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, 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
June 10, 1999 - 11,083,605
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, 1999 and July 31, 1998 1 & 2 of 17
Unaudited Condensed Consolidated Statements of Operations -
Three Months Ended April 30, 1999 and 1998 3 of 17
Unaudited Condensed Consolidated Statements of Operations -
Nine Months Ended April 30, 1999 and 1998 4 of 17
Unaudited Condensed Consolidated Statements of Cash Flows -
Nine Months Ended April 30, 1999 and 1998 5 of 17
Unaudited Condensed Consolidated Statement of Stockholders' Equity -
April 30, 1999 6 & 7 of 17
Notes to Unaudited Condensed Consolidated Financial
Statements - April 30, 1999 8 & 9 of 17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
10, 11, 12, 13 and 14 of 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15 of 17
Item 5. Other Information 15 of 17
Item 6. Exhibits and Reports on Form 8-K 16 of 17
Signatures 17 of 17
PART I. FINANCIAL INFORMATION
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 30, July 31,
1999 1998
ASSETS (Unaudited) (Note)
Current assets:
Cash and cash equivalents $ 5,468,420 $ 6,148,068
Receivables, principally
trade, less allowances
for doubtful accounts and
discounts of $1,438,000
and $1,329,000
34,761,406 40,559,581
Inventories 62,576,303 60,641,309
Prepaid expense and other 6,413,699 3,636,446
Total current assets 109,219,828 110,985,404
Property, plant and
equipment - at cost $112,837,702 $105,327,427
Less allowances for
depreciation and
amortization (60,877,584) 51,960,118 (56,346,824) 49,025,603
Real estate held for
development or sale, at cost 2,133,463 2,175,344
Other assets and deferred
charges 21,445,531 23,223,366
Excess of cost over net
assets acquired 15,600,317 15,773,875
$200,359,257 $201,183,592
Note: The balance sheet at July 31, 1998has been derived from the audited
financial statements at that date.
See notes to unaudited condensed consolidated financial statements.
1 of 17
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 30, July 31
1999 1998
(Unaudited) (Note)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current installments of long-term debt $ 266,052
Accounts payable 12,655,070 $8,502,778
Accrued expenses 7,498,227 9,159,994
Income taxes 1,256,114 1,093,979
Total current liabilities 21,675,463 18,756,751
Long-term debt, excluding current installments 88,348,675 92,246,967
Other non-current liabilities 3,049,759 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 11,326,924 and 11,306,444 shares 2,831,731 2,826,611
Additional paid-in-capital 52,216,913 52,064,121
Retained earnings 31,406,008 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 (1,365,573) (1,610,424)
Total stockholders' equity 78,515,360 77,555,041
$200,359,257 $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 17
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended April 30,
Revenues: 1999 1998
Net Sales $ 86,046,704 $95,895,503
Rentals from real estate 505,462 453,296
86,552,166 96,348,799
Cost and expenses:
Cost of sales 63,072,813 70,869,138
Selling, general and
administrative expenses 24,309,826 20,950,921
Expenses of real estate 432,081 427,060
87,814,720 92,247,119
Operating (loss)/profit (1,262,554) 4,101,680
Interest income 124,783 176,479
Interest expense (1,863,545) (1,952,018)
Other (deductions) - net (331,722) (5,386)
(Loss)/income before income taxes (3,333,038) 2,320,755
Income tax (benefit)/provision (1,277,000) 1,008,000
Net (loss)/ income $ (2,056,038) $1,312,755
(Loss)/income per share:
Basic ($.19) $.13
Diluted ($.19) $.11
See notes to unaudited condensed consolidated financial statements.
3 of 17
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended April 30,
Revenues: 1999 1998
Net Sales $270,260,223 $306,294,851
Rentals from real estate 1,587,256 1,519,010
271,847,479 307,813,861
Cost and expenses:
Cost of sales 194,947,136 227,998,972
Selling, general and
administrative expenses 69,057,221 64,648,948
Expenses of real estate ___1,244,720 1,257,948
265,249,077 293,905,868
Operating profit 6,598,402 13,907,993
Gain on sale of real estate 1,281,698
Interest income 545,831 418,165
Interest expense (5,618,405) (6,084,065)
Other (deductions) - net (458,274) (41,675)
Income before income taxes 1,067,554 9,482,116
Income taxes 510,000 3,916,000
Net income $557,554 $5,566,116
Income per share:
Basic $.05 $.54
Diluted $.05 $.40
See notes to unaudited condensed consolidated financial statements.
4 of 17
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended April 30,
1999 1998
Operating Activities:
Net income $ 557,554 $5,566,116
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization of
property, plant and equipment 4,530,760 4,994,908
Amortization of deferred
compensation and deferred charges 2,302,656 2,952,056
Gain on sale of real estate (1,281,698)
Other, net (1,123,494) (1,889,791)
Changes in operating assets and
liabilities:
Decrease in accounts
receivable 5,689,554 3,024,062
(Increase)/decrease in inventory (1,934,994) 11,627,740
(Increase) in prepaid
expense (2,900,185) (679,302)
Increase/(decrease)in accounts
payable, accrued expenses and
income taxes 2,652,660 (8,558,241)
NET CASH PROVIDED BY OPERATING
ACTIVITIES 9,774,511 15,755,850
Investing Activities:
Proceeds from sale of real estate 6,685,941
Sales /(purchases) of marketable
securities 122,932 (33,333)
Purchases of property, plant and
equipment (6,306,482) (3,802,970)
Proceeds from/(advances to) co-packer,
net 359,424 (1,014,768)
NET CASH (USED IN)/PROVIDED BY
INVESTING ACTIVITIES (5,824,126) 1,834,870
Financing Activities:
Proceeds from/(payments of) revolving
credit and term loans, net 369,967 (2,930,688)
(Payment of) convertible subordinated
debentures (5,000,000) (5,281,000)
Loan to employees' stock ownership
plan (1,000,000)
NET CASH (USED IN)FINANCING ACTIVITIES (4,630,033) (9,211,688)
(Decrease)/increase in Cash and Cash
Equivalents (676,648) 8,379,032
Cash and Cash Equivalents at Beginning
of Period 6,148,068 4,585,633
Cash and Cash Equivalents at End of Period $ 5,468,420 $12,964,665
See notes to unaudited condensed financial statements.
5 of 17
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
Conversion of debentures 21 5
Deferred compensation under stock
bonus plan and employees' stock
ownership plan:
Amortization
Balance at April 30, 1999 11,327 $2,832 476 $6,574
See notes to unaudited condensed consolidated financial statements.
6 of 17
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 558
Conversion of debentures 153
Deferred compensation under stock
bonus plan and employees' stock
ownership plan:
Amortization 244
Balance at April 30, 1999 $1,366 $52,217 $31,406
See notes to unaudited condensed consolidated financial statements.
7 of 17
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
April 30, 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
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, 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 10,582,000 and 10,532,000 for the three and nine
months ended April 30, 1999, respectively, and 10,433,000 and
10,392,000 for the three and nine months ended April 30, 1998,
respectively. Diluted per share data, assuming conversion of debentures,
is based on 20,994,000 and 21,241,000 shares outstanding for the three
and nine months ended April 30, 1999, respectively and 21,899,000 and
21,920,000 for the three and nine months ended April 30, 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 $972,000 and $2,996,000 for three
and nine months ended April 30, 1999, respectively and $1,056,000 and
$3,205,000 for the three and nine months ended April 30, 1998,
respectively. However, for the three and nine month periods ended
April 30, 1999, the effect of the assumed conversion is anti-dilutive
and is therefore excluded from the earnings per share calculations.
(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,
1999 1998
Finished goods $38,771,425 $35,775,998
Raw materials 16,496,717 17,539,666
Supplies 7,308,161 7,325,645
$62,576,303 $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 April 30, 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 April 30, 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 17
(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.
Subsequent to April 30, 1999 through June 10, 1999, $1,436,000 of
the Company's 8% Convertible Subordinated Debentures and $398,000
of the Company's 7% Convertible Senior Subordinated Debentures were
converted into 232,202 shares of Company Common Stock.
(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 17
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 $85,745,000 or 9.0% for
the three months ended April 30, 1999 compared to $95,496,000 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 7.6% increase in coffee pounds sold (primarily attributable to the
Park Coffee Company ("Park")acquisition in July 1998). Operating loss
from beverage products was $988,000 for the three months ended April
30, 1999 compared to an operating profit of $4,524,000 in the prior
year's comparable period. The decrease for the three months resulted
primarily from decreases in gross margins and increases 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 April 30, 1999 prices of green coffee
ranged from a high of $1.13 to a low of $.97 per pound. Selling,
general and administrative expenses increased, other than those
applicable to Park, primarily due to increased advertising, coupon
costs, compensation costs, delivery costs (resulting from the
manufacturing transition period for Park and increased coffee pounds
sold) and professional fees and related expenses incurred in
connection with the proposed acquisition of the Company by Sarah
Lee Corporation.
Net sales from beverage products decreased to $268,386,000 or 11.7%
for the nine months ended April 30, 1999 compared to $304,042,000 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 7.7% increasein coffee pounds sold (primarily attributable to the
Park acquisition). Operating profit from beverage products was
$7,192,000 a decrease of 52% for the nine months ended April 30, 1999
compared to the prior year's comparable period. The decrease for the
nine months resulted primarily from decreases in gross margins and
increases in selling, general and administrative expenses for
operations other than Park. Decreased gross margins were primarily due
an increase in manufacturing costs of approximately $4.5 million
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 nine months ended April 30,
1999 prices of green coffee ranged from a high of $1.35 to a low of
$.97 per pound. Selling, general and administrative expenses increased,
other than those applicable to Park, primarily due to increased
delivery costs (resulting from the manufacturing transition period for
park and increased coffee pounds sold), coupon costs, compensation
costs and professional fees and related expenses incurred in connection
with the proposed acquisition of the Company by Sarah Lee Corporation,
partially offset by decreased amortization of purchased intangibles
and insurance costs.
10 of 17
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
$3,521,000 for nine months ended April 30, 1999 versus $2,364,000, an
increase of 49% over the comparable 1998 period. Quikava company-
operated shop sales were $1,874,000 for the nine months ended April
30, 1999 compared to $2,253,000 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
$936,000 for the nine months ended April 30, 1999 compared to
$1,367,000 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 loss was $2,056,000 ($.19 per basic and diluted share) for the
three months ended April 30, 1999, compared to net income of
$1,313,000 ($.13 per basic share and $.11 per diluted share) for
the comparable period of the prior year. The decrease was primarily
due to decreased operating profits from beverage products, partially
offset by an income tax benefit in 1999 versus an income tax in 1998
(attributable to a loss before income taxes in 1999 and income before
income taxes in 1998) and to a lesser extent decreased operating
losses from Quikava.
Net income was $558,000 ($.05 per basic share and diluted share) for
the nine months ended April 30, 1999, compared to $5,566,000 ($.54
per basic share and $.40 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 to a lesser extent 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 April 30, 1999, working capital was approximately $87,500,000
and the ratio of current assets to current liabilities was 5.0 to 1.
As of April 30, 1999, the Company had unused borrowing capacity of
approximately $36 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 and certain conversions of the
8% Convertible Subordinated Debentures and 7% Convertible Senior
Subordinated Debentures.
The Company plans on expanding its Quikava franchised operations,
which are currently operating in 42 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 17
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 coffe purchases and
commitments returned to pricing levels closer to those that existed
prior to the frosts. In February 1997, green coffee bean
12 of 17
prices began to rise significantly reaching a high of $3.18 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.
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 nine months of fiscal 1999, the coffee market was in
the $.97 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 17
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 Fall 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 nine 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 April 30, 1999, the Company's long-term debt,
other than capitalized leases, consists of $84 million of fixed rate
long-term debt (its convertible subordinated debentures) and $4
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 April 30,
1999, the total value of coffee contracts was approximately $12.9
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 April 30, 1999 ($1.04) were to
increase or decrease by $.15, the effect of such an increase would
be to decrease inventory by approximately $300,000 and the effect
of such a decrease would not have a significant effect. 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.
14 of 17
Part II. Other Information
Item 1. Legal Proceedings
Since April 26, 1999, seven putative class action lawsuits have been
filed by alleged Shareholders of the Company against certain officers
and directors of the Company and the Company, in the Supreme Court of
the State of New York, styled LAURA BENJAMIN V. CHOCK FULL O'NUTS
CORP., ET AL., C.A. No. 999108759, SANDRA KAFENBAUM, ET AL.V.MARK A.
ALEXANDER, ET AL., C.A. No. 99602054, STANILOFF V. ALEXANDER, ET AL.,
C.A. No. 99602054, VICTOR V. CHOCK FULL O'NUTS CORP., ET AL., C.A. No.
99602254, GUTTERMAN V. ALEXANDER, ET AL., C.A. No. 99602412, JANNER V.
CHOCK FULL O'NUTS CORP. ET AL., C.A. No. 9910826, and BOLLINGER V.
CHOCK FULL O'NUTS ET AL., C.A. No 99109951. A motion to consolidate
the pending class actions for pre-trial and trial purposes has been
filed by plaintiffs' counsel with the Court. In addition, since April
26, 1999, two shareholder's derivative complaints have been filed by
alleged Shareholders of the Company against certain officers and
directors of the Company and, nominally, the Company, (i) in the
Supreme Court of the State of New York, styled HARBOR FINANCE
PARTNERS AND ALAN FREBURG V. MARVIN I. HAAS, ET AL., No. 99-602013,
(ii) in the United States District Court for the Southern District
of New York, styled RICHARD A. ASH V. NORMAN F. ALEXANDER,
ET AL., No. 99 Civ. 3820. Each of the class action suits and the
shareholder's derivative suits set forth substantially similar
allegations of purported misconduct and breach of fiduciary duties
by certain officers and directors of the Company and the Board
related to their conduct and consideration of certain business
combinations. Additionally, in the ASH action, plaintiff
(purportedly on behalf of the Company) has alleged a claim
arising under the Federal securities laws. The shareholder
plaintiffs seek, in each case unspecified damages, attorneys' fees
and equitable relief, including, among other things, orders
requiring the individual defendants to carry out their fiduciary
duties, enjoining them from proceeding with alleged violations
complained of in the complaints, and requiring certain directors
to disgorge all profits allegedly earned from purported insider
stock transactions during the relevant time period. The Board
has received a letter from another shareholder demanding that the
Company bring direct claims against the directors substantially
similar to the claims set forth above. By letter dated May 14,
1999, Company counsel informed counsel for the shareholder who had
lodged the demand that the Board of Directors had unanimously
rejected the demand.
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;
5 of 17
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
16 of 17
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 $ 5,468,420
5-02 (2) Marketable securities $ -0-
5-02 (3) (a) (1) Notes and accounts receivable - trade $ 36,199,406
5-02 (4) Allowances for doubtful accounts $ 1,438,000
5-02 (6) Inventory $ 62,576,303
5-02 (9) Total current assets $109,219,828
5-02 (13) Property, plant and equipment $112,837,702
5-02 (14) Accumulated depreciation $ 60,877,584
5-02 (18) Total assets $200,359,257
5-02 (21) Total current liabilities $ 21,675,463
5-02 (22) Bonds, mortgages and similar debt $ 88,348,675
5-02 (28) Preferred stock - mandatory redemption $ -0-
5-02 (29) Preferred stock - no mandatory redemption $ -0-
5-02 (30) Common stock $ 2,831,731
5-02 (31) Other stockholders' equity $ 75,683,629
5-02 (32) Total liabilities and stockholders' equity$ 200,359,257
5-03 (b) 1 (a) Net sales of tangible products $ 270,260,233
5-03 (b) 1 Total revenues $ 271,847,479
5-03 (b) 2 (a) Cost of tangible goods sold $ 194,947,136
5-03 (b) 2 Total costs and expenses applicable to
sales and revenues $ 196,191,856
5-03 (b) 3 Other costs and expenses $ -0-
5-03 (b) 5 Provision for doubtful accounts and notes $ 1,529,000
5-03 (b) (8) Interest and amortization of debt $ 5,618,405
5-03 (b) (10) Income before taxes and other items $ 1,067,554
5-03 (b) (11) Income tax expense $ 510,000
5-03 (b) (14) Income/loss continuing operations $ 557,554
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 $ 557,554
5-03 (b) (20) Earnings per share - basic $ .05
5-03 (b) (20) Earnings per share - diluted $ .05
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 14, 1999 Marvin I. Haas
President and Chief Executive
Officer
June 14, 1999 Howard M. Leitner
Senior Vice President and
Chief Financial and Accounting
Officer
17 of 17
??
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