SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended January 31, 1997 Commission File Number 1-4183
CHOCK FULL O' NUTS CORPORATION
(Exact Name of Registrant As Specified In Its Charter)
New York 13-0697025
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
370 Lexington Avenue, New York, N.Y. 10017
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (212) 532-0300
Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter
period that the registrant was required to file such
reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
No. of Shares of Common Stock ($.25 par value) outstanding as of
March 14, 1997 - 10,735,546
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets -
January 31, 1997 and July 31, 1996 1 & 2 of 12
Unaudited Condensed Consolidated Statements of
Operations -Three Months Ended January 31, 1997
and 1996 3 of 12
Unaudited Condensed Consolidated Statements
of Operations -Six Months Ended January 31, 1997
and 1996 4 of 12
Unaudited Condensed Consolidated Statements of
Cash Flows -Six Months Ended January 31, 1997
and 1996 5 of 12
Unaudited Condensed Consolidated Statement of
Stockholders' Equity - January 31, 1997 6 & 7 of 12
Notes to Unaudited Condensed Consolidated Financial
Statements - January 31, 1997 8 & 9 of 12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 & 11 of 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11 of 12
Item 4. Submission of Matters to a Vote of Security Holders 11 of 12
Item 5. Other Information 11 of 12
Item 6. Exhibits and Reports on Form 8-K 11 of 12
Signatures 12 of 12
PART I. FINANCIAL INFORMATION
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
January 31, July 31,
1997 1996
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 16,805,029 $ 16,293,783
Receivables, principally
trade, less allowances
for doubtful accounts and
discounts of $1,282,000
and $1,133,000 36,507,691 30,989,008
Inventories 58,646,112 59,637,802
Investments in marketable
securities, at market
(approximates cost) 162,125 128,099
Prepaid expenses and other 3,181,007 3,539,776
Total current assets 115,301,964 110,588,468
Property, plant and
equipment - at cost $ 98,385,493 93,683,328
Less allowances for
depreciation and
amortization (48,708,790) 49,676,703 (45,172,084) 48,511,244
Real estate held
for development or
sale, at cost 7,663,348 7,691,267
Other assets and
deferred charges 24,667,265 26,976,132
Excess of cost over net
assets acquired 10,261,252 5,668,008
$207,570,532 $199,435,119
Note: The balance sheet at July 31, 1996 has been derived from the
audited financial statements at that date.
See notes to unaudited condensed consolidated financial statements.
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
January 31, July 31,
1997 1996
(Unaudited) (Note)
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities:
Accounts payable $ 13,179,943 $ 10,469,300
Accrued expenses 8,233,017 11,346,483
Income taxes 2,676,258 1,719,575
Total current liabilities 24,089,218 23,535,358
Long-term debt 107,727,069 105,235,468
Other non-current liabilities 3,221,566 1,586,231
Deferred income taxes 5,591,000 5,591,000
Stockholders' equity:
Common stock, par value $.25 per share;
Authorized 50,000,000 shares:
Issued 11,211,068 shares 2,802,767 2,802,767
Additional paid-in-capital 51,357,008 51,357,008
Retained earnings 20,633,804 17,434,755
Cost of 475,522 shares in treasury (6,573,719) (6,573,719)
Deferred compensation under stock bonus
plan and employees' stock ownership plan (1,278,181) (1,533,749)
Total stockholders' equity 66,941,679 63,487,062
$207,570,532 $199,435,119
Note: The balance sheet at July 31, 1996 has been derived from the audited
financial statements at that date.
See notes to unaudited condensed consolidated financial statements.
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended January 31,
1997 1996
Revenues:
Net sales $ 84,242,490 $ 82,243,101
Rentals from real estate 524,969 581,615
84,767,459 82,824,716
Cost and expenses:
Cost of sales 58,455,236 59,266,194
Selling, general and
administrative expenses 21,114,737 19,386,323
Expenses of real estate 444,179 382,871
80,014,152 79,035,388
Operating profit 4,753,307 3,789,328
Interest income 360,156 276,688
Interest expense (2,126,938) (2,234,837)
Other income - net 1,964 410,105
Income before income taxes 2,988,489 2,241,284
Income taxes 1,240,000 852,000
Income from continuing operations 1,748,489 1,389,284
Discontinued operations, net of income tax
credits of $228,000 (443,577)
Net income $1,748,489 $ 945,707
Income/(loss) per share:
Primary:
Continuing operations $.16 $.13
Discontinued operations (.04)
Net income $.16 $.09
Fully diluted:
Continuing operations $.13 $.11
Discontinued operations (.02)
Net income $.13 $.09
See notes to unaudited condensed consolidated financial statements.
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
Six Months Ended January 31,
1997 1996
Operating Activities:
Net income $ 3,199,049 $ 1,772,619
Adjustments to reconcile net income
to net cash provided by/(used in)
operating activities:
Depreciation and amortization of property,
plant and equipment 3,536,706 3,105,337
Amortization of deferred compensation and
deferred charges 2,172,602 2,384,927
Other, net (237,266) (1,110,265)
Changes in operating assets and liabilities:
Decrease in accounts receivable (3,702,554) (1,000,711)
Decrease in inventory 2,345,396 6,478,025
Decrease in prepaid expenses 459,566 654,057
(Decrease)/increase in accounts payable, accrued
expenses and income taxes (2,416,856) 997,875
NET CASH PROVIDED BY OPERATING
ACTIVITIES 5,356,643 13,281,864
Investing Activities:
Acquisition of business (5,746,230)
Proceeds from sale and collection of principal of
marketable securities 23,769,058
Purchases of marketable securities (34,026) (23,767,734)
Purchases of property, plant and equipment (2,826,088) (4,700,033)
NET CASH (USED IN) INVESTING ACTIVITIES (8,606,344) (4,698,709)
Financing Activities:
Proceeds from long-term debt, net 2,491,601 (499,106)
Proceeds from co-packer 1,269,346 (1,719)
Loan to employees' stock ownership plan (500,000)
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 3,760,947 (1,000,825)
Increase in Cash and Cash Equivalents 511,246 7,582,330
Cash and Cash Equivalents at Beginning
of Period 16,293,783 8,386,620
Cash and Cash Equivalents at End of Period $16,805,029 $15,968,950
See notes to unaudited condensed financial statements.
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CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended January 31,
1997 1996
Revenues:
Net sales $166,819,000 $159,615,380
Rentals from real estate 1,047,853 1,128,457
167,866,853 160,743,837
Cost and expenses:
Cost of sales 117,610,436 115,050,125
Selling, general an
administrative expenses 40,355,556 36,963,891
Expenses of real estate 868,477 751,427
158,834,469 152,765,443
Operating profit 9,032,384 7,978,394
Interest income 678,590 415,144
Interest expense (4,266,407) (4,500,858)
Other income - net 18,482 489,083
Income before income taxes 5,463,049 4,381,763
Income taxes 2,264,000 1,639,000
Income from continuing operations 3,199,049 2,742,763
Discontinued operations, net of income tax
credits of $499,000 (970,144)
Net income $3,199,049 $1,772,619
Income/(loss) per share:
Primary:
Continuing operations $.30 $.26
Discontinued operations (.09)
Net income $.30 $.17
Fully diluted:
Continuing operations $.24 $.21
Discontinued operations (.04)
Net income $.24 $.17
See notes to unaudited condensed consolidated financial statements.
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CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock
Issued In Treasury
Shares Amount Shares Amount
In Thousands
Balance at July 31, 1996 11,211 $2,803 476 $6,574
Net income
Deferred compensation under stock
bonus plan and employees' stock
ownership plan:
Amortization
Balance at January 31, 1997 11,211 $2,803 476 $6,574
See notes to unaudited condensed consolidated financial statements.
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CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Deferred
Compensation
Under Stock
Bonus Plan and Additional
Employees' Stock Paid-In Retained
Ownership Plan Capital Earnings
In Thousands
Balance at July 31, 1996 $1,534 $51,357 $17,435
Net income 3,199
Deferred compensation under stock
bonus plan and employees' stock
ownership plan:
Amortization 256
Balance at January 31, 1997 $1,278 $51,357 $20,634
See notes to unaudited condensed consoliated financial statements.
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CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
January 31, 1997
(A) The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly,they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and six months
ended January 31, 1997 and 1996 are not necessarily indicative of the results
that may be expected for a full fiscal year. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended July 31, 1996.
(B) Primary per share data is based on the weighted average number of
common shares outstanding of 10,736,000 for the three and six months ended
January 31, 1997 and 1996. Fully diluted per share data, assuming conversion
of debentures, is based on 22,556,000 shares outstanding for the three and six
months ended January 31, 1997 and 1996.
(C) Inventories are stated at the lower of cost (first-in, first-out) or
market. The components of inventory consist of the following:
January 31, July 31,
1997 1996
Finished goods $36,631,800 $35,715,505
Raw materials 17,096,803 18,931,470
Supplies 4,917,509 4,990,827
$58,646,112 $59,637,802
(D) Under the Company's amended and restated revolving credit and term
loan agreements (collectively the "Loan Agreements") with Fleet Bank, N.A.
and The Chase Manhattan Bank (the "Banks"), the Company may, from time
to time, borrow funds from the Banks, provided that the total principal amount
of all such loans outstanding through December 31, 1997 may not exceed
$40,000,000 and after such date may not exceed $20,000,000. Interest
(8.25% at January 31, 1997) on all such loans is equal to prime rate, subject
to adjustment based on the level of loans outstanding. Outstanding
borrowings under the Loan Agreements may not exceed certain percentages
of and are collateralized by, among other things, the trade accounts
receivable and inventories, and substantially all of the machinery and
equipment and real estate of the Company and its subsidiaries. All loans
made under the term loan agreement ($10,000,000 at January 31, 1997)
are to be repaid in December 1999. Outstanding loans under the revolving
credit agreements are to be repaid in December 1999. Pursuant to the
terms of the Loan Agreements, the Company and its subsidiaries, among
other things, must maintain a minimum net worth and meet ratio tests for
liabilities to net worth and coverage of fixed charges and interest, all as
defined. The Loan Agreements also provide, among other things, for
restrictions on dividends (except for stock dividends) and require repayment
of outstanding loans with excess cash flow, as defined.
(E) Prepaid expenses and other on the unaudited condensed consolidated
balance sheets includes deferred income taxes of $933,000.
(F) On January 17, 1997, the Company acquired substantially all of the
assets and assumed substantially all of the liabilities of Ireland Coffee &
Tea Company, a leading roaster and distributor of coffees to hotels,
restaurants and institutions on the East Coast for approximately $8,000,000.
The acquisition is being accounted for as purchase. The excess of cost over
net assets acquired (approximately $4,700,000) is being amortized over a
period of 40 years using the straight-line mehtod. The pro forma effects on
the Company's operations as if this business had been acquired on
August 1, 1995 are not material.
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain statements in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Form 10-Q consti-
tute "forward-looking statements" within the meaning of the Reform Act. See
Other Information Item 5.
Operations
The following is Management's discussion and analysis of certain significant
factors that have affected the Company's continuing operations during the
periods included in the accompanying unaudited condensed consolidated
statements of operations.
Net sales increased $1,999,000 or 2.4% and $7,204,000 or 4.5% for the three
and six months ended January 31, 1997, compared to the comparable periods
of the prior year. The increases in net sales was due to a 18% and 6% increase
in coffee pounds sold partially offset by a decrease in the average selling
price of coffee.
Operating profits from food products were $4,673,000 and $8,853,000, increases
of 30% and 16% for the three and six months ended January 31, 1997,
respectively, compared to $3,591,000 and $7,601,000 for the comparable periods
of the prior year. The increases resulted primarily from increased gross
margins partially offset by increased selling, general and administrative
expenses. Increased gross margins were due to increased coffee pounds sold
and a decrease in the average selling price of coffee less than the decrease
in the average cost of green coffee. During the six months ended
January 31, 1997 prices for green coffee ranged from a high of $1.40 to a low
of $1.04 per pound. Selling, general and administrative expenses increased
primarily due to increased advertising, brokerage, delivery and coupon costs
and salaries. Certain of the Company's selling expenses are tied to the number
of pounds sold, therefore selling expense has increased in 1997 compared to
1996.
Income from continuing operations was $1,748,000 or $.16 per share and
$3,199,000 or $.30 per share for the three and six months ended
January 31, 1997, compared to $1,389,000 or $.13 per share and $2,743,000 or
$.26 per share for the comparable periods of the prior year. The differences
were primarily due to increased operating profits, increased interest income
and reduced interest expense, partially offset by increased income taxes. Net
income for the 1997 periods are the same as the results from continuing
operations. Net income for the 1996 periods are net of a loss from
discountinued operations of $444,000 or $.04 per share (three months) and
$970,000 or $.09 per share (six months).
Liquidity and Capital Resources
As of January 31, 1997, working capital was approximately $91,200,000 and
the ratio of current assets to current liabilities was approximately 4.8 to 1.
As of January 31, 1997, the Company had unused borrowing capacity of
approximately $27 million under its credit facilities of $40 million with Fleet
Bank, N.A. and The Chase Manhattan Bank.
The Company plans on expanding its Quikava, company operated and franchised
operations, which in total are currently operating in 16 locations. The sales
of these operations are not material to the Company's consolidated sales.
Total Quikava store level operations are not currently profitable. In
addition, Quikava headquarters' expenses of approximately $1,200,000 on an
annual basis are not being absorbed.
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The Company believes that its cash flow from operations and its amended
and restated revolving credit and term loan agreements with its Banks
provide sufficient liquidity to meet its working capital, expansion and
capital requirements.
Green Coffee Market
Subsequent to Janaury 31, 1997, the green coffee market has become extremely
volatile reaching a high of $2.20 per pound. Historically, the Company has
been able, on a long-term basis, to pass along price increases to its
customers, although at very high retail price levels there is a fall-off in
consumer demand.
Part II. Other Information
Item 1. Legal Proceedings - None
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's annual meeting of shareholders' held on
December 19, 1996, the Company's shareholders' elected Martin J. Cullen
(8,127,893 for 1,398,654 against), Marvin I. Haas (8,131,830 for 1,394,717
against) and R. Scott Schafler (8,129,473 for 1,397,074 against) as directors
for a term of three years and ratified the appointment for independent
auditors for 1997 with a vote of 9,264,381 for, 213,286 against and 48,873
abstained. In addition, the Company's shareholders' rejected (1) a proposal
by John J. Gilbert, 29 East 64th Street, New York, NY 10021 for the elimi-
nation of the staggered Board of Directors with a vote of 4,110,296 against,
2,563,024 for and 145,799 abstained and (2) a proposal by Mark Kreiger 2098
Lower Lake Drive, Santa Ana, CA 92705 for a 10,000 share ownership require-
ment by Directors of10,000 shares of the Company's Common Stock by a vote of
4,610,205 against, 2,009,948 for and 198,962 abstained.
Item 5. Other Information
Certain statements under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and elsewhere in this Form
10-Q constitute "forward looking statements" within the meaning of the Reform
Act. Such forward looking statements involve known risks, uncertainties, and
other factors which may cause the actual results, performance or achievements
of the Company to be materially different from any future results, performance
or achievements expressed or implied by such forward looking statements. Such
factors include, among others, the following: general economic and business
conditions; competition; success of operating initiatives; development and
operating costs, including green cofee prices; advertising and promotional
efforts; brand awareness; the existence of or adherence to development
schedules; the existence or absence of adverse publicity; availability,
locations and terms of sites for Quikava outlets; changes in business
strategy or development plans; quality of management; availability, terms and
deployment of capital; business abilities and judgment of personnel;
availability of qualified personnel; labor and employee benefit costs;
changes in or the failure to comply with government regulations; construction
costs and other factors.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits - Financial Data Schedule - Exhibit 27 - see below
b) Reports on Form 8-K - none
11 of 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant duly caused this Report of Form 10-Q to be signed on its behalf
by the undersigned, thereunto duly authorized.
CHOCK FULL O' NUTS CORPORATION
(Registrant)
March 14, 1997
Marvin I. Haas
President and Chief Executive Officer
March 14, 1997
Howard M. Leitner
Senior Vice President and
Chief Financial and Accounting Officer
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