SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 1998
OR
[] TRANSITION REPORT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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, New York 10017
(Address of Principal Executive Offices) (Zip Code)
212-532-0300
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title Of Each Class On Which Registered
Common Stock, par value $.25 per share New York Stock Exchange
8% Convertible Subordinated Debentures, American Stock Exchange
due September 15, 2006
7% Convertible Senior Subordinated Debentures, New York Stock Exchange
due April 1, 2012
Securities Registered Pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
Yes x No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [].
Aggregate market value of the Common Stock ($.25 par value) held by non
affiliates of the registrant as of October 8,1998: $51,800,000
Number of Shares of Common Stock ($.25 par value) outstanding as of
October 8 1998: 10,831,000
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual proxy statement for the year ended July 31, 1998 are
incorporated by reference into Part III.
Certain statements in the Letter of the President and Chief Executive Officer
and Chairman of the Board included in the Annual Report to Shareholders and in
the "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and elsewhere in this Form 10-K constitute "forward-looking
statements" within the meaning of the Reform Act. See "Forward-Looking
Statements".
PART I
Item 1. BUSINESS
Item 101 (a) and (c) of Regulation S-K
The Company is the fourth largest roaster, packer, and marketer of coffee in
the United States based on coffee pounds sold by the Company. Its broad
range of regular and decaffeinated, ground roast, instant and specialty coffees
for the Foodservice and Retail Grocery Industries are sold regionally
throughout the United States and Canada under various well known trademarks,
including Chock full o' Nuts, LaTouraine and Cain's. Best known among its
products is Chock full o' Nuts brand premium, vacuum packed, all-method grind
coffee. The Company is also one of the largest marketers of Foodservice and
private label coffees. The balance of the Company's business is derived from
its developing Quikava outlets and from real estate operations.
Incorporated in 1932, for many years, the Company's primary business was the
operation of counter service restaurants, under the Chock full o' Nuts name.
In 1953, the Company expanded its business by marketing the coffee made
famous in its restaurants to consumers via supermarkets and other Retail
Grocery outlets. Impactful advertising, featuring the "Heavenly Coffee" jingle,
made Chock full o' Nuts brand premium coffee a market leader. In 1983,
Management discontinued the Company's restaurant operations and concentrated
its efforts on the sale of coffee and related food products. In 1994, the
Company commenced opening a limited number of Chock Cafes in the New York
metropolitan area. In October 1996, the Company adopted a plan to discontinue
operations of these company-owned cafes. See Note 5 of Notes to Consolidated
Financial Statements.
In July 1998, the Company acquired the hot beverage business of Park Foods, LLP
("Park"). Park's business consists primarily of sales of coffee, cappuccino,
cocoa and leaf tea to a nationwide customer base. See Note 2 of Notes to
Consolidated Financial Satements.
In January 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. See Note 2 of Notes to Consolidated Financial
Statements.
In March 1994, the Company acquired all the assets and liabilities of a company
("Quikava") whose menu features a full assortment of the most popular specialty
coffee beverages, plus a variety of freshly prepared foods and snacks
specifically suited for in-car consumption. Quikava's unique "double drive-
thru" format targets the suburban commuter and is uniquely suited to take
advantage of the growth of Specialty Coffees "away from home", where annual
growth rates are significant.
In December 1992, the Company acquired the stock of Cain's Coffee Co.
("Cain's") and certain trademarks related to that business. Cain's primary
business is the direct sale and distribution of coffee and related products
under the Cain's label to Foodservice Customers in twelve states primarily
West of the Mississippi. Cain's also sells coffee and tea to Retail Customers,
using a direct store distribution system.
In November 1992, the Company acquired a controlling interest in a partnership,
which owned Dana Brown Private Brands, Inc., a company which markets and sells
private label coffee and tea products to food retailers and distributors,
located primarily in the Midwest.
In December 1986, the Company acquired Greenwich Mills Company ("Greenwich").
Established in 1912, Greenwich is a leading manufacturer and supplier of
coffee, tea and allied products to Foodservice and private label customers.
The majority of their customers are located in markets East of the
Mississippi. Greenwich's best known trademark is LaTouraine.
Corporate Management is currently focused on the following growth initiatives:
(1) Maximizing the Company's Foodservice franchise by significantly broadening
its customer base for Cain's, Chock full o' Nuts and LaTouraine brand coffee,
tea and allied products; (2) Increasing Retail Grocery Market shares for such
higher margin products as Chock full o' Nuts brand Cafe Blend, decaffeinated,
instant and Rich French Roast coffees; (3) Selectively pursuing new business
development opportunities that will deliver significant volume and profit
growth; and (4) Expansion of its developing Quikava drive-thru outlets through
franchising.
The following table sets forth revenues and operating results from continuing
operations, before interest and corporate expenses, attributable to the
Company's beverage products sales, Quikava sales and real estate operations,
for the fiscal years ended July 31, 1998, 1997 and 1996:
Fiscal Years Ended July 31,
1998 1997 1996
(In Thousands)
Revenues Net Sales - Beverage Products $ 390,731 $360,467 $319,213
Net Sales - Quikava 3,626 3,737 1,922
Rentals from Real Estate 2,011 2,091 2,156
Operating Profit/(Loss):
Beverage Products 17,854 23,498 16,708
Quikava (1,781) (1,998) (1,649)
Real Estate Operations 260 140 671
COFFEE AND RELATED PRODUCTS
Description of Coffee Market
According to certain available industry surveys and Company estimates, total
United States coffee sales by manufacturers in 1997 were approximately $6
billion. Approximately 34% of total United States coffee sales in 1997 were
to Foodservice customers.
BEVERAGE PRODUCTS OPERATIONS
Foodservice Sales and Marketing
In January 1985, the Company began using Company sales personnel and
independent food brokers to market its coffee and allied products to
Foodservice customers. These include chain and independent restaurants,
hospitals, airlines, schools, governmental institutions, vending and office
coffee service operators and other institutional distributors. In December
1986, the Company acquired Greenwich, which is a major direct sales and
distribution supplier in the Eastern United States of coffee, tea and allied
products to Foodservice Customers and private label customers. Greenwich's
best-known label is LaTouraine, which enjoys a reputation for high quality.
LaTouraine also distributes spices, international coffee mixes, specialty
coffees, whole bean and pod Espresso, hot chocolate, iced and hot tea,
powdered soft drinks, soup bases, and portion controlled jams, jellies and
condiments.
In December 1992, the Company acquired Cain's, which is a major supplier in
the Midwest and Southwest of products similar to those sold by Greenwich and
LaTouraine to Foodservice Customers.
In fiscal 1998, approximately 48% of sales were derived from processing and
marketing coffee and allied products for sale to Foodservice Customers (49%
and 46% in fiscal 1997 and 1996, respectively). Sales of coffee products to
Foodservice Customers have traditionally been less price-sensitive and depend
more on the level of customer service provided. These sales also tend to
generate higher operating margins, due to lower marketing and advertising
expenses, than do sales of coffee products to Retail Customers. In addition,
the absence of competitors with a dominant market position, makes the
Company's pricing to Foodservice Customers less susceptible, as compared to
pricing to Retail Customers, to changes in price in response to pricing actions
of any single competitor.
Retail Sales and Marketing
The Company currently sells most of its Retail Grocery coffee products to
supermarket chains, wholesalers and independent food outlets ("Retail
Customers") through independent food brokers. The Company's retail products
include coffees sold under the Chock full o' Nuts, Cain's, Ireland and Safari
labels. The Company believes that its best known product, Chock full o' Nuts
premium, vacuum packed, all-method grind coffee, is superior to most
competitors in being able to produce a more consistent, better tasting,
finished brew from a single, "all-method grind", regardless of the coffee maker
used. The Company also sells an "extended yield" coffee, which produces more
cups than equivalent quantities of standard yield coffee. Additionally, the
Company sells decaffeinated roast and ground coffee, instant coffees, a
premium quality Cafe blend and a Rich French Roast coffee.
The Company and Greenwich roast, pack and market regular, decaffeinated and
instant coffees for sale by others under a variety of private labels.
In fiscal 1998, the Company's coffee sales to Retail Customers accounted for
approximately 46% of sales (44% and 48% in fiscal 1997 and 1996, respectively)
and coffee sales under the Chock full o'Nuts label represented approximately
4% of total Branded Retail Grocery coffee sales in the United States.
Chock full o' Nuts all-method grind coffee is sold in most major metropolitan
areas of the United States and in the provinces of Ontario and Quebec, Canada.
Sales are concentrated in the New York metropolitan area, upstate New York,
New England, Philadelphia, Washington, D.C. and Florida. The Company
believes that its distinctive packaging design and one grind concept are
important factors in the marketing of its coffee products. Marketing a single
grind coffee has enabled the Company's all-method grind coffee to be
consistently one of the fastest moving items off supermarket shelves in its
core markets.
The sales of Cain's, Ireland and Safari brand products are concentrated in the
Midwest, East and Southwest, respectively.
Suppliers and Manufacturing
The Company's coffee is primarily a blend of readily available Central and
South American coffees. The Company purchases approximately 100 million
pounds of green coffee beans annually. All such coffee is purchased from
approximately 25 importers located in New York City, New Orleans and Miami,
who assume the risk of delivering beans that meet the Company's quality
requirements at a guaranteed price. The Company generally buys its coffee
pursuant to contracts providing for delivery in 4 to 12 weeks and supplements
such contracts with purchases on the spot market. All purchases are subject
to inspection and approval by the United States Food and Drug Administration.
Manufacturing activities for coffee and related products are presently
conducted at the following facilities:
Location Principal Use
Brooklyn, New York............Coffee Roasting Plant, Warehouse
St. Louis, Missouri...........Coffee Roasting Plant, Warehouse
Hialeah, Florida..............Coffee Roasting Plant, Warehouse
Rochester, New York...........Coffee Roasting Plant, Warehouse
Oklahoma City, Oklahoma.......Coffee Roasting Plant and Processing
Plant for Tea and Related Food
Products, Warehouse
Springfield, Missouri.........Processing Plant for Spices, Warehouse
Pleasantville, New Jersey.....Coffee Roasting Plant, Warehouse
All of the above facilities are owned, except the Rochester, New York,
Springfield, Missouri and Pleasantville, New Jersey facilities, which are
leased. The Company believes that it has sufficient production capacity to
meet its current and future needs.
The Company also rents executive office space in New York City and maintains
arehousing facilities in over forty-five locations throughout the United
States. None of these facilities are material to the Company's operations.
Competition
The coffee business is highly competitive. The Company competes for Retail
Customers with a number of nationally and regionally established brands. Its
largest competitors are Kraft Foods (Maxwell House, Yuban and Sanka coffees),
Procter & Gamble (Folger's coffees) and The Nestle Company (Hills, MJB and
Chase & Sanborn coffees), with combined annual sales accounting for
approximately 80% of the United States coffee market. The profitability of the
Company's coffee sales to Retail Customers is largely dependent on competitive
pricing conditions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
There are many competitors in the business of selling coffee to Foodservice
Customers. However, the Company believes that no single competitor's sales
constitute more than 20% of this market. Sales of coffee, tea and allied
products to Foodservice Customers have traditionally been less price-sensitive
and more dependent on the level of service provided to such customers than
sales of such products to Retail Customers. In addition, the absence of
direct competitors with a dominant market position has traditionally made the
Company's pricing to Foodservice Customers less susceptible, as compared to
pricing to Retail Customers, to changes in price in response to pricing
actions of any single competitor.
QUIKAVA OPERATIONS
Quikava is the operator and franchiser of double-drive thru outlets, which
offer a variety of specialty coffees, espresso-based drinks, fresh baked
goods, sandwiches, other "finger foods" and snacks. Quikava units are
situated on major commuter thoroughfares in suburban markets and offer quick-
service of quality beverages and snacks. The Company intends to develop
additional Quikava units, most of which will be franchised. At the fiscal
year end, the Company was operating eight company owned units and there were
30 operating franchised units.
CAFES
In June 1994, with the opening of a flagship store in Midtown Manhattan, the
Company began to develop the business of operating retail cafes which offered
moderately priced specialty coffees, sandwiches, salads, bakery products,
snacks, and other assorted food and beverage products. In October 1996, the
Company discontinued the operations of its Cafes due to store operating losses
esulting from high food and labor costs and insufficient volume to cover high
fixed and operating costs related to Midtown Manhattan operations as well as
a Cafe Corporate structure organized to support a much higher number of
locations. See Note 5 of Notes to the Consolidated Financial Statements.
RESEARCH AND DEVELOPMENT
The Company invested a nominal amount in research and development for the
three years ended July 31, 1998.
TRADEMARKS
Certain trademarks (i.e. Chock full o' Nuts, LaTouraine, Eppen Smith, Cain's,
Safari and Ireland) are important to the business of the Company.
EMPLOYEES
The Company employs approximately 1,430 employees, 18% of whom are represented
by labor unions. The Company believes that its relations with both union and
non-union employees are good.
REAL ESTATE OPERATIONS
The Company is both lessor and lessee on certain properties. Such properties
had been part of the Company's original restaurant operations. Additionally,
the Company owns a coffee roasting facility in Castroville, California which
it leases to another coffee company.
OTHER MATTERS
Reference is made to Notes 2 and 5 of Notes to Consolidated Financial
Statements with respect to the acquisition and disposition of certain assets.
Item 101 (b) of Regulation S-K
Segment Information is included elsewhere in this document after Management's
Discussion and Analysis of Financial Consolidation and Results of Operations.
Item 101 (d) of Regulation S-K
All of the Company's operations are located in the United States. Export sales
are not significant.
Item 2. PROPERTIES
The Company leases certain premises which are under long-term leases expiring
on various dates through 2009 and certain of which contain renewal options.
Reference should be made to Note 6 of Notes to Consolidated Financial
Statements for additional information about these leases. The following table
sets forth the location and certain information with respect to the Company's
plants and certain other properties as of October 8, 1998, all of which
premises the Company considers adequate for its present and anticipated needs.
PLANTS AND OTHER PROPERTIES
Approximate Whether
Square Feet Owned
of or
Location Principal Use Floor Space Leased (1)
Brooklyn, New York Coffee Roasting
Plant, Warehouse 55,000 Owned
St. Louis, Missouri Coffee Roasting
Plant, Warehouse 77,000 Owned
Secaucus, New Jersey Warehouse and
Offices 104,000 Owned
Hialeah, Florida Coffee Roasting
Plant, Warehouse 50,000 Owned
Rochester, New York Coffee Roasting
Plant, Warehouse 50,000 Leased
Oklahoma City, Oklahoma Coffee Roasting Plant
and Processing
Plant for
Tea and Related
Food Products,
Warehouse 150,000 Owned
Springfield, Missouri Processing Plant
for Spices,
Warehouse 30,000 Leased
Pleasantville, New Coffee Roasting 47,000 Leased
Jersey Plant, Warehouse
574 Fifth Avenue Real Estate
New York, New York Operation 13,000 Leased
422 Madison Avenue Real Estate
New York, New York Operation 8,750 Leased
532 Madison Avenue Real Estate
New York, New York Operation 12,250 Leased
49 Broadway Real Estate
New York, New York Operation 12,000 Leased
1420 Broadway Real Estate
New York, New York Operation 6,750 Leased
370 Lexington Avenue Corporate
New York, New York Headquarters 11,000 Leased
Waverly Place corner
Green Street Real Estate
New York, New York Operation 2,500 Leased
Castroville, Real Estate
California Operation 66,000 Owned
Queen Ann Plaza
Norwell, Mass Quikava Operation 250 Leased
2297 Brown Avenue
Manchester,
New Hampshire Quikava Operation 500 Leased
917 Lynnfield Street
Lynn, Mass Quikava Operation 600 Leased
1184 Main Street
Haverhill, Mass Quikava Operation 600 Leased
84 Milfod Road
Amherst, New Hampshire Quikava Operation 600 Leased
374 Bridge Street
N. Weymouth, Mass Quikava Operation 600 Leased
895 Bald Hill Road
Warwick, Rhode Island Quikava Operation 600 Leased
190 Old Derby Street Headquarters
Hingham, Mass. Quikava 1,196 Leased
83 Brocton Avenue
Abington, Mass. Quikava Operations 600 Leased
(1) -- No Company-leased premises are owned by any officer or director of the
Company. See Note 6 of Notes to Consolidated Financial Statements.
Item 3. LEGAL PROCEEDINGS
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
Not applicable.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED SECURITY HOLDER MATTERS
"Common Share Prices" and related security holder matters may be found
immediately after "Segment Information."
Item 6. SELECTED FINANCIAL DATA
"Selected Financial Data" may be found immediately after Note 11 of Notes to
Consolidated Financial Statements.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" may be found immediately after "Forward-Looking Statements."
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item is submitted in a separate section of this report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Applicable-Report dated May 5, 1998 - The Company engaged Grant Thornton LLP
as its independent auditors for the year ending July 31, 1998.
PART III
Item 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
and
Item 11. EXECUTIVE COMPENSATION
and
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
and
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted, per General Instruction G. The information required by Part III shall
be incorporated by reference from the Registrant's definitive proxy statement
pursuant to Regulation 14A for the fiscal year ended July 31, 1998 which is to
be filed with the Commission.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2) The response to this portion of Item 14 is submitted as a
separate section of this report.
(3) The response to this portion of Item 14 is submitted as a separate
section of this report (see below).
(b) Reports on Form 8-K: Filed on May 5, 1998 - The Company engaged Grant
Thornton LLP as its independent auditors for the year ending July 31, 1998.
(c) The response to this portion of Item 14 is submitted as a separate section
of this report (see below).
(d) The response to this portion of Item 14 is submitted as a separate section
of this report.
Pursuant to Regulation S-K Item 601, following is a list of Exhibits.
Exhibit 3 Articles of incorporation and by laws.
(a) Articles of incorporation filed as an Exhibit to Form 10-K for the
fiscal year ended July 31, 1994 is incorporated herein by reference.
(b) By-laws filed as an Exhibit to Form 10-K for the fiscal year ended
July 31, 1994 is incorporated herein by reference.
Exhibit 4 Instruments defining the rights of security holders, including
indentures.
(a) Indenture dated as of September 15, 1986 between the Company and
Manufacturers Hanover Trust Company ("Manufacturers") filed as an
Exhibit to Form 10-K for the fiscal year ended July 31, 1994 is
incorporated herein by reference.
(b) Form of the Company's 8% Convertible Subordinated Debenture
included in Exhibit 4(a)filed as an Exhibit to Form 10-K for the fiscal
year ended July 31, 1994 is incorporated herein by reference.
(c) Instrument of resignation, appointment and acceptance dated August
9, 1993 among the Company, Manufacturers and Liberty Bank and Trust
Company of Oklahoma City filed as an Exhibit to Form 10-K for the
fiscal year ended July 31, 1994 is incorporated herein by reference.
(d) Indenture dated as of April 1, 1987 between the Company and IBJ
Schroder Bank and Trust Company filed as an Exhibit to Form 10-K for the
fiscal year ended July 31, 1994 is incorporated herein by reference.
(e) Form of the Company's 7% Convertible Senior Subordinated Debenture
included in Exhibit 4(d) filed as an Exhibit to Form 10-K for the fiscal
year ended July 31, 1994 is incorporated herein by reference.
Exhibit 9 Voting Trust Agreement, not applicable.
Exhibit 10 Material contracts
(a) Amended and Restated Rights Agreement, dated as of December 30, 1997,
between Chock full O' Nuts Corporation and American Stock Transfer
Company, as Rights Agent, the Form of Rights Certificate and Summary
of Rights to Purchase Common Stock filed as an Exhibit to Form 8-K
dated December 30, 1997 is incorporated herein by reference.
(b) Benefits protection trust with State Street Bank and Trust Company
filed as an Exhibit to Form 10-K for the fiscal year ended July 31, 1994
is incorporated herein by reference.
(c) Resolution of the Board of Directors adopting severance policy filed as
an Exhibit to Form 10-K for the fiscal year ended July 31, 1994 is
incorporated herein by reference.
(d) Chock full o' Nuts Corporation Employees' Stock Ownership Plan dated
December 16,1988 filed as an Exhibit to From 10-K for the fiscal year
ended July 31, 1995, is incorporated herein by reference.
(e) Amended and Restated Credit Agreement dated December 4, 1992, amended
and restated as of January 1, 1996, among Chock full o' Nuts Corporation
and its Subsidiaries and National Westminster Bank N.A., now known as
Fleet Bank, N.A., and Chemical Bank, now known as the Chase Manhattan
Bank, filed as an Exhibit to Form 10-K for the fiscal year ended July 31,
1996, is incorporated herein by references.
(f) Form of restricted stock agreement dated January 2,1988 with key
employees (including certain officers and directors) filed as an Exhibit
to Form 10-K for the fiscal year ended July 31, 1994 is incorporated
herein by reference.
(g) Asset Purchase Agreement dated as of January 16, 1997 by and between
Chock full o' Nuts Corporation and Ireland Coffee-Tea, Inc. filed as an
Exhibit to Form 8-K dated February 3, 1997 is incorporated herein by
reference.
(h) Asset Purchase Agreement dated as of July 13, 1998 by and between
Chock full o' Nuts Corportion and Park, L.P. attached herein.
(i) Employment agreements of executive officers dated August 5, 1998
attached herein.
(j) Supplemental Executive Retirement Plan effective January 1, 1998
attached herein.
(k) 1984 Incentive Compensation Plan attached herein.
Exhibit 11 Statement re: Computation of Per Share Earnings
Exhibit 12 Statement re: Computation of ratios, not applicable.
Exhibit 13 Not applicable.
Exhibit 18 Letter re: change in accounting principles, not applicable.
Exhibit 21 Subsidiaries of the registrant.
Exhibit 22 Published report regarding matter submitted to vote of security
holders, not applicable.
Exhibit 23 Consent of experts and counsel, not applicable.
Exhibit 24 Power of attorney, not applicable.
Exhibit 27 Financial Data Schedule.
Exhibit 99 Additional exhibits, not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CHOCK FULL O' NUTS CORPORATION
(Registrant)
October 23, 1998 /s/ Howard M. Leitner
Howard M. Leitner, Vice President,
Chief Financial and Accounting Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
October 23, 1998 /s/ Norman E. Alexander October 23, 1998 /s/ Mark A. Alexander
Norman E. Alexander Mark A. Alexander
Chairman of the Board Director
October 23, 1998 /s/ Stuart Z. Krinsly October 23, 1998 /s/ Martin J. Cullen
Stuart Z. Krinsly Martin J. Cullen
Director Vice President
and Director
October 23, 1998 /s/ Howard M. Leitner October 23, 1998 /s/ Marvin I. Haas
Howard M. Leitner Marvin I. Haas
Vice President and President and
Chief Financial Officer Chief Executive
and Director Officer
and Director
October 23, 1998 /s/ R. Scott Schafler October 23, 1998 /s/ Henry Salzhauer
R. Scott Schafler Henry Salzhauer
Director Director
October 23, 1998 /s/ Jerry Columbus October 23, 1998 ____________________
Jerry Columbus David S. Weil
Director Director
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) AND (2), (c) and (d)
LIST OF FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
CERTAIN EXHIBITS
YEAR ENDED JULY 31, 1998
CHOCK FULL O' NUTS CORPORATION
NEW YORK, NEW YORK
FORM 10-K--ITEM 14(a)(1) and (2)
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND SCHEDULES
The following consolidated financial statements of the Registrant and its
subsidiaries are included in Item 8:
Page
Report of Independent Certified Public Accountants................15
Report of Independent Auditors....................................16
Consolidated Balance Sheets--July 31, 1998 and 1997...............17 and 18
Consolidated Statements of Operations--Years Ended
July 31, 1998, 1997 and 1996....................................19
Consolidated Statements of Cash Flows--
Years Ended July 31, 1998, 1997 and 1996........................20 and 21
Consolidated Statements of Stockholders' Equity--
Years Ended July 31, 1998, 1997 and 1996........................22 and 23
Notes to Consolidated Financial Statements........................24 to 34
The following consolidated financial statement schedule of the registrant and
its subsidiaries is included in Item 14(d):
Page
Schedule II -- Valuation and Qualifying Accounts..................42
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and therefore have been omitted.
GRANT THORNTON LLP
Report of Independent Auditors
The Board of Directors and Stockholders
Chock Full o' Nuts Corporation
New York, New York
We have audited the accompanying consolidated balance sheet of Chock Full o'
Nuts Corporation and subsidiaries as of July 31, 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Chock
Full o' Nuts Corporation and subsidiaries as of July 31, 1998, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles. We have also
audited Schedule II for the year ended July 31, 1998. In our opinion, this
Schedule presents fairly, in all material respects, the information required
to be set forth therein.
GRANT THORNTON LLP
New York, New York
October 15, 1998
ERNST & YOUNG LLP
Report of Independent Auditors
The Board of Directors and Stockholders
Chock Full o' Nuts Corporation
New York, New York
We have audited the accompanying consolidated balance sheet of Chock Full o'
Nuts Corporation and subsidiaries as of July 31, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the two years in the period ended July 31, 1997. Our audit also
included the financial statement schedule listed in the index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Chock
Full o' Nuts Corporation and subsidiaries at July 31, 1997, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended July 31, 1997 in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
ERNST & YOUNG LLP
New York, New York
September 30, 1997
CONSOLIDATED BALANCE SHEETS
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
July 31, 1998 and 1997
ASSETS 1998 1997
CURRENT ASSETS:
Cash and cash equivalents $ 6,148,068 $ 4,585,633
Receivables, principally trade, less
allowances for doubtful accounts and
discounts of $1,329,000 and $1,422,000--
Notes 3 and 10(a) 40,559,581 37,554,412
Inventories--Notes 1 and 3 60,641,309 82,951,688
Prepaid expenses and other -- Note 4 3,636,446 2,457,221
OTAL CURRENT ASSETS 110,985,404 127,548,954
PROPERTY, PLANT AND EQUIPMENT, at cost-
Note 3:
Land 3,127,640 3,114,889
Buildings and improvements 15,161,611 14,805,429
Leaseholds and leasehold improvements 2,304,715 2,526,691
Machinery and equipment 84,778,461 78,162,457
105,372,427 98,609,466
Less allowances for depreciation and
amortization 56,346,824 49,933,489
49,025,603 48,675,977
REAL ESTATE HELD FOR DEVELOPMENT OR SALE
at cost -- Note 3 2,175,344 7,635,427
OTHER ASSETS AND DEFERRED CHARGES, net--
Note 10 (b) 23,223,366 23,799,057
EXCESS OF COST OVER NET ASSETS
ACQUIRED, net 15,773,875 9,670,551
$201,183,592 $217,329,966
See notes to consolidated financial statements
CONSOLIDATED BALANCE SHEETS - Continued
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
July 31, 1998 and 1997
1998 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 8,502,778 $13,590,697
Accrued expenses 9,159,994 12,148,313
Income taxes--Note 4 1,093,979 1,957,788
Current installments of long-term debt --
Note 3 __________ 766,000
TOTAL CURRENT LIABILITIES 18,756,751 28,462,799
LONG-TERM DEBT, Excluding Current Installments--
Note 3 92,246,967 106,065,753
OTHER NON-CURRENT LIABILITIES 3,854,833 3,265,078
DEFERRED INCOME TAXES -- Note 4 8,770,000 7,655,000
STOCKHOLDERS' EQUITY--Notes 3 and 7:
Common stock, par value $.25 per share;
Authorized 50,000,000 shares;
Issued 11,306,444 and 11,211,068 shares 2,826,611 2,802,767
Additional paid-in capital 52,064,121 51,357,008
Retained earnings 30,848,452 25,349,146
85,739,184 79,508,921
Deduct:
Cost of 475,522 shares in treasury (6,573,719) (6,573,719)
Deferred compensation under stock
bonus plan and employees' stock
ownership plan (1,610,424) (1,053,865)
TOTAL STOCKHOLDERS' EQUITY 77,555,041 71,881,337
LEASES--Note 6 _________ __________
$201,183,592 $217,329,966
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
Years ended July 31, 1998, 1997 and 1996
1998 1997 1996
Revenues:
Net sales $394,356,822 $364,203,601 $321,134,537
Rentals from real estate 2,011,257 2,091,307 2,156,070
396,368,079 366,294,908 323,290,607
Costs and expenses:
Cost of sales 293,304,109 257,078,504 229,477,193
Selling, general and
administrative expenses 85,682,621 86,018,181 77,223,407
Expenses of real estate 1,751,005 1,951,137 1,484,681
380,737,735 345,047,822 308,185,281
OPERATING PROFIT 15,630,344 21,247,086 15,105,326
Gain on sale of real estate -
Note 10(c) 1,281,698 460,000
Interest and dividend income 628,333 1,061,160 865,145
Interest expense (7,903,211) (8,599,963) (8,783,798)
Other (deductions)/income--
Notes 10(d) and (e) (166,859) (1,495,891) 60,692
INCOME BEFORE INCOME TAXES 9,470,305 12,212,392 7,707,365
Income taxes--Note 4:
Current:
Federal 2,126,000 1,885,000 1,905,000
State and local 709,000 753,000 488,000
Deferred 1,136,000 1,660,000 683,000
3,971,000 4,298,000 3,076,000
INCOME FROM CONTINUING
OPERATIONS 5,499,305 7,914,392 4,631,365
Discontinued operations --
Note 5:
(Loss)from operations, net of
income tax credits of
$1,073,000 (1,757,044)
(Loss) on disposition, net of
deferred income tax credit of
$2,590,000 (4,410,000)
(6,167,044)
NET INCOME/(LOSS) $5,499,305 $7,914,392 $(1,535,679)
Income /(loss) per share--
Note 1:
Basic:
Continuing operations $ .53 $ .76 $ .45
Discontinued operations (.60)
Net income/(loss) $ .53 $ .76 $(.15)
Diluted:
Continuing operations $ .45 $ .55 $ .41
Discontinued operations (.28)
Net income $ .45 $ .55 $ .13
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
Years Ended July 31, 1998, 1997 and 1996
1998 1997 1996
Operating Activities - Continuing
Operations:
Income from continuing operations
before income taxes $9,470,305 $12,212,392 $7,707,365
Adjustments to reconcile pretax
income from continuing operations
to net cash provided by
continuing operations:
Depreciation and amortization of
property, plant and equipment 6,724,977 7,386,215 6,380,262
Amortization of deferred
compensation
and deferred charges 3,732,609 4,437,262 4,561,305
Gain on sale of real estate (1,281,698) (460,000)
Other, net (443,670) (312,060) (1,000,099)
Changes in operating assets and
liabilities, net of aquisitions:
(Increase)/decrease in
receivables (407,866) (4,889,186) 6,818,278
Decrease/(increase) in
inventories 28,875,289 (21,960,180) 913,733
(Increase)/decrease in
prepaid expenses (1,455,579) 1,600,484 (281,086)
(Decrease)/increase in accounts
payable, accrued expenses and
income taxes (9,871,375) 1,259,724 (5,098,044)
Net cash provided by /(used
in)operating activities -
continuing operations 35,342,992 (265,349) 19,541,714
Operating Activities - Discontinued
Operations:
Discontinued operations exclusive
of income taxes
Adjustments to reconcile pretax
loss from discontinued (9,830,044)
operations to net cash used
in discontinued operations
Provision for close down and
write-off of equipment 7,000,000
Depreciation and amortization 431,623
Other (192,929)
Net cash (used in)
discontinued operations (2,591,350)
Income taxes - current (2,835,000) (2,638,000) (1,320,000)
NET CASH PROVIDED BY/(USED IN)
OPERATING ACTIVITIES 32,507,992 (2,903,349) 15,630,364
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
Years Ended July 31, 1998, 1997 and 1996
1998 1997 1996
Investing Activities -
Continuing Operations:
Purchases of marketable
securities (41,646) (34,026) (152,018,726)
Proceeds from sale and
collection of principal of
marketable securities 79,99 158,863,555
Purchases of property, plant and
equipment (6,926,061) (6,123,523) (7,411,199)
Acquisition of businesses (14,900,112) (5,872,858)
(Advances to)/proceeds from
co-packer (923,893) 1,549,328 (3,132,245)
Proceeds from sale of real-estate 6,685,941 460,000
Other (13,147)
Net Cash (used in)
investing activities -
continuing operations (16,105,771) (10,401,086) (3,251,762)
Net cash (used in)investing
activities -
discontinued operations -
Purchases of property and
equipment (2,608,543)
NET CASH (USED IN)
INVESTING ACTIVITIES (16,105,771) (10,401,086) (5,860,305)
Financing activities - Continuing
Operations:
Loan to employees' stock
ownership plan (1,000,000) (500,000)
Net (payments of)/proceeds from
long-term debt (13,839,786) 1,596,285 (1,333,428)
NET CASH (USED IN)/ PROVIDED BY
FINANCING ACTIVITIES (14,839,786) 1,596,285 (1,833,428)
INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS - CONTINUING
OPERATIONS 1,562,435 (11,708,150) 7,936,631
Cash and cash equivalents at
beginning of year -
continuing operations 4,585,633 16,293,783 8,357,152
CASH AND CASH EQUIVALENTS AT END
OF YEAR-CONTINUING OPERATIONS $6,148,068 $4,585,633 $16,293,783
Supplemental Information
Cash paid during the year: 1998 1997 1996
Interest $7,688,931 $8,143,201 $8,259,325
Income taxes 3,958,061 2,168,425 848,539
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
Years Ended July 31, 1998, 1997 and 1996
Common Stock
Shares Amount Shares Amount
In Thousands
Balance at July 31, 1995 11,211 $2,803 476 $6,574
Net(loss)
Deferred compensation under stock
bonus plan and employees' stock
ownership plan:
Amortization
Loan to employees' stock
ownership plan ______ _____ ___ _____
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 July 31, 1997 11,211 2,803 476 6,574
Net income
Conversion of debentures 95 24
Deferred compensation under stock
bonus plan and employees' stock
ownership plan:
Loan to employees' stock
ownership plan
Amortization _____ _____ ____ _____
Balance at July 31, 1998 11,306 $2,827 476 $6,574
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - Continued
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
Years Ended July 31, 1998, 1997, and 1996
Deferred
Compensation
Under Stock
Bonus Plan
and Employees'
Stock Additional
Ownership Paid-In Retained
Plan Capital Earnings
In Thousands
Balance at July 31, 1995 $1,620 $51,357 $18,970
Net (loss) (1,535)
Deferred compensation
under stock bonus plan and
employees' stock ownership
plan:
Amortization (586)
Loan to employees' stock
ownership plan 500 ______ ______
Balance at July 31, 1996 1,534 51,357 17,435
Net income 7,914
Deferred compensation
under stock bonus plan and
employees' stock ownership plan:
Amortization (480) ______ ______
Balance at July 31, 1997 1,054 51,357 25,349
Net income 5,499
Conversion of debentures 707
Deferred compensation understock
bonus plan and employees' stock
ownership plan:
Loan to employees' stock
ownership plan 1,000
Amortization (444) ______ ______
Balance at July 31, 1998 $1,610 $52,064 $30,848
See notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
July 31, 1998, 1997 and 1996
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
Fiscal year: The Company's year ends on the last Friday in July. Fiscal years
are designated as ending July 31 for convenience of reference.
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its subsidiaries. Significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates: The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Receivables - Concentration of Credit Risk: The Company's primary business is
the roasting, packing and marketing of a broad range of regular and
decaffeinated, ground roast, instant and specialty coffees for the
Foodservice and Retail Grocery Industries. These products are sold
regionally throughout the United States and Canada. The Company performs
periodic credit evaluations of its customers' financial condition and
generally does not require collateral. Credit losses relating to customers
have consistently been within management's expectations.
Cash Equivalents: The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
Inventories: Inventories are stated at the lower of cost (first-in, first-out)
or market and consist of:
July 31, 1998 1997
Finished goods $35,775,998 $41,747,129
Raw materials 17,539,666 36,412,728
Supplies 7,325,645 4,791,831
$60,641,309 $82,951,688
Commodities: The Company uses coffee futures and options for hedging
purposes to reduce the effect of changing green coffee prices. The contracts
that effectively meet the risk reduction and correlation criteria are recorded
using hedge accounting. Effectiveness is measured based upon high correlation
between commodity gains and losses on the futures and options and those on the
firm commitment. Under hedge accounting, the gain or loss on the hedge is
deferred and recorded as a component of the underlying inventory purchase.
Gains and losses on hedges that are terminated prior to inventory purchases
are recorded in inventory until the inventory is sold.
Property, Plant and Equipment: Depreciation and amortization of property,
plant and equipment are computed by the straight-line method for financial
reporting purposes and by accelerated methods for income tax purposes.
Long-Lived Assets: In accordance with Financial Accounting Standards Board
("FASB") Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of", the Company records
impairment losses on long-lived assets used in operations, including
intangible assets, when events and circumstances indicate that the assets
might be impaired and the undiscounted cash flows estimated to be generated
by those assets are less than the carrying amounts of those assets.
Pre-opening Costs: Pre-opening costs are charged to operations as incurred.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
July 31, 1998, 1997 and 1996
Excess of Cost over Net Assets Acquired: The Company evaluates goodwill
impairment at the end of each quarter based on recoverability measured by
undiscounted estimated operating profits (i.e., pretax earnings before
interest expense and goodwill amortization). Under this approach, the carrying
value would be reduced to estimated realizable value if it is probable that
Management's best estimate of future operating profits during the goodwill
amortization period will be less than the carrying amount of the related
goodwill. Excess of cost over net assets acquired is being amortized on a
straight-line basis over periods of 40 and 15 years. Accumulated amortization
amounted to $2,319,000 and $2,010,000 at July 31, 1998 and 1997,
respectively.
Other Intangibles: Other intangibles consist principally of trademarks,
covenants not to compete and customer lists. Such items are being amortized
on a straight-line basis over periods of 40, 5 and 7.5 years, respectively.
See Note 10(b). The Company evaluates any impairment of these assets on a
basis similar to goodwill.
Advertising Expenses: The cost of advertising is expensed as incurred. The
Company incurred $4,632,000, $4,253,000 and $3,130,000 in advertising costs
during 1998, 1997 and 1996, respectively.
Stock-Based Compensation: In October 1995, the FASB issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, which provides an alternative to APB Opinion No. 25,
Accounting for Stock Issued to Employees, in accounting for stock-based
compensation issued to employees. The Statement allows for a fair value based
method of accounting for employee stock options and similar equity instruments.
The Company has determined it will continue to use APB Opinion No. 25 in
accounting for stock-based compensation for all options that are issued.
Per Share Data: Basic per share data is based on the following weighted
average number of common shares outstanding during each year adjusted for
unallocated shares in the employees' stock ownership plan and contingent
shares: 10,416,000, 10,395,000 and 10,308,000 in 1998, 1997 and 1996,
respectively. Diluted per share data, assuming conversion of debentures, the
aforementioned unallocated and contingent shares and the dilutive effect of
stock options, is based on 21,766,000, 22,216,000 and 22,129,000 common shares
outstanding in 1998, 1997 and 1996,respectively. In addition, net income/
(loss) is increased/(decreased) due to a reduction in interest and amortization
charges of $4,237,000, $4,392,000 and ($4,396,000) for the years ended July 31,
1998, 1997 and 1996, respectively.
Recently Issued Accounting Standards: In June 1997, the FASB issued SFAS
No. 130, "Reporting Comprehensive Income," which is effective for the Company's
fiscal year ending July 31, 1999. the statement addresses the reporting and
displaying of comprehensive income and its components. Adoption of SFAS
No. 130 is not expected to have a material effect on the Company's financial
statement disclosures.
In June 1997, the FASB also issued SFAS No.131, "Disclosures About Segments of
an Enterprise and Related Information," which is effective for the Company's
fiscal year ending July 31, 1999. The statement changes the way public
companies report information about segments of their business in their annual
financial statements and requires them to report selected segment information
in their quarterly reports. Adoption of SFAS No. 131 is not expected to have
a material effect on the Company's financial statement disclosures.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
July 31, 1998, 1997 and 1996
In June 1998, the FASB issued Statement No. 133, accounting for Derivative
Instruments and Hedging Activities, which is effective for the Company's
fiscal year ending July 31, 2000. The Statement permits early adoption as of
the beginning of any fiscal quarter after its issuance. The Company expects
to adopt the new Statement effective August 1,1999. The Statement will
require the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's
change in fair value will be immediately recognized in earnings. The Company
has not yet determined what the effect of Statement 133 will be on the earnings
and financial position of the Company.
NOTE 2--ACQUISITIONS
In July 1998, the Company acquired the hot beverage business of Park Foods LLP
("Park") for an adjusted purchase price of approximately $11,300,000 which
includes $750,000 for contingent payments. Park's business consists primarily
of sales of coffee, cappuccino, cocoa and leaf tea to a nationwide customer
base. In connection with the acquisition, which has been accounted for as a
purchase transaction, the Company acquired identifiable net tangible and
intangible assets with an estimated fair value of approximately $5,300,000.
The excess of cost over net assets acquired (approximately $6,000,000) is
being amortized over a period of 40 years using the straight-line method.
The Company used its existing cash to fund the purchase price. The Company
is still gathering certain information required to complete the allocation of
the purchase price. Further adjustments may arise as a result of the
finalization of the ongoing study.
The following unaudited pro forma results of operations assume the acquisition
of Park occurred at the beginning of fiscal 1997 and give effect to certain
adjustments, including amortization of excess of cost over net assets acquired
and reduced interest income, resulting from the acquisition and related cash
funding. Amounts for 1998 and 1997 include the pre-acquisition results of
operations for Park for the year ended June 30, 1998 and 1997. The results are
not necessarily indicative of what actually would have occurred if the
acquisition had been in effect for the entire period presented.
Year Ended July 31
(in thousands,
except per share) 1998 1997
Net sales $461,523 $415,540
Net income 5,740 8,629
Net income per share:
Basic .55 .83
Diluted .46 .59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
July 31, 1998, 1997 and 1996
In January 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 which includes
$1,500,000 for contingent payments. In connection with the acquisition which
is being accounted for as a purchase, the Company acquired identifiable net
tangible and intangible assets with an estimated fair value of approximately
$3,900,000. The excess of cost over net assets acquired (approximately
$4,100,000) is being amortized over a period of 40 years using the straight-
line method. The pro forma effects on the Company's operations as if this
business had been acquired on August 1, 1995 are not material.
NOTE 3--LONG TERM DEBT
Long-term debt consists of the following:
JULY 31,
1998 1997
7% Convertible senior subordinated
debentures due 2012 $ 51,693,000 $ 51,693,000
8% Convertible subordinated debentures
due 2006 37,240,000 43,266,000
Revolving credit and term loan 3,313,967 11,872,753
92,246,967 106,831,753
Less current installments __________ 766,000
$ 92,246,967 $106,065,753
The 7% and 8% debentures require annual sinking fund payments of $3,000,000
and $3,750,000, respectively, which after giving effect to previous
conversions and redemptions, commence April 1, 2000 and September 15, 1999,
respectively, and provide for balloon payments of $18,000,000 and $12,500,000
on April 1, 2012 and September 15, 2006, respectively. The debentures are
convertible at the option of the debenture holders into shares of the Company's
common stock at a price of $8.23 per share and $7.81 per share, respectively
(subject to adjustment). As of July 31, 1998, approximately 11,049,000 common
shares are reserved for issuance upon conversion of debentures.
Under the Company's amended and restated revolving credit and term loan
agreements (collectively the "Loan Agreements") with Fleet Bank, N.A. and
The Chase Manhattan Bank (the "Banks"), the Company may, from time to time,
borrow funds from the Banks, provided that the total principal amount of all
such loans outstanding through November 30, 1998 may not exceed $40,000,000
and after such date may not exceed $20,000,000. Interest on all such loans is
equal to the prime rate or at the Company's option the London Interbank
Offering Rate ("LIBOR") plus 1.75%, subject to adjustment based on the level
of loans outstanding (8.5% at prime and 7.44% at LIBOR, at July 31, 1998).
Outstanding borrowings under the Loan Agreements may not exceed certain
percentages of and are collateralized by, among other things, the trade
accounts receivable and inventories, and substantially all of the machinery
and equipment and real estate of the Company and its subsidiaries. All loans
made under the term loan agreement ($3,000,000 at July 31, 1998) are to be
repaid in December 1999. Outstanding loans under the revolving credit a
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
July 31, 1998, 1997 and 1996
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.
As of July 31, 1998, long-term debt matures as follows: $6,246,967 (year
ending July 31, 2000),$6,750,000 (years ending July 31, 2001, 2002, and 2003)
and $65,750,000 thereafter.
The Company believes that the fair value of its 7% and 8% convertible
subordinated debentures approximates $50,659,000 and $37,240,000,
respectively, as indicated by the public trading prices of such debt.
NOTE 4--INCOME TAXES
The provision for income taxes for continuing operations differs from the
expected Federal income tax for the reasons shown in the following table:
1998 1997 1996
Federal income tax provision
expected at the statutory rate $3,219,800 $4,152,213 $2,620,504
Effect on Federal income tax of:
State and local income taxes,
net of Federal income tax
benefit 467,940 496,980 322,080
Amortization of excess of cost
over net assets acquired 69,020 68,000 68,000
Other 214,240 347,807 65,416
Realization of prior year capital
loss not previously recorded _________ (767,000) _________
$3,971,000 $4,298,000 $3,076,000
Deferred tax liabilities and assets are comprised of the following at July 31,
1998 1997
Net deferred non-current tax liabilities:
Net difference between tax and book basis
of property, plant and equipment $8,477,000 $7,755,000
Prepaid pension expense 1,143,000 779,000
Compensation under stock bonus plan,
employees' stock ownership plan and
other qualified plans (501,000) (387,000)
Other (349,000) (492,000)
$8,770,000 $7,655,000
Net deferred current tax assets:
Net difference between tax and book
basis of inventory $339,000 $356,000
Allowance for doubtful accounts and discounts 485,000 463,000
Accrued expenses - close-down 28,000 169,000
Accrued cash bonus 20,000 208,000
Other 79,000 72,000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
July 31, 1998, 1997 and 1996
NOTE 5--DISCONTINUED OPERATIONS
In October 1996, the Company's Board of Directors adopted a plan to discontinue
operations of the Chock Cafes. Accordingly, the operating results of the Chock
Cafe operations, including provisions for estimated lease termination costs,
employee benefits and losses during the phase-out period of approximately
$1,800,000 and a write-off of leasehold improvements and equipment and
deferred charges of approximately $5,200,000 have been segregated from
continuing operations and reported as a separate line item on the statement
of operations. During the years ended July 31, 1998 and 1997, respectively,
approximately $480,000 and $1,250,000 were charged against the previously
established reserves.
Operating results for the year ended July 31, 1996 (exclusive of any corporate
charges or interest expense and the aforementioned provisions)from discontinued
operations are as follows: Net sales $3,783,397; Cost of sales $5,903,142;
Selling, general and administrative expenses $710,299; Operating loss
$2,830,044; Income tax credits $1,073,000; and Loss from operations $1,757,044.
NOTE 6 -- LEASES
The Company and subsidiaries lease manufacturing plants, warehouses, office
space and Quikava locations and related premises. Leases which provide for
payment of property taxes, utilities and certain other expenses, expire on
various dates through 2009 and contain renewal options. As of July 31, 1998,
the Company's obligation for future minimum rental payments, assuming the
exercise of renewal options, aggregated $17,674,000. Payments required in
the following five fiscal years amount to $4,654,000 (1999), $3,983,000
(2000), $2,747,000 (2001),$1,577,000 (2002) and $1,115,000 (2003). Rental
expense charged to continuing operations under operating leases for the years
ended July 31, 1998, 1997 and 1996 was $4,531,000, $4,751,000 and
$4,150,000, respectively.
As of July 31, 1998, future minimum rental payments due from tenants under
sub-leases of retail facilities and related premises aggregated $16,313,000.
Amounts receivable in the following five fiscal years amount to $2,000,000
(1999), $2,014,000 (2000), $1,954,000 (2001), $1,820,000 (2002) and
$1,778,000(2003).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
July 31, 1998, 1997 and 1996
NOTE 7--STOCKHOLDERS' EQUITY
A non-contributory employee stock ownership plan ("ESOP") acquires shares of
the Company's common stock for the benefit of all eligible employees. The
Company has made loans to the ESOP to be repaid in equal annual installments
over 8 years with interest primarily at 9% and 10%. Deferred compensation
equal to the loans has been recorded as a reduction of stockholders' equity
representing the Company's prepayment of future compensation expense. As the
Company makes annual contributions to the ESOP, these contributions will be
used to repay the loans to the Company, together with accrued interest, and
common stock is allocated to ESOP participants and deferred compensation is
reduced.
As of December 30, 1997, the Company's Board of Directors extended the
Company's Shareholder Rights Plan through December 30, 2007. The original
Shareholder Rights Plan was adopted in 1987 and would have expired on December
30, 1997. The Company's Shareholder Rights Plan is designed to deter
coercive or unfair takeover tactics and to prevent a person or group from
gaining control of the Company without offering a fair price to all
shareholders. The Company's Shareholder Rights Plan provides for distribution
to shareholders of a right to purchase one share of the Company's common
stock currently for $28 (subject to anti-dilution adjustments) as a dividend
on each of the Company's outstanding common shares. These rights are not
currently exercisable and will only become exercisable upon the happening of
certain events. Under certain circumstances, the rights entitle the holders
to receive, upon payment of the then current exercise price of the right,
that number of shares of Company common stock having a market value of two
times the then current exercise price of the right. The rights are redeemable
at $.01 per right at any time prior to the occurrence of certain events.
The Company's incentive compensation plan provides, among other things, for
incentive or non-qualified stock options, stock appreciation rights,
performance units, restricted stock and incentive bonus awards. During the
years ended July 31, 1998 and 1996, respectively, non-qualified stock options
for the purchase of 53,000 and 16,000 shares, at prices of $6.94 and $5.25
per share were granted to key executives under the plan. During the year ended
July 31, 1998 options to purchase 8,500 shares with an exercise price of $8.50
per share were forfeited. At July 31, 1998, there were outstanding options
for 401,000 shares with an average exercise price of $6.52 per share. Options
granted are exercisable at the fair market value at date of grant and, subject
to termination of employment (a) expire five years from the date of grant with
respect to the fiscal 1998 grants and (b) expire ten years from the date of
grant with respect to all prior grants, are non-transferable other than on
death, and are exercisable in three equal annual installments commencing (a) one
year from date of grant with respect to the fiscal 1998 grants (b) three years
from date of grant with respect to all prior grants.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
July 31, 1998, 1997 and 1996
Had compensation cost for the Company's stock option plan been determined
based on the fair market value at the grant date for awards in 1998 and 1996
consistent with the provisions of SFAS 123, the Company's net income would
have been reduced by approximately $25,000 in 1998 and $1,000 in 1997 and net
loss would have been increased by approximately $2,000 in 1996, with no affect
on per share amounts. These pro forma amounts may not be representative of
future disclosures since the estimated fair value of stock options is amortized
to expense over the vesting period, and additional options may be granted in
future years. The fair value for the options awarded was estimated at the date
of grant using the Black-Scholes model with the following assumptions:
expected dividend yield - 0, expected stock price volatility : 1998 - 24%,
1997 and 1996 - 22%, risk-free interest rate: 1998 - 5.69%, 1997 - 6.15% and
1996 - 5.34% and expected life of options - 4 years.
Under the incentive compensation plan, as of July 31, 1998, 31,000 common
shares are outstanding which were issued to key executives in 1987 and 1988.
These shares are subject to restricted stock agreements which provide that
the shares will vest ratably over periods through 2001. Such shares are
subject, upon the occurrence of certain events, to either forfeiture or
accelerated vesting. The fair value of the shares on the dates of issuance
is being charged to operations as compensation during the period the
restrictions remain in effect. At July 31, 1998, 76,500 shares were available
under the plan.
NOTE 8--PENSION PLANS
The Company has non-contributory defined benefit pension plans covering all
employees who have completed six months of service, have attained age twenty
and one-half and are not covered by union-sponsored plans. The benefits are
based on years of service and the employee's compensation during the last 60
months of employment. The pension plans are funded to accumulate sufficient
assets to provide for accrued benefits. In addition, contributions are made
to multi-employer plans which provide defined benefits to union employees.
A summary of the components of net periodic pension cost for the defined
benefit plans for the three years ended July 31, 1998 and total contributions
charged to pension expense for the union-sponsored plans follows (in
thousands):
1998 1997 1996
Service cost-benefits earned
during the year $1,886 $1,681 $1,729
Interest cost on projected benefit
obligation 2,441 2,246 1,985
Actual return on plan assets (2,370) (2,021) (1,866)
Net amortization and deferral 174 211 144
NET PENSION COST OF DEFINED BENEFIT
PLANS 2,131 2,117 1,992
UNION-SPONSORED PLANS 339 335 319
TOTAL PENSION EXPENSE $2,470 $2,452 $2,311
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
July 31, 1998, 1997 and 1996
The following table sets forth the funded status and amounts recognized in
the consolidated balance sheet at July 31, for the defined benefit pension
plans (in thousands): 1998 1997
Plans Whose Plans Whose
Assets Exceed Assets Exceed
Accumulated Accumulated
Benefits Benefits
Actuarial present value of
benefit obligations:
Vested benefit obligation $ (29,263) $ (27,641)
Accumulated benefit
obligation $ (29,937) $ (27,967)
Projected benefit
obligation $ (33,991) $ (31,141)
Plan assets, consisting
primarily of U.S.
treasury notes, other
U.S. agency issues,
guaranteed insurance
contracts and corporate
investments, at fair
value 31,923 29,404
Projected benefit obligation
(in excess of)plan assets (2,068) (1,737)
Unrecognized prior service cost 333 280
Unrecognized net loss 6,862 5,586
Unrecognized net asset at
August 1, 1987; net of
amortization (397) (484)
Net pension asset
recognized in the consolidated
balance sheet $4,730 $3,645
The weighted-average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected
benefit obligation were 7.5% and 4% and 8% and 4%, respectively, at July 31,
1998 and 1997. The expected long-term rate of return on plan assets was 8.0%
in 1998, 1997 and 1996, respectively.
During fiscal 1998, the Company adopted an unfunded supplemental executive
retirement plan for certain key executives. The plan provides for benefits
that supplement those provided by a defined benefit plan and for immediate
funding in the event of a change in control of the Company (as defined). At
July 31, 1998, the projected benefit obligation for this plan was
approximately $450,000 and expense for this plan was approximately $50,000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
July 31, 1998, 1997 and 1996
NOTE 9--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for the years ended July 31, 1998 and 1997:
Fiscal 1998
Three Months Ended
October 31 January 31 April 30 July 31
(Thousands of Dollars Except Per Share Data)
Net sales $108,275 $102,124 $95,896 $88,062
Gross profit $26,740 $26,529 $25,026 $22,757
Net income/(loss) $1,568 $2,685 $1,313 $(67)
Per share:
Basic $ .15 $ .26 (1) $ .13 $ (.01)
Diluted $ .12 $ .17 (1) $ .11 $ (.01)
Fiscal 1997
Three Months Ended
October 31 January 31 April 30 July 31
(Thousands of Dollars Except Per Share Data)
Net sales $82,577 $84,242 $95,306 $102,079
Gross profit $23,421 $25,787 $29,110 $28,807
Net income $ 1,451 $ 1,748 $ 2,236 $ 2,479 (2)
Per share:
Basic $ .14 $ .17 $ .21 $ .24 (2)
Diluted $ .11 $ .13 $ .15 $ 16
1) Includes gain on sale of real estate of $725,000 or $.07 per basic share and
$.03 per diluted share (see Note 10(c)).
(2) Includes write-off of $1,500,000
relating to litigation, $.09 per basic share and $.05 per diluted share and
$767,000 income tax credit relating to realization of prior year capital loss
not previously recorded , $.07 per basic share and $.03 per diluted share,
(see Notes 10(d) and 4).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
July 31, 1998, 1997 and 1996
NOTE 10--OTHER ITEMS
a. Receivables other than trade at July 31,1998 and 1997 amount to
$4,352,000 and $576,000, respectively. The 1998 amount includes
$2,400,000 from the seller of Park resulting from an adjustment to
the purchase price (see Note 2) and the amount of an insurance claim
(see Note 10(e)).
b. Other assets and deferred charges consist of (in thousands):
July 31, 1998 1997
Deferred financing costs (1) $2,051 $2,460
Non-compete agreements, net 854 1,424
Trademarks, net 5,062 5,207
Customer lists, net 2,359 3,512
Due from co-packer 2,574 1,711
Prepaid pension expense 4,730 3,645
Other 5,593 5,840
$23,223 $23,799
(1) Being amortized over the terms of the related indebtedness (see Note 3).
c. In November 1997, the Company consummated the sale of one of its downtown
Manhattan properties for $6,900,000, resulting in an after tax gain of
$725,000.
d. In connection with closing a business and termination of a pension plan the
Company paid a liability for an underfunded pension plan of approximately
$1,500,000 and recorded a similar amount receivable at July 31, 1994 from
the previous owner of such business pursuant to certain provisions of the
acquisition agreement. The previous owner of the business contested the
liability to the Company and the Company commenced litigation seeking
collection of such amount. In August 1997, the United States District
Court Southern District of New York granted the previous owner's motion
for summary judgment. The Company then appealed the decision to the Second
Circuit. However, due to the then uncertainty surrounding the outcome of
such appeal and in light of the aforementioned decision, the Company wrote-
off the $1,500,000 due from the previous owner. Such amount is included in
other deductions in fiscal 1997. In August 1998, the Second Circuit
affirmed the decision of the District Court.
e. Other deductions in fiscal 1998, includes a $650,000 charge for the write-
off of leasehold improvements and equipment and provision for estimated
lease termination costs related to the Quikava operations. Other income
in fiscal 1998, includes $570,000 of income resulting from an insurance
claim of approximately $1,000,000 (the balance is shown as a reduction of
cost of sales) related to the unauthorized distribution of inventory.
NOTE 11 -- INDUSTRY SEGMENT INFORMATION
The Company's financial information by industry segment for 1998, 1997 and
1996 may be found immediately after "Managements Discussion and Analysis of
Financial Condition and Results of Operations."
SELECTED FINANCIAL DATA
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
_________________YEAR ENDED JULY 31__________________
1998 1997 1996 1995 1994
(Dollar Amounts in Thousands, Except Per Share Amounts)
Net sales $394,357 $364,204 $321,135 $326,141 $263,511
Income from
continuing operations 5,499 7,914 4,631 6,738 8,243
Working capital 92,229 99,086 87,053 89,612 81,590
Working capital ratio 5.9 to 1 4.5 to 1 4.7 to 1 4.3 to 1 3.6 to 1
Total assets 201,184 217,330 199,435 207,005 208,807
Long-term debt 92,247 106,066 105,235 106,569 110,427
Stockholders' equity 77,555 71,881 63,487 64,937 58,262
Per common share (1):
Income from continuing
operations:
Basic .53 .76 .45 .65 .80
Diluted .45 .55 .41 .51 .57
Stock dividends distributed 3% 3%
Stockholders' equity 7.16 6.70 5.91 6.05 5.43
________________________
(1) Per share data has been retroactively adjusted for a 3% stock dividend
in July 1995 and 1994.
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-K and in the letter of the President and Chief Executive Officer and
Chairman of the Board and elsewhere in the Company's Annual Report to
Shareholders, constitute "forward looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward looking
statements are based on current expectations and information available to
management at this time. They may involve known risks, uncertainties, and
other factors which may cause the actual results, performance or achievements
of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward looking
statements. Factors which could cause actual results to differ from the
forward looking statements include, among others, the following: general
economic and business conditions; the availability of green coffee; green
coffee prices; competition; the success of operating initiatives; development
and operating costs, including green coffee prices; advertising and
promotional efforts; brand awareness; the existence of or adherence to
development schedules; the existence or absence of adverse publicity;
availability, locations and terms of sites for Quikava franchised outlets;
changes in business strategy or development plans; quality of management;
availability, terms and deployment of capital; business abilities and
judgment of personnel; availability of qualified personnel; labor and employee
benefit costs; changes in or the failure to comply with government
regulations; construction costs, and the Year 2000 issue.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
RESULTS OF OPERATIONS
The discussion and analysis that follows relates solely to continuing
operations of the Company. Net income for 1998 and 1997, is the same as the
results from continuing operations.
Net sales from beverage products increased to $390,731,000 or 8.4% for the
year ended July 31, 1998 compared to $360,467,000 for the prior year. The
increase was primarily due to increases in the average selling price of coffee
and to a lesser extent a 2.8% increase in coffee pounds sold. Operating profit
from beverage products was $17,854,000, a decrease of 24% for the year ended
July 31, 1998 compared to the prior year. The decrease resulted primarily
from decreased gross margins attributable to an increase in the average cost
of green coffee greater than the increase in the average selling price of
coffee and increased manufacturing costs, partially offset by increased coffee
pounds sold and increased sales of allied products. During the year ended
July 31, 1998 prices for green coffee ranged from a high of $2.11 to a low of
$1.06 per pound. Selling ,general and administrative expenses decreased
slightly primarily due to reduced coupon, compensation and bad debt costs and
decreased amortization of purchased intangibles, partially offset by increased
advertising, delivery and legal costs. Certain of the Company's selling
expenses vary with the number of pounds sold, therefore these selling
expenses have increased in 1998 compared to 1997.
Quikava's growth plans involve franchising the concept, thereby generating
initial franchise fees and continuing royalty income to cover headquarters'
expenses. Franchise operated shop sales were $3,531,000 for the year ended
July 31, 1998 versus $2,437,000 an increase of 45% over 1997. Quikava
company-operated shop sales were $3,626,000 for the year ended July 31, 1998
compared to $3,737,000 in 1997. Company operated shops generate potential
franchise interest and gain exposure to the concept. Operating losses
amounted to $1,781,000 for the year ended July 31, 1998, compared to
$1,998,000 in the prior year. The operating losses consist primarily of
headquarters' expenses (primarily payroll and related expenses for franchising
infrastructure) and shop level losses, partially offset by initial franchise
fee income in 1998 and royalty income on franchisee sales.
Net income was $5,499,000 ($.53 per basic share and $.45 per diluted share)
for the year ended July 31, 1998, compared to $7,914,000 ($.76 per basic share
and $.55 per diluted share). The difference was primarily due to reduced
operating profits from beverage products and to lesser extent reduced interest
income (resulting from decreased invested funds), partially offset by decreased
income taxes (attributable to decreased income before income taxes), the
unfavorable litigation result in fiscal 1997, the gain on sale of real estate
in 1998 ($.07 per basic share and $.03 per diluted share) and to a lesser
extent reduced interest expense (resulting from reduced amounts of debt
outstanding in the second half of the year).
In January 1997, the Company acquired substantially all of the assets and
assumed substantially all 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 $41,254,000 or 13% for the year
ended July 31, 1997, compared to the prior year. The increase was primarily
due to a 15% increase in coffee pounds sold. Operating profits from beverage
products were $23,498,000, an increase of 41% for the year ended July 31, 1997
compared to the prior year. The increase resulted primarily from increased gross
margins and the operations of Ireland from date of acquisition, partially
offset by increased selling, general and administrative expenses. Increased
gross margins were primarily due to increased coffee pounds sold and a decrease
in the average cost of green coffee. During the year ended July 31, 1997
prices for green coffee ranged from a high of $3.15 to a low of $1.03 per
pound. Selling, general and administrative expenses increased primarily due
to increased advertising, brokerage and data processing costs and salaries.
Certain of the Company's selling expenses vary with the number of pounds sold,
therefore these selling expenses have increased in 1997 compared to 1996.
Net sales of Quikava franchise operated shops increased to $2,437,000 for the
year ended July 31, 1997 from $1,747,000 in the prior year. Company operated
shops with net sales of $3,737,000 (fiscal 1997) and $1,922,000 (fiscal 1996)
were opened in new markets to generate potential franchisee interest and gain
exposure to the concept. Operating losses increased to $1,998,000 for the year
ended July 31, 1997 compared to $1,649,000 in the prior year. The increase in
operating losses consists primarily of increased headquarters' expenses
(primarily payroll and related expenses for franchising infrastructure and
pre-opening costs) and increased shop level losses (primarily due to the
number of shops open less than 12 months), partially offset by increased
royalty income on increased 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.
Income from continuing operations was $7,914,000 or $.76 per basic share and
$.55 per diluted share for the year ended July 31, 1997, compared to
$4,631,000 or $.45 per basic share and $.41 per diluted share for the prior
year. The difference was primarily due to increased operating profits from
beverage products and to a lesser extent increased interest income (resulting
from increased invested funds in the early part of fiscal 1997) and reduced
interest expense (resulting from lower amounts of debt outstanding), partially
offset by increased income taxes, the write-off of amounts due from the
previous owner of an acquired business due to the result of unfavorable
litigation and increased operating losses from Quikava. Increased income taxes
are primarily attributable to increased income before income taxes, partially
offset by realization of a prior year capital loss not previously recorded.
The net loss for 1996 is due to a loss from discontinued operations of
$6,167,000 or $.60 per basic share and $.28 per diluted share (see Note 5 of
Notes to Consolidated Financial Statements).
General inflation has been relatively low for the last several years; however,
green coffee prices have changed significantly during fiscal 1998, 1997 and
1996. While the Company manages its inventory to have rapid turnover, the
changes in green coffee prices have required the Company at times to carry
higher inventories (dollars) than it might otherwise have done in a more
stable green coffee market and impacted the Company's gross profit percentage.
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 1998, working capital was approximately $92,229,000 and the
ratio of current assets to current liabilities was 5.9 to 1.
As of July 31, 1998, the Company had unused borrowing capacity of approximately
$37 million under its credit facilities of $40 million with Fleet Bank, N.A.
and The Chase Manhattan Bank (see Note 3 of Notes to Consolidated Financial
Statements).
The Company plans on expanding its Quikava franchised operations, which are
currently operating in 30 locations. The sales of Company operated and
franchised units are not material to the Company's consolidated sales. Total
Quikava store level operations are not currently profitable but are being
offset by franchise 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 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 can be and have been volatile. The
supply and price is affected by multiple factors, such as weather, weather
forecasts, consumption trends, changes in stock levels, export restrictions
observed by members of the Association of Coffee Producing Countries ("ACPC"),
activities of hedge funds, politics and economics in the coffee producing
countries, many of which are lesser developed nations. While coffee trades
primarily on the futures market, coffee of the quality level sought by the
Company can trade on a negotiated basis at a substantial premium above
commodity coffee pricing, depending upon the supply and demand at the time of
purchase.
In the sixties some coffee exporting countries plus a group of coffee
importing countries together formed the International Coffee Organization
("ICO"). The principal aim of the organization was to stabilize coffee prices
in the world market. One of the instruments which the ICO used to achieve
this goal was a system allocating an export quota to each of the coffee
producing countries. In July 1989, this system was abandoned due to
disagreements involving several exporting as well as importing countries. In
1994, a new International Coffee Agreement came into force which no longer
included the price stability mechanism. As a consequence, the function of
the ICO changed. This organization now provides a forum where exporting and
importing countries can discuss matters pertaining to coffee. In addition,
the ICO publishes statistics about the coffee market and has become an
administrative organization.
When the export quota system was abandoned in 1989, coffee prices declined in
the global market. Certain exporting countries were dissatisfied with the new
situation and tried to regain their grip on the international coffee market.
In 1993, they established the ACPC to boost coffee prices in the global market
by keeping part of annual production out of the world market. The ACPC members
account for around 70% of world coffee exports. The ACPC attempts to achieve
better prices by agreeing on export quotas for each member country and an
export volume ceiling for the organization as a whole.
The effect of the ACPC on coffee prices is difficult to determine in light of
the dramatic price increases resulting from the 1994 frosts in Brazil
discussed below. Nonetheless, the ACPC met in November 1994 and resolved to
sustain green coffee prices. In January 1996, the ACPC agreed to extend its
current limitations on the supply of green coffee which were scheduled to
expire in June 1996 through the 1996/1997 green coffee year. No further
actions have been taken by the ACPC subsequent to that date. The Company is
unable to predict whether the ACPC will be successful in achieving its goals.
Based on published statistics the supplies of green coffees held by consumers
(roasters and buyers) are currently near historically low levels.
Brazil, the world's largest coffee producer, experienced frosts in June and
July of 1994 which reportedly damaged approximately 40% of the green coffee
crop. The announcement of the Brazilian frost damage caused a substantial
increase in green coffee prices and other coffee-product prices worldwide.
The Company purchases a modest amount of its green coffee from Brazil. In the
third and fourth quarter of 1994 the Company experienced a significant
increase in the price of green coffee which carried over into the first three
quarters of 1995. The Company was not able to immediately pass through to
customers all of the price increases in the third and fourth quarters of 1994
and the first quarter of 1995 following the significant increase in green
coffee prices that resulted from the Brazilian 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
aforementioned frosts. In February 1997, green coffee prices began to rise
significantly reaching a high of $3.18 per pound in May 1997. This bull
market was somewhat unique in that the fundamental cause was very tight
stocks of arabica coffee in consuming countries. Historically, bull markets
have been the direct result of weather developments in Brazil, specifically
cold weather and drought that damages the following crop.
During fiscal 1998, the green coffee market has been in the $1.09 to $2.11
per pound range, most recently at the lower end of this range. From August
1997 until February 1998, coffee remained relatively high, most of the time
at above $1.70 per pound, when a fast, substantial and sustained drop occurred,
caused by a significantly large Brazilian crop. This left the Company with
large quantities of high-priced inventory while sales slowed as retailers
waited for the green coffee market to effect the price they pay for roasted
coffee and pressure intensified as major competitors cut prices in response.
The result was lower net income in the third quarter of fiscal 1998 compared
to the first and second quarters and an approximate break-even in the fourth
quarter.
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 reduce
the risk of price fluctuations. In addition, the Company uses options and
futures for hedging purposes to reduce the risk of changing green coffee
prices. 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 from any particular country.
Retail Customers are very price-sensitive about the purchase of coffee in
supermarkets. When retail prices increase dramatically, take away declines and
consumers switch to less expensive brands and high yield roasts. Likewise,
Foodservice Customers in times of price increase tend to stretch the use of
inventory.
Year 2000 Issue
In 1998, the Company established an oversight committee, to review all of the
Company's computer systems and programs, as well as the computer systems of
the third parties upon whose data or functionality the Company relies in any
material respect, and to assess their ability to process transactions in the
Year 2000. The Company has a formal Year 2000 Program focusing on three key
readiness areas: 1) Internal hardware/software and non-information technology
systems; 2) Supplier readiness; and 3) Customer readiness. For each readiness
area, the Company has identified steps to perform and developed timetables for
Year 2000 compliant. The Company has conducted an assessment of internal
applications and hardware. Some software applications have been made Year
2000 compliant and resources have been assigned to address other applications
based on their criticality and the time required to make them Year 2000
compliant. All software remediation is scheduled to be completed no later
than the beginning of 1999. The Year 2000 compliant evaluation of hardware,
including roasters, grinders, bagging machines, telecommunication equipment,
workstations and other items, is nearing completion. The Company has
identified and contacted key suppliers. To date, the Company has received
responses from the majority of its key suppliers, most of which indicate that
the suppliers are in the process of developing remediation plans. Based on
the supplier's progress to adequately address the Year 2000 issue, the Company
will develop a suppliers action list and contingency plan. The Company has
identified and been in contact with key customers. The customers have
responded that they are or will be Year 2000 compliant.
The Company has expensed approximately $350,000 for Year 2000 costs in fiscal
1998 and estimates future expenditures for Year 2000 compliance to be
approximately $275,000. There can be no assurance, however, that there will
not be a delay in, or increased costs associated with, the programs described
in this section. Since the programs described in this section are ongoing,
all potential Year 2000 complications have not yet been identified.
Therefore, the potential impact of these complications on the Company's
financial condition and results of operations cannot be determined at this
time. If computer systems used by the Company, its suppliers or customers
fail or experience significant difficulties related to the Year 2000, the
Company's results of operation and financial condition could be materially
affected.
SEGMENT INFORMATION
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
___________Year Ended July 31_______
1998 1997 1996
(Amounts in Thousands)
Net sales - Beverage products $390,731 $360,467 $319,213
Net sales - Quikava 3,626 3,737 1,922
$394,357 $364,204 321,135
Rental revenues $ 2,011 $ 2,091 $ 2,156
Operating profit\(loss):
Beverage products $ 17,854 $ 23,498 $ 16,708
Quikava (1,781) (1,998) (1,649)
Real estate 260 140 671
Eliminations (703) (393) (625)
$ 15,630 $ 21,247 $ 15,105
Identifiable assets:
Beverage products $171,642 $186,304 $152,168
Quikava 4,198 4,835 4,720
Real estate 3,901 9,356 9,493
Corporate 21,443 16,835 33,054
$201,184 $217,330 $199,435
Depreciation and amortization:
Beverage products $ 6,170 $ 6,843 $ 6,006
Quikava 378 366 197
Corporate 177 177 177
$ 6,725 $ 7,386 $ 6,380
Capital expenditures:
Beverage products $ 6,648 $ 5,154 $ 4,831
Quikava 170 953 2,566
Corporate 108 17 14
$ 6,926 $ 6,124 $ 7,411
______________________
The beverage products segment is engaged in the (a) roasting, packing and
marketing of regular, instant, decaffeinated and specialty coffees and (b)
packing and marketing of regular and decaffeinated tea for sale to Retail,
Foodservice and Private Label customers. Additionally, other related food
products are marketed and sold to Foodservice customers. Quikava operations
feature a full assortment of specialty coffee beverages and a variety of
freshly prepared foods and baked goods specifically suited for in-car
consumption. See Note 5 of Notes to Consolidated Financial Statements for
discontinued cafe operations. Operations of real estate represent rental and
other income principally from the Company's original restaurant facilities.
All of the Company's operations are located in the United States. Export
sales are not significant.
Identifiable assets under the caption "Corporate" include (1) cash and cash
equivalents, investments in marketable securities and short-term investments
of $5,214,000 (1998), $3,781,000 (1997) and $15,180,000 (1996) and (2) net
assets of discontinued operations of $895,000 (1997) and $941,000 (1996).
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES COMMON SHARE PRICES
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol CHF. The Company has approximately 14,000 shareholders of
record as of October 8, 1998.
_____1998____ _____1997____
High Low High Low
1st Quarter 8 3/4 6 1/2 5 3/8 4 5/8
2nd Quarter 7 7/8 6 1/2 5 3/8 4 5/8
3rd Quarter 7 15/16 6 5/8 6 1/8 5 1/8
4th Quarter 7 15/16 6 1/4 7 7/16 5 5/8
Pursuant to certain provisions of a revolving credit and term loan agreement,
the Company may not declare or pay any dividend (except for stock dividends).
Item 14(d)
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES SCHEDULE II- VALUATION AND
QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
Additions
Balance at Charged to Balance
Beginning Costs and at End of
Description of Period Expenses Other Deductions Period
(1)
Year ended July 31, 1998:
Allowance for doubtful
accounts and discounts $1,422,000 $2,062,928 $22,508 $2,178,436 $1,329,000
Year ended July 31, 1997:
Allowance for doubtful
accounts and discounts $1,133,000 $2,440,846 $2,151,846 $1,422,000
Year ended July 31, 1996:
Allowance for doubtful
accounts and discounts $1,251,000 $2,315,902 $2,433,902 $1,133,000
(1) Discounts taken by customers and uncollectible accounts written-off, net
of recoveries.