<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 June 27, 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 June 30, 1997 the Registrant had outstanding (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--June 27, 1997 and
December 27, 1996. . . . . . . . . . . . . . . . . . . . . . 1
Condensed Consolidated Statements of Operations--Three months
and six months ended June 27, 1997 and June 28, 1996 . . . . 2
Condensed Consolidated Statements of Cash Flows--Three months
and six months ended June 27, 1997 and June 28, 1996 . . . . 3
Notes to Condensed Consolidated Financial Statements--
June 27, 1997. . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations . . . . . . 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 13
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . 13
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders. . . . . 13
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . 13
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 13
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
<PAGE>
BROTHERS GOURMET COFFEES, INC.
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS UNDER THE CAPTION "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS FORM
10-Q (AND ANY DOCUMENTS INCORPORATED HEREIN BY REFERENCE) CONTAIN
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933 (THE "1933 ACT") AND SECTION 21E OF THE SECURITIES AND
EXCHANGE ACT OF 1934 (THE "1934 ACT"). THESE STATEMENTS INVOLVE KNOWN AND
UNKNOWN RISKS AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, LEVELS OF
ACTIVITY, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY, OR INDUSTRY RESULTS, TO
BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, LEVELS OF ACTIVITY,
PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. THESE STATEMENTS ARE TYPICALLY IDENTIFIED BY THEIR INCLUSION OF
PHRASES SUCH AS "THE COMPANY ANTICIPATES," "MANAGEMENT BELIEVES" AND OTHER
PHRASES OF SIMILAR MEANING. SUCH FACTORS INCLUDE, AMONG OTHERS, THE EFFECT
OF ECONOMIC AND MARKET CONDITIONS; INDUSTRY AND INDUSTRY SEGMENT CONDITIONS
AND DIRECTIONS; WEATHER; COFFEE CROP AND GREEN COFFEE PRICE FLUCTUATIONS;
FOREIGN LABOR PROBLEMS; FOREIGN COFFEE DELIVERY DIFFICULTIES; PRODUCTION
COSTS; COMPETITIVE PRESSURES; THE COMPANY'S OWN FINANCING CONTINGENCIES AND
RESTRICTIONS; MANAGEMENT LIMITATIONS; THE ABILITY AND WILLINGNESS OF
PURCHASERS TO COMPLETE ACQUISITIONS OF THE COMPANY'S RETAIL COFFEE BARS AND
THE GLORIA JEAN'S STORES; THE COMPANY'S ABILITY TO RESOLVE POST-CLOSING
DIFFERENCES WITH THE PURCHASERS' OF CERTAIN COMPONENTS OF THE COMPANY'S
DISCONTINUED RETAIL OPERATIONS; LEGISLATION AND REGULATIONS; RESOLUTION OF
PENDING LITIGATION IN WHICH THE COMPANY IS A DEFENDANT; THE ABILITY OF THE
COMPANY TO CLOSE CONTRACTS WITH NEW ACCOUNTS AND TO RENEW EXISTING ACCOUNTS
AS SUCH ACCOUNTS COME UP FOR RENEWAL; CHANGES IN CONSUMER TASTES AND
PREFERENCES; THE SUCCESS OR LACK THEREOF OF THE COMPANY'S NEW PRODUCTS,
DISPLAY MODELS AND CAN LINES; AND OTHER FACTORS REFERENCED IN THIS FORM 10-Q.
AS A RESULT OF THE FOREGOING AND OTHER FACTORS, NO ASSURANCE CAN BE GIVEN AS
TO FUTURE RESULTS, LEVELS OF ACTIVITY AND/OR ACHIEVEMENTS, AND NEITHER THE
COMPANY NOR ANY OTHER PERSON ASSUMES RESPONSIBILITY FOR THE ACCURACY OR
COMPLETENESS OF THESE STATEMENTS.
<PAGE>
BROTHERS GOURMET COFFEES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
June 27, December 27,
1997 1996
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ -- $ --
Trade receivables, net 9,118 15,717
Receivable from the sale of discontinued
retail operations 2,699 3,795
Inventories 12,656 13,826
Prepaid promotional expenses 328 776
Prepaid expenses and other current assets 1,470 1,225
-------- --------
Total current assets 26,271 35,339
Plant and equipment, net 15,464 14,814
Other assets:
Excess of cost over net assets acquired, net 51,730 52,470
Noncompete agreements, net 598 1,197
Noncurrent promotional expenses 4,932 2,918
Debt acquisition costs 1,570 1,689
Other assets 791 778
-------- --------
$101,356 $109,205
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 15,187 $ 1,648
Accounts payable 2,752 8,247
Accrued expenses 5,580 6,498
Accrued litigation settlement 5,500 5,500
Accrued losses and other costs of
discontinued retail operations 1,417 1,781
Accrued restructuring costs 133 373
-------- --------
Total current liabilities 30,569 24,047
Long-term debt, less current liabilities 11,932 20,137
Minority interest 79 89
Stockholders' equity:
Preferred Stock--10,000,000 shares
authorized: $1.00 par value;
-0- shares issued and outstanding at
June 27, 1997 and December 27, 1996 -- --
Common Stock -- 15,000,000 shares authorized
at December 27, 1996 and 25,000,000 shares
authorized at June 27, 1997:
$.0001 par value; 10,362,605 shares issued
and outstanding at June 27, 1997 and
December 27, 1996, respectively 1 1
Common Stock Class B -- 2,000,000 shares authorized:
$.0001 par value; 839,332 shares issued and
outstanding at June 27, 1997 and December 27, 1996 -- --
Additional paid-in capital 145,992 145,992
Accumulated deficit in earnings (86,967) (80,811)
Treasury stock (37,500 shares, at cost) (250) (250)
-------- --------
Total stockholders' equity 58,776 64,932
-------- --------
$101,356 $109,205
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE>
BROTHERS GOURMET COFFEES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months Three months Six months Six months
Ended June 27, Ended June 28, Ended June 27, Ended June 28,
1997 1996 1997 1996
-------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net sales $ 15,863 $ 15,413 $ 32,671 $ 34,523
Cost of goods sold 7,302 8,711 16,349 18,719
-------------- ------------- ------------ -------------
Gross profit 8,561 6,702 16,322 15,804
Operating expenses:
Distribution, selling and marketing 6,715 5,939 13,784 12,452
Administrative 1,416 1,376 2,741 2,937
Amortization of intangibles 669 672 1,338 1,446
Restructuring -- 124 -- 221
-------------- ------------- ------------ -------------
Loss from operations (239) (1,409) (1,541) (1,252)
Other expenses (income):
Interest expense, net 961 540 1,904 1,119
Other (income) expense (4) (13) 11 (23)
-------------- ------------- ------------ -------------
Loss from continuing operations (1,196) (1,936) (3,456) (2,348)
Loss on disposal of discontinued
retail operations -- -- (2,700) --
-------------- ------------- ------------ -------------
Net loss $(1,196) $(1,936) $(6,156) $(2,348)
-------------- ------------- ------------ -------------
-------------- ------------- ------------ -------------
Loss per common share:
Loss per common share
from continuing operations $ (0.11) $ ( 0.17) $ (0.31) $ (0.21)
Loss per common share
from discontinued retail
operations -- -- (0.24) --
-------------- ------------- ------------ -------------
Net loss per common share $ (0.11) $ (0.17) $ (0.55) $ (0.21)
-------------- ------------- ------------ -------------
-------------- ------------- ------------ -------------
Weighted average common shares
outstanding 11,202 11,202 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>
<CAPTION>
Three months Three months Six months Six months
Ended June 27, Ended June 28, Ended June 27, Ended June 28,
1997 1996 1997 1996
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(1,196) $ (1,936) $(6,156) $(2,348)
Adjustments to reconcile net income to cash
provided by operating activities:
Discontinued retail operations -- -- 2,700 --
Depreciation and amortization 3,185 2,998 6,342 6,499
Current and noncurrent promotional expenses (1,285) 1,425 (3,784) (869)
Changes in operating assets and liabilities:
Current assets 2,769 276 7,524 4,531
Current liabilities (1,113) (3,103) (6,740) (1,374)
Other noncurrent assets 3 (107) (23) (213)
-------------- -------------- -------------- ---------------
Net cash provided by (used in) operating activities:
Continuing operations 2,363 (447) (137) 6,226
Discontinued retail operations (1,662) (1,168) (2,068) (2,928)
-------------- -------------- -------------- ---------------
701 (1,615) (2,205) 3,298
Cash flows from investing activities:
Purchases of property, plant and equipment, net (1,243) (754) (3,012) (1,174)
Proceeds from sale of discontinued retail
operations -- 754 100 3,937
-------------- -------------- -------------- ---------------
Net cash provided by (used in) investing
activities (1,243) -- (2,912) 2,763
Cash flows from financing activities:
Net borrowings and repayments under
revolving line of credit 954 (5,885) 5,964 (13,561)
(Repayment of) proceeds from term loan (375) 7,500 (750) 7,500
Payments under capital lease (37) -- (74) --
Debt issuance costs -- -- (23) --
-------------- -------------- -------------- ---------------
Net cash provided by (used in) financing
activities 542 1,615 5,117 (6,061)
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
<PAGE>
BROTHERS GOURMET COFFEES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 27, 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-months and six
month periods ended June 27, 1997 are not necessarily indicative of the results
that may be expected for the year ending 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").
This Quarterly Report on Form 10-Q contains certain restated financial
information regarding the Company's financial position for certain prior
reporting periods. For more details concerning such restated financial
information, see the Company's Quarterly Report on Form 10-Q/A for the fiscal
quarter ended March 28, 1997 (the "First Quarter 1997 Form 10-Q/A") and Note 2
below.
NOTE 2-- ACCOUNTING CHANGE
During the fiscal quarter ended June 27, 1997, the Company changed its method of
accounting for inventories from the last-in, first-out (LIFO) method to the
first-in, first out (FIFO) method. The Company believes the change is
preferable because (1) due to recent operating losses and demands on liquidity,
users of the Company's financial statements are principally interested in
understanding the Company's current financial position, and the FIFO method
better illustrates that position, (2) the FIFO method provides a better matching
of current costs with revenues and (3) the FIFO method is the predominant method
used by the Company's competitors and peer group.
The change in method of inventory costings has been applied retroactively by
restating the prior years' financial statements. The effect on the balance
sheet as of December 27, 1996, was to decrease inventory and retained
earnings by $98, and loss for the three-month period ended March 28, 1997 was
decreased by $200. The income statements for the three-month and six-month
periods ended June 28, 1996 were not affected.
NOTE 3--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 4--EARNINGS PER SHARE
Shares underlying options and warrants are not included in the computation for
the three-months ended and six months ended June 27, 1997, and June 28, 1996,
because their effect is antidilutive to the net loss per share.
4
<PAGE>
BROTHERS GOURMET COFFEES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 27, 1997
(IN THOUSANDS)
(UNAUDITED)
NOTE 5--INVENTORIES
The components of inventories consist of the following:
June 27, December 27,
1997 1996
------------- -------------
Green coffee $ 4,452 $ 4,844
Finished goods 5,937 6,900
Packaging and other supplies 2,267 2,082
------------- -------------
$12,656 $ 13,826
------------- -------------
------------- -------------
NOTE 6--DEBT FACILITIES
A summary of indebtedness outstanding under the Company's Debt Facilities (as
defined below) at June 27, 1997 and December 27, 1996 is as follows:
1997 1996
------------- -------------
Revolving Credit Facility(a) $ 9,130 $ 3,166
Term Loan Facility(b) 6,000 6,750
Senior Subordinated Note Facility(c) 15,000 15,000
Capital lease obligations 155 228
------------- -------------
30,285 25,144
Less value ascribed to warrants (3,166) ( 3,359)
Less current maturities 15,187 ( 1,648)
------------- -------------
$11,932 $20,137
------------- -------------
------------- -------------
(a) The Company's revolving credit facility (the "Revolving Credit Facility"),
in the maximum principal amount of $15,000 (the "Revolving Credit Facility"),
bears interest (at the Company's election) at (1) the prime rate plus 1.0% (9.5%
at June 27, 1997) or (2) the LIBOR rate plus 2.5% (8.2% at June 27, 1997).
Interest is payable monthly in arrears. The Revolving Credit Facility is
scheduled to mature on May 28, 1999. At June 27, 1997, the outstanding
principal balance drawn under the Revolving Credit Facility was $9,130, and the
remaining availability under the Revolving Credit Facility was $2,000.
(b) The Company's term loan facility (the "Term Loan Facility"), in the
principal amount of $7,500, bears interest (at the Company's election) at (1)
the prime rate plus 1.5% (10.0% at June 27, 1997) or (2) the LIBOR rate plus
3.0% (8.7% at June 27, 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 Facility"), in the principal amount of $15,000, bears interest
at the rate of 11.25% per annum. Interest is payable quarterly. The entire
principal balance of the Senior Subordinated Note Facility (plus accrued and
unpaid interest) is due and payable on December 26, 2002.
5
<PAGE>
BROTHERS GOURMET COFFEES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 27, 1997
(IN THOUSANDS)
(UNAUDITED)
(a), (b) and (c)The Revolving Credit Facility and Term Loan Facility
(collectively, the "Operating Facility") and the Senior Subordinated Debt
Facility (which, together with the Operating Facility, are collectively
referred to herein as the "Debt Facilities") contain various restrictive
covenants. At March 28, 1997 and June 27, 1997, the Company was not in
compliance with the cash flow-to-debt service covenants in its Debt
Facilities. Such non-compliance constitutes continuing events of default
(the "Covenant Defaults") under the agreements governing the Debt Facilities.
On or about May 15, 1997, Sanwa Business Credit Corporation, the Operating
Facility lender ("SBCC"), and the Company executed a Forbearance Agreement,
effective as of March 28, 1997. Pursuant to the Forbearance Agreement, SBCC
agreed (1) to continue to permit the Company to borrow under the Revolving
Credit Facility and (2) to forbear from exercising any of its remedies with
respect to the Covenant Default through the earliest to occur of (a) August 15,
1997, (b) repayment in full of the obligations under the Operating Facility or
(c) the date of a default under the Forbearance Agreement. As required by the
Forbearance Agreement, the Company has (X) retained a consultant to review its
business plan and (Y) is providing additional financial reporting to SBCC.
Absent any other defaults under the Forbearance Agreement, SBCC has agreed to
extend the forbearance period through November 15, 1997, on such terms as SBCC
may reasonably require, including, without limitation, an increase in the
applicable interest rates. Based on the foregoing, the Company has reflected
all borrowings outstanding under the Operating Facility as current liabilities
on its Condensed Consolidated Balance Sheet at June 27, 1997.
The Company has asked Dilmun Financial Services, the Senior Subordinated Note
Facility lender ("Dilmun"), to waive the Covenant Default under the Senior
Subordinated Note Facility. Dilmun has indicated that it is willing to waive
the Covenant Default provided certain conditions are met (including the
possible vesting of all or a portion of the Senior Subordinated Note
Warrants). Dilmun has informed the Company that it would prefer to wait and
finalize the Covenant Default waiver as part of either (1) any renegotiation
of the terms of the Operating Facility with SBCC or (2) in connection with
the negotiation of the terms of the Company's new long-term credit facility,
which is discussed below.
On June 3, 1997, the Company received (and countersigned) a letter of interest
from an institutional lender for a new, long-term, operating debt facility which
would replace the Operating Facility. As of the date hereof, the institutional
lender and its agents and consultants are in the process of completing their due
diligence review of the Company, its business and its business plan. The
Company anticipates that the institutional lender will complete its due
diligence review by mid-August 1997. If the results of the institutional
lender's due diligence review are favorable, the Company anticipates that it
will receive a binding commitment letter from the institutional lender before
the end of August 1997. However, there can be no assurance (a) that the Company
will receive a commitment letter on terms acceptable to it or (b) if it does
receive such commitment letter, that the parties will sign and deliver
definitive loan documents before the end of the forbearance period. If the
Company is unable, for any reason, to obtain a new, operating debt facility in a
principal amount sufficient to permit it to refinance the entire outstanding
principal balance of the Operating Facility prior to the expiration of the
Forbearance Agreement, the Company will be in default under its Operating
Facility, and SBCC's agreement to forbear from acting on such default will have
expired. In the meantime, while it waits for the institutional lender to
complete its due diligence work, the Company is continuing to explore new, long-
term operating facility opportunities with other institutional lenders.
NOTE 7--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
6
<PAGE>
BROTHERS GOURMET COFFEES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 27, 1997
(IN THOUSANDS)
(UNAUDITED)
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. 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 8 -- Contingencies and
Contingent Liabilities.
As of June 27, 1997, the Company's obligations under the non-cancelable
operating leases for its Coffee Bars were as follows: fiscal year 1997- $281;
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 8--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 $28,191 of the purchase price. The remaining $1,809 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. Second Cup has advised the Company that it
intends 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) franchisee disputes, (2) inventory, packaging and fixed
asset claims, (3) lease termination and buyout costs and (4) 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.
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 is
currently negotiating to sell two of its Coffee Bars located in New York
City.
NOTE 9--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
months and six months ended June 27, 1997 and June 28, 1996, and expects this
trend to continue for the remainder of fiscal year 1997.
NOTE 10--LITIGATION
For background information concerning the litigation matters discussed below,
please see the Company's (1) 1996 Form 10-K and (2) the First Quarter 1997
Form 10-Q/A.
(1) SHAREHOLDER CLASS ACTION AND SHAREHOLDER DERIVATIVE ACTION
(COLLECTIVELY, THE "SHAREHOLDER ACTIONS"). As discussed in the First Quarter
Form 10-Q, the Company agreed to distribute, 1,848,118 shares of its Common
7
<PAGE>
BROTHERS GOURMET COFFEES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 27, 1997
(IN THOUSANDS)
(UNAUDITED)
Stock to the plaintiff class. The case is still in the share allocation
phase. The Company expects to complete this phase, to distribute the
settlement shares to the plaintiff class and for the Shareholder Actions to
be resolved during the third quarter of fiscal year 1997.
(2) KONA COFFEE CLASS ACTION. In June 1997, the court (a) granted the
defendants' motion to dismiss the Kona Coffee Class Action on the grounds
that the plaintiffs failed to state a claim or claims with the required
specificity and (b) granted the plaintiffs' motion for an additional 60 days
to refile their claims. The hearing on class certification is scheduled for
October 1997. The Company has submitted a claim to its insurers seeking
coverage for advertising injury. The insurers have denied coverage. The
Company is continuing to negotiate this matter with the insurers.
(3) PARKER/FRANKLIN MILLS FRANCHISE ARBITRATION. This matter went before
an arbitration panel in May 1997. A decision is expected from the
arbitration panel in September 1997.
(4) PATEL/HILLTOP FRANCHISE ARBITRATION. The plaintiff has filed an
arbitration claim against the Company and Gloria Jean's seeking to rescind a
franchise agreement for the Hilltop franchise, located in Richmond,
California. The Company has received the notice of arbitration and counsel
is preparing an answer.
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.
THREE MONTHS ENDED JUNE 27, 1997 COMPARED TO THE THREE MONTHS ENDED JUNE 28,
1996
NET SALES. Net sales increased $.5 million to $15.9 million, or 3%, in
the second quarter of fiscal year 1997 as compared to the second quarter of
fiscal year 1996. The increase was principally due to a 1% increase in pound
volume sales and a 2% increase in sales prices. The improvement in sales
prices resulted principally from an increase in wholesale prices announced by
the Company during the second quarter of fiscal year 1997. The Company
announced a second wholesale price increase in July 1997.
GROSS PROFIT. Gross profit increased $1.9 million to $8.6 million, or
27.7%, during the second quarter of fiscal year 1997 as compared to the
second quarter of fiscal year 1996. The increase was due principally to a
reduction in cost of goods sold as a result of (a) green coffee inventory
sales of $1.3 million, (b) $.2 million in incremental sales growth and (c)
$.3 million from material and direct labor savings. Gross profit margin
improved as a percentage of net sales from 43.5% in the second quarter of
fiscal year 1996 to 54% in the second quarter of fiscal year 1997.
8
<PAGE>
BROTHERS GOURMET COFFEES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 27, 1997
(IN THOUSANDS)
(UNAUDITED)
DISTRIBUTION, SELLING AND MARKETING EXPENSES. Distribution, selling and
marketing expenses increased $.8 million to $6.7 million, or 13.1%, in the
second quarter of fiscal year 1997 as compared to the second quarter of
fiscal year 1996. The increase was due principally to (a) increased
advertising expenses of $.4 million and (b) increased customer expenses of
$.4 million associated with incremental customer rebate and advertising
allowance costs. Due to these same factors, distribution, selling and
marketing expenses as a percentage of sales increased from 38.5% in the
second quarter of fiscal year 1996 to 42.3% in second quarter of fiscal year
1997.
INTEREST EXPENSE. Interest expense increased $.4 million to $1.0
million, or 78%, in the second quarter of fiscal year 1997 as compared to the
second quarter of fiscal year 1996. The increase was principally due to
higher outstanding borrowings and higher effective interest rates.
LOSS FROM CONTINUING OPERATIONS. Loss from continuing operations was
$1.2 million in the second quarter of fiscal year 1997 as compared to a loss
of $1.9 million in the second quarter of fiscal year 1996. The $.7 million
decrease in loss from continuing operations during the second quarter of
fiscal year 1997 was principally due to a $1.9 million increase in gross
profit, partially offset by (a) an increase of $.8 in distribution, selling
and marketing expenses and (b) an increase of $.4 million in interest expense.
NET LOSS. Due to the above factors, net loss decreased $.7 million to $1.2
million during the second quarter of fiscal year 1997 as compared to the second
quarter of fiscal year 1996.
SIX MONTHS ENDED JUNE 27, 1997 COMPARED TO THE SIX MONTHS ENDED JUNE 28, 1996
NET SALES. Net sales decreased $1.9 million to $32.7 million, or 5.4%,
during the first six months of fiscal year 1997 as compared to the first six
months of fiscal year 1996. The decrease consisted of a decrease in net
sales of $2.4 million in the first quarter of fiscal year 1997, offset by an
increase in net sales of $.5 million during the second quarter of fiscal year
1997. The decrease in the first quarter of fiscal year 1997 was principally
due to (a) a $1.2 million decline in pound volume due to a loss of certain
customers and (b) a $1.1 million (.31 per pound) decline in sales prices.
During the second quarter of fiscal year 1997, the Company's pound volume
increased by 1% over second quarter fiscal year 1996 levels and sales prices
increased by 2% over second quarter fiscal year 1996 levels. In response to
higher green coffee prices, the Company announced wholesale price increases
in April 1997 and July 1997.
GROSS PROFIT. Gross profit increased $.5 million to $16.3 million, or
3.3%, in the first six months of fiscal year 1997 as compared to the first
six months of fiscal year 1996. A $1.4 million reduction in cost of goods
for green coffee sales, a $.5 million reduction in direct labor costs and a
$.4 million reduction in material costs offset a $1.8 million decrease from
lower sales and higher green coffee costs.
DISTRIBUTION, SELLING AND MARKETING EXPENSES. Distribution, selling and
marketing expenses increased $1.3 million to $13.8 million, or 10.7%, in the
first six months of fiscal year 1997 as compared to the first six months of
fiscal year 1996. Customer expenses increased $.3 million principally in the
area of rebates and advertising allowances for new customer agreements.
Direct store distribution ("DSD") costs increased $.5 million as a result of
the increase in DSD routes from 46 to 64 (39%) during the fourth quarter of
fiscal year 1996. Marketing increased by $.5 million due to (a) a national
coupon drop, (b) an increase in point of purchase advertising materials for
customer displays and (c) the roll-out of the new gourmet gift line.
Distribution, selling and marketing expenses as a percentage of sales
increased from 36% in the first six months of fiscal year 1996 to 42.2% in
the first six months of fiscal year 1997.
9
<PAGE>
BROTHERS GOURMET COFFEES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 27, 1997
(IN THOUSANDS)
(UNAUDITED)
ADMINISTRATIVE EXPENSES. Administrative expenses decreased $.2 million
to $2.7 million, or 7.8%, during the first six months of fiscal year 1997 as
compared to the first six months of fiscal year 1996. This was due
principally to a decrease of $.2 million of administrative costs associated
with plant consolidations.
INTEREST EXPENSE. Interest expense, including debt acquisition costs,
increased by $.8 million to $1.9 million, or 70%, in the first six months of
fiscal year 1997 as compared to the first six months of fiscal year 1996.
The increase was principally due to higher outstanding borrowings and higher
effective interest rates.
LOSS FROM CONTINUING OPERATIONS. Loss from continuing operations was
$3.5 million in the first six months of fiscal year 1997 as compared to $2.3
million for the first six months of fiscal year 1996 due to higher
distribution, selling and marketing expenses and interest expense, more than
offsetting the increased gross profit and decreased administrative expenses.
LOSS FROM DISCONTINUED OPERATIONS. Loss from discontinued operations
increased by $2.7 million in the first six months of fiscal year 1997 as
compared to the first six months of fiscal year 1996. The Company settled the
Gloria Jean's Franchise Litigation during the first six months of fiscal year
1997 by agreeing to pay $2.2 million in cash and stock to the plaintiffs,
resulting in a charge to earnings of $1.4 million. The Company accrued an
additional $1.3 million during the first six months of fiscal year 1997 for
remaining obligations associated with discontinued operations.
NET LOSS. Due to the above factors, net loss increased by $3.8 million
to $6.2 million in the first six months of fiscal year 1997 as compared to
the first six months of fiscal year 1996. The increased loss consisted of
(a) a $2.7 million loss from discontinued operations and (b) a $1.1 million
loss from continuing operations.
LIQUIDITY AND CAPITAL RESOURCES
Net cash (used in) provided by operating activities for the six months
ended June 27, 1997 and June 28, 1996, was ($2.2) million and $3.3 million,
respectively. The $7.5 million reduction of current assets, principally
accounts receivable, partially offset the $6.7 million reduction in current
liabilities and $3.8 of promotional expense payments. In addition, the
Company made $3.0 million of capital expenditures, consisting of $1.8 million
for customer display equipment and $1.2 million for plant and computer
equipment. The Company funded net cash used in operating activities and
capital expenditures with $5.1 million of borrowings under its Revolving
Credit Facility.
Management expects that capital expenditures for the remainder of fiscal
year 1997 (primarily associated with the acquisition of customer display and
plant equipment) will not exceed $2.5 million. Management expects to fund
these expenditures with cash from operations and borrowings under its
Revolving Credit Facility to the extent required. At June 27, 1997,
the outstanding principal balance drawn under the Revolving Credit Facility
was $9.1 million and the remaining availability under the Revolving Credit
Facility was $2.0 million. At June 27, 1997, the Term Loan Facility and
Senior Subordinated Debt Facility were fully drawn.
The Revolving Credit Facility and Term Loan Facility (collectively, the
"Operating Facility") and the Senior Subordinated Debt Facility (which,
together with the Operating Facility, are collectively referred to herein as
the "Debt Facilities") contain various restrictive covenants. At June 27,
1997, the Company was not in compliance with the cash flow-to-debt service
covenants in its Debt Facilities. Such non-compliance constitutes continuing
events of default (the "Covenant Defaults") under the agreements governing
the Debt Facilities.
On or about May 15, 1997, Sanwa Business Credit Corporation, the Operating
Facility lender ("SBCC"), and the Company executed a Forbearance Agreement,
effective as of March 28, 1997. Pursuant to the Forbearance
10
<PAGE>
BROTHERS GOURMET COFFEES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 27, 1997
(IN THOUSANDS)
(UNAUDITED)
Agreement, SBCC agreed (1) to continue to permit the Company to borrow under
the Revolving Credit Facility and (2) to forbear from exercising any of its
remedies with respect to the Covenant Default through the earliest to occur
of (a) August 15, 1997, (b) repayment in full of the obligations under the
Operating Facility or (c) the date of a default under the Forbearance
Agreement. As required by the Forbearance Agreement, the Company has (X)
retained a consultant to review its business plan and (Y) is providing
additional financial reporting to SBCC. Absent any other defaults under the
Forbearance Agreement, SBCC has agreed to extend the forbearance period
through November 15, 1997, on such terms as SBCC may reasonably require,
including, without limitation, an increase in the applicable interest rates.
Based on the foregoing, the Company has reflected all borrowings outstanding
under the Operating Facility as current liabilities on its Condensed
Consolidated Balance Sheet at June 27, 1997.
The Company has asked Dilmun Financial Services, the Senior Subordinated Note
Facility lender ("Dilmun"), for a waiver of the Covenant Default under the
Senior Subordinated Note Facility. Dilmun has indicated that it is willing to
waive such Covenant Default provided certain conditions are met (including the
possible vesting of all or a portion of the Senior Subordinated Note Warrants).
Dilmun has informed the Company that it would prefer to wait and finalize the
Covenant Default waiver as part of either (1) any renegotiation of the terms of
the Operating Facility with SBCC or (2) in connection with the negotiation of
the terms of the Company's new long-term credit facility, which is discussed
below.
On June 3, 1997, the Company received (and countersigned) a letter of
interest from an institutional lender for a new, long-term, operating debt
facility which would replace the Operating Facility. As of the date hereof,
the institutional lender and its agents and consultants are in the process of
completing their due diligence review of the Company, its business and its
business plan. The Company anticipates that the institutional lender will
complete its due diligence review by mid-August 1997. If the results of the
institutional lender's due diligence review are favorable, the Company
anticipates that it will receive a binding commitment letter from the
institutional lender before the end of August 1997. However, there can be no
assurance (a) that the Company will receive a commitment letter on terms
acceptable to it or (b) if it does receive such commitment letter, that the
parties will sign and deliver definitive loan documents before the end of the
forbearance period. If the Company is unable, for any reason, to obtain a
new, operating debt facility in a principal amount sufficient to permit it to
refinance the entire outstanding principal balance of the Operating Facility
prior to the expiration of the Forbearance Agreement, the Company will be in
default under its Operating Facility and SBCC's agreement to forbear from
acting on such default will have expired. In the meantime, while it waits
for the institutional lender to complete its due diligence work, the Company
is continuing to explore new, long-term operating facility opportunities with
other institutional lenders.
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
11
<PAGE>
BROTHERS GOURMET COFFEES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 27, 1997
(IN THOUSANDS)
(UNAUDITED)
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 resulted in an increase in
green coffee prices from $1.14 per pound in December 1996 to in excess of
$3.00 per pound in April 1997. In response to these increases, the Company
announced wholesale price increases on all of its products of approximately
$0.50 per pound, effective April 15, 1997, and $.30 per pound effective July
15, 1997. Green coffee prices have recently dropped back below $2.00 per
pound. The Company will attempt to maintain its per pound gross profit by
increasing sales prices when and as necessary to help keep pace with
increases 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. Increases in sales prices may result in decreases 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.
12
<PAGE>
BROTHERS GOURMET COFFEES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 27, 1997
(IN THOUSANDS)
(UNAUDITED)
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See the discussion of pending litigation in Note 10 - Litigation to the
Notes to Condensed Consolidated Financial Statements at June 27, 1997.
The Company is also involved in other 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
See Part II, Item 4., below.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See Part I, Item 2. above and Note 6 - Debt Facilities to the Notes to
Condensed Consolidated Financial Statements at June 27, 1997 for a detailed
description of the pending Covenant Defaults, the Forbearance Agreement with
SBCC and the ongoing waiver discussions with Dilmun.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In May 1997, at the annual meeting of stockholders of the Company, the
stockholders approved an amendment to the Restated Certificate of Incorporation
of the Company to increase the authorized number of shares of Common Stock, par
value $.0001 per share of the Company from 15,000,000 to 25,000,000.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS.
Exhibit No. Description of Document
- ----------- -----------------------
3.1 (1) Restated Certificate of Incorporation
3.2 (2) Certificate of Amendment to Restated Certificate of
Incorporation
3.3 (3) Restated bylaws
18 (2) Letter from Ernst and Young Regarding Change of Accounting
Method
27.1 (2) Financial Data Schedule
- ---------------
(1) Filed with the Company's Registration Statement, No. 33-70236, filed
with the Securities and Exchange Commission ("SEC") and incorporated
herein by reference thereto
(2) Filed herewith
(3) Filed with the Company's Current Report on Form 8-K filed with the SEC
on March 2, 1995 and incorporated herein by reference thereto
(B) REPORTS ON FORM 8-K.
None
13
<PAGE>
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: 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
14
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Document
- ----------- -----------------------
3.1 (1) Restated Certificate of Incorporation
3.2 (2) Certificate of Amendment to Restated Certificate of
Incorporation
3.3 (3) Restated bylaws
18 (2) Letter from Ernst and Young Regarding Change of Accounting
Method
27.1 (2) Financial Data Schedule
- ---------------
(1) Filed with the Company's Registration Statement, No. 33-70236, filed
with the Securities and Exchange Commission ("SEC") and incorporated
herein by reference thereto
(2) Filed herewith
(3) Filed with the Company's Current Report on Form 8-K filed with the SEC
on March 2, 1995 and incorporated herein by reference thereto
<PAGE>
EXHIBIT 3.1
Certificate of Amendment to Restated Certificate of Incorporation
<PAGE>
CERTIFICATE OF AMENDMENT
TO
RESTATED CERTIFICATE OF INCORPORATION
OF
BROTHERS GOURMET COFFEES, INC.
BROTHERS GOURMET COFFEES, INC., a corporation organized and existing under,
and by virtue of, the General Corporation Law of the State of Delaware, DOES
HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of BROTHERS GOURMET
COFFEES, INC. held on February 27, 1997, the Board of Directors of Brothers
Gourmet Coffees, Inc. adopted a resolution proposing and declaring advisable the
following amendments to the Certificate of Incorporation of said corporation:
RESOLVED, that the Restated Certificate of Incorporation of
BROTHERS GOURMET COFFEES, INC. be amended by changing the following
Article:
ARTICLE FOUR
Paragraph A. of Article FOURTH is amended to read in its entirety as
follows:
The Aggregate number of shares of stock which the Corporation
shall have authority to issue is 37,000,000, consisting of (i)
25,000,000 shares of common stock, par value $.0001 per share ("Common
Stock"), (ii) 2,000,000 shares of Class B Common Stock, par value
$.0001 per share ("Class B Common Stock"), and (iii) 10,000,000 shares
of Preferred Stock, par value $1.00 per share ("Preferred Stock").
SECOND: That, thereafter, an annual meeting of the stockholders of said
corporation was duly called and held on May 15, 1997, upon notice in accordance
with Section 222 of the General Corporation Law of the State of Delaware, at
which meeting the necessary number of shares, as required by statute, were voted
in favor of the aforesaid amendment.
THIRD: That the aforesaid amendments were duly adopted in accordance
with the provisions of Section 242 of the General Corporation Law of the State
of Delaware.
<PAGE>
IN WITNESS WHEREOF, BROTHERS GOURMET COFFEES, INC. has caused this
Certificate of Amendment to the Restated Certificate of Incorporation to be
signed by JOHN L. RUPPERT, its Secretary, this 16th day of May, 1997.
/s/ JOHN L. RUPPERT
--------------------------------------
JOHN L. RUPPERT, Secretary
2
<PAGE>
EXHIBIT 18
Letter Regarding Change of Accounting Method
<PAGE>
August 6, 1997
Mr. Don Breen
CEO and CFO
Brothers Gourmet Coffees, Inc.
Boca Raton, Florida
Dear Sir:
Note 2 of the Notes to Condensed Consolidated Financial Statements of
Brothers Gourmet Coffees, Inc. included in its Quarterly Report on Form 10-Q
for the quarter ended June 27, 1997 describe a change in policy for
accounting for certain inventories from the last-in, first-out ("LIFO")
method to the first-in, first-out ("FIFO") method. You have advised us that
you believe that the change in method of accounting for certain inventories
from LIFO to FIFO is to a preferable method in your circumstances because due
to recent operating losses and demands on liquidity, users of the Company's
financial statements are more interested in the Company's financial position;
the FIFO method provides a better matching of current costs and revenues; and
the FIFO method is the predominant method used by the Company's competitors
and peer group.
There are no authoritative criteria for determining a "preferable" method of
costing inventories based on particular circumstances; however, we conclude
that the change in the method of accounting for inventories from LIFO to FIFO
is an acceptable alternative method which, based on your business judgment to
make these changes for the reasons cited above, are preferable in your
circumstances. We have not conducted an audit in accordance with generally
accepted auditing standards of any financial statements of the Company as of
any date or for any period subsequent to December 27, 1996, and therefore we
do not express any opinion on any financial statements of Brothers Gourmet
Coffees, Inc. subsequent to that date.
Very truly yours,
/s/ Ernst & Young LLP
<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 six months ended June 27, 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>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-26-1997
<PERIOD-START> DEC-28-1996
<PERIOD-END> JUN-27-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 9,118
<ALLOWANCES> 0
<INVENTORY> 12,656
<CURRENT-ASSETS> 26,271
<PP&E> 15,464
<DEPRECIATION> 0
<TOTAL-ASSETS> 101,356
<CURRENT-LIABILITIES> 30,569
<BONDS> 11,932
0
0
<COMMON> 0
<OTHER-SE> 1
<TOTAL-LIABILITY-AND-EQUITY> 58,776
<SALES> 32,671
<TOTAL-REVENUES> 32,671
<CGS> 16,322
<TOTAL-COSTS> 17,863
<OTHER-EXPENSES> 11
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,904
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,456)
<DISCONTINUED> (2,700)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,156)
<EPS-PRIMARY> (.55)
<EPS-DILUTED> (.55)
</TABLE>
