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 October 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 of Organization) Identification No.)
370 Lexington Avenue, New York, N.Y. 10017
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number,including Area Code (212)532-0300
Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was
required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days.
Yes X No
No. of Shares of Common Stock ($.25 par value) outstanding as of
December 10, 1997 - 10,741,050
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets -
October 31, 1997 and July 31, 1997 1 & 2 of 12
Unaudited Condensed Consolidated Statements of Income-
Three Months Ended October 31, 1997 and 1996 3 of 12
Unaudited Condensed Consolidated Statements of Cash Flows -
Three Months Ended October 31, 1997 and 1996 4 of 12
Unaudited Condensed Consolidated Statement of Stockholders'
Equity - October 31, 1997 5 & 6 of 12
Notes to Unaudited Condensed Consolidated Financial
Statements - October 31, 1997 7 & 8 of 12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9,10 & 11 of 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 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
October 31, July 31,
1997 1997
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 6,488,857 $4,585,633
Receivables, principally
trade, less allowances
for doubtful accounts and
discounts of $1,420,000
and $1,422,000 43,614,656 37,554,412
Inventories 69,952,974 82,951,688
Prepaid expenses and other 8,082,991 2,457,221
Total current assets 128,139,478 127,548,954
Property, plant and
equipment - at cost $ 99,840,505 $ 98,609,466
Less allowances for
depreciation and
amortization (51,601,849) 48,238,656 (49,933,489) 48,675,977
Real estate held for
development or sale,
at cost 2,217,223 7,635,427
Other assets and deferred
charges 24,341,689 23,799,057
Excess of cost over net
assets acquired 9,593,664 9,670,551
$212,530,710 $217,329,966
Note: The balance sheet at July 31, 1997 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
October 31, July 31,
1997 1997
(Unaudited) (Note)
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities:
Current portion of long-term
debt $ 3,750,000 $ 766,000
Accounts payable 11,207,594 13,590,697
Accrued expenses 10,512,612 12,148,313
Income taxes 2,330,990 1,957,788
Total current liabilities 27,801,196 28,462,798
Long-term debt, excluding current
portion 101,224,599 106,065,753
Other non-current liabilities 3,271,924 3,265,078
Deferred income taxes 7,655,000 7,655,000
Stockholders' equity:
Common stock, par value $.25 per
share;
Authorized 50,000,000 shares:
Issued 11,216,572 and 11,211,068
shares 2,804,143 2,802,767
Additional paid-in-capital 51,397,859 51,357,008
Retained earnings 26,917,038 25,349,146
Cost of 475,522 shares in treasury (6,573,719) (6,573,719)
Deferred compensation under stock
bonus plan and employees' stock
ownership plan (1,967,330) (1,053,865)
Total stockholders' equity 72,577,991 71,881,337
$212,530,710 $217,329,966
Note: The balance sheet at July 31, 1997 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 INCOME
Three Months Ended October 31,
1997 1996
Revenues:
Net sales $108,275,295 $ 82,576,510
Rentals from real estate 514,579 522,884
108,789,874 83,099,394
Cost and expenses:
Cost of sales 81,535,083 59,155,200
Selling, general and
administrative expenses 21,977,843 19,240,819
Expenses of real estate 393,552 424,298
103,906,478 78,820,317
Operating profit 4,883,396 4,279,077
Interest income 62,076 318,434
Interest expense (2,189,594) (2,139,469)
Other (deductions)/income - net (33,987) 16,518
Income before income taxes 2,721,891 2,474,560
Income taxes 1,154,000 1,024,000
Net income $1,567,891 $1,450,560
Income per share:
Primary $.15 $.14
Fully diluted $.12 $.11
See notes to unaudited condensed consolidated financial statements.
3 of 12
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months Ended October 31,
1997 1996
Operating Activities:
Net income $ 1,567,892 $ 1,450,560
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization of
property, plant and equipment 1,668,360 1,750,108
Amortization of deferred compensation
and deferred charges 1,190,890 1,091,923
Other, net (320,528) (201,948)
Changes in operating assets and
liabilities:
(Increase) in accounts receivable (6,057,965) (1,659,740)
Decrease in inventory 12,998,714 6,499,068
(Increase) in prepaid expenses (215,992) (163,361)
(Decrease) in accounts payable, accrued
expenses and income taxes (3,645,602) (856,598)
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,814,154 7,910,012
Investing Activities:
Purchases of marketable securities (5,535) (31,494)
Purchases of property, plant and
equipment (1,231,039) (1,507,682)
NET CASH (USED IN) INVESTING ACTIVITIES (1,236,574) (1,539,176)
Financing Activities:
(Payments of)/proceeds from long-term
debt, net (1,814,154) 189,423
(Advances to)/proceeds from co-packer,
net (1,231,817) 1,148,947
Loan to employees' stock ownership plan (1,000,000)
NET CASH (USED IN)/PROVIDED BY FINANCING
ACTIVITIES (4,045,971) 1,338,370
Increase in Cash and Cash Equivalents 1,903,224 7,709,206
Cash and Cash Equivalents at Beginning
of Period 4,585,633 16,293,783
Cash and Cash Equivalents at End of
Period $ 6,488,857 $24,002,989
See notes to unaudited condensed financial statements.
4 of 12
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, 1997 11,211 $2,803 476 $6,574
Net income
Conversion of debentures 6 1
Deferred compensation under stock
bonus plan and employees' stock
ownership plan:
Amortization
Loan to employees' stock
ownership plan
Balance at October 31, 1997 11,217 $2,804 476 $6,574
See notes to unaudited condensed consolidated financial statements.
5 of 12
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, 1997 $1,054 $51,357 $25,349
Net income 1,568
Conversion of debentures 41
Deferred compensation under stock
bonus plan and employees' stock
ownership plan:
Amortization (87)
Loan to employees' stock
ownership plan 1,000
Balance at October 31, 1997 $1,967 $51,398 $26,917
See notes to unaudited condensed consoliated financial statements.
6 of 12
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 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 months
ended October 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, 1997.
(B) Primary per share data is based on the weighted average number of common
shares outstanding of 10,738,000 and 10,736,000 for the three months ended
October 31, 1997 and 1996, respectively. Fully diluted per share data,
assuming conversion of debentures, is based on 22,556,000 shares outstanding
for the three months ended October 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:
October 31, July 31,
1997 1997
Finished goods $41,544,268 $41,747,129
Raw materials 22,998,559 36,412,728
Supplies 5,410,147 4,791,831
$69,952,974 $82,951,688
(D) Under the Company's amended and restated revolving credit and term loan
agreements (collectively the "Loan Agreements") with Fleet Capital Corporation
and The Chase Manhattan Bank (the "Banks"), the Company may, from time to time,
borrow funds from the Banks, provided that the total principal amount of all
such loans outstanding through November 30, 1998 may not exceed $40,000,000
and after such date may not exceed $20,000,000. Interest (8.5% at October 31,
1997) on all such loans is equal to the prime rate or at the Company's option
the London Interbank Offering Rate plus 1.75%, 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 October 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.
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(E) Prepaid expenses and other on the unaudited condensed consolidated
balance sheets includes deferred income taxes of $1,268,000.
(F) In February of 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share", which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. The Company believes adoption of Statement No. 128 will not have a
material impact on earnings per share information currently presented.
(G) On November 19, 1997, the Company consummated the sale of one of its
downtown Manhattan properties for $6,900,000. The sale will result in an after
tax gain of approximately $725,000 or $.07 per share to be recorded in the
second quarter ending January 31, 1998. The cost of this property has been
reclassified at October 31, 1997 to prepaid expenses and other current assets.
The proceeds were used to reduce the Company's outstanding term loans.
8 of 12
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain statements in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Form 10-Q constitute
"forward-looking statements" within the meaning of the Reform Act. See Other
Information Item 5.
Operations
The following is Management's discussion and analysis of certain significant
factors that have affected the Company's operations during the periods included
in the accompanying unaudited condensed consolidated statements of operations.
In January 1997, the Company acquired substantially all of the assets and
assumed substantially of the liabilities of Ireland Coffee and Tea Company
("Ireland"). The business of Ireland consists of roasting and distributing
coffees to hotels, restaurants and institutions on the East Coast.
Net sales from beverage products increased to $107,268,000 or 31% for the three
months ended October 31, 1997, compared to the comparable period of the prior
year. The increase was primarily due to an increase in the average selling
price of coffee and to a lesser extent a 7% increase in coffee pounds sold.
Operating profits from beverage products were $5,197,000, an increase of 13%
for the three months ended October 31, 1997 compared to the prior year's
comparable period. The increase resulted primarily from increased gross
margins and to a lesser extent the operations of Ireland, partially offset by
increased selling, general and administrative expenses. Increased gross
margins were primarily due to an increase in the average selling price of
coffee greater than the increase in the average cost of green coffee and to a
lesser extent increased coffee pounds sold. During the three months ended
October 31, 1997 prices for green coffee ranged from a high of $2.11 to a low
of $1.49 per pound. Selling general and administrative expenses increased
primarily due to increased salaries, advertising and delivery costs. Certain
of the Company's selling expenses vary with the number of pounds sold,
therefore selling expense has increased in the 1997 quarter compared to the
1996 quarter.
Net sales of Quikava company operated shops increased to $979,000 for the
three months ended October 31, 1997 from $805,000 in the comparable period of
the prior year. Quikava's future lies in its ability to franchise the concept,
thereby generating royalty income on franchise sales ($644,000 in 1997 versus
$626,000 in 1996) plus initial franchise fees to cover expenses for
headquarters. Company operated shops have been opened in new markets to
generate potential franchise interest and gain exposure to the concept.
Operating losses amounted to $435,000 for the three months ended October 31,
1997 compared to $438,000 in the comparable period of the prior year. The
operating losses consist primarily of headquarters' expenses (primarily payroll
and related expenses for franchising infrastructure and pre-opening costs in
1996) and increased shop level losses (primarily due to the number of shops
open less than 12 months), partially offset by initial franchise fee income
in 1997 and royalty income on franchisee sales. The first year shops opening
in new markets with lack of brand recognition resulted in slower sales growth
and greater shop level losses than established comparable shops.
Net income was $1,577,000 or $.15 per share for the three months ended October
31, 1997, compared to $1,451,000 or $.14 per share for the comparable period of
the prior year. The difference was primarily due to increased operating profits
from beverage products partially offset by decreased interest income (resulting
from decreased invested funds), increased interest expense (resulting from
greater amounts of debt outstanding) and increased income taxes. Increased
income taxes are primarily attributable to increased income before income
taxes.
9 of 12
Liquidity and Capital Resources
As of October 31, 1997, working capital was approximately $100,000,000 and the
ratio of current assets to current liabilities was 4.6 to 1.
As of October 31, 1997, the Company had unused borrowing capacity of
approximately $28 million under its credit facilities of $40 million with Fleet
Capital Corporation and The Chase Manhattan Bank (see Notes D and G of Notes to
Unaudited Condensed Consolidated Financial Statements).
The Company plans on expanding its Quikava franchised operations, which are
currently operating in 12 locations. The sales of Company operated and
franchised units are not material to the Company's consolidated sales. Total
Quikava store level opertions are not currently profitable but are being
partially offset by franchise fee and royalty income and, in addition, Quikava
headquarters' expenses of approximately $1,100,000 on an annual basis are not
being absorbed.
The Company believes that its cash flow from operations, its cash equivalents
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
Coffee is one of the leading commodities traded on futures exchanges. Supplies
fluctuate with the weather and prices have been volatile. The supply and price
is affected by multiple factors, such as weather, politics and economics in the
coffee producing countries, many of which are lesser developed nations. While
coffee trades primarily on the futures market, coffee of the quality level
sought by the Company can trade on a negotiated basis at a substantial premium
above commodity coffee pricing, depending upon the supply and demand at the
time of purchase.
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 July 1989 the refusal of
certain countries to participate in the quota system resulted in the
dissolution of the agreement and a drop in the prices of 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. The effect of the ACPC on coffee prices is difficult to determine in
light of the dramatic price increases resulting from the 1994 frosts in Brazil
discussed below. Nonetheless, the ACPC met in November 1994 and resolved to
sustain green coffee bean 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. Based on
published statistics the supplies of green coffees held by consumers (roasters
and buyers) are currently, near historically low levels.
Brazil, the world's largest coffee producer, experienced frosts in June and
July of 1994 which reportedly damaged approximately 40% of the green coffee
bean crop. The announcement of the Brazilian frost damage caused a substantial
increase in green coffee bean prices and other coffee-product prices worldwide.
The Company purchases a modest amount of its green coffee beans from Brazil.
In the third and fourth quarter of 1994 the Company experienced a significant
increase in the price of green coffee beans which carried over into the first
three quarters of 1995. The Company was not able to immediately pass through
to customers all of the price increases in the third and fourth quarters of
1994 and the first quarter of 1995 following the significant increase in
green coffee bean prices that resulted from the Brazilian frosts. Subsequent
to such period through January 1997, the Company's green coffee purchases and
commitments returned to pricing levels closer to those that existed prior to
the June and July 1994 Brazilian frosts. In February 1997, green coffee bean
prices began to rise significantly reaching a high of $3.15 per pound in May
1997. This bull market was somewhat unique in that the fundamental cause was
very tight stocks of arabica coffee in consuming countries. Historically, bull
markets have been the direct result of weather developments in Brazil,
specifically cold weather and drought that damages the following crop.
Subsequent to May 1997, the green coffee market has been in the $1.44 to $2.11
range.
The Company is unable to predict weather events in particular countries that
may adversely affect coffee supplies and price. Except for late 1994 and early
1995, the Company generally has been able to pass green coffee price increases
through to its customers, thereby maintaining its gross margins. The Company
cannot predict whether it will be able to pass inventory price increases
through to its customers in full in the future.
A significant portion of the Company's green coffee supply is contracted for
future delivery, generally between three and twelve months forward (with
declining percentages of the supply being subject to future contracts in the
latter portions of each year), to ensure both an adequate supply and reduced
risk of short-term price fluctuations. Green coffee is a large market with
well-established brokers, importers and warehousemen though which the Company
manages its requirements. In addition to forward purchases, the Company keeps
physical inventory in each of its production facilities and third-party
warehouses representing anywhere from four to ten weeks of supply requirements.
All coffee purchase transactions are in U.S. dollars, the industry's standard
currency. The Company believes that it is not dependent upon any one importer
or broker for its supply of green coffee beans from any particular country.
Retail Customers are very price-sensitive about the purchase of coffee in
supermakets. When retail prices increase dramatically, takeaway declines and
consumers switch to less expensive brands and high yield roasts. Likewise,
FoodService Customers in times of price increase tend to stretch the use of
inventory.
Part II. Other Information
Item 1. Legal Proceedings - None
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; the availability of green coffee; green coffee prices; competition;
success of operating initiatives; development and operating costs, including
green coffee prices; advertising and promotional efforts; brand awareness;
the existence of or adherence to development schedules; the existence or
absence of adverse publicity; availability, locations and terms of sites for
Quikava 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
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Appendix A to item 601 (c) of Regulation S-K
(Article 5 of Regulation S-X
Chock full o'Nuts Corporation and Subsidiaries)
Item Number Item Description Amount
5-02 (1) Cash and cash items $ 6,488,857
5-02 (2) Marketable securities $ -0-
5-02 (3) (a) (1) Notes and accounts receivable
- trade $ 45,034,656
5-02 (4) Allowances for doubtful accounts $ 1,420,000
5-02 (6) Inventory $ 69,952,974
5-02 (9) Total current assets $128,139,478
5-02 (13) Property, plant and equipment $ 99,840,505
5-02 (14) Accumulated depreciation $ 51,601,849
5-02 (18) Total assets $212,530,710
5-02 (21) Total current liabilities $ 27,801,196
5-02 (22) Bonds, mortgages and similar debt $101,224,599
5-02 (28) Preferred stock - mandatory redemption -0-
5-02 (29) Preferred stock - no mandatory redemption -0-
5-02 (30) Common stock $ 2,804,143
5-02 (31) Other stockholders' equity $ 69,773,848
5-02 (32) Total liabilities and stockholders'equity $212,530,710
5-03 (b) 1 (a) Net sales of tangible products $108,275,295
5-03 (b) 1 Total revenues $108,789,874
5-03 (b) 2 (a) Cost of tangible goods sold $ 81,535,083
5-03 (b) 2 Total costs and expenses applicable to
sales and revenues $103,906,478
5-03 (b) 3 Other costs and expenses $ -0-
5-03 (b) 5 Provision for doubtful accounts and notes $ 547,000
5-03 (b) (8) Interest and amortization of debt $ 2,189,594
5-03 (b) (10) Income before taxes and other items $ 2,721,891
5-03 (b) (11) Income tax expense $ 1,154,000
5-03 (b) (14) Income/loss continuing operations $ 1,567,891
5-03 (b) (15) Discontinued operations -0-
5-03 (b) (17) Extraordinary items -0-
5-03 (b) (18) Cumulative effect - changes in
accounting principles -0-
5-03 (b) (19) Net income or loss $ 1,567,891
5-03 (b) (20) Earnings per share - primary $ .15
5-03 (b) (20) Earnings per share - fully diluted $ .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)
December 11, 1997
Marvin I. Haas
President and Chief Executive
Officer
December 11, 1997
Howard M. Leitner
Senior Vice President and
Chief Financial and Accounting
Officer
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