<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C., 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------- --------
Commission file number 0-23024
BROTHERS GOURMET COFFEES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1681708
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2255 GLADES ROAD
SUITE 100E
BOCA RATON, FL 33431
(Address of principal executive offices)
(Zip code)
(561) 995-2600
(Registrant's telephone number, including area code)
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 [ ]
As of May 9, 1997 the Registrant had (1) 10,362,605 shares of Common Stock,
par value $.0001 per share, and (2) 839,332 shares of Class B Common Stock,
par value $.0001 per share.
<PAGE>
BROTHERS GOURMET COFFEES, INC.
INDEX
-----
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets--March 28, 1997 and
December 27, 1996 . . . . . . . . . . . . . . . . . . . . . . 1
Condensed Consolidated Statements of Operations--Three months
ended March 28, 1997 and March 29, 1996 . . . . . . . . . . . 2
Condensed Consolidated Statements of Cash Flows--Three months
ended March 28, 1997 and March 29, 1996 . . . . . . . . . . . 3
Notes to Condensed Consolidated Financial Statements--
March 28, 1997. . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations. . . . . . . 7
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 11
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . 12
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . 12
Item 4. Submission of Matters to a Vote of Security Holders . . . . . 12
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 12
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . 12
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
i
<PAGE>
BROTHERS GOURMET COFFEES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
March 28, December 27,
1997 1996
----------- -----------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash $ -- $ --
Trade receivables, net 10,811 15,717
Receivable from the sale of discontinued retail operations 3,695 3,795
Inventories 13,646 13,924
Prepaid promotional expenses 986 776
Prepaid expenses and other current assets 1,454 1,225
-------- --------
Total current assets 30,592 35,437
Plant and equipment, net 15,403 14,814
Other assets:
Excess of cost over net assets acquired, net 52,100 52,470
Noncompete agreements, net 898 1,197
Noncurrent promotional expenses 4,134 2,918
Debt acquisition costs 1,617 1,689
Other assets 796 778
-------- --------
$105,540 $109,303
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 1,611 $ 1,648
Accounts payable 3,295 8,247
Accrued expenses 6,014 6,498
Accrued litigation settlement 5,500 5,500
Accrued losses and other costs of
discontinued retail operations 4,075 1,781
Accrued restructuring costs 182 373
-------- --------
Total current liabilities 20,677 24,047
Long-term debt, less current liabilities 24,912 20,137
Minority interest 81 89
Stockholders' equity:
Preferred Stock--10,000,000 shares authorized: $1.00 par value;
-0- shares issued and outstanding at March 28, 1997
and December 27, 1996 -- --
Common Stock -- 15,000,000 shares authorized:
$.0001 par value; 11,400,105 shares issued and outstanding
at March 28, 1997 and December 27, 1996 1 1
Common Stock Class B -- 2,000,000 shares authorized:
$.0001 par value; 839,332 shares issued and outstanding
at March 28, 1997 and December 27, 1996 -- --
Additional paid-in capital 145,992 145,992
Accumulated deficit in earnings (85,873) (80,713)
Treasury stock (37,500 shares, at cost) (250) (250)
-------- --------
Total stockholders' equity 59,870 65,030
-------- --------
$105,540 $109,303
-------- --------
-------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
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BROTHERS GOURMET COFFEES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
Three-months Three-months
Ended March 28, Ended March 29,
1997 1996
-------------- --------------
<S> <C> <C>
Net sales $16,808 $19,109
Cost of goods sold 9,247 10,007
------- -------
Gross profit 7,561 9,102
Operating expenses:
Distribution, selling and marketing 7,069 6,514
Administrative 1,325 1,558
Amortization of intangibles 669 775
Restructuring -- 97
------- -------
Income (loss) from operations (1,502) 158
Other expenses (income):
Interest expense, net 943 579
Other income 15 (9)
------- -------
Loss before discontinued retail operations (2,460) (412)
Loss on disposal of discontinued retail operations (2,700) --
------- -------
Net loss $(5,160) $ (412)
------- -------
------- -------
Loss per common share:
Loss per common share from continuing
operations $ (0.22) $ (0.04)
Loss per common share from discontinued
retail operations $ (0.24) $ --
------- -------
Net loss per common share $ (0.46) $ (0.04)
------- -------
------- -------
Weighted average common
shares outstanding 11,202 11,202
------- -------
------- -------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
BROTHERS GOURMET COFFEES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
Three-months Three-months
Ended March 29, Ended March 29,
1996 1996
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,160) $ (412)
Adjustments to reconcile net income to cash
provided by operating activities:
Discontinued retail operations 2,700 --
Depreciation and amortization 3,157 3,501
Current and noncurrent promotional expenses (2,499) (2,294)
Changes in operating assets and liabilities:
Current assets 4,955 4,255
Current liabilities (5,627) 1,729
Other noncurrent assets (26) (106)
--------- --------
Net cash (used in) provided by
operating activities:
Continuing operations (2,500) 6,673
Discontinued retail operations (406) (1,760)
Cash flows from investing activities: --------- --------
(2,906) 4,913
Purchases of property, plant and
equipment, net (1,769) (420)
Proceeds from sale of discontinued
retail operations 100 3,183
Net cash (used in) provided by --------- --------
investing activities (1,669) 2,763
Cash flows from financing
activities:
Net borrowings and repayments
under revolving line of credit 5,010 (7,676)
Payment of term loan (375) --
Payments under capital lease (37) --
Debt issuance costs (23) --
--------- --------
Net cash provided by (used in)
financing activities 4,575 (7,676)
--------- --------
Change in cash -- --
Cash at the beginning of the period -- --
--------- --------
Cash at the end of the period $ -- $ --
--------- --------
--------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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BROTHERS GOURMET COFFEES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 28, 1997
(IN THOUSANDS)
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
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 pursuant to the
Securities Exchange Act of 1934, as amended, and Article 10 of Regulation S-X,
as amended. Accordingly, they do not include all the financial statements 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-month period
ended March 28, 1997 are not necessarily indicative of the results that may be
expected for the year ended December 26, 1997. For further information, refer
to the Brothers Gourmet Coffees, Inc.'s (the "Company") consolidated financial
statements and footnotes (collectively the "1996 Financial Statements") included
in its Annual Report on Form 10-K for the fiscal year ended December 27, 1996
(the "1996 Form 10-K").
NOTE 2--SALES
The Company is an integrated sourcer, roaster and wholesaler of high quality
gourmet coffee products. The Company participates in the wholesale distribution
channel through sales of gourmet coffee to supermarkets, grocery and drug
stores, military commissaries, warehouse stores, mass merchandisers and
specialty stores. The Company's business is seasonal, with increased sales
during the colder months. As a result, in a typical year, a substantial portion
of the Company's sales and its reported results from operations occur during the
fourth quarter of each year. The Company's results of operations for any
particular quarter may not necessarily be indicative of its results of
operations for any other particular quarter or for the whole year.
NOTE 3--EARNINGS PER SHARE
Shares underlying options and warrants are not included in the computation for
the three-months ended March 28, 1997, and March 29, 1996, because their effect
is antidilutive to the net loss per share.
NOTE 4--INVENTORIES
The components of inventories consist of the following:
March 28, December 27,
1997 1996
-------- --------
Green coffee $ 4,601 $ 4,844
Finished goods 7,254 7,500
Packaging and other supplies 2,493 2,082
-------- --------
14,348 14,426
Less: LIFO reserve (702) (502)
-------- --------
$ 13,646 $ 13,924
-------- --------
-------- --------
4
<PAGE>
BROTHERS GOURMET COFFEES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 28, 1997
(IN THOUSANDS)
(UNAUDITED)
An actual valuation of inventory under the last-in, first-out ("LIFO") method
can only be determined at the end of each year based on the inventory levels
and costs at that time. Accordingly, interim LIFO calculations must
necessarily be based on management's estimates of expected year-end inventory
levels and costs. Because inventory levels and costs are subject to many
factors beyond management's control, interim results are subject to the final
year-end LIFO inventory valuation.
NOTE 5--DEBT FACILITIES
A summary of indebtedness outstanding under various credit arrangements at March
28, 1997 and December 27, 1996 is as follows:
1997 1996
---- ----
Revolving Credit Facility(a) $ 8,176 $ 3,166
Term Loan Facility(b) 6,375 6,750
Senior Subordinated Note Facility(c) 15,000 15,000
Capital lease obligations 191 228
------- -------
29,742 25,144
Less value ascribed to warrants (3,219) (3,359)
Less current maturities (1,611) (1,648)
------- -------
$24,912 $20,137
------- -------
------- -------
(a) The Company's revolving credit facility (the "Revolving Credit Facility"),
in the aggregate principal amount of $15,000 (the "Revolving Credit Facility"),
bears interest (at the Company's election) at (1) the prime rate plus 1.0%
(9.50% at March 28, 1997) or (2) the LIBOR rate plus 2.5% (8.0% at March 28,
1997). Interest is payable monthly in arrears. The Revolving Credit Facility
is scheduled to mature (absent earlier acceleration under the applicable loan
documents) on May 28, 1999. At March 28, 1997, (X) the outstanding principal
balance drawn under the Revolving Credit Facility was $8,600 and (Y) the
remaining availability under the Revolving Credit Facility was $6,400. In
connection with the closing of the Revolving Credit Facility in May 1996,
certain stockholders of the Company provided credit support to the Company in
the form of letters of credit (the "Credit Support Facility"). The Credit
Support Facility terminated in December 1996. In exchange for such credit
support, in May 1996, the Company issued warrants (the "Credit Support
Warrants") to the stockholders providing the Credit Support Facility entitling
them to purchase up to 103,626 shares of Company common stock at an exercise
price of $3.00 per share (the then quoted market price of the Company's common
stock). The Credit Support Warrants were fully vested as of March 28, 1997.
(b) The Company's term loan facility (the "Term Loan Facility"), in the
aggregate principal amount of $7,500 (which has been fully drawn), bears
interest (at the Company's election) at (1) the prime rate plus 1.5% (10.0%
at March 28, 1997) or (2) the LIBOR rate plus 3.0% (8.5% at March 28, 1997).
The Term Loan Facility is payable in monthly installments of $125 of
principal, plus interest, through May 2001. The Term Loan Facility is due
and payable in full at the maturity of the Revolving Credit Facility, i.e.,
May 28, 1999.
(c) The Company's unsecured subordinated senior note facility (the "Senior
Subordinated Note"), in an aggregate principal amount of $15,000 (which has been
fully drawn), bears interest at the rate of 11.25% per annum. Interest is
payable quarterly. The entire principal balance of the Senior Subordinated Note
(plus accrued and unpaid interest) is due and payable on December 26, 2002. In
connection with the closing of the Senior Subordinated Note in December 1996,
the Company issued (1) warrants (the "Senior Subordinated Note Warrants") to an
affiliate of the
5
<PAGE>
BROTHERS GOURMET COFFEES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 28, 1997
(IN THOUSANDS)
(UNAUDITED)
lender providing the Senior Subordinated Note Facility entitling such
affiliate to purchase up to 1,245,000 shares of Company common stock at an
exercise price of $0.25 per share and (2) warrants (the "Placement Warrants")
to an affiliate of the Company's investment banker that placed the Senior
Subordinated Note Facility entitling such affiliate to purchase 400,000
shares of Company common stock at an exercise price of $3.44 per share. The
Senior Subordinated Note Warrants vest in various amounts over the six year
period immediately following the closing of the Senior Subordinated Note
Facility so long as any portion of the principal amount of the Senior
Subordinated Note remains outstanding on each vesting date. As of March 28,
1997, 265,600 of the Senior Subordinated Notes had vested and all of the
Placement Warrants were vested.
The Revolving Credit Facility and Term Loan Facility (collectively, the
"Operating Facility") and the Senior Subordinated Note Facility (together
with the Operating Facility, the "Debt Facilities") contain several financial
covenants, including separate cash flow-to-debt service covenants. As of
March 28, 1997, the Company was not in compliance with either cash
flow-to-debt service covenant. Such non-compliance constitutes an event of
default ("Covenant Default") under the agreements governing the Debt
Facilities (the "Debt Documents"). The Company has requested a waiver from
its Lenders (as defined below) with respect to the Covenant Default. Dilmun
Financial Services, the Senior Subordinated Note lender ("Dilmun"), is
considering the Company's request. Sanwa Business Credit Corporation, the
Operating Facility lender ("SBCC"), has informed the Company that it is not
willing to waive the Covenant Default at this time; however, it has indicated
that it is willing to enter into a forbearance agreement with respect to such
default. The Company and SBCC are currently negotiating the terms of such
forbearance agreement. The Company anticipates that SBCC will agree to (1)
forbear from exercising any of its remedies with respect to the Covenant
Default for the time period specified in the forbearance agreement (probably
not to exceed 90 days) and (2) continue to permit the Company to borrow under
the Operating Facility in accordance with the terms thereof. While the
Company believes that SBCC and Dilmun (together, the "Lenders") will offer
some forbearance arrangement, there can be no assurance that the specific
terms of such arrangement will be acceptable to the Company. If the Company
is unable, for any reason, to negotiate a forbearance agreement on terms
acceptable to it, there is a risk that one or both of the Lenders could
declare the Company in default and seek to enforce their remedies (as set
forth in the Debt Documents), which would severely impair (and possibly halt)
the operations of the Company.
NOTE 6--DISCONTINUED RETAIL OPERATIONS
In June 1995, the Company's Board of Directors (the "Board") adopted a plan
(the "Disposition Plan") to dispose of all of its retail operations,
consisting of the Gloria Jean's specialty retail business ("Gloria Jean's")
and the Brothers Gourmet Coffee Bars (the "Coffee Bars"). Accordingly, the
operating results of discontinued retail operations, including provisions for
estimated losses during the phase-out period, have been segregated from
continuing operations and reported as a separate line item on the statement
of operations. Interest expense has been allocated to discontinued retail
operations based on the ratio of discontinued operations net assets to
consolidated net assets. Due to the subjective nature of estimating future
operating losses and incremental costs of disposal, it is reasonably possible
that these estimates may change in the future. Future changes in estimates
will be included in the statement of operations in the fiscal year
determined. See Note 7 -- Contingencies.
As of March 28, 1997, the Company's obligations under the non-cancelable
operating leases for its Coffee Bars were as follows: fiscal year 1997- $421;
fiscal year 1998 - $570; fiscal year 1999 - $583; fiscal year 2000 - $601;
fiscal year 2001 - $610 ; and thereafter -$2,471. The Company is negotiating
to terminate its obligations under all of the remaining leases and estimates
that the total costs relating to the assignment and termination of these
leases will be approximately $250. This incremental cost has been included
in the estimated loss on disposal. The Company remains as a guarantor on
twenty (20) leases sold and assigned to third parties.
NOTE 7--CONTINGENCIES AND CONTINGENT LIABILITIES
In November 1995, the Company sold Gloria Jean's to The Second Cup, Ltd.
("Second Cup") for an aggregate purchase price of $30,000. To date, the
Company has received $28,500 of the purchase price (including $1,300 applied
to the Lindgren settlement (See Note 9 below)) and the remaining $1,500 of
the purchase price is subject to holdback and escrow arrangements (the
"Escrow") to secure the Company's post-closing obligations under the purchase
agreement with Second Cup. In connection with the settlement of the Lindgren
litigation, the Company requested Second Cup's consent to release the full
amount of the cash settlement from the post-closing escrow. Second Cup
refused to consent to the distribution of more than $1.3 million from the
post-closing escrow and advised the Company that it intended to assert claims
against the remainder of the funds held in the escrow. These claims consist
of costs, expenses and other amounts incurred with respect to (1) missing
landlord consents and waivers, (2) franchisee disputes, (3) inventory,
packaging and fixed asset claims, (4) lease termination and buyout costs and
(5) other miscellaneous costs and expenses. The total amount of these claims
is approximately $1,000. After completing a detailed review of these claims,
the Company has set up a reserve of $600 to cover these claims. While the
6
<PAGE>
BROTHERS GOURMET COFFEES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 28, 1997
(IN THOUSANDS)
(UNAUDITED)
Company believes that this reserve is reasonable under all of the facts and
circumstances known to it at this time, there can be no assurance that the
aggregate amount of such claims will not exceed the reserve. At this time
the amount of claims is less than the remaining balance in the post-closing
escrow. As of March 28, 1997, the receivable from the sale of Gloria Jean's
was $2,800.
During fiscal year 1996, the Company sold or closed its remaining Coffee Bars
located in Colorado, Texas, Washington, D.C., New York and Illinois
(including the assignment of leases on 5 Coffee Bar sites which were never
built out) for $2,660 (subject to certain holdbacks to secure the performance
by the Company of certain of its post-closing obligations). The Company has
set up a reserve of $400 to cover the termination/buyout of its remaining
Coffee Bar leases. See Note 6 above. While the Company believes that this
reserve is reasonable under all of the facts and circumstances known to the
Company at this time, there can be no assurance that the aggregate
termination/buyout costs for the remaining Coffee Bar leases will not exceed
the reserve. As of March 28, 1997, the receivable from the sale of the
Coffee Bars was $900.
See Note 9--Litigation below for a discussion of pending litigation.
NOTE 8--INCOME TAXES
The Company historically has experienced net operating losses and has
established valuation allowances to offset net deferred tax assets.
Accordingly, the Company has had no provision for income taxes for the
three-month periods ended March 28, 1997 and March 29, 1996, and expects this
trend to continue for the remainder of fiscal year 1997.
NOTE 9--LITIGATION
See the discussion of the Lindgren litigation, the Shareholder Class Action,
the Shareholder Derivative Action, the Kona Coffee Class Action in Note 9 to
the 1996 Financial Statements. Developments concerning these matters in the
first quarter of fiscal year 1997 are discussed below.
1. GLORIA JEAN'S FRANCHISE LITIGATION. In April 1997, the parties
entered into a Mutual Settlement Agreement and Release, pursuant to which (a)
the defendants agreed to pay $2,200 in cash, and to deliver 76,667 shares of
Company common stock, to the plaintiffs in settlement of all of the
plaintiffs' claims and (b) the parties mutually released each other and
dismissed all claims against each other. The $2,200 was funded as follows:
(i) $2,015 from the Company (of which approximately $900 was funded out of
the escrowed purchase price from the sale of Gloria Jean's), and (ii) $225
for the other defendants and their counsel. The shares of Company common
stock came entirely from the Company.
2. SHAREHOLDER CLASS ACTION. In January 1997, the parties executed a
definitive Stipulation of Settlement (the "Stipulation of Settlement") with
respect to this litigation. In late January 1997, the court issued an order
preliminarily approving the proposed settlement. In April 1997, the court
entered the final judgment in the case. The principle terms of the
settlement are as follows: (a) the plaintiff class will receive $3,000 in
cash and the Company will transfer to the plaintiff class 1,848,118 shares of
its own freely tradeable common stock, (b) the parties will enter into mutual
general releases and (c) the Shareholder Class Action (and the Derivative
Action, see 3. SHAREHOLDER DERIVATIVE ACTION below) will be dismissed.
The case is currently in the share allocation phase. There is one
remaining issue as to whether the holders of Class C Preferred Stock of the
Company who converted their shares of Class C Preferred Stock into Company
Common Stock in connection with the Company's IPO in December 1993 are part
of the plaintiff class and entitled
7
<PAGE>
BROTHERS GOURMET COFFEES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 28, 1997
(IN THOUSANDS)
(UNAUDITED)
to share in the settlement. This issue is not yet resolved. The Company
expects the share allocation phase of the case to be completed by the end of
the second quarter of fiscal year 1997.
The cash portion of the settlement is fully funded. The Company's
insurance carrier and other defendants have transferred $3.0 million to the
settlement fund to fund this amount. The Company has fully funded the stock
component of the settlement.
3. SHAREHOLDER DERIVATIVE ACTION. The plaintiff in the Shareholder
Derivative Action has agreed to settle his claims and is a party to the
Stipulation of Settlement. The principle terms of the proposed settlement
are as follows: (a) the Company has agreed to use its reasonable best
efforts (i) to appoint a new non-employee member to its Board of Directors on
or before April 30, 1997 (which it has done), (ii) to continuously maintain
thereafter at least a majority of non-employee members on its Board of
Directors and on its Audit and Finance and Compensation Committees (which it
has done), and (iii) unless approved by unanimous action of the Board of
Directors, to neither enter into any new employment agreement or consulting
agreement with any person who prior to October 22, 1996 was a former employee
Board member nor renew or extend the term of any existing consulting
arrangement with any such former employee Board member beyond its stated
termination date and (b) the Shareholder Derivative Action will be dismissed
and all of the claims asserted by the plaintiff will be released. The
arrangements described in (a) of the preceding sentence will remain in place
until the earlier of the date upon which the Company no longer has any class
of securities registered under the Securities and Exchange Act of 1934 or 5
years from the date of the Stipulation of Settlement.
4. KONA COFFEE CLASS ACTION. The defendants have filed a motion to
dismiss the litigation. Oral arguments on the motion are scheduled for the
end of June 1997. The defendants also have proposed to stay all discovery on
the merits pending the court's determination as to whether this lawsuit can
proceed as a class action.
5. PARKER/FRANKLIN MILLS FRANCHISE ARBITRATION. In August 1996, a
franchisee filed a claim for arbitration against Gloria Jean's, the Company,
Brothers Retail Corp. and certain officers and a director of the Company
seeking to rescind a franchise agreement to develop and operate a Gloria
Jean's franchise at the Franklin Mills mall, alleging fraud in the
inducement, misrepresentation, violations of the Illinois Franchise and
breach of contract, occurring prior to the Company's sale of Gloria Jean's to
the Second Cup in November 1995. The parties are in negotiation to settle
this matter. However, there can be no assurance that a settlement will be
reached. The matter is scheduled to go to arbitration in late May 1997. The
plaintiffs have asserted damages of approximately $350,000, $50,000 of which
has already been paid by the defendants to the Franklin Mills landlord to
buyout the remainder of the Franklin Mills lease.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company is an integrated sourcer, roaster, and wholesaler of high
quality gourmet coffee products. The Company is one of the leading wholesale
suppliers of gourmet coffees in the United States. The Company participates in
the wholesale distribution channel through sales of gourmet coffee to
supermarkets, grocery and drug stores, military commissaries, warehouse stores,
mass merchandisers and specialty stores.
FIRST QUARTER 1997 COMPARED WITH FIRST QUARTER 1996
NET SALES. Net sales decreased $2.3 million, or 12.0%, in the first
quarter of fiscal year 1997 as compared to the first quarter of fiscal year
1996. The decline was principally due to (a) a $1.2 million decline in pound
volume and (b) a $1.1 million (a $0.31 per pound) decline in sales price
realization. The $1.2 million decline in pound volume was attributable
principally to a loss of certain customers. The Company's decision not to enter
into unprofitable promotional contracts, requiring the payment by the Company of
substantial product placement costs, was the primary reason for the loss of such
customers. The Company also lowered its sales prices during the second quarter
of fiscal year 1996 in response to lower green coffee costs and competitive
market conditions. Beginning late last year, green coffee costs started rising.
In response to this increase, the Company announced a sales price increase,
effective April 15, 1997.
GROSS PROFIT AND GROSS PROFIT MARGIN. Gross profit decreased $1.5 million,
or 16.9%, in the first quarter of fiscal year 1997 as compared to the first
quarter of fiscal year 1996. The decrease resulted principally from a (a)
decrease in sales volume and price realization ($2.3 million) and (b) a $.2
million increase in LIFO cost of goods sold. These negative changes were
partially offset by favorable savings of (x) $.6 million in packaging and
flavoring costs and (y) $.5 million in lower labor and overhead costs. The
gross profit margin decreased as a percentage of sales from 47.6% in the first
quarter of fiscal year 1996 to 45.0% in the first quarter of fiscal year 1997
principally due to the (i) lower sales price realization and (ii) the $.2
million increase in LIFO cost of goods sold.
DISTRIBUTION, SELLING AND MARKETING EXPENSES. Distribution, selling and
marketing expenses increased $.6 million, or 8.5%, in the first quarter of
fiscal year 1997 as compared to the first quarter of fiscal year 1996
principally due to higher advertising and distribution costs. Distribution
costs increased $.5 million as a result of the increase in the Company's direct
store distribution ("DSD") routes. The number of route increased by 18, or 30%,
during the fourth quarter of fiscal year 1996 and the first quarter of fiscal
year 1997. The Company expects to improve same store growth and sales price
realization as a result of the discontinuation of certain distributor
arrangements and the increase in DSD. Distribution, selling and marketing
expenses as a percentage of sales increased from 34.1% of sales in the first
quarter of fiscal year 1996 to 42.1% of sales in the first quarter of fiscal
year 1997 principally due to these same factors.
ADMINISTRATIVE EXPENSES. Administrative expenses decreased $.2 million, or
14.9%, in the first quarter of fiscal year 1997 as compared to the first
quarter of fiscal year 1996 principally due to lower professional fees and
reduced bad debt expense. Administrative expenses decreased from 8.1% of sales
in the first quarter of fiscal year 1996 to 7.8% of sales in the first quarter
of fiscal year 1997 due to these same factors.
INTEREST EXPENSE. Interest expense increased $.4 million, or 62.9%, in the
first quarter of fiscal year 1997 as compared to the first quarter of fiscal
year 1996. The increase was principally due to higher borrowing amounts and
higher effective interest rates.
LOSS FROM CONTINUING OPERATIONS. Loss from continuing operations was $2.5
million in the first quarter of fiscal year 1997 compared to a loss from
continuing operations of $0.5 million in the first quarter of fiscal year 1996.
The $2.0 million increase in loss from continuing operations during the first
quarter of fiscal year 1997 was principally due to a $1.5 million decrease in
gross profit and an increase of $.4 million in interest expense.
9
<PAGE>
LOSS FROM DISCONTINUED RETAIL OPERATIONS. Loss from discontinued retail
operations was $2.7 million in the first quarter of fiscal year 1997 compared to
a loss from discontinued operations of $0 in the first quarter of fiscal year.
The first quarter fiscal year 1997 loss was principally due to (a) the
additional cost of settling the Lindgren litigation ($1.3 million) and (b)
increased anticipated costs associated with post-closing claims with respect to
the sale of Gloria Jean's, the closing of the Coffee Bars and the
termination/buyout of certain remaining Coffee Bars leases ($1.4 million).
NET LOSS. Net loss increased $4.7 million in the first quarter of fiscal
year 1997 from the first quarter of fiscal 1996 principally due to (a) an
increased loss from continuing operations of $2.0 million and (b) an increased
loss from discontinued retail operations of $2.7 million.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities for the first quarter
of fiscal year 1997 was ($2.9) million. The liquidation of $5.0 million of
current assets, principally accounts receivable, partially offset the $5.6
million reduction in current liabilities and $2.5 of promotional expense
payments. In addition, the Company made $1.8 million of capital expenditures,
consisting of $1.2 million for customer display equipment and $.6 million for
plant and computer equipment. The Company funded net cash used in operating
activities and capital expenditures through $5.0 million of borrowings under its
Revolving Credit Facility.
Net cash provided by (used in) financing activities for the first quarter
of fiscal year 1997 was $4.6 million compared to ($7.7) million for the first
quarter of fiscal year 1996. Net cash provided by (used in) investing
activities for the first quarter of fiscal year 1997 was ($1.7) million compared
to $2.8 million for the first quarter of fiscal year 1996. The Company funded
net cash used in investing activities with borrowings under its revolving Credit
Facility.
Management expects capital expenditures in fiscal year 1997 (primarily
associated with the acquisition of customer display and plant equipment) not to
exceed $5.5 million. Management expects to fund these expenditures from
operations and borrowings under its Revolving Credit Facility to the extent
required. At March 28, 1997, the Company had approximately $6.4 million of
borrowing availability under its Revolving Credit Facility.
The Revolving Credit Facility and Term Loan Facility (collectively, the
"Operating Facility") and the Senior Subordinated Note Facility (together
with the Operating Facility, the "Debt Facilities") contain several financial
covenants, including separate cash flow-to-debt service covenants. As of
March 28, 1997, the Company was not in compliance with either cash
flow-to-debt service covenant. Such non-compliance constitutes an event of
default ("Covenant Default") under the agreements governing the Debt
Facilities (the "Debt Documents"). The Company has requested a waiver from
its Lenders (as defined below) with respect to the Covenant Default. Dilmun
Financial Services, the Senior Subordinated Note lender ("Dilmun"), is
considering the Company's request. Sanwa Business Credit Corporation, the
Operating Facility lender ("SBCC"), has informed the Company that it is not
willing to waive the Covenant Default at this time; however, it has indicated
that it is willing to enter into a forbearance agreement with respect to such
default. The Company and SBCC are currently negotiating the terms of such
forbearance agreement. The Company anticipates that SBCC will agree to (1)
forbear from exercising any of its remedies with respect to the Covenant
Default for the time period specified in the forbearance agreement (probably
not to exceed 90 days) and (2) continue to permit the Company to borrow under
the Operating Facility in accordance with the terms thereof. While the
Company believes that SBCC and Dilmun (together, the "Lenders") will offer
some forbearance arrangement, there can be no assurance that the specific
terms of such arrangement will be acceptable to the Company. If the Company
is unable, for any reason, to negotiate a forbearance agreement on terms
acceptable to it, there is a risk that one or both of the Lenders could
declare the Company in default and seek to enforce their remedies (as set
forth in the Debt Documents), which would severely impair (and possibly halt)
the operations of the Company. Management is actively pursuing refinancing
opportunities and believes that the Company has sufficient assets and
anticipated revenues to close a refinancing this fiscal year.
SUPPLY OF COFFEE AND GENERAL RISK CONDITIONS
Coffee is the world's second largest traded commodity. Supply and price
can be and have been volatile. While most coffee trades in the commodities
market, coffee of the quality level sought by the Company has a tendency to
trade on a negotiated basis at a substantial premium above commodity coffee
pricing, depending upon the supply and demand at the time of purchase. The
supply and price can be affected by multiple factors, such as weather, politics
and economics in the coffee producing countries, many of which are lesser
developed nations.
The International Coffee Organization, through the imposition of export
quotas agreed upon by consumer and producer member nations, has in the past
attempted to maintain the commodity prices of green coffees. In August 1993, 21
coffee-producing countries formed a new cartel, the Association of Coffee
Producing Countries ("ACPC"), and announced plans to cut the supply of coffee
by 20% beginning October 1, 1993 in an attempt to raise world coffee 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. The Company is unable to predict whether the ACPC will be
successful in achieving its goals; however, the supplies of green coffees held
by consumers (roasters and buyers) are currently at historical low levels.
The low levels of supplies, labor unrest in Colombia and reported poor
coffee crops in key Arabica growing countries has led to an increase in green
coffee prices from $1.14 per pound in December 1996 to in excess of $2.50 per
pound in April 1997. In response to the green coffee price increases, the
Company announced sales price increases on all its products of approximately
$0.50 per pound, effective April 15, 1997. The Company will attempt
10
<PAGE>
to maintain its per pound gross profit by increasing sales prices commensurate
with the increase in green coffee prices. There is no assurance that the
Company will be able to pass such price increases through to the customer.
In the past, substantial price increases have met with varying degrees of
customer resistance. The increase in sales prices may result in a decrease
in sales volume.
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 through which the Company
manages its requirements. In addition to forward purchases, the Company keeps
physical inventory in each of its production facility 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.
SEASONALITY AND FLUCTUATIONS IN QUARTERLY RESULTS
The Company's business is seasonal, with increased sales during the colder
months. As a result, in a typical year, a substantial portion of the Company's
sales and its reported income from operations occur during the fourth quarter of
each fiscal year, while the Company's working capital requirements fluctuate
during the year with its greatest needs during the third and fourth quarter of
each year. The Company's income from operations thus fluctuates somewhat from
quarter to quarter. The timing of slotting fee payments, other similar payments
and product introduction costs in connection with wholesale accounts and the
amount of revenue contributed by such new wholesale accounts may cause the
Company's quarterly results of operations to fluctuate in the future. The
Company may experience quarterly losses and its results of operations for any
particular quarter may not necessarily be indicative of net income or loss that
may be expected for any other particular quarter or for the whole year.
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See the discussion of the Lindgren Litigation, the Shareholder Class
Action, the Shareholder Derivative Action, the Kona Coffee Class Action and the
Parker/Franklin Mills Franchise Arbitration in (a) Note 9 to the 1996 Financial
Statements and (b) Note 9 to the Notes to Condensed Consolidated Financial
Statements of the Company for the fiscal quarter ended March 28, 1997, which are
included elsewhere in this Quarterly Report on Form 10-Q.
The Company is also involved in routine legal proceedings incidental to the
conduct of its business. Management believes that none of these routine legal
proceedings will have a material adverse effect on the financial condition or
operations of the Company.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See Part I, Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources and Note
5 to Notes to Condensed Consolidated Financial Statements March 28, 1997 for a
detailed description of the pending violation of the cash flow-to-debt service
covenants in the Debt Documents and the status of the Company's request for a
waiver from the Lenders with respect to this violation.
11
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
27 -- Financial Data Schedule
(b) REPORTS ON FORM 8-K.
Form 8-K filed on January 10, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BROTHERS GOURMET COFFEES, INC.
Dated: May 12, 1997 By: /s/ Barry Bilmes
--------------------------------------
Barry Bilmes
Vice President Finance
and Administration
Signing on behalf of the registrant
and as principal financial officer of
the registrant
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS (UNAUDITED) FOR THE THREE-MONTHS ENDED MARCH 28, 1997 CONTAINED IN
THE FORM 10-Q FILED ON MAY 12, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-26-1997
<PERIOD-START> DEC-28-1996
<PERIOD-END> MAR-28-1997
<CASH> 0
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<RECEIVABLES> 10,811
<ALLOWANCES> 0
<INVENTORY> 13,646
<CURRENT-ASSETS> 30,592
<PP&E> 15,403
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<TOTAL-ASSETS> 105,540
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0
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<TOTAL-LIABILITY-AND-EQUITY> 59,870
<SALES> 16,808
<TOTAL-REVENUES> 16,808
<CGS> 9,247
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<INCOME-PRETAX> (5,160)
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