalents and funds available under its amended and restated revolving credit and term loan agreements with its Banks provide sufficient liquidity to meet its working capital, expansion and capital requirements. 11 of 16 Green Coffee Market Coffee is one of the leading commodities traded on futures exchanges. Supplies fluctuate with the weather and prices can be and have been volatile. The supply and price is affected by multiple factors, such as weather, weather forecasts, consumption trends, changes in stock levels, export restrictions observed by members of the Association of Coffee Producing Countries ("ACPC") members, activities of hedge funds, politics and economics in the coffee producing countries, many of which are lesser developed nations. While coffee trades primarily on the futures market, coffee of the quality level sought by the Company can trade on a negotiated basis at a substantial premium above commodity coffee pricing, depending upon the supply and demand at the time of purchase. In the sixties some coffee exporting countries plus a group of coffee importing countries together formed the International Coffee Organization ("ICO"). The principal aim of the organization was to stabilize coffee prices in the world market. One of the instruments which the ICO used to achieve this was a system allocating an export quota to each of the coffee producing countries. In July 1989, this system was abandoned due to disagreements involving several exporting as well as importing countries. In 1994, a new International Coffee Agreement came into force which no longer included the price stability mechanism. As a consequence, the function of the ICO changed. This organization now provides a forum where exporting and importing countries can discuss matters pertaining to coffee. In addition, the ICO publishes statistics about the coffee market. It has thus become an administrative organization. When the export quota system was abandoned in 1989, coffee prices declined in the global market. Certain exporting countries were dissatisfied with the new situation and tried to regain their grip on the international coffee market. In 1993, they established the ACPC to boost coffee prices in the global market by keeping part of annual production out of the world market. The ACPC members account for around 70% of world coffee exports. The ACPC attempts to achieve better prices by agreeing export quotas for each member country and an export volume ceiling for the organization as a whole. The effect of the ACPC on coffee prices is difficult to determine in light of the dramatic price increases resulting from the 1994 frosts in Brazil discussed below. Nonetheless, the ACPC met in November 1994 and resolved to sustain green coffee prices. In January 1996, the ACPC agreed to extend its current limitations on the supply of green coffee which were scheduled to expire in June 1996 through the 1996/1997 green coffee year. No further actions have been taken by the ACPC subsequent to that date. The Company is unable to predict whether the ACPC will be successful in achieving its goals. Based on published statistics the supplies of green coffees held by consumers (roasters and buyers) are currently, near historically low levels. Brazil, the world's largest coffee producer, experienced frosts in June and July of 1994 which reportedly damaged approximately 40% of the green coffee crop. The announcement of the Brazilian frost damage caused a substantial increase in green coffee prices and other coffee-product prices worldwide. The Company purchases a modest amount of its green coffee from Brazil. In the third and fourth quarter of 1994 the Company experienced a significant increase in the price of green coffee which carried over into the first three quarters of 1995. The Company was not able to immediately pass through to customers all of the price increases in the third and fourth quarters of 1994 and the first quarter of 1995 following the significant increase in green coffee prices that resulted from the Brazilian aforementioned frosts. Subsequent to such period through January 1997, the Company's green coffee purchases and commitments returned to pricing levels closer to those that existed prior to the frosts. In February 1997, green coffee bean prices began to rise significantly reaching a high of $3.18 per 12 of 16 pound in May 1997. This bull market was somewhat unique in that the fundamental cause was very tight stocks of arabica coffee in consuming countries. Historically, bull markets have been the direct result of weather developments in Brazil, specifically cold weather and drought that damages the following crop. During the fiscal 1998, the green coffee market was in the $1.09 to $2.11 per pound range, and towards the end of such year at the lower end of this range. From August 1997 until February 1998, coffee remained relatively high, most of the time at above $1.70 per pound, when a fast, substantial and sustained drop occurred caused by a significantly large Brazilian crop. This left the Company with large quantities of high-priced inventory while sales slowed as retailers waited for the green coffee market to affect the price they pay for roasted coffee and pressure intensified as major competitors cut prices in response. The result was lower net income in the third quarter of fiscal 1998 compared to the first and second quarters and an approximate break-even in the fourth quarter. During the first six months of fiscal 1999, the coffee market was in the $1.02 to $1.35 per pound range. The large Brazilian crop continues to overhang the coffee market, notwithstanding the effects in Central America of Hurricane Mitch, and the price of coffee currently is at the lower end of that range. The Company is unable to predict weather events in particular countries that may adversely affect coffee supplies and price. Except for late 1994 and early 1995, the Company generally has been able to pass green coffee price increases through to its customers, thereby maintaining its gross margins. The Company cannot predict whether it will be able to pass inventory price increases through to its customers in full in the future. A significant portion of the Company's green coffee supply is contracted for future delivery, generally between three and twelve months forward (with declining percentages of the supply being subject to future contracts in the latter portions of each year), to ensure both an adequate supply and reduced risk of price fluctuations. In addition, the Company uses options and futures for hedging purposes to reduce the risks of changing green coffee prices. Green coffee is a large market with well-established brokers, importers and warehousemen through which the Company manages its requirements. In addition to forward purchases, the Company keeps physical inventory in each of its production facilities and third-party warehouses representing anywhere from four to ten weeks of supply requirements. All coffee purchase transactions are in U.S. dollars, the industry's standard currency. The Company believes that it is not dependent upon any one importer or broker for its supply of green coffee from any particular country. Retail Customers are very price-sensitive about the purchase of coffee in supermarkets. When retail prices increase dramatically, take away declines and consumers switch to less expensive brands and high yield roasts. Likewise, FoodService Customers in times of price increase tend to stretch the use of inventory. Year 2000 Issue In 1998, the Company established an oversight committee, to review all of the Company's computer systems and programs, as well as the computer systems of the third parties upon whose data or functionality the Company relies in any material respect, and to assess their ability to process transactions in the Year 2000. The Company has a formal Year 2000 Program focusing on three key 13 of 16 readiness areas: 1) Internal hardware/software and non-information technology systems; 2) Supplier readiness; and 3) Customer readiness. For each readiness area, the Company has identified steps to perform and developed timetables for Year 2000 compliance. The Company has conducted an assessment of internal applications and hardware. Some software applications have been made Year 2000 compliant and resources have been assigned to address other applications based on their criticality and the time required to make them Year 2000 compliant. All software remediation is scheduled to be completed no later than the middle of 1999. The Year 2000 compliance evaluation of hardware, including roasters, grinders, bagging machines, telecommunication equipment, workstations and other items, is nearing completion. The Company has identified and contacted key suppliers. To date, the Company has received responses from the majority of its key suppliers, most of which indicate that the suppliers are in the process of developing remediation plans. Based on the supplier's progress to adequately address the Year 2000 issue, the Company is developing a supplier action list and contingency plan to include alternative sources of supply. The Company has identified and been in contact with Key customers. The customers have responded that they are or will be Year 2000 compliant. The Company has expensed approximately $350,000 for Year 2000 costs in fiscal 1998, approximately $100,000 for Year 2000 costs in the first six months of fiscal 1999 and estimates future expenditures for Year 2000 compliance to be approximately $150,000. There can be no assurance, however, that there will not be a delay in, or increased costs associated with, the programs described in this section. Since the programs described in this section are ongoing, all potential Year 2000 complications have not yet been identified. Therefore, the potential impact of these complications on the Company's financial condition and results of operations cannot be determined at this time. If computer systems used by the Company, its suppliers or customers fail or experience significant difficulties related to the Year 2000, the Company's results of operations and financial conditions could be materially affected. Disclosure About Interest Rate Risk The Company is subject to market risk from exposure to fluctuations in interest rates. At January 31, 1999, the Company's long-term debt consists of $95 million of fixed rate long-term debt (principally its convertible subordinated debentures) and $5 million of variable rate debt under its revolving credit and term loans. The Company does not enter into derivative financial instruments for trading or speculative purposes. The Company does not expect changes in interest rates to have a material effect on income or cash flows in fiscal 1999, although there can be no assurance that interest rates will not significantly change. Disclosure About Commodity Price Risk The Company uses coffee futures and options for hedging purposes to reduce the effect of changing green coffee prices. At January 31, 1999, the total value of coffee contracts was approximately $8.5 million. These contracts meet the risk reduction and correlation criteria for hedge accounting and gains and losses are deferred and recorded as a component of the underlying inventory purchase. If the market value of green coffee at January 31, 1999 ($1.04) were to increase or decrease by $.15, the effect would be to decrease inventory by approximately $250,000 and $75,000, respectively. The Company generally has been able to pass green coffee prices increases through to its customers, thereby maintaining its gross margins. The Company cannot predict whether it will be able to pass inventory price increases through to its customers in full in the future. 1 14 of 16 Part II. Other Information Item 1. Legal Proceedings - None Item 4. Submission of Matters to a Vote of Security Holders At the Company's annual meeting of shareholders' held on December 18, 1998, the Company's shareholders' elected Norman E. Alexander (9,922,798 for 389,827 against), Stuart Z. Krinsly (9,922,507 for 390,118 against)and David S. Weil (9,922,768 for 389,857 against) as directors for a term of three years, ratified the appointment of independent auditors for fiscal 2000 with a vote of 10,127,441 for and 136,361 against and rejected a shareholder proposal to publish an appendix on charitable donations with a vote of 6,082,298 against and 665,511 for. Item 5. Other Information Certain statements under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-Q constitute "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward looking statements are based on current expectations and information available to management at this time. They may involve known risks, uncertainties, and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. Factors which could cause actual results to differ from the forward looking statements include, among others, the following: general economic and business conditions; the availability of green coffee; green coffee prices; competition; the success of operating initiatives; development and operating costs, including green coffee prices; advertising and promotional efforts; brand awareness; the existence of or adherence to development schedules; the existence or absence of adverse publicity; availability, locations and terms of sites for Quikava franchised outlets; changes in business strategy or development plans; quality of management; availability, terms and deployment of capital; business abilities and judgment of personnel; availability of qualified personnel; labor and employee benefit costs; changes in or the failure to comply with government regulations; construction costs and the Year 2000 issue. Item 6. Exhibits and Reports on Form 8-K a) Exhibits - Financial Data Schedule - Exhibit 27 - see below b) Reports on Form 8-K None 15 of 16 Appendix A to item 601 (c) of Regulation S-K (Article 5 of Regulation S-X Chock full o'Nuts Corporation and Subsidiaries) Item Number Item Description Amount 5-02 (1) Cash and cash items $ 9,915,454 5-02 (2) Marketable securities $ -0- 5-02 (3) (a) (1) Notes and accounts receivable - trade $ 38,758,040 5-02 (4) Allowances for doubtful accounts $ 1,328,000 5-02 (6) Inventory $ 62,866,428 5-02 (9) Total current assets $115,544,181 5-02 (13) Property, plant and equipment $110,858,492 5-02 (14) Accumulated depreciation $ 59,577,756 5-02 (18) Total assets $206,544,669 5-02 (21) Total current liabilities $ 24,298,702 5-02 (22) Bonds, mortgages and similar debt $ 90,089,385 5-02 (28) Preferred stock - mandatory redemption -0- 5-02 (29) Preferred stock - no mandatory redemption -0- 5-02 (30) Common stock $ 2,826,611 5-02 (31) Other stockholders' equity $ 77,505,256 5-02 (32) Total liabilities and stockholders' equity $206,544,669 5-03 (b) 1 (a) Net sales of tangible products $184,213,519 5-03 (b) 1 Total revenues $185,295,313 5-03 (b) 2 (a) Cost of tangible goods sold $131,874,323 5-03 (b) 2 Total costs and expenses applicable to sales and revenues $132,686,969 5-03 (b) 3 Other costs and expenses $ -0- 5-03 (b) 5 Provision for doubtful accounts and notes $ 1,177,000 5-03 (b) (8) Interest and amortization of debt $ 3,754,860 5-03 (b) (10) Income before taxes and other items $ 4,400,595 5-03 (b) (11) Income tax expense $ 1,787,000 5-03 (b) (14) Income/loss continuing operations $ 2,613,502 5-03 (b) (15) Discontinued operations -0- 5-03 (b) (17) Extraordinary items -0- 5-03 (b) (18) Cumulative effect - changes in accounting principles -0- 5-03 (b) (19) Net income or loss $ 2,613,592 5-03 (b) (20) Earnings per share - basic $ .25 5-03 (b) (20) Earnings per share - diluted $ .22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant duly caused this Report of Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized. CHOCK FULL O' NUTS CORPORATION (Registrant) March 12, 1999 Marvin I. Haas President and Chief Executive Officer March12, 1999 Howard M. Leitner Senior Vice President and Chief Financial and Accounting Officer 16 of 16 EX-27 2
5 6-MOS JUL-31-1999 JAN-31-1999 9915454 0 38758040 1328000 62866428 115544181 110858492 59577756 206544669 24298702 90089385 0 0 2826611 77505256 206544669 184213519 185295313 131874323 132686969 0 1177000 3754860 4400595 1787000 2613502 0 0 0 2613592 0.25 0.22
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