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 April 30, 1998 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
June 12, 1998 - 10,812,613
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets -
April 30, 1998 and July 31, 1997 1 & 2 of 14
Unaudited Condensed Consolidated Statements of Income-
Three Months Ended April 30, 1998 and 1997 3 of 14
Unaudited Condensed Consolidated Statements of Income-
Nine Months Ended April 30, 1998 and 1997 4 of 14
Unaudited Condensed Consolidated Statements of Cash Flows -
Nine Months Ended April 30, 1998 and 1997 5 of 14
Unaudited Condensed Consolidated Statement of Stockholders' Equity -
April 30, 1998 6 & 7 of 14
Notes to Unaudited Condensed Consolidated Financial
Statements - April 30, 1998 8 & 9 of 14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10,11 and 12 of 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13 of 14
Item 5. Other Information 13 of 14
Item 6. Exhibits and Reports on Form 8-K 13 of 14
Signatures 14 of 14
PART I. FINANCIAL INFORMATION
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 30, July 31,
1998 1997
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $12,964,665 $ 4,585,633
Receivables, principally
trade, less allowances
for doubtful accounts and
discounts of $1,588,000
and $1,422,000 33,927,093 37,554,412
Inventories 71,323,948 82,951,688
Prepaid expenses and other 3,169,856 2,457,221
Total current assets 121,385,562 127,548,954
Property, plant and
equipment - at cost $102,412,436 $ 98,609,466
Less allowances for
depreciation and
amortization (54,928,397) 47,484,039 (49,933,489) 48,675,977
Real estate held for
development or sale, at cost 2,189,304 7,635,427
Other assets and deferred charges 23,571,990 23,799,057
Excess of cost over net
assets acquired 9,553,608 9,670,551
$204,184,503 $217,329,966
Note: The balance sheet at July 31, 1997 has been derived from the audited
financial statements at that date.
See notes to unaudited condensed consolidated financial statements.
1 of 14
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 30, July 31,
1998 1997
(Unaudited) (Note)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 766,000
Accounts payable $10,483,645 13,590,697
Accrued expenses 6,478,920 12,148,313
Income taxes 2,175,992 1,957,788
Total current liabilities 19,138,557 28,462,798
Long-term debt, excluding current portion 98,018,065 106,065,753
Other non-current liabilities 2,002,289 3,265,078
Deferred income taxes 7,655,000 7,655,000
Stockholders' equity:
Common stock, par value $.25 per share;
Authorized 50,000,000 shares:
Issued 11,288,135 and 11,211,068 shares 2,822,034 2,802,767
Additional paid-in-capital 51,928,359 51,357,008
Retained earnings 30,915,263 25,349,146
Cost of 475,522 shares in treasury (6,573,719) (6,573,719)
Deferred compensation under stock bonus
plan and employees' stock ownership plan (1,721,345) (1,053,865)
Total stockholders' equity 77,370,592 71,881,337
$204,184,503 $217,329,966
Note: The balance sheet at July 31, 1997 has been derived from the audited
financial statements at that date.
See notes to unaudited condensed consolidated financial statements.
2 of 14
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended April 30,
1998 1997
Revenues:
Net sales $ 95,895,503 $95,305,553
Rentals from real estate 453,296 523,218
96,348,799 95,828,771
Cost and expenses:
Cost of sales 70,869,138 66,195,704
Selling, general and
administrative expenses 20,950,921 23,588,807
Expenses of real estate 427,060 410,940
92,247,119 90,195,451
Operating profit 4,101,680 5,633,320
Interest income 176,479 258,191
Interest expense (1,952,018) (2,131,045)
Other (deductions)/income - net (5,386) 4,565
Income before income taxes 2,320,755 3,765,031
Income taxes 1,008,000 1,529,000
Net income $1,312,755 $2,236,031
Income per share:
Basic $.13 $.21
Diluted $.11 $.15
See notes to unaudited condensed consolidated financial statements.
3 of 14
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended April 30,
1998 1997
Revenues:
Net sales $306,294,851 $262,124,553
Rentals from real estate 1,519,010 1,571,071
307,813,861 263,695,624
Cost and expenses:
Cost of sales 227,998,972 183,806,140
Selling, general and
administrative expenses 64,648,948 63,944,363
Expenses of real estate 1,257,948 1,279,417
293,905,868 249,029,920
Operating profit 13,907,993 14,665,704
Interest income 418,165 936,781
Gain on sale of real estate 1,281,698
Interest expense (6,084,065) (6,397,452)
Other (deductions)/income - net (41,675) 23,047
Income before income taxes 9,482,116 9,228,080
Income taxes 3,916,000 3,793,000
Net income $5,566,116 $5,435,080
Income per share:
Basic $.54 $.52
Diluted $.40 $.39
See notes to unaudited condensed consolidated financial statements.
4 of 14
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended April 30,
1998 1997
Operating Activities:
Net income $ 5,566,116 $ 5,435,080
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization of property,
plant and equipment 4,994,908 4,337,915
Amortization of deferred compensation and
deferred charges 2,952,056 3,284,982
Gain on sale of real estate (1,281,698)
Other, net (1,889,791) (779,405)
Changes in operating assets and liabilities:
Decrease/(increase) in accounts receivable 3,024,062 (3,123,588)
Decrease in inventory 11,627,740 10,382,605
(Increase)/decrease in prepaid expenses (679,302) 1,376,196
(Decrease)in accounts payable, accrued
expenses and income taxes (8,558,241) (6,127,539)
NET CASH PROVIDED BY OPERATING ACTIVITIES 15,755,850 6,276,196
Investing Activities:
Proceeds from sale of real estate 6,685,941
Acquisition of business (5,746,230)
Purchases of marketable securities (33,333) (43,489)
Purchases of property, plant and equipment (3,802,970) (3,575,210)
NET CASH PROVIDED BY/(USED IN)INVESTING ACTIVITIES 2,849,638 (9,364,929)
Financing Activities:
(Payments of)/proceeds from long-term debt, net (8,211,688) 1,662,146
(Advances to)/proceeds from co-packer, net (1,014,768) 1,360,174
Loan to employees' stock ownership plan (1,000,000)
NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES (10,226,456) 3,022,320
Increase/(decrease) in Cash and Cash Equivalents 8,379,032 (66,413)
Cash and Cash Equivalents at Beginning of Period 4,585,633 16,293,783
Cash and Cash Equivalents at End of Period $12,964,665 $16,227,370
See notes to unaudited condensed financial statements.
5 of 14
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, 1997 11,211 $2,803 476 $6,574
Net income
Conversion of debentures 77 19
Deferred compensation under stock
bonus plan and employees' stock
ownership plan:
Amortization
Loan to employees' stock
ownership plan
Balance at April 30, 1998 11,288 $2,822 476 $6,574
See notes to unaudited condensed consolidated financial statements.
6 of 14
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, 1997 $1,054 $51,357 $25,349
Net income
Conversion of debentures 571 5,566
Deferred compensation under stock
bonus plan and employees' stock
ownership plan:
Amortization (333)
Loan to employees' stock
ownership plan 1,000
Balance at April 30, 1998 $1,721 $51,928 $30,915
See notes to unaudited condensed consolidated financial statements.
7 of 14
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1998
(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 to 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
nine months ended April 30, 1998 and 1997 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, 1997.
(B) In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement 128
replace the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants,
and convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements.
Basic per share data is based on the weighted average number of common
shares outstanding of 10,433,000 and 10,392,000 for the three and nine months
ended April 30, 1998, respectively, and 10,426,000 and 10,380,000 for the three
and nine months ended April 30, 1997, respectively. Diluted per share data,
assuming conversion of debentures, is based on 21,899,000 and 21,920,000 shares
outstanding for the three and nine months ended April 30, 1998, respectively,
and 22,246,000 and 22,200,000 shares outstanding for the three and nine months
ended April 30, 1997, respectively.
(C) Inventories are stated at the lower of cost (first-in, first-out) or
market. The components of inventory consist of the following:
April 30, July 31,
1998 1997
Finished goods $47,454,706 $41,747,129
Raw materials 17,996,203 36,412,728
Supplies 5,873,039 4,791,831
$71,323,948 $82,951,688
(D) Under the Company's amended and restated revolving credit and term
loan agreements (collectively the "Loan Agreements") with Fleet Capital
Corporation 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, 1998 may not exceed
$40,000,000 and after such date may not exceed $20,000,000. Interest (8.5%
at April 30, 1998) on all such loans is equal to the prime rate or at the
Company's option the London Interbank Offering Rate plus 1.75%, subject to
adjustment based on the level of loans outstanding. 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 April 30, 1998) are to be repaid in December
1999. Outstanding loans under the revolving credit agreements are to be
repaid in December 1999. 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.
(E) Prepaid expenses and other on the unaudited condensed consolidated
balance sheets includes deferred income taxes of $1,268,000.
(F) On November 19, 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 the sale were used to
reduce outstanding bank indebtedness.
(G) On March 27, 1998, the Company called for redemption $5,000,000 of its
8% Convertible Subordinated Debentures, of which $457,000 were converted
prior to redemption.
(H) In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which is effective for the Company's fiscal year ending July 31, 1999.
The statement addresses the reporting and displaying of comprehensive income
and its components. Adoption of SFAS No. 130 is not expected to have a
material effect on the Company's financial statement disclosures.
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. Adoption of SFAS No. 131 is not
expected to have a material effect on the Company's financial statement
disclosures.
(I) The Company currently is upgrading its management information systems,
which it expects to complete in the beginning of 1998, to ensure proper
processing of transactions relating to the year 2000 and beyond. The Company
continues to evaluate appropriate courses of corrective action, including
replacement of certain systems. The Company does not expect the costs
associated with ensuring year 2000 compliance to have a material effect on
its financial position or results of operations. All costs associated with
year 2000 compliance are being funded with cash flow generated from operations
and are being expensed as incurred. Although the Company believes that the
information systems of its major customers and vendors (insofar as they
relate to the Company's business) comply with Year 2000 requirements, there
can be no assurance that the Year 2000 issue will not affect the information
systems of such customers and vendors as they relate to the Company's
business, or that any such impact on such customers' and vendors' information
systems would not have a material adverse effect on the Company's business,
financial condition or results of operations.
9 of 14
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.
In January 1997, the Company acquired substantially all of the assets and
assumed substantially of the liabilities of Ireland Coffee and Tea Company
("Ireland"). The business of Ireland consists of roasting and distributing
coffees to hotels, restaurants and institutions on the East Coast.
Net sales from beverage products increased to $95,231,000 or 0.7% for the
three months ended April 30, 1998 compared to $94,532,000 for the comparable
period of the prior year. The increase was primarily due to increases in the
average selling price of coffee offset by a 4.9% decrease in coffee pounds
sold. Operating profit from beverage products was $4,555,000 a decrease of
25.1% for the three months ended April 30, 1998 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. Decreased gross margins were primarily due to
decreased pounds sold and an increase in the average cost of green coffee
greater than the increase in the average selling price of coffee. During the
three months ended April 30, 1998 prices of green coffee ranged from a high
of $1.82 to a low of $1.29 per pound. Selling, general and administrative
expenses decreased primarily due to decreased salaries, advertising, coupon
costs and amortization of purchased intangibles.
Net sales from beverage products increased to $304,040,000 or 17% for the
nine months ended April 30, 1998 compared to $259,850,000 for the comparable
period of the prior year. The increase was primarily due to increases in the
average selling price of coffee and to a lesser extent a 4.4% increase in
coffee pounds sold. Operating profit from beverage products was $15,014,000 a
decrease of 4.9% for the nine months ended April 30, 1998 compared to the
prior year's comparable period. The decrease for the nine months resulted
primarily from slightly decreased gross margins and increased selling,
general and administrative expenses. Decreased gross margins were primarily
due to increased manufacturing costs, partially offset by increased coffee
pounds sold and increased sales of allied products. The increase in the
average selling price of coffee during the nine months approximated the
increase in the average cost of green coffee. During the nine months ended
April 30, 1998 prices for green coffee ranged from a high of $2.11 to a low
of $1.29 per pound. Selling, general and administrative expenses increased
primarily due to increased salaries, advertising and delivery costs,
partially offset by reduced coupon costs and decreased amortization of
purchased intangibles. Certain of the Company's selling expenses vary with
the number of pounds sold, therefore selling expense has increased in 1998
compared to the 1997 periods.
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 $2,328,000 for nine months ended
April 30, 1998 versus $1,707,000, an increase of 36%, in the comparable 1997
period. Quikava company-operated shop sales were $2,255,000 for the nine
months ended April 30, 1998 compared to $2,275,000 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
$1,367,000 for the nine months ended April 30, 1998 compared to $1,411,000 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 in 1998 and royalty income on franchisee sales.
The operating losses for the three months ended April 30, 1998 and 1997 were
$448,000 and $453,000, respectively.
Net income was $1,313,000 ($.13 per basic share and $.11 per diluted share)
for the three months ended April 30, 1998, compared to $2,236,000 ($.21 per
basic share and $.15 per diluted share) for the comparable period of the
prior year. The difference was primarily due to decreased operating profits
from beverage products, partially offset by decreased interest expense
(resulting from reduced amounts of debt outstanding) and decreased income
taxes. Decreased income taxes are primarily attributable to decreased income
before income taxes.
Net income was $5,566,000 ($.54 per basic share and $.40 per diluted share)
for the nine months ended April 30, 1998, compared to $5,435,000 ($.52 per
basic share and $.39 per diluted share) for the comparable period of the
prior year. The difference was primarily due to the gain on sale of real
estate ($.07 per basic share and $.03 per diluted share) and to a lesser
extent reduced interest expense (resulting from reduced amounts of debt
outstanding in the second and third quarters), partially offset by reduced
operating profits from beverage products, reduced interest income (resulting
from decreased invested funds) and increased income taxes (attributable to
increased income before income taxes).
Liquidity and Capital Resources
As of April 30, 1998, working capital was approximately $102,000,000 and the
ratio of current assets to current liabilities was 6.3 to 1.
As of April 30, 1998, the Company had unused borrowing capacity of
approximately $31 million under its credit facilities of $40 million with
Fleet Capital Corporation and The Chase Manhattan Bank (see Notes D and F of
Notes to Unaudited Condensed Consolidated Financial Statements).
See Note G of Notes to Unaudited Condesened 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 27 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 $1,200,000 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.
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 resolutions observed by
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.
11 of 14
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. The aim of this organization is
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 bean prices. In January 1996, the ACPC agreed to extend
its current limitations on the supply of green coffee upon their expiration 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
bean crop. The announcement of the Brazilian frost damage caused a
substantial increase in green coffee bean prices and other coffee-product
prices worldwide. The Company purchases a modest amount of its green coffee
beans from Brazil. In the third and fourth quarter of 1994 the Company
experienced a significant increase in the price of green coffee beans 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 bean prices that resulted from the
Brazilian 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 June and July 1994 Brazilian frosts.
In February 1997, green coffee bean prices began to rise significantly
reaching a high of $3.15 per 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. Subsequent to May 1997, the green coffee market
has been in the $2.11 to $1.20 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 green coffee 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 short-term price fluctuations. Green coffee is a large market with
well-established brokers, importers and warehousemen though 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 beans from any
particular country.
Retail Customers are very price-sensitive about the purchase of coffee in
supermarkets and club stores. When retail prices increase dramatically,
takeaway declines and consumers switch to less expensive brands and high
yield roasts. When retail prices decrease rapidly, retailers may react by
reducing their purchases; the Company is currently experiencing this
situation. FoodService Customers in times of price increase tend to stretch
the use of inventory.
Part II. Other Information
Item 1. Legal Proceedings - None
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 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; and
construction costs.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits - Financial Data Schedule - Exhibit 27 - see below
b) Reports on Form 8-K
Item 4: Changes in Registrant's Certifying Accountant
Report dated May 5, 1998 - The Company engaged Grant
Thornton, LLPas its independent auditors for the year ending
July 31, 1998.
13 of 14
Appendix A to item 601 (c) of Regulation S-K
(Article 5 of Regulation S-X
Chock full o'Nuts Corporation and Subsidiaries)
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)
June 12, 1998
Marvin I. Haas
President and Chief
Executive Officer
June 12, 1998
Howard M. Leitner
Senior Vice President and
Chief Financial and
Accounting Officer
14 of 14
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