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, 2000
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.
1
<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, 2000 AND OCTOBER 31, 1999 F-2
CONDENSED STATEMENTS OF OPERATIONS
NINE AND THREE MONTHS ENDED JULY 31, 2000 AND 1999 F-3
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY (DEFICIENCY)
NINE MONTHS ENDED JULY 31, 2000 F-4
CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 2000 AND 1999 F-5
NOTES TO CONDENSED FINANCIAL STATEMENTS F-6/10
* * *
F-1
<PAGE>
COFFEE HOLDING CO., INC.
CONDENSED BALANCE SHEETS
JULY 31, 2000 AND OCTOBER 31, 1999
<TABLE>
<CAPTION>
July October
ASSETS 31, 2000 31, 1999
------ -------- --------
(Unaudited) (See Note 1)
<S> <C> <C>
Current assets:
Cash $ 199,239 $ 265,044
Due from broker 99,602 281,064
Accounts receivable, net of allowance for doubtful
accounts of $232,210 and $227,210 1,414,263 2,416,700
Inventories 1,458,826 1,478,485
Prepaid expenses and other current assets 24,676 59,565
---------- ----------
Total current assets 3,196,606 4,500,858
Property and equipment, at cost, net of accumulated
depreciation of $2,081,865 and $1,908,410 1,889,864 1,983,317
Cash equivalents restricted under credit facility 256,377
Deposits and other assets 89,756 27,423
---------- ----------
Totals $5,432,603 $6,511,598
========== ==========
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIENCY)
---------------------------------
Current liabilities:
Current portion of term loan $ 106,380 $ 87,312
Current portion of obligations under capital leases 76,910 202,743
Accounts payable and accrued expenses 2,468,224 3,709,297
---------- ----------
Total current liabilities 2,651,514 3,999,352
Term loan, net of current portion 107,563 192,119
Line of credit borrowings 2,025,538 2,445,130
Obligations under capital leases, net of current portion 46,161
Loans from related parties 419,010 148,014
---------- ----------
Total liabilities 5,203,625 6,830,776
---------- ----------
Commitments and contingencies
Stockholders' equity (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 743,985 480,997
Accumulated deficit (519,007) (804,175)
---------- ----------
Total stockholders' equity (deficiency) 228,978 (319,178)
---------- ----------
Totals $5,432,603 $6,511,598
========== ==========
</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, 2000 AND 1999
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Three Months
Ended July 31, Ended July 31,
--------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $14,021,517 $17,231,006 $ 3,956,506 $ 4,414,575
Cost of sales 11,761,916 14,589,571 3,334,691 3,727,221
----------- ----------- ----------- -----------
Gross profit 2,259,601 2,641,435 621,815 687,354
----------- ----------- ----------- -----------
Operating expenses:
Selling and administrative 1,368,606 1,340,595 440,878 329,553
Officers' salaries 213,912 217,500 74,499 78,077
----------- ----------- ----------- -----------
Totals 1,582,518 1,558,095 515,377 407,630
----------- ----------- ----------- -----------
Income from operations 677,083 1,083,340 106,438 279,724
Interest expense 226,915 249,149 78,552 66,954
----------- ----------- ----------- -----------
Income before income taxes 450,168 834,191 27,886 212,770
Provision for income taxes 165,000 15,000 8,000 15,000
----------- ----------- ----------- -----------
Net income $ 285,168 $ 819,191 $ 19,886 $ 197,770
=========== =========== =========== ===========
Basic earnings per share $.07 $.20 $-- $.05
==== ==== === ====
Basic weighted average common
shares outstanding 3,999,650 3,999,650 3,999,650 3,999,650
=========== =========== =========== ===========
</TABLE>
See Notes to Condensed Financial Statements.
F-3
<PAGE>
COFFEE HOLDING CO., INC.
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
NINE MONTHS ENDED JULY 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional
---------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
--------- --------- ---------- ----------- -----
<S> <C> <C> <C> <C> <C>
Balance, November 1, 1999 3,999,650 $4,000 $480,997 $(804,175) $(319,178)
Capital contribution 262,988 262,988
Net income 285,168 285,168
--------- ------ -------- --------- ---------
Balance, July 31, 2000 3,999,650 $4,000 $743,985 $(519,007) $ 228,978
========= ====== ======== ========= =========
</TABLE>
See Notes to Condensed Financial Statements.
F-4
<PAGE>
COFFEE HOLDING CO., INC.
CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 2000 AND 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
----------- ---------
<S> <C> <C>
Operating activities:
Net income $ 285,168 $ 819,191
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 173,455 188,331
Bad debts 5,000
Write-off of deferred mortgage costs 55,063
Changes in operating assets and liabilities:
Due from broker 181,462 92,252
Accounts receivable 997,437 465,179
Inventories 19,659 (301,740)
Prepaid expenses and other current assets 34,889 35,462
Deposits and other assets (62,333) 83,436
Accounts payable and accrued expenses (1,241,073) (916,493)
----------- ---------
Net cash provided by operating activities 393,664 520,681
----------- ---------
Investing activities - purchases of property and equipment (80,002) (48,011)
----------- ---------
Financing activities:
Principal payments on mortgage note payable (600,000)
Decrease in cash and cash equivalents restricted
under mortgage note 432,965
Increase in cash equivalents restricted under credit facility (256,377)
Principal payments on term loan (65,488) (65,487)
Net payments of obligations under bank line of credit (419,592) (144,865)
Principal payments of obligations under capital leases (171,994) (160,079)
Advances from related parties 270,996 64,796
Capital contribution 262,988
----------- ---------
Net cash used in financing activities (379,467) (472,670)
----------- ---------
Net decrease in cash (65,805) --
Cash, beginning of period 265,044 --
----------- ---------
Cash, end of period $ 199,239 $ --
=========== =========
Supplemental disclosure of cash flow data:
Interest paid $ 222,968 $ 249,149
=========== =========
</TABLE>
See Notes to Condensed Financial Statements.
F-5
<PAGE>
COFFEE HOLDING CO., INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Note 1 - Business activities:
Coffee Holding Co., Inc. (the "Company") 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.
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, 2000, its results of operations for the nine
and three months ended July 31, 2000 and 1999, its changes in
stockholders' equity for the nine months ended July 31, 2000 and its cash
flows for the nine months ended July 31, 2000 and 1999. Information
included in the balance sheet as of October 31, 1999 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, 1999 (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, 2000 and 1999
are not necessarily indicative of the results that may be expected for the
years ending October 31, 2000 and 1999.
Note 3 - Inventories:
Inventories at July 31, 2000 and October 31, 1999 consisted of the
following:
July October
31, 2000 31, 1999
---------- ----------
Packed coffee $ 387,071 $ 211,620
Green coffee 675,711 892,344
Packaging supplies 396,044 374,521
---------- ----------
Totals $1,458,826 $1,478,485
========== ==========
F-6
<PAGE>
COFFEE HOLDING CO., INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Note 3 - Inventories (concluded):
Historically, the Company has used short-term coffee futures and options
contracts primarily for the purpose of hedging and minimizing the effects
of changing green coffee prices, as further explained in Note 2 of the
notes to financial statements in the Form 10-K. At July 31, 2000, the
Company held options covering an aggregate of $1,125,000 pounds of green
coffee beans which are exercisable in fiscal 2000 at $1.00 per pound. The
fair market value of these options, which was obtained from a major
financial institution, was approximately $5,625 at July 31, 2000. Due from
broker includes the effects of unrealized hedging gains of $290,221 at
July 31, 2000 and unrealized hedging losses of $198,532 at October 31,
1999.
In addition, during the three months ended July 31, 2000, the Company
began to acquire futures contracts with longer terms (generally three to
four months) primarily for the purpose of guaranteeing an adequate supply
of green coffee. At July 31, 2000, the Company held longer-term futures
contracts for the purchase of 1,687,500 pounds of coffee at an average
price of $.97 per pound. The fair market price of coffee applicable to
such contracts was $.8645 per pound at that date. Generally, such
contracts are marked to market on a daily basis, and realized gains and
losses are included in cost of sales.
Note 4 - Credit facility borrowings:
The Company was obligated for borrowings during the nine months ended July
31, 2000 and 1999 under a credit facility provided by Bank of America
Commercial Finance Corporation ("BACFC"), formerly Nationscredit
Commercial Corp., consisting of a revolving line of credit and a term loan
that as of July 31, 2000 was scheduled to expire on November 20, 2000, as
further explained in Note 7 of the notes to financial statements in the
Form 10-K.
The line of credit provides for maximum borrowings of $5,000,000. The
outstanding balance under the line of credit of $2,025,538 at July 31,
2000 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 $213,943 at July
31, 2000, provides for borrowings of up to the greater of 80% of the cost
of eligible equipment or $500,000. Interest was payable monthly at the
prime rate plus 1% (an effective rate of 10.5% at July 31, 2000). At July
31, 2000, two of the Company's stockholders had each guaranteed
outstanding borrowings under the credit facility of up to $100,000, plus
interest and other costs and expenses, as defined, and the Company also
had $256,377 in a noninterest bearing money market account that was
deposited with BACFC during the nine months ended July 31, 2000 to secure
outstanding borrowings under the credit facility.
F-7
<PAGE>
COFFEE HOLDING CO., INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Note 4 - Credit facility borrowings (concluded):
As a result of amendments to the agreements with Wells Fargo Business
Credit, the assignee of BACFC, that became effective on November 29, 2000,
interest on borrowings under the line of credit and the term loan will be
payable monthly at .5% and .75% above the prime rate, respectively; the
credit facility will not expire until November 20, 2002; term loan
principal payments will increase from $7,276 to $10,000 per month
commencing January 1, 2001; the amount of borrowings guaranteed by each of
the two stockholders increased to $500,000; and the Company's ability to
continue to use the credit facility will become subject to its ability to
meet specified financial covenants and ratios. In addition, the
outstanding balance under the line of credit and a portion of the
outstanding balance under the term loan were classified as long-term
liabilities in the accompanying July 31, 2000 balance sheet based on the
Company's ability to either defer payments until, or make installment
payments through, November 20, 2002.
Note 5 - Income taxes:
The Company's provision for income taxes for the nine and three months
ended July 31, 2000 and 1999 was comprised as follows:
Nine Months Three Months
Ended July 31, Ended July 31,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
Federal $ 87,000 $ 9,700 $ 5,000 $ 9,700
State 36,000 2,200 1,000 2,200
Local 42,000 3,100 2,000 3,100
-------- ------- -------- -------
Provision for income taxes $165,000 $15,000 $ 8,000 $15,000
======== ======= ======== =======
The differences between the tax provision computed based on the Company's
pre-tax income and the applicable statutory income tax rate and the
Company's provisions for Federal, state and local income taxes for the
nine and three months ended July 31, 2000 and 1999 are set forth below:
<TABLE>
<CAPTION>
Nine Months Three Months
Ended July 31, Ended July 31,
--------------------- ----------------------
2000 1999 2000 1999
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Tax provision at statutory rate of 34% $177,000 $ 284,000 $5,000 $ 73,000
Adjustments for effects of:
State income taxes, net of Federal benefit 54,000 94,000 3,000 26,000
Change in valuation allowance (66,000) (363,000) (84,000)
-------- --------- ------ --------
Provision for income taxes $165,000 $ 15,000 $8,000 $ 15,000
======== ========= ====== ========
</TABLE>
F-8
<PAGE>
COFFEE HOLDING CO., INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Note 5 - Income taxes (concluded):
As explained in Note 9 of the notes to financial statements in the Form
10-K, the Company had estimated net operating loss carryforwards remaining
as of October 31, 1999 of approximately $191,000 available to reduce
future Federal, state and local taxable income. There were no other
material temporary differences as of October 31, 1999. Due to the
uncertainties related to the extent and timing of the Company's future
taxable income, the Company had offset the estimated deferred tax assets
of approximately $89,000 attributable to the potential benefits from the
net operating loss carryforwards as of October 31, 1999 by an equivalent
valuation allowance. During the first three months of the nine months
ended July 31, 2000, the Company reversed the estimated valuation
allowance of $89,000 and reduced its provision for income taxes by $66,000
based on the actual benefits realized from the utilization of the
remaining net operating loss carryforwards.
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. There were
no other material temporary differences as of those dates. 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.
Note 6 - 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" and certain other
financial accounting pronouncements, as further explained in Note 2 of the
notes to financial statements in the Form 10-K. Diluted earnings per share
have not been presented because the Company had no potentially dilutive
securities outstanding during the nine and three months ended July 31,
2000 and 1999.
Note 7 - Major customer:
Approximately 19% of the Company's sales were derived from one customer
during the nine months ended July 31, 2000 and 1999 (see Note 11 of the
notes to financial statements in the Form 10-K).
F-9
<PAGE>
COFFEE HOLDING CO., INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Note 8 - Stock option plan:
As of July 31, 2000, 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).
Note 9 - Related party balances and transactions:
The Company had loans payable to its stockholders of $419,010 and $148,014
at July 31, 2000 and October 31, 1999, respectively. The loans are due on
demand and bear interest at 10%. Interest expense totaled approximately
$24,800 and $10,500 for the nine and three months ended July 31, 2000,
respectively, and was not material for the nine and three months ended
July 31, 1999.
During the nine months ended July 31, 2000, a stockholder made a capital
contribution of $262,988 to the Company which represented a return of a
portion of a dividend paid during a period in which the Company was taxed
as an "S" Corporation.
During the nine months ended July 31, 1999, the Company loaned a total of
$300,000 to a stockholder. The loans, which were repaid in February 1999,
bore interest at 10% (interest income attributable to the loans was not
material for the nine months ended July 31, 1999).
* * *
F-10
<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 the
Company. Coffee Holding 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. 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 quarterly report. We undertake no
responsibility to update any forward-looking statements contained in this
report.
Nine Months Ended July 31, 2000 Compared to Nine Months Ended July 31, 1999
Net sales totaled $14,021,517 in the nine months ended July 31, 2000, a
decrease of $3,209,489 or 19% from $17,231,006 in the nine months ended July 31,
1999. The Company's selling prices continued to decrease in response to
gradually declining green coffee purchase prices. Beginning at the end of 1998,
the purchase price of green coffee began a gradual decline that, with the
exception of brief price surges, continued through to July 31, 2000. In
addition, the Company lost one of its largest wholesale customers in the quarter
ended January 31, 2000. Although this customer made some purchases during the
quarter ended April 30, 2000 and the quarter ended July 31, 2000, those
purchases were significantly below historical levels and are expected to
continue to be below historical levels. The Company expects its net sales in the
fourth quarter and for the fiscal year ended October 31, 2000 to be negatively
impacted by the loss of this customer. The Company expects that this loss in
sales will be partially offset by sales to new customers.
Cost of sales in the nine months ended July 31, 2000 was $11,761,916 or
84% of net sales, as compared to $14,589,571, or 85% of net sales in the nine
months ended July 31, 1999. The decrease in cost of sales was attributable to a
gradual decline in green coffee purchase prices enabling the Company to purchase
inventory at lower prices. Although green coffee purchase prices surged in
November and December 1999, that surge was temporary and the Company's inventory
position enabled it to forego purchases during the price surge.
The Company's gross profit in the nine months ended July 31, 2000 was
$2,259,601, a decrease of $381,834 or 14% from $2,641,435 in the nine months
ended July 31, 1999. Gross profits were down on a comparison basis due to the
decrease in net sales in the nine months ended July 31, 2000 as compared to the
period a year ago. Gross profit as a percentage of net sales increased by 1% to
16% in the nine months ended July 31, 2000 from 15% in the nine months ended
July 31, 1999. Margins improved slightly primarily due to lower inventory costs
as a result of the overall decline in green coffee purchase prices.
Selling and administrative expenses were $1,368,606 in the nine months
ended July 31, 2000, an increase of $28,011 or 2% from $1,340,595 in the nine
months ended July 31, 1999. As a percentage of net sales, this change
represented a 2% increase from 8% in the nine months ended July 31, 1999 to 10%
in the nine months ended July 31, 2000.
3
<PAGE>
Interest expense decreased $22,234 or 9% from $249,149 in the nine months
ended July 31, 1999 to $226,915 in the nine months ended July 31, 2000. This
decrease was due to lower borrowings on the Company's asset based line of
credit.
Primarily as a result of a decrease in net sales that exceeded the
decrease in cost of sales, the Company had income of $450,168 before income
taxes in the nine months ended July 31, 2000 compared to income of $834,191
before income taxes in the nine months ended July 31, 1999, a decrease of 46%.
The Company's provision for income taxes for the nine months ended July
31, 2000 totaled $165,000 as compared to a provision for income taxes of $15,000
for the nine months ended July 31, 1999. The differences between the tax
provision computed based on the Company's pre-tax income and the applicable
statutory income tax rate and the Company's provisions for Federal, state and
local income taxes for the nine months ended July 31, 2000 and 1999 are set
forth below:
<TABLE>
<CAPTION>
Nine Months
Ended July 31,
--------------
2000 1999
-------- --------
<S> <C> <C>
Tax provision at statutory rate of 34% $177,000 $284,000
Adjustments for effects of:
State income taxes, net of Federal benefit 54,000 94,000
Change in valuation allowance (66,000) (363,000)
-------- --------
Provision for income taxes $165,000 $ 15,000
======== ========
</TABLE>
As further explained in Note 5 of the notes to financial statements
elsewhere herein, the Company had estimated net operating loss carryforwards
remaining as of October 31, 1999 of approximately $191,000 available to reduce
future Federal, state and local taxable income. Due to the uncertainties related
to the extent and timing of the Company's future taxable income, the Company had
offset the estimated deferred tax assets of approximately $89,000 attributable
to the potential benefits from the net operating loss carryforwards as of
October 31, 1999 by an equivalent valuation allowance. During the first three
months of the nine months ended July 31, 2000, the Company reversed the
estimated valuation allowance of $89,000 and reduced its provision for income
taxes by $66,000 based on the actual benefits realized from the utilization of
the remaining net operating loss carryforwards.
The Company also offset the deferred tax assets of approximately $363,000
attributable to the potential benefits from the net operating loss carryforwards
as of October 31, 1998 by an equivalent valuation allowance. Since the Company
had pre-tax income of approximately $834,000 for the nine 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 provision for income taxes
for the nine months ended July 31, 1999 was partially offset by the reduction in
the valuation allowance of $363,000 for that period.
As a result, the Company had net income of $285,168, or $.07 per share, in
the nine months ended July 31, 2000 compared to net income of $819,191, or $.20
per share, in the nine months ended July 31, 1999.
Three Months Ended July 31, 2000 Compared to Three Months Ended July, 31, 1999
Net sales totaled $3,956,506 in the three months ended July 31, 2000, a
decrease of $458,069 or 10% from $4,414,575 in the three months ended July 31,
1999. The Company's selling prices decreased slightly in response to gradually
declining green coffee purchase prices. In addition, the Company lost one of its
largest wholesale customers in the quarter ended January 31, 2000. Although this
customer made some purchases during the quarter ended July 31, 2000, those
purchases were significantly below historical levels and are expected to
continue to be below historical levels. The Company expects its net sales in the
fourth quarter and for the fiscal year ended October 31, 2000 to be negatively
impacted by the loss of this customer. The Company expects that this loss in
sales will be partially offset by sales to new customers.
Cost of sales in the three months ended July 31, 2000 was $3,334,691, or
84% of net sales, as compared to $3,727,221, or 84% of net sales in the three
months ended July 31, 1999.
4
<PAGE>
The Company's gross profit in the three months ended July 31, 2000 was
$621,815, a decrease of $65,539 or 10% from $687,354 in the three months ended
July 31, 1999. Gross profits were down on a comparable basis due to the decrease
in net sales in the three months ended July 31, 2000 as compared to the period a
year ago. Gross profit as a percentage of net sales stayed the same at 16% in
the three months ended July 31, 2000.
Selling and administrative expenses were $440,878 in the three months
ended July 31, 2000, an increase of $111,325 or 34% from $329,553 in the three
months ended July 31, 1999. As a percentage of net sales, this change
represented a 4% increase from 7% in the three months ended July 31, 1999 to 11%
in the three months ended July 31, 2000. The increase was primarily attributable
to higher professional fees incurred in connection with the preparation of
reports filed by the Company with the Securities and Exchange Commission and
increased freight expenses.
Interest expense increased $11,598 or 17% from $66,954 in the three
months ended July 31, 1999 to $78,552 in the three months ended July 31, 2000.
Primarily as a result of a decrease in net sales and an increase in
selling and administrative expenses that exceeded the decrease in cost of sales,
the Company had income of $27,886 before income taxes in the three months ended
July 31, 2000 compared to income of $212,770 before income taxes in the three
months ended July 31, 1999, a decrease of 87%.
The Company's provision for income taxes for the three months ended
July 31, 2000 totaled $8,000 as compared to a provision of $15,000 for income
taxes for the three months ended July 31, 1999. The differences between the tax
provision computed based on the Company's pre-tax income and the applicable
statutory income tax rate and the Company's provisions for Federal, state and
local income taxes for the three months ended July 31, 2000 and 1999 are set
forth below:
<TABLE>
<CAPTION>
Three Months
Ended July 31,
--------------
2000 1999
------- --------
<S> <C> <C>
Tax provision at statutory rate of 34% $ 5,000 $ 73,000
Adjustments for effects of:
State income taxes, net of Federal benefit 3,000 26,000
Change in valuation allowance (84,000)
------- --------
Provision for income taxes $ 8,000 $ 15,000
======= ========
</TABLE>
As explained above, the Company had utilized all of its remaining net
operating loss carryforwards during the first three months of the nine months
ended July 31, 2000 and, accordingly, the Company's provision for income taxes
during the three months ended July 31, 2000 was not affected by a change in any
valuation allowance for deferred taxes. As further explained in Note 5 of the
notes to the financial statements elsewhere herein, the Company had offset the
estimated deferred tax assets of approximately $84,000 attributable to the
potential benefits from the net operating loss carryforward as of April 30, 1999
by an equivalent valuation allowance. 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 provision for income taxes for the three months ended
July 31, 1999 was partially offset by the reduction in the valuation allowance
of $84,000 for that period.
As a result, the Company had net income of $19,886, less than $.01 per
share, in the three months ended July 31, 2000 compared to net income of
$197,770, or $.05 per share, in the three months ended July 31, 1999.
Liquidity and Capital Resources
The Company had net income of approximately $285,000 during the nine
months ended July 31, 2000. As of July 31, 2000, the Company had total
stockholders' equity of $229,000, which increased by $548,000 from its total
stockholders' deficiency of $319,000 as of October 31, 1999. The Company had a
cash balance of $199,000, which decreased by $66,000 from its cash balance of
$265,000 as of October 31, 1999, and working capital of $545,000 as of July 31,
2000, compared to working capital of $502,000 as of October 31, 1999.
5
<PAGE>
The Company has a credit facility from Bank of America Commercial Finance
Corporation ("BACFC") (formerly 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 $2,026,000 under the line
of credit as of July 31, 2000 approximated the maximum amount that the Company
could borrow based on its eligible trade accounts receivable and inventories as
of that date. The outstanding balance under the term loan was approximately
$214,000 as of July 31, 2000. Interest was payable monthly at the prime rate
plus 1% (an effective rate of 10.5% at July 31, 2000). At July 31, 2000, two of
the Company's stockholders had each guaranteed outstanding borrowings under the
credit facility of up to $100,000, plus interest and other costs and expenses,
and the Company also had approximately $256,000 in a noninterest bearing money
market account that was deposited with BACFC during the nine months ended July
31, 2000 to secure outstanding borrowings under the credit facility.
At July 31, 2000, the credit facility was due to expire on November 20,
2000. As a result of amendments to the agreements with Wells Fargo Business
Credit, the assignee of BACFC, that became effective on November 29, 2000, the
credit facility was extended. The amendments included the following:
o interest on borrowings under the line of credit and the term loan
will be payable monthly at .5% and .75% above the prime rate,
respectively;
o the credit facility will not expire until November 20, 2002;
o term loan principal payments will increase from $7,276 to $10,000
per month commencing January 1, 2001;
o the amount of borrowings guaranteed by each of the two stockholders
increased to $500,000; and
o the Company's ability to continue to use the credit facility will
become subject to its ability to meet specified financial covenants
and ratios.
In addition, the outstanding balance under the line of credit and a portion of
the outstanding balance under the term loan were classified as long-term
liabilities in the Company's July 31, 2000 condensed balance sheet based on the
Company's ability to either defer payments until, or make installment payments
through, November 20, 2002.
During the nine months ended July 31, 2000, the Company's operating
activities provided net cash of $394,000 primarily as a result of the net income
generated during the period, adjusted to eliminate the effects of charges for
depreciation and amortization, and decreases in amounts due from broker and
accounts receivable, which were partially offset by a decrease in accounts
payable and accrued expenses.
During the nine months ended July 31, 2000, the Company used approximately
$657,000 of its cash resources to reduce its line of credit, term loan and
capital lease obligations. Capital expenditures totaled $80,000 during the
period. Management presently does not expect to make any significant capital
expenditures during the remainder of fiscal 2000. The Company also received
short-term advances of $271,000 from a related party and a capital contribution
of $263,000 from a stockholder which represented a return of a portion of a
dividend paid during a period in which the Company was taxed as an "S"
Corporation.
Year 2000
The Year 2000 issue concerns the possible inability of information systems
and non-information systems with embedded technology to properly recognize and
process date sensitive information beyond December 31, 1999. The Company did not
experience any systems problems related to Year 2000 issues. The Company's
information and non-information systems functioned normally. The Company's
business with its suppliers and customers was not affected by Year 2000 issues.
The Company did experience some reduction in inventory purchases from its
wholesale customers in November and December 1999 as the customers did not want
to carry a large inventory ahead of the Year 2000. The Company does not
presently anticipate making any expenditures in the fiscal year ending October
31, 2000 for Year 2000 items.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Market risks relating to the Company's results of operations result
primarily from changes in interest rates and commodity prices as further
described below.
6
<PAGE>
Interest Rate Risks
The Company is subject to market risk from exposure to fluctuations in
interest rates. At July 31, 2000, the Company's long-term debt, other than
capitalized leases, consisted of approximately $419,000 of fixed rate debt and
approximately $2,239,000 of variable rate debt under its revolving line of
credit and term loan. Interest on the variable rate debt was payable primarily
at 1% above a specified prime rate (an effective rate of 10.5% at July 31,
2000). The Company does not expect changes in interest rates to have a material
effect on results of operations or cash flows in the remainder of 2000, 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.
Historically, the Company has used short-term coffee futures and options
contracts primarily for the purpose of hedging and minimizing the effects of
changing green coffee prices, as further explained in Note 2 of the notes to
financial statements in the Company's Annual Report on Form 10-K for the fiscal
year ended October 31, 1999. In addition, during the three months ended July 31,
2000, the Company began to acquire futures contracts with longer terms
(generally three to four months) primarily for the purpose of guaranteeing an
adequate supply of green coffee. The use of these derivative financial
instruments has enabled the Company to mitigate the effect of changing prices
although it generally remains exposed to loss when prices surge significantly in
a short period of time. 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.
At July 31, 2000, the Company held options covering an aggregate of
1,125,000 pounds of green coffee beans which are exercisable in fiscal 2000 at
$1.00 per pound. The fair market value of these options, which was obtained from
a major financial institution, was approximately $5,625 at July 31, 2000.
At July 31, 2000, the Company held longer-term futures contracts for the
purchase of 1,687,500 pounds of coffee at an average price of $.97 per pound.
The fair market price of coffee applicable to such contracts was $.8645 per
pound at that date. Generally, such contracts are marked to market on a daily
basis, and realized gains and losses are included in cost of sales.
The table below provides information about the Company's green coffee
inventory and futures contracts that are sensitive to changes in commodity
prices, specifically green coffee prices. For inventory, the table presents the
carrying amount and fair value at July 31, 2000. For the future contracts, the
table presents the notional amounts in pounds, the weighted average contract
prices, and the total dollar contract amount by expected maturity dates, the
latest of which occurs within one year from the reporting date. Contract amounts
are used to calculate the contractual payments and quantity of green coffee to
be exchanged under the futures contracts.
<TABLE>
<CAPTION>
July 31, 2000
Carrying Fair
Amount Value
<S> <C> <C> <C>
On balance sheet commodity position and
related derivatives
Green coffee inventory $675,711 $ 675,711
Fair value
Related derivatives
Futures contracts (long):
Contract volumes (1,687,500 pounds)
Weighted average price (per pound) $ 0.97
Contract amount $1,636,875
</TABLE>
7
<PAGE>
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.
<TABLE>
Signature Title Date
--------- ----- -----
<S> <C> <C>
/s/ Andrew Gordon Chief Executive Officer, President December 20, 2000
------------------------- and Treasurer
Andrew Gordon (principal executive officer and principal
financial officer)
</TABLE>
8
<PAGE>
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.
9
