UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549-1004
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________.
Commission file No. _______
COFFEE HOLDING CO., INC.
(Exact name of registrant as specified in its charter)
Nevada 11-2238111
(state or other jurisdiction of (IRS employer
incorporation or organization) identification number)
4401 First Avenue, Brooklyn, New York 11232
(address of principal executive offices) (zip code)
Registrant's telephone number, including area code (718) 832-0800
Securities registered pursuant to Section 12(b) of the Act:
None
----
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
None
----
(Title of Class)
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 and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes___ No X.
As of September 30, 2000, the Registrant had 3,999,650 shares of common stock,
par value $.001 per share, outstanding.
<PAGE>
PART I
COFFEE HOLDING CO., INC.
ITEM 1. FINANCIAL STATEMENTS
2
<PAGE>
COFFEE HOLDING CO., INC.
INDEX TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
PAGE
----
CONDENSED BALANCE SHEETS
JULY 31, 1999 AND OCTOBER 31, 1998 F-2
CONDENSED STATEMENTS OF OPERATIONS
NINE AND THREE MONTHS ENDED JULY 31, 1999 AND 1998 F-3
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
NINE MONTHS ENDED JULY 31, 1999 F-4
CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 1999 AND 1998 F-5
NOTES TO CONDENSED FINANCIAL STATEMENTS F-6/11
* * *
F-1
<PAGE>
COFFEE HOLDING CO., INC.
CONDENSED BALANCE SHEETS
JULY 31, 1999 AND OCTOBER 31, 1998
<TABLE>
<CAPTION>
July October
ASSETS 31, 1999 31, 1998
------ ------------ --------------
(Unaudited) (See Note 1)
<S> <C> <C>
Current assets:
Due from broker $ 58,340 $ 150,592
Accounts receivable, net of allowance for doubtful
accounts of $215,000 1,778,619 2,243,798
Inventories 1,661,694 1,359,954
Cash and cash equivalents restricted under mortgage note 432,965
Prepaid expenses and other current assets 21,736 57,198
----------- -----------
Total current assets 3,520,389 4,244,507
Property and equipment, at cost, net of accumulated
depreciation of $1,843,816 and $1,657,206 1,984,830 2,123,429
Deferred mortgage costs, net of accumulated amortization
of $48,611 56,784
Deposits and other assets 15,887 99,323
----------- -----------
Totals $ 5,521,106 $ 6,524,043
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
Current liabilities:
Mortgage note payable $ 600,000
Current portion of term loan $ 87,312 87,312
Current portion of obligations under capital leases 235,479 215,026
Accounts payable and accrued expenses 2,652,828 3,569,321
----------- -----------
Total current liabilities 2,975,619 4,471,659
Term loan, net of current portion 213,944 279,431
Line of credit borrowings 2,175,648 2,320,513
Obligations under capital leases, net of current portion 68,793 249,325
Loans from related parties 195,993 131,197
----------- -----------
Total liabilities 5,629,997 7,452,125
----------- -----------
Commitments and contingencies
Stockholders' deficiency:
Preferred stock, par value $.001 per share; 10,000,000
shares authorized; none issued -- --
Common stock, par value $.001 per share; 30,000,000 shares
authorized, 3,999,650 shares issued and outstanding 4,000 4,000
Additional paid-in capital 480,997 480,997
Accumulated deficit (593,888) (1,413,079)
----------- -----------
Total stockholders' deficiency (108,891) (928,082)
----------- -----------
Totals $ 5,521,106 $ 6,524,043
=========== ===========
</TABLE>
See Notes to Condensed Financial Statements.
F-2
<PAGE>
COFFEE HOLDING CO., INC.
CONDENSED STATEMENTS OF OPERATIONS
NINE AND THREE MONTHS ENDED JULY 31, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Three Months
Ended July 31, Ended July 31,
------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $17,231,006 $19,865,601 $ 4,414,575 $ 6,684,459
Cost of sales 14,589,571 17,502,949 3,727,221 6,173,356
----------- ----------- ----------- -----------
Gross profit 2,641,435 2,362,652 687,354 511,103
----------- ----------- ----------- -----------
Operating expenses:
Selling and administrative 1,340,595 1,444,010 329,553 543,091
Officers' salaries 217,500 261,587 78,077 98,412
----------- ----------- ----------- -----------
Totals 1,558,095 1,705,597 407,630 641,503
----------- ----------- ----------- -----------
Income (loss) from operations 1,083,340 657,055 279,724 (130,400)
----------- ----------- ----------- -----------
Other expenses:
Interest expense 249,149 261,972 66,954 75,569
Expenses in connection with
Reverse acquisition 180,000
----------- ----------- ----------- -----------
Totals 249,149 441,972 66,954 75,569
----------- ----------- ----------- -----------
Income (loss) before income taxes 834,191 215,083 212,770 (205,969)
Provision (credit) for income taxes 15,000 24,000 15,000 (22,000)
----------- ----------- ----------- -----------
Net income (loss) $ 819,191 $ 191,083 $ 197,770 $ (183,969)
=========== =========== =========== ===========
Basic earnings per share $.20 $.05 $(.05)
==== ==== =====
Basic weighted average common
shares outstanding 3,999,650 3,999,650 3,999,650
=========== =========== ===========
Unaudited:
Historical income (loss) before
income taxes $ 215,083
Pro forma:
Provision (credit) for income
taxes 97,000
-----------
Net income (loss) $ 118,083
===========
Basic earnings (loss) per share $.03
====
Basic weighted average
common shares outstanding 3,999,650
=========
</TABLE>
See Notes to Condensed Financial Statements.
F-3
<PAGE>
COFFEE HOLDING CO., INC.
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
NINE MONTHS ENDED JULY 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, November 1, 1998 3,999,650 $ 4,000 $ 480,997 $(1,413,079) $ (928,082)
Net income 819,191 819,191
----------- ----------- ----------- ----------- -----------
Balance, July 31, 1999 3,999,650 $ 4,000 $ 480,997 $ (593,888) $ (108,891)
=========== =========== =========== =========== ===========
</TABLE>
See Notes to Condensed Financial Statements.
F-4
<PAGE>
COFFEE HOLDING CO., INC.
CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Operating activities:
Net income $ 819,191 $ 191,083
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 188,331 166,477
Write-off of deferred mortgage costs 55,063
Changes in operating assets and liabilities:
Due from broker 92,252 116,852
Accounts receivable 465,179 396,624
Inventories (301,740) (205,445)
Prepaid expenses and other current assets 35,462 (690)
Deposits and other assets 83,436 (95,109)
Accounts payable and accrued expenses (916,493) 185,211
--------- ---------
Net cash provided by operating activities 520,681 755,003
--------- ---------
Investing activities - purchases of property and equipment (48,011) (396,952)
--------- ---------
Financing activities:
Principal payments on mortgage note payable (600,000) (37,500)
(Increase) decrease in cash and cash equivalents restricted
under mortgage note 432,965 (304,167)
Principal payments on term loan (65,487) (65,484)
Net advances under bank line of credit (144,865) 585,578
Principal payments of obligations under capital leases (160,079) (86,260)
Advances from (repayments to) loans from related parties 64,796 (399,723)
--------- ---------
Net cash used in financing activities (472,670) (307,556)
--------- ---------
Net increase in cash -- 50,495
Cash, beginning of period -- 198,679
--------- ---------
Cash, end of period $ -- $ 249,174
========= =========
Supplemental disclosure of cash flow data:
Interest paid $ 249,149 $ 261,972
========= =========
Income taxes paid $ 104,664
=========
</TABLE>
Supplemental schedule of noncash investing and financing activities:
During the nine months ended July 31, 1998, the Company purchased
equipment at a cost of $288,500 by incurring capital lease obligations.
During the nine months ended July 31, 1998, the Company increased its
obligations under the credit facility that provides it with the line of
credit and term loan and decreased the balance payable to its factor
through a direct transfer of $2,503,288 from the bank to the factor.
See Notes to Condensed Financial Statements.
F-5
<PAGE>
COFFEE HOLDING CO., INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Note 1 - Business activities and reverse acquisition:
Coffee Holding Co., Inc. ("Coffee"), which was incorporated in New
York on January 22, 1971, conducts wholesale coffee operations,
including manufacturing, roasting, packaging, marketing and
distributing roasted and blended coffees for private labeled
accounts and its own brands, and sells green coffees. The Company's
sales are primarily to customers that are located throughout the
United States.
On February 10, 1998, the holders of all of the shares of Coffee's
common stock consummated an exchange (the "Exchange") of their
shares for shares of common stock of Transpacific International
Group Corp. ("Transpacific"). Transpacific was incorporated in
Nevada on October 9, 1995 and organized originally as a "blind pool"
or "blank check" company for the purpose of either merging with or
acquiring an operating company. It had been a development stage
company with no significant operating activities or assets and
liabilities prior to the Exchange.
Transpacific, which had, effectively, 999,650 outstanding shares of
common stock (with a par value of $.001 per share) prior to the
Exchange, issued 3,000,000 shares of common stock in exchange for
all of the 100 issued and outstanding shares of common stock (no par
value) of Coffee. Concurrently, Coffee was merged into Transpacific
(the "Merger") and Transpacific changed its name to Coffee Holding
Co., Inc.
Coffee Holding Co., Inc. after the Exchange, the Merger and the name
change is referred to below as the "Company" or the "Combined
Company." The "Company" is also used to refer to Coffee Holding Co.,
Inc. prior to the Exchange, the Merger and the name change.
The stockholders of Coffee also owned 540,040 shares of common stock
of Transpacific prior to the Exchange and, accordingly, they owned a
total of 3,540,400 or 88.5% of the outstanding shares of the
Combined Company immediately after the Exchange. Therefore, the
Merger was treated, effective as of February 10, 1998, as a
"purchase business combination" and a "reverse acquisition" for
accounting purposes in which Transpacific was the "legal acquirer"
and Coffee was the "accounting acquirer." The carrying values of the
assets and liabilities of Transpacific, which were immaterial, were
recorded at their historical carrying values as of February 10,
1998. Accordingly, the historical financial statements included
herein only reflect the operations of Coffee for the period prior to
February 10, 1998. All references to numbers of shares of common
stock as of the dates or for periods prior to the Exchange have been
restated to reflect the ratio of the number of common shares of
Transpacific effectively exchanged for common shares of Coffee.
Consulting and professional fees and other costs incurred in
connection with the reverse acquisition totaling $180,000 were
charged to expense during the nine months ended July 31, 1998.
Information as to the unaudited pro forma results of operations of
the Company for the nine and three months ended July 31, 1998
assuming the Merger had been consummated as of, and the results of
operations of Transpacific had been included from, November 1, 1997
has not been presented because such pro forma results would not
differ materially from the historical results of operations for the
nine and three months ended July 31, 1998 reflected in the
accompanying historical statements of operations.
F-6
<PAGE>
COFFEE HOLDING CO., INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Note 2 - Basis of presentation:
In the opinion of management, the accompanying unaudited condensed
financial statements reflect all adjustments, consisting of normal
recurring accruals, necessary to present fairly the financial
position of the Company as of July 31, 1999, its results of
operations for the nine and three months ended July 31, 1999 and
1998, its changes in stockholders' equity for the nine months ended
July 31, 1999 and its cash flows for the nine months ended July 31,
1999 and 1998. Information included in the balance sheet as of
October 31, 1998 has been derived from the Company's audited balance
sheet included in the Company's Annual Report on Form 10-K for the
year ended October 31, 1998 (the " Form 10-K") previously filed with
the Securities and Exchange Commission (the "SEC"). Pursuant to
generally accepted accounting principles and the rules and
regulations of the SEC for interim financial statements, certain
information and disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted from these financial
statements unless significant changes have taken place since the end
of the most recent fiscal year. Accordingly, these unaudited
condensed financial statements should be read in conjunction with
the audited financial statements, the related notes to the financial
statements and the other information in the Form 10-K.
Operating results for the nine month periods ended July 31, 1999 and
1998 are not necessarily indicative of the results that may be
expected for the years ending October 31, 1999 and 1998.
Note 3 - Inventories:
Inventories at July 31, 1999 and October 31, 1998 consisted of the
following:
July October
31, 1999 31, 1998
----------- ----------
Packed coffee $ 234,539 $ 395,655
Green coffee 1,072,156 755,305
Packaging supplies 354,999 208,994
---------- ----------
Totals $1,661,694 $1,359,954
========== ==========
The Company uses futures and options contracts to hedge the effects
of fluctuations in the price of green coffee beans, as further
explained in Note 2 of the notes to financial statements in the Form
10-K. At July 31, 1999, the Company held options covering an
aggregate of 3,675,000 pounds of green coffee beans which are
exercisable in fiscal 1999 at prices ranging from $.90 to $1.20 per
pound. The fair market value of these options, which was obtained
from a major financial institution, was approximately $62,000 at
July 31, 1999. Due from broker includes the effects of unrealized
hedging gains of $59,763 and $123,222 at July 31, 1999 and October
31, 1998, respectively.
F-7
<PAGE>
COFFEE HOLDING CO., INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Note 4 - Mortgage note payable:
On June 1, 1989, the Company financed the purchase of land and
building through the issuance of a mortgage note payable in the
principal amount of $1,050,000 to the New York City Industrial
Development Agency (the "NYCIDA"). The mortgage note, which had an
outstanding balance of $600,000 at October 31, 1998, required
monthly payments of $4,167 plus interest based on a variable rate
set weekly by Bear Stearns & Co. The final payment was due on
November 1, 2009. The payment of the note was secured by a first
mortgage on the Company's land and building and the Company's
restricted investments (see Note 5 of the notes to financial
statements in the Form 10-K).
At October 31, 1998, the Company was not in compliance with certain
financial covenants in the NYCIDA agreement and, accordingly, the
outstanding balance of the mortgage note payable was classified as a
current liability in the accompanying October 31, 1998 balance
sheet.
In March 1999, the restricted investments were liquidated, the
mortgage note was repaid and the remaining unamortized deferred
mortgage costs of $55,063 were charged to interest expense.
Note 5 - Credit facility borrowings:
The Company was obligated for borrowings under a factoring agreement
until November 21, 1997 when it obtained a credit facility from
Nationscredit Commercial Corp. consisting of a revolving line of
credit and a term loan, as further explained in Note 7 of the notes
to financial statements in the Form 10-K.
The Company incurred costs of approximately $113,000 in connection
with the cancellation of the factoring agreement that were charged
to interest expense during the nine months ended July 31, 1998.
The line of credit provides for maximum of borrowings of $5,000,000.
The outstanding balance under the line of credit of $2,175,648 at
July 31, 1999 approximated the maximum amount that the Company could
have borrowed based on its eligible trade accounts receivable and
inventories as of that date. The term loan, which had an outstanding
balance of $301,256 (including a current portion of $87,312) at July
31, 1999, provides for borrowings of up to the greater of 80% of the
cost of eligible equipment or $500,000.
F-8
<PAGE>
COFFEE HOLDING CO., INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Note 6 - Income taxes:
As shown in the accompanying statements of operations, the Company
had historical provisions and credits for income taxes for the nine
and three months ended July 31, 1999 and 1998 that were attributable
to current Federal, state and local income taxes as set forth below:
Nine Months Three Months
Ended July 31, Ended July 31,
-------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
Federal $ 9,700 $ 9,700
State 2,200 $ 5,000 2,200 $ (3,000)
Local 3,100 19,000 3,100 (19,000)
-------- -------- -------- --------
Total historical $ 15,000 $ 24,000 $ 15,000 $(22,000)
======== ======== ======== ========
As explained in Notes 2 and 9 of the notes to the financial
statements in the Form 10-K, prior to February 10, 1998, the date of
the Exchange, the Company had elected to be taxed as an "S"
Corporation and, accordingly, it was not required to record a
provision (credit) for Federal income taxes on its historical income
(loss) before income taxes of approximately $1,028,000 for the
period from November 1, 1997 to February 10, 1998; however, it was
required to provide for state income taxes at a reduced rate and New
York City income taxes at the same rates as companies that had not
made such an election during those periods. Although the Company
became subject to Federal, state and local income taxes at full
statutory rates for periods subsequent to the date of the Exchange,
it had a historical loss before income taxes of approximately
$813,000 for the period from February 11, 1998 to July 31, 1998 and
approximately $206,000 for the three months ended July 31, 1998. As
a result of the loss for the period from February 11, 1998 to July
31, 1998 and certain other elections related to the termination of
its "S" Corporation election, the Company had net operating loss
carryforwards as of July 31, 1998 of approximately $307,000
available to reduce future Federal, state and local taxable income.
There were no other material temporary differences as of July 31,
1998. Due to the uncertainties related to the extent and timing of
the Company's future taxable income, the Company offset the deferred
tax assets of approximately $138,000 attributable to the potential
benefits from the net operating loss carryforwards as of July 31,
1998 by an equivalent valuation allowance and, accordingly, it did
not recognize a credit for Federal income taxes for either the
period from February 11, 1998 to July 31, 1998 or the three months
ended July 31, 1998. As a result of recording the valuation
allowance for the period after February 10, 1998, and the "S"
Corporation election for the period through February 10, 1998, the
Company did not recognize any provision or credit for Federal income
taxes for the nine months ended July 31, 1998.
F-9
<PAGE>
COFFEE HOLDING CO., INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Note 6 - Income taxes (concluded):
The Company had net operating loss carryforwards of approximately
$179,000 and $800,000 available to reduce future Federal, state and
local taxable income as of April 30, 1999 and October 31, 1998,
respectively. The Company also offset the deferred tax assets of
approximately $84,000 and $363,000 attributable to the potential
benefits from the net operating loss carryforwards as of April 30,
1999 and October 31, 1998, respectively, by equivalent valuation
allowances. Since the Company had pre-tax income of approximately
$834,000 for the nine months ended July 31, 1999 (including $213,000
for the three months ended July 31, 1999), the net operating loss
carryforwards and the related valuation allowance were eliminated as
of July 31, 1999. As a result, the provisions for income taxes for
the nine and three months ended July 31, 1999 were partially offset
by the reduction in the valuation allowance of $363,000 and $84,000
for those respective periods.
The differences between the tax provision or credit computed based
on the Company's historical pre-tax income or loss and the
applicable statutory income tax rate and the Company's historical
provisions and credits for Federal, state and local income taxes for
the nine and three months ended July 31, 1999 and 1998 are set forth
below:
<TABLE>
<CAPTION>
Nine Months Three Months
Ended July 31, Ended July 31,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Tax provision (credit) at statutory rate of 34% $ 284,000 $ 73,000 $ 73,000 $ (70,000)
Adjustments for effects of:
State income taxes, net of Federal tax
effect 94,000 24,000 26,000 (22,000)
"S" Corporation election and termination
of "S" Corporation election (211,000) 34,000
Change in valuation allowance (363,000) 138,000 (84,000) 36,000
--------- --------- --------- ---------
Historical provision (credit) $ 15,000 $ 24,000 $ 15,000 $ (22,000)
========= ========= ========= =========
</TABLE>
The Company's "S" Corporation election was in effect for part of the
nine months ended July 31, 1998. Unaudited pro forma historical
provisions for income taxes assuming the Exchange had occurred on
November 1, 1997 and the Company was subject to Federal, state and
local income taxes at full statutory rates for all of the nine
months ended July 31, 1998 are set forth below:
Federal $60,000
State 18,000
Local 19,000
-------
Total pro forma (unaudited) $97,000
=======
The unaudited pro forma provisions and credits for income taxes
reflect an effective rate of approximately 45% for each period
comprised of an 11% rate for state and local income taxes, net of
the related Federal income tax effect, and a statutory Federal
income tax rate of 34%.
F-10
<PAGE>
COFFEE HOLDING CO., INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Note 7 - Earnings per share:
The Company presents "basic" and, if applicable, "diluted" earnings
per common share pursuant to the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128") and certain other financial accounting pronouncements, as
further explained in Note 2 of the notes to financial statements in
the Form 10-K.
Since the Company had elected to be taxed as an "S" Corporation, it
was not required to provide for Federal income taxes and it was only
required to provide for state income taxes at a reduced rate prior
to the date of the Exchange. SEC rules and regulations prohibit the
presentation of earnings (loss) per common share amounts on a
historical basis for the periods during which the "S" Corporation
elections were in effect; instead, they require the presentation of
basic and, if applicable, diluted unaudited pro forma earnings
(loss) per common share amounts in the statements of operations for
such periods assuming that the Company had been subject to Federal
and state income taxes at statutory rates applicable to those
companies that had not made "S" Corporation elections.
Since the Company had elected to be taxed as an "S" Corporation for
part of the nine months ended July 31, 1998 and it had no
potentially dilutive securities outstanding during the nine and
three months ended July 31, 1999 and 1998, historical basic earnings
per share is presented in the accompanying condensed statements of
operations for only the nine and three months ended July 31, 1999
and the three months ended July 31, 1998 and unaudited pro forma
earnings per share is presented in the accompanying condensed
statements of operations for the nine months ended July 31, 1998.
The weighted average common shares outstanding used in the
computation of basic earnings per share for the nine and three
months ended July 31, 1999 was 3,999,650 which was the number of
shares of common stock actually outstanding during those periods.
The weighted average common shares outstanding used in the
computation of unaudited pro forma basic earnings per share for the
nine months ended July 31, 1998 was also 3,999,650, which reflects
the retroactive adjustment of the number of common shares of
Transpacific actually outstanding to include only the 999,650 shares
effectively outstanding as of the date of the Exchange and the
3,000,000 shares of common stock issued to the stockholders of
Coffee in connection with the Exchange (see Note 1).
Note 8 - Major customer:
Approximately 19% and 20% of the Company's sales were derived from
one customer during the nine months ended July 31, 1999 and 1998,
respectively (see Note 11 of the notes to financial statements in
the Form 10-K).
Note 9 - Stock option plan:
As of July 31, 1999, no options had been granted under the Company's
stock option plan (see Note 12 of the notes to financial statements
in the Form 10-K).
* * *
F-11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the "Act") provides
a safe harbor for forward-looking statements made by or on behalf of Coffee
Holding Co., Inc. (the "Company" or "Coffee"). Coffee and its representatives
may from time to time make written or oral forward-looking statements, including
statements contained in this report and in our other filings with the Securities
and Exchange Commission ("SEC"). These statements use words such as "believes",
"expects", "intends", "plans", "may", "will", "should", "anticipates" and other
similar expressions. All statements which address operating performance, events
or developments that the Company expects or anticipates will occur in the
future, including statements relating to volume growth, share of sales or
statements expressing general optimism about future operating results, are
forward-looking statements within the meaning of the Act. The forward-looking
statements are and will be based on management's then current views and
assumptions regarding future events and operating performance. We cannot assure
that anticipated results will be achieved since actual results may differ
materially because of risks and uncertainties. We do not undertake to revise
these statements to reflect subsequent developments.
The following are some of the factors that could cause actual results to
differ materially from in our forward-looking statements:
o the impact of rapid or persistent fluctuations in the price of
coffee beans;
o fluctuations in the supply of coffee beans;
o general economic conditions and conditions which affect the market
for coffee;
o the effects of any loss of major customers;
o the effects of competition from other coffee manufacturers and other
beverage alternatives;
o changes in consumption of coffee; and
o other risks which we identify in future filings with the SEC.
You are strongly encouraged to consider these factors when evaluating
forward looking statements in this report. We undertake no responsibility to
update any forward-looking statements contained in this report.
Nine Months Ended July 31, 1999 Compared to Nine Months Ended July 31, 1998
Net sales totaled $17,231,006 in the nine months ended July 31, 1999, a
decrease of $2,634,595 or 13% from $19,865,601 in the nine months ended July 31,
1998. Sales revenue declined primarily due to lower selling prices for retail
coffee.
Cost of sales in the nine months ended July 31, 1999 was $14,589,571, or
85% of net sales, as compared to $17,502,949, or 88% of net sales in the nine
months ended July 31, 1998.
The Company's gross profit in the nine months ended July 31, 1999 was
$2,641,435, an increase of $278,783 or 12% from $2,362,652 in the nine months
ended July 31, 1998. Gross profit as a percentage of net sales increased by 3%
to 15% in the nine months ended July 31, 1999 from 12% in the nine months ended
July 31, 1998.
Selling and administrative expenses were $1,340,595 in the nine months
ended July 31, 1999, a decrease of $103,415 or 7% from $1,444,010 in the nine
months ended July 31, 1998. As a percentage of net sales, this change
represented a 1% increase from 7% in the nine months ended July 31, 1998 to 8%
in the nine months ended July 31, 1999.
Interest expense decreased $12,823 or 5% from $261,972 in the nine months
ended July 31, 1998 to $249,149 in the nine months ended July 31, 1999.
Other expenses in the nine months ended July 31, 1998 also include
$180,000 of consulting and professional fees and other costs incurred in
connection with the reverse acquisition by Transpacific International Group
Corp. that was effectively completed on February 10, 1998 (the "Reverse
Acquisition").
Primarily as a result of the decreases in cost of sales and operating
expenses, which exceeded the effects of the decrease in sales, and as a result
of the absence in the nine months ended July 31, 1999 of the charge for costs
incurred in connection with the Reverse Acquisition, the Company had income of
$834,191 before income taxes in the nine months ended July 31, 1999 compared to
$215,083 in the nine months ended July 31, 1998.
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As further explained in Note 6 of the notes to the financial statements
elsewhere herein, the Company was not required to record a provision for Federal
income taxes in the nine months ended July 31, 1998 because it had elected to be
taxed as an "S" Corporation during the period from November 1, 1997 to February
10, 1998 (the date of the Reverse Acquisition) and it had a pre-tax loss during
the period from February 11, 1998 to July 31, 1998. Although the Company had
potential benefits of approximately $138,000 from net operating loss
carryforwards as of July 31, 1998, it did not record a credit for Federal income
taxes in the nine months ended July 31, 1998 due to the uncertainties related to
the extent and timing of its future taxable income. As a result of additional
pre-tax losses through October 31, 1998, the Company had potential benefits from
the net operating loss carryforwards of approximately $363,000 as of October 31,
1998. The Company recorded a provision for Federal, state and local income taxes
of only $15,000 based on its pre-tax income in the nine months ended July 31,
1999 because it used all of the benefits from the net operating loss
carryforwards that were available as of October 31, 1998. The Company had a
historical provision for state and local income taxes of $24,000 in the nine
months ended July 31, 1998. Accordingly, the Company had historical net income
of $819,191 in the nine months ended July 31, 1999 compared to $191,083 in the
nine months ended July 31, 1998.
The statement of operations included in the financial statements elsewhere
herein presents unaudited pro forma provision for income tax, net income and
related earnings per share information assuming the Company had not elected to
be taxed as an "S" Corporation during any portion of the nine months ended July
31, 1998. The Company would have had a provision for income taxes of
approximately $97,000 in the nine months ended July 31, 1998 assuming the "S"
Corporation elections had not been made. The unaudited pro forma provision for
income taxes reflects an effective rate of approximately 45% comprised of an 11%
rate for state and local income taxes, net of the related Federal income tax
effect, and a statutory Federal income tax rate of 34%. On an unaudited pro
forma basis, the Company would have had net income of $118,083, or $.03 per
share, in the nine months ended July 31, 1998 compared to historical net income
of $819,191, or $.20 per share, in the nine months ended July 31, 1999.
Three Months Ended July 31, 1999 Compared to Three Months Ended July 31, 1998
Net sales totaled $4,414,575 in the three months ended July 31, 1999, a
decrease of $2,269,884 or 34% from $6,684,459 in the three months ended July 31,
1998. Sales revenues declined primarily due to lower selling prices for retail
coffee.
Cost of sales in the three months ended July 31, 1999 was $3,727,221, or
84% of net sales, as compared to $6,173,356, or 92% of net sales in the three
months ended July 31, 1998. Green coffee purchase prices continued their slight
gradual decline which enabled the Company to purchase inventory at lower prices.
The Company's gross profit in the three months ended July 31, 1999 was
$687,354, an increase of $176,251 or 34% from $511,103 in the three months ended
July 31, 1998. Gross profit as a percentage of net sales increased by 8% to 16%
in the three months ended July 31, 1999 from 8% in the three months ended July
31, 1998. The increase in gross profit was attributable to increased margins on
sales of wholesale green coffee.
Selling and administrative expenses were $329,553 in the three months
ended July 31, 1999, a decrease of $213,538 or 39% from $543,091 in the three
months ended July 31, 1998. As a percentage of net sales, this change
represented a 1% decrease from 8% in the three months ended July 31, 1998 to 7%
in the three months ended July 31, 1999. This decrease was primarily caused by
lower professional fees and less promotional costs.
Interest expense decreased $8,615 or 11% from $75,569 in the three months
ended July 31, 1998 to $66,954 in the three months ended July 31, 1999.
Primarily as a result of the decreases in cost of sales and operating
expenses, which exceeded the effects of the decrease in sales in the three
months ended July 31, 1999, the Company had income of $212,770 before income
taxes in the three months ended July 31, 1999 compared to a loss of $205,969
before income taxes in the three months ended July 31, 1998.
The Company was not required to record a provision for Federal income
taxes in the three months ended July 31, 1998 primarily because it had a pre-tax
loss during that period. Although the Company had potential benefits of
approximately $138,000 from net operating loss carryforwards as of July 31,
1998, it did not record a credit for income taxes in the three months ended July
31, 1998 due to the uncertainties related to the extent and timing of its future
taxable income. The Company recorded a provision for Federal, state and local
income taxes of only $15,000 based on its pre-tax income in the three months
ended July 31, 1999 because it used all of the remaining benefits from its net
operating loss carryforwards during that period. The Company had a historical
credit for state and local income taxes of $22,000 in the three months ended
July 31, 1998. Accordingly, the Company had historical net
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income of $197,770, or $.05 per share, in the three months ended July 31, 1999
compared to a historical net loss of $183,969, or $.05 per share, in the three
months ended July 31, 1998.
Liquidity and Capital Resources
As of July 31, 1999, the Company had working capital of approximately
$545,000, which increased by $772,000 from its working capital deficiency of
$227,000 as of October 31, 1998, and a total stockholders' deficiency of
$109,000, which decreased by $819,000 from its total stockholders' deficiency of
approximately $928,000 as of October 31, 1998. The Company had no unrestricted
cash balances as of July 31, 1999 and October 31, 1998. The Company's working
capital increased primarily as a result of the net income it generated during
the nine months ended July 31, 1999.
The Company has obtained a credit facility from Nationscredit Commercial
Corp. that provides for a revolving line of credit of up to $5,000,000 based on
eligible trade accounts receivable and inventories and a term loan for equipment
purchases of up to $500,000. The line of credit provides for borrowings of up to
85% of the Company's eligible trade accounts receivable and 60% of its eligible
inventories. The outstanding balance of approximately $2,176,000 as of July 31,
1999 approximated the maximum amount that the Company could borrow based on its
eligible trade accounts receivable and inventories as of that date. Interest is
payable monthly at the prime rate plus 1% (an effective rate of 9% at July 31,
1999). Assuming the Company has sufficient collateral, substantially all of the
balances outstanding under the credit facility will not have to be repaid until
November 20, 2000.
During the nine months ended July 31, 1999, net cash provided by operating
activities totaled approximately $521,000 primarily as a result of the net
income generated during that period, adjusted to eliminate the effects of
charges for depreciation and amortization and the write-off of deferred mortgage
costs, and decreases in amounts receivable from the Company's broker and
customers that were offset by an increase in inventories and a decrease in
accounts payable and accrued expenses.
The Company financed the purchase of land and a building in 1989 through
the issuance of a mortgage note in the amount of $1,050,000 payable to the New
York City Industrial Development Agency. The mortgage note required monthly
payments of $4,167 plus interest based at a variable rate set weekly. The
payment of the mortgage note was secured by a first mortgage on the Company's
land and building and the Company's restricted investments. The final payment
was due November 1, 2009. On March 3, 1999, the Company repaid the mortgage note
in full in the amount of $600,000. The Company generated a portion of the funds
required for the repayment by liquidating approximately $433,000 of cash and
cash equivalent investments that were restricted under the mortgage note.
During the nine months ended July 31, 1999, the Company also used
approximately $370,000 of its cash resources to reduce its term loan, line of
credit and capital lease obligations. Capital expenditures totaled $48,000
during the period and management expects that the Company's capital expenditures
will be substantially below those made in fiscal 1998.
Management believes, but cannot assure, that the Company will be able to
finance its operations, including increases in accounts receivable and
inventories, capital expenditures and debt repayments, over the next twelve
months through cash provided by operating activities and/or borrowings under its
credit facility.
Year 2000
The Year 2000 problem concerns the inability of information systems and
systems with embedded chip technology to properly recognize and process
data-sensitive information beyond December 31, 1999. In the fall of 1997, the
Company and its information technology consultant assessed the Company's
personal computer hardware and its accounting software (which included accounts
receivable and payroll and inventory management) for Year 2000 readiness. The
Company concluded that its then accounting software and computer hardware and
system were not Year 2000 compliant.
The Company installed software modifications and upgrades to its
accounting software in November 1997 at an approximate cost of $4,300.
In April and August 1999, the Company replaced its computer hardware and
operating systems including its server and three workstations. The Company also
added an additional workstation. The total cost of the equipment, installation
and follow-up support was approximately $18,800. The Company also paid its
consultant $1,400 to oversee installation of the operating system.
As of June 30, 2000, with regard to Year 2000, the Company had not
experienced any disruptions in its internal information systems or its business
activities with its suppliers and customers.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Interest Rate Risks
The Company is subject to market risk from exposure to fluctuations in
interest rates. At July 31, 1999, the Company's long-term debt, other than
capitalized leases, consisted of approximately $196,000 of fixed rate debt and
approximately $2,500,000 of variable rate debt under its revolving line of
credit, term loan and mortgage note payable. Interest on the variable rate debt
was payable primarily at 1% above a specified prime rate. The Company does not
expect changes in interest rates to have a material effect on income or cash
flows in fiscal 1999, although there can be no assurance that interest rates
will not significantly change.
Commodity Price Risks
The supply and price of coffee beans are subject to volatility and are
influenced by numerous factors which are beyond the Company's control. The
Company uses coffee futures and options contracts for hedging purposes to
minimize the effect of changing green coffee prices and, if needed, to
supplement its supply. At July 31, 1999, the Company held options covering an
aggregate of 3,675,000 pounds of green coffee beans, which are exercisable in
fiscal 1999 at prices ranging from $.90 to $1.20 per pound. The price per pound
of green coffee on July 31, 1999 was $.91. The Company generally has been
able to pass green coffee price increases through to its customers, thereby
maintaining its gross profits. However, the Company cannot predict whether it
will be able to pass inventory price increases through to its customers in the
future.
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PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Exhibit Name
------- ------------
27 Financial Data Schedule
(b) There were no reports on Form 8-K filed during the period covered by this
report.
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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, hereunto duly authorized.
COFFEE HOLDING CO., INC.
Signature Title Date
--------- ----- ----
/s/ Andrew Gordon Chief Executive Officer, October 25, 2000
----------------- President and Treasurer
Andrew Gordon (principal executive officer and
principal financial officer)
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INDEX TO EXHIBITS
27 Financial Data Schedule
