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
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