================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
----------
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 October 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 11232-0005
(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 .
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. [X]
The aggregate market value of the voting common stock held by
non-affiliates of the Registrant cannot be determined as the common stock is not
quoted or listed on any quotation system or market.
As of September 30, 2000, the Registrant had 3,999,650 shares of common
stock, par value $.001 per share, outstanding.
================================================================================
<PAGE>
COFFEE HOLDING CO., INC.
PART I
This document contains forward looking statements. Forward looking
statements are based on management's then current views and assumptions
regarding future events and operating performance. These statements are subject
to factors which could cause actual results to differ materially from those
statements. For a more detailed discussion of forward looking statements and the
factors which could cause actual results to differ, please refer to Item 7
herein.
Item 1. Business
Coffee Holding Co., Inc. (sometimes referred to herein as the "Company" or
"Coffee Holding") conducts wholesale coffee operations, including roasting,
blending, packaging, marketing and distributing coffees for sale under private
labels and under its own brands of specialty coffees. The Company also sells
unprocessed green coffee to specialty gourmet roasters. Coffee Holding's sales
are primarily to customers located throughout the United States.
Coffee Holding Co., Inc. was originally incorporated in New York in 1971.
Pursuant to an Agreement and Plan of Merger between Coffee Holding Co., Inc. and
Transpacific International Group Corp. (the "Merger Agreement"), Coffee Holding
merged with and into Transpacific International Group Corp. ("Transpacific") in
February, 1998, with Transpacific being the surviving corporation (the "Reverse
Acquisition"). After the merger, Transpacific changed its name to Coffee Holding
Co., Inc.
Transpacific was incorporated in Nevada in 1995 for the sole purpose of
acquiring or merging with an unspecified operating business. Transpacific had no
operating assets and did not engage in any business activities other than
seeking and investigating other businesses for potential merger or acquisition.
On August 12, 1996, Transpacific commenced a "blank check" offering pursuant to
Rule 419 of the Securities Act, selling 3,000 shares of common stock at $6.00
per share, which generated $18,000 in gross proceeds from approximately 35
different investors. Pursuant to Rule 419, all of the gross proceeds from the
offering, less 10%, and the shares of Transpacific purchased by the investors
were held in escrow pending distribution of a prospectus to each of them
describing any prospective business acquisition by Transpacific and the
subsequent confirmation of holders of at least 80% of the shares that they
elected to remain investors. All but one investor reconfirmed their investment
and the merger was consummated. Pursuant to the Merger Agreement, the
Transpacific common stock was split ten for one and 3,000,000 shares were issued
to Coffee Holding shareholders in exchange for the outstanding shares of Coffee
Holding.
All descriptions of the business of Coffee Holding contained in this Form
10-K prior to the date of the merger describe the operations of the New York
corporation named Coffee Holding Co., Inc. and, from the date of the merger, the
operations of the Nevada corporation currently named Coffee Holding Co., Inc.
Unless otherwise specifically stated herein, all descriptions of Coffee Holding
and its operations contained herein are as of the date of this Form 10-K.
Products
Coffee Holding's products can be divided into three categories:
(i) Private label coffee
(ii) Branded coffee; and
(iii) Wholesale green coffee
Private label coffee. Coffee Holding roasts, blends, packages and
distributes coffee under private labels for companies throughout the United
States and Canada. As of March 31, 2000, the Company supplied coffee to
approximately 35 different wholesale and retail companies. Coffee Holding is
currently the leading supplier for three of the largest wholesalers in the
United States.
-2-
<PAGE>
In the year ended October 31, 1999 ("fiscal 1999"), approximately 50% of
Coffee Holding's sales revenue came from private label coffee sales, and, in
fiscal years 1998 and 1997, 42% and 44% of revenues, respectively, came from
those sales.
Branded coffee. Coffee Holding roasts, grinds and blends coffee according
to its own recipes and packages the coffee at its facilities. The Company then
sells the packaged coffee in its proprietary brand label to supermarkets,
wholesalers and individually owned stores throughout the United States, shipping
directly from its factory.
Coffee Holding's name brands of coffee are: Cafe Caribe, Cafe Supremo, Don
Manuel, Fifth Avenue and Via Roma. The Company has acquired trademark
registration rights for each of Coffee Holding's name brands. For further
information regarding these trademark registration rights, see
"Business--Trademarks and Domain Names." Each of Coffee Holding's name brands is
directed at a particular segment of the consumer coffee market.
Cafe Caribe, Coffee Holding's leading name brand by revenue, is a
specialty espresso coffee that targets espresso coffee drinkers, in particular,
the Latin American consumer market. Market research indicates that Latin
American coffee drinkers consume up to four times as much coffee than other
coffee drinkers and tend to be more brand loyal than other coffee drinkers.
Cafe Supremo is a specialty espresso that targets espresso drinkers of all
backgrounds and tastes. It is designed to introduce coffee drinkers to the
tastes of dark roasted coffee.
Don Manuel is a 100% Colombian coffee product made from the finest beans
Colombia produces. 100% Colombian coffee is an upscale quality product which
commands a substantial premium at retail compared to the more traditional brown
coffee blends.
Fifth Avenue is a blended coffee which has become popular as a second
alternative to consumers who purchase private label coffee.
Via Roma is an Italian style espresso targeted at the more traditional
espresso drinker.
In fiscal 1999, sales of Coffee Holding's branded coffees comprised
approximately 6% of its sales revenues and, in fiscal 1998 and 1997, 10% and 8%
of revenues, respectively, came from those sales.
Wholesale Green Coffee. Coffee Holding sells and brokers green coffee
beans to small roasters and coffee shop operators located throughout the United
States. The Company purchases its green coffee from suppliers located primarily
within the United States. The suppliers supply the Company with coffee beans
from many countries, including Columbia, Mexico, Kenya, Indonesia, Brazil and
Ethiopia, among others. In fiscal 1999, substantially all of the Company's
purchases were from less than ten vendors. Management does not believe that the
loss of any one vendor would have a material adverse effect on the Company's
operations due to the availability of alternate suppliers.
Coffee Holding carries over 50 different varieties of green coffee beans.
Green gourmet coffee beans are sold unroasted, direct from the Company's
warehouse to the small roasters and gourmet coffee shop operators which then
roast the beans themselves. In fiscal 1999, wholesales of green coffee beans
accounted for approximately 44% of Coffee Holding's sales revenues, and, in
fiscal 1998 and 1997, approximately 48% and 47% of revenues, respectively, came
from such sales.
Although the overall coffee market is mature, the green coffee market
represents the fastest growing area of the industry, as gourmet coffee houses
are increasing in all areas of the United States. The Company currently has over
150 customers in this area.
Raw Materials
Coffee is a commodity traded on the Commodities and Futures Exchange.
Coffee prices are subject to fluctuation. Over the past five years, the average
price per pound of coffee beans ranged from approximately $.80 to $3.18. The
price for coffee beans on the commodities market as of September 29, 2000 was
$.83.
The supply and price of coffee beans are subject to volatility and are
influenced by numerous factors which are beyond Coffee Holding's control. Supply
and price can be affected by many factors such as weather, politics and
economics in the exporting countries. Increases in the cost of coffee beans can,
to a certain extent, be passed
-3-
<PAGE>
on to Coffee Holding's customers in the form of higher prices for coffee beans
and processed coffee. However, there can be no assurance that the Company will
be successful in passing coffee price increases to customers without losses in
sales volume or margin. Drastic or prolonged increases in coffee prices could
also adversely impact the Company's business as it could lead to a decline in
overall consumption of coffee. Similarly, rapid decreases in the cost of coffee
beans could force the Company to lower its sales prices before realizing cost
reductions in its purchases. In addition, a worldwide supply shortage of gourmet
coffee beans could have an adverse impact on the Company.
Gourmet coffee, unlike most coffee, does not trade on the commodity
market. Instead, it tends to trade on a negotiated basis at a substantial
premium over commodity coffee pricing, depending on the origin, supply and
demand at the time of purchase.
The Company from time to time engages in the purchase and sale of coffee
futures and option contracts to guard against the effects of fluctuations in the
price of green coffee beans and supplement its supply of coffee, if necessary.
See "Item 7A - Quantitative and Qualitative Disclosures About Market Risks"
herein.
Trademarks and Domain Names
Coffee Holding holds trademarks, registered with the United States Patent
and Trademark Office for all five of its proprietary coffee brands. Trademark
registrations are subject to periodic renewal and the Company anticipates
maintaining its registration. The Company believes that its brands are
recognizable in the marketplace and that brand recognition is important to the
success of its branded coffee business.
Customers
Coffee Holding sells private label and its branded coffee to four of the
leading wholesalers in the United States: Supervalu, Nash Finch, Shurefine
International and Wakefern Foods. For fiscal 1999, sales to these four companies
accounted for approximately 37% of Coffee Holding's total sales. Sales of green
coffee beans to Green Mountain Coffee Roasters accounted for approximately 20%
of Coffee Holding's total sales.
The Company historically has had short term contracts with some of these
customers (generally one to three years in duration) and although the Company
believes that it has a strong mutually beneficial relationship with those
companies, there can be no assurance that these relationships will continue. The
loss of any one of these relationships would likely have a material adverse
effect on the Company's business.
Competition
The coffee market is highly competitive. Coffee Holding competes with
other suppliers and distributors of green coffee beans, whole coffee beans and
roasted coffees. The Company's whole bean coffees compete directly against
specialty coffees sold at retail through supermarkets and a growing number of
specialty coffee stores.
Private Label Competition. There are approximately six companies that
produce coffee for private label sale in the United States. Many other companies
produce coffee for sale on a regional basis. Coffee Holding's main competitors
are Kroger and Chock Full O' Nuts. Both Kroger and Chock Full O' Nuts, a
division of Sara Lee, are larger and have more financing and resources than
Coffee Holding does and therefore are able to devote more resources to product
development and marketing. The Company believes that it remains competitive by
providing a high level of quality and customer service. Private label coffee
also competes with all of the branded coffee on the market. Chock Full O' Nuts
also produces branded coffees which compete with their private label products.
Brand Competition. Coffee Holding's proprietary brand coffees compete with
many other brand coffees which are sold in supermarkets and specialty stores.
The branded coffee market is dominated by several large companies: Kraft General
Foods, Inc., Proctor & Gamble Co. and Nestle S.A., many of which have also begun
to market gourmet coffee in addition to non-gourmet coffee. Smaller competitors
include Chock Full O' Nuts and Tetley. Coffee Holding's large competitors have
greater access to capital than the Company and have a greater ability to conduct
marketing and promotions. The Company believes that, while its competitors'
brands may be more recognizable nationwide, its proprietary brands are well
recognized in the Northeastern United States and are distinguished by their
distinctive flavors.
-4-
<PAGE>
Wholesale Green Coffee Competition. There are many green coffee dealers
throughout the United States. Many of these dealers have greater financial
resources than Coffee Holding. However, Coffee Holding believes that it has both
the knowledge and the capability to assist small specialty gourmet coffee
roasters with developing and growing their business. Because the Company is also
a roaster as well as a seller of green coffee, it can provide its roasting
experience as a value added service to its gourmet roaster customers. While
other coffee merchants may be able to offer a lower price for coffee beans,
Coffee Holding markets itself as a partner to small roasters, with the ability
to help them market their specialty coffee products and develop a customer base.
The assistance the Company provides its customers includes training, coffee
blending and market identification.
Marketing
The Company markets its private label and wholesale coffee through trade
shows, industry publications, face to face contract and through the use of
non-exclusive independent food and beverage sales brokers. Recently, the Company
began to use its web site (www.coffeeholding.com) as a method of marketing
itself and its coffee products.
For its private label and brand coffees, the Company will from time to
time, in conjunction with retailers and with wholesalers, conduct in-store
promotions (e.g. coupons, price reductions, two for one sales).
Seasonality
Historically, consumer coffee consumption is greater in the winter months
as compared to the other seasons.
Employees
Coffee Holding has 28 full-time employees, 22 of which are employed in the
areas of coffee roasting, blending and packaging and six of which are in
administration and sales. None of its employees are represented by unions or
collective bargaining agreements. The Company's management believes that the
Company maintains a good working relationship with its employees. In order to
supplement its internal sales staff, Coffee Holding sometimes uses independent
national and regional sales brokers who work on a commission basis.
Item 2. Properties
Coffee Holding is headquartered at 4401 First Avenue, Brooklyn, New York
where it owns the land and an approximately 15,000 square foot building. The
building houses the Company's executive offices as well as the Company's plant
where it roasts, blends and packages its coffee. In March 1999, the Company paid
in full the outstanding balance of $602,000 of a mortgage note, which note was
secured by a first mortgage on the property.
Coffee Holding also leases a 7,500 square foot warehouse located at 4425A
First Avenue in Brooklyn from T & O Management. T& O Management is not
affiliated with the Company or any of its officers, directors or shareholders.
The Company pays an annual rent of $46,800. The lease expires on August 31,
2002.
Coffee Holding also uses a variety of independent, bonded commercial
warehouses to store its green coffee beans.
Coffee Holding's management believes that the Company's facilities are
adequate for its current operations and for the foreseeable future.
Item 3. Legal Proceedings
In the ordinary course of its business, Coffee Holding is a party to
litigation involving its operations. The Company does not believe that the
outcome of any current litigation will have a material adverse effect upon its
business, financial condition or results of operations.
Item 4. Submission Of Matters To A Vote Of Security Holders
During the fourth quarter of the fiscal year covered by this report on
Form 10-K, no matters were submitted to a vote of security holders.
-5-
<PAGE>
PART II
Item 5. Market For Registrant's Common Equity And Related Stockholder Matters
The Company's Common Stock is not quoted or listed on any quotation system
or market. The Company does not know of any firm that makes a market for the
Common Stock.
The number of registered holders of the Company's Common Stock at October
4, 2000 was approximately 472.
In January 1998, prior to the date of the merger with Transpacific, Coffee
Holding, while it was still a privately held "S" corporation, paid a
distribution in the amount of $422,258 to its stockholders to pay personal
income taxes. Since the January 1998 payment, the Company has never paid any
cash dividends on its Common Stock and has no intention to do so in the
foreseeable future.
Item 6. Selected Financial Data
The following selected data should be read in conjunction with the audited
financial statements of the Company and management's discussion and analysis of
the Company's financial condition and results of operations included elsewhere
herein:
<TABLE>
<CAPTION>
As of or for the Year Ended October 31,
-----------------------------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Operating data:
Net sales ........................................ $23,089,592 $25,853,791 $26,120,519
Cost of sales .................................... 19,796,476 24,090,666 22,961,911
----------- ----------- -----------
Gross profit ..................................... 3,293,116 1,763,125 3,158,608
Operating expenses ............................... 2,301,306 2,215,134 2,355,548
----------- ----------- -----------
Income (loss) from operations .................... 991,810 (452,009) 803,060
Other income (expense), net (A) .................. (382,906) (650,020) (301,448)
----------- ----------- -----------
Income (loss) before income taxes ................ 608,904 (1,102,029) 501,612
Provision for state and local income taxes (B) ... 64,173
----------- ----------- -----------
Net income (loss) (B) ............................ $ 608,904 $(1,102,029) $ 437,439
=========== =========== ===========
Basic earnings per share (B) ..................... $.15
====
Basic weighted average common shares outstanding . 3,999,650
===========
Pro forma (B):
Historical income (loss) before income taxes ..... $(1,102,029) $ 501,612
Unaudited pro forma:
Provision (credit) for income taxes ............ (424,000) 226,000
=========== ===========
Net income (loss) .............................. $ (678,029) $ 275,612
=========== ===========
Basic earnings (loss) per share ................ $ (.17) $ .07
=========== ===========
Basic weighted average common shares outstanding 3,999,650 3,999,650
=========== ===========
Dividends .......................................... $ -- $ 422,258 $ --
=========== =========== ===========
Balance sheet data:
Total assets ..................................... $ 6,511,598 $ 6,524,043 $ 6,794,629
=========== =========== ===========
Long-term obligations (including current portion) $ 3,121,479 $ 3,882,804 $ 1,486,549
=========== =========== ===========
Stockholders' equity (deficiency) ................ $ (319,178) $ (928,082) $ 595,432
=========== =========== ===========
</TABLE>
--------------------------------------------------------------------------------
(A) Includes consulting and professional fees and other costs incurred in
connection with the reverse acquisition totaling $327,087 in fiscal 1998.
(B) As further explained in Notes 2 and 9 to the financial statements
elsewhere herein, prior to the reverse acquisition on February 10, 1998,
the Company had elected to be treated as an "S" Corporation. Therefore, it
was not required to record any historical provision or credit for Federal
income taxes, whereas it recorded provisions for state and local taxes at
full or reduced rates. The unaudited pro forma provisions and credits for
income taxes assume that the Company had not made the "S" Corporation
elections during any portion of fiscal 1998 and 1997 and reflect an
effective rate of approximately 45% for each period. There were no
provisions or credits for income taxes in periods subsequent to the
reverse acquisition primarily as a result of pre-tax losses incurred in
those periods, the utilization of a portion of the related net operating
loss carryforwards and/or the inability of the Company to recognize
benefits from the net operating loss carryforwards due to the
uncertainties related to the extent and timing of its future taxable
income.
-6-
<PAGE>
Item 7. 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 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 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 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 annual report. We undertake no responsibility
to update any forward-looking statements contained in this report.
Year Ended October 31, 1999 (fiscal 1999) Compared to Year Ended October 31,
1998 (fiscal 1998)
Net sales totaled $23,089,592 in fiscal 1999, a decrease of $2,764,199 or
11% from $25,853,791 in fiscal 1998. Although coffee sold increased by
approximately 3 million pounds or 23% from 13 million pounds in fiscal 1998 to
16 million pounds in fiscal 1999, sales revenues decreased primarily due to
lower selling prices for green coffee.
Cost of sales in fiscal 1999 was $19,796,476, or 86% of net sales, as
compared to $24,090,666, or 93% of net sales in fiscal 1998. Cost of sales
consists primarily of green coffee and packaging materials. The decrease in cost
of sales in fiscal 1999 was attributable to lower purchase prices for green
coffee. Beginning around the end of fiscal 1998, the purchase price of coffee
began to decline gradually and fiscal 1999 saw continuing decreases in the
purchase price. As the price of coffee is cyclical and volatile and subject to
many factors, including weather, politics and economics, the Company is unable
to predict the purchase price of coffee in fiscal 2000 and beyond.
The Company's gross profit in fiscal 1999 was $3,293,116, an increase of
$1,529,991 or 87% from $1,763,125 in fiscal 1998. Gross profit as a percentage
of net sales increased by 7% to 14% in fiscal 1999 from 7% in fiscal 1998. The
increase in gross profit as a percentage of sales was primarily attributable to
increased margins on sales of private label and wholesale green coffee as
purchase prices for green coffee gradually declined throughout the year.
Selling and administrative expenses were $1,911,306 in fiscal 1999, a
decrease of $10,558 or 1% from $1,921,864 in fiscal 1998. As a percentage of net
sales, this change represented a 1% increase from 7% in fiscal 1998 to 8% in
fiscal 1999.
Interest expense increased $23,061 or 6% from $363,445 in fiscal 1998 to
$386,506 in fiscal 1999. The increase in fiscal 1999 was attributable primarily
to additional average borrowings on the Company's credit line. The amount in
fiscal 1998 included costs incurred in connection with the cancellation of a
factoring agreement.
-7-
<PAGE>
Other income (expense) in fiscal 1999 was a net expense of $382,906
compared to a net expense of $650,020 in fiscal 1998 which included $327,087 of
consulting and professional fees and other costs incurred in connection with the
reverse acquisition by Transpacific that was effectively completed on February
10, 1998.
Primarily as a result of the increase in gross profit, the increase in
other operating expenses and the absence of the charge for costs incurred in
connection with the reverse acquisition, the Company had income of $608,904
before income taxes in fiscal 1999 compared to a loss of $1,102,029 before
income taxes in fiscal 1998.
As further explained in Notes 2 and 9 of the notes to the financial
statements elsewhere herein, the Company was not required to record a provision
for Federal income tax in fiscal 1998 because it had elected to be taxed as an
"S" Corporation prior to the Reverse Acquisition on February 10, 1998 and it had
a pre-tax loss for the period from February 11, 1998 to October 31, 1998.
Although the Company had potential benefits of approximately $363,000 from the
net operating loss carryforwards as of October 31, 1998, it did not record a
credit for income taxes based on its pre-tax loss due to the uncertainties
related to the extent and timing of its future taxable income. The Company did
not record a provision for income taxes based on its pre-tax income in fiscal
1999 because it used a portion of the benefits available from the net operating
loss carryforwards that were available as of October 31, 1998. Although the
Company had potential benefits of approximately $89,000 from the net operating
loss carryforwards as of October 31, 1999, it did not record a credit for income
taxes based on its net operating loss carryforwards due to the uncertainties
related to the extent and timing of its future taxable income. Since the Company
had no historical provisions or credits for income taxes in fiscal 1999 and
1998, it had historical net income of $608,904 in fiscal 1999 compared to a
historical net loss of $1,102,029 in fiscal 1998.
The statement of operations included in the financial statements elsewhere
herein presents unaudited pro forma provisions and credits for income taxes, net
income and losses and related earnings (loss) per share information for 1998 and
1997 assuming the Company had not elected to be taxed as an "S" Corporation. The
Company would have had a credit for income taxes of approximately $424,000 in
fiscal 1998 assuming the "S" Corporation elections had not been made and it
would have been able to carryback its net operating losses. The unaudited pro
forma credit 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 a net loss of $678,029, or
$.17 per share, in fiscal 1998 compared to the Company's historical net income
of $608,904, or $.15 per share, in fiscal 1999.
Year Ended October 31, 1998 (fiscal 1998) Compared to Year Ended October 31,
1997 (fiscal 1997)
Net sales totaled $25,853,791 in fiscal 1998, a decrease of $266,728 or 1%
from $26,120,519 in fiscal 1997. Although coffee sold increased by approximately
2 million pounds or 18% from 11 million pounds in fiscal 1997 to 13 million
pounds in fiscal 1998, sales revenues remained steady due to lower retail coffee
selling prices, particularly in the fourth quarter of fiscal 1998. Management
attributes the decrease in revenue to declines in the selling price of retail
coffee which began in the second quarter of fiscal 1998 and continued to the end
of fiscal 1998 and the decision of management to reduce some selling prices to
attract larger customers.
Cost of sales in fiscal 1998 was $24,090,666, or 93% of net sales, as
compared to $22,961,911, or 88% of net sales in fiscal 1997. Cost of sales
consists primarily of green coffee and packaging materials. The increase in cost
of sales in fiscal 1998 was attributable to higher green coffee purchase prices.
The Company's gross profit in fiscal 1998 was $1,763,125, a decrease of
$1,395,483 or 44% from $3,158,608 in fiscal 1997. Gross profit as a percentage
of net sales decreased by 5% to 7% in fiscal 1998 from 12% in fiscal 1997. The
decrease of gross profit as a percentage of sales was primarily attributable to
lower margins on private label coffee and wholesale green coffee sales as a
result of higher green coffee purchase prices and higher Company inventories.
Margins were also reduced by management's decision to reduce some selling prices
to attract larger customers.
Selling and administrative expenses were $1,921,864 in fiscal 1998, a
decrease of $175,867 or 8% from $2,097,731 in fiscal 1997. As a percentage of
net sales, this change represented a 1% decrease from 8% in fiscal 1997 to 7% in
fiscal 1998. The reduction in expenses was related to lower bad debt expense in
fiscal 1998 versus fiscal 1997 which was partially offset by higher advertising,
promotional and freight expenses as well as office salaries in fiscal 1998.
-8-
<PAGE>
Interest expense increased $39,100 or 12% from $324,345 in fiscal 1997 to
$363,445 in fiscal 1998. The increase in fiscal 1998 was attributable to costs
incurred in connection with the cancellation of a factoring agreement that were
charged to interest expense. Also, the average balances on the Company's
replacement line of credit were higher although the applicable rate of interest
was lower.
Other income (expenses) in fiscal 1998 was a net expense of $650,020,
which included $327,087 of consulting and professional fees and other costs
incurred in connection with the Reverse Acquisition by Transpacific that was
effectively completed on February 10, 1998. Other income (expense) in 1997 was a
net expense of $301,448.
Primarily as a result of the decrease in gross profit and the charge for
costs incurred in connection with the reverse acquisition, the Company had a
loss of $1,102,029 before income taxes in fiscal 1998 compared to income of
$501,612 before income taxes in fiscal 1997.
As further explained above and in Notes 2 and 9 of the notes to the
financial statements elsewhere herein, the Company was not required to record a
provision for Federal income tax in fiscal 1998 because it had elected to be
taxed as an "S" Corporation prior to the Reverse Acquisition on February 10,
1998 and it had a pre-tax loss for the period from February 11, 1998 to October
31, 1998. Although the Company had potential benefits of approximately $363,000
from the net operating loss carryforwards as of October 31, 1998, it did not
record a credit for income taxes based on the pre-tax loss due to the
uncertainties related to the extent and timing of its taxable income. The
Company was not required to record a provision for Federal income taxes in 1997
because it had elected to be taxed as an "S" Corporation.
The Company would have had a credit for income taxes of approximately
$424,000 in fiscal 1998 and a provision for income taxes of approximately
$226,000 in fiscal 1997 assuming the "S" Corporation elections had not been made
and it would have been able to carryback its net operating losses. 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%. On an unaudited pro forma basis, the Company
would have had a net loss of $678,029, or $.17 per share, in fiscal 1998
compared to net income of $275,612, or $.07 per share, in fiscal 1997.
Liquidity and Capital Resources
As of October 31, 1999, the Company had working capital of approximately
$502,000, which increased by $729,000 from its working capital deficiency of
$227,000 as of October 31, 1998, and a total stockholders' deficiency of
$319,000, which decreased by $609,000 from its total stockholders' deficiency of
approximately $928,000 as of October 31, 1998. The Company had unrestricted cash
balances of $265,000 as of October 31, 1999, whereas it had no unrestricted cash
balances as of October 31, 1998. The Company's working capital increased
primarily as a result of net income generated and the additional borrowings
under its credit facility during fiscal 1999.
The Company obtained a credit facility from Nationscredit Commercial Corp.
and repaid its short-term obligations under a factoring agreement during fiscal
1998. The credit facility provides for a revolving line of credit 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
$2,445,000 as of October 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 9.25% at October 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 fiscal 1999, net cash provided by operating activities totaled
approximately $704,000 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 an increase in
accounts payable that were partially offset by increases in amounts on deposit
with the Company's coffee broker and an increase in coffee inventories.
-9-
<PAGE>
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 note was
initially due to mature on 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 fiscal 1999, the Company also used approximately $111,000 of its
cash resources to purchase property and equipment and $303,000 to reduce its
term loan and capital lease obligations. Capital expenditures were substantially
below those made in fiscal 1998 and management does not believe that the
Company's capital expenditures will be significant in fiscal 2000. The Company
borrowed approximately $125,000 under the line of credit during fiscal 1999 for
working capital purposes.
As of October 31, 1998, the Company had a working capital deficiency of
approximately $227,000, which decreased by $310,000 from its working capital
deficiency of $537,000 as of October 31, 1997, and a total stockholders'
deficiency of approximately $928,000, which decreased by $1,523,000 from its
total stockholders' equity of $595,000 as of October 31, 1997. The Company had
unrestricted cash balances of $199,000 as of October 31, 1997, whereas it had no
unrestricted cash balances as of October 31, 1998. The Company's working capital
increased primarily as a result of the conversion of short-term borrowings under
the factoring agreement to long-term borrowings under the credit facility and
through additional borrowings under its credit facility during fiscal 1998.
During fiscal 1998, net cash provided by operating activities totaled
approximately $1,333,000 primarily as a result of increases in amounts
receivable from the Company's broker and an increase in accounts payable that
were partially offset by the net loss generated during that year, adjusted to
eliminate the effects of charges for depreciation and amortization and bad
debts.
During fiscal 1998, the Company used approximately $347,000 of its cash
resources to purchase property and equipment. In addition to these cash
expenditures, the Company also added property and equipment totaling $288,500 in
fiscal 1998 by entering into capital leases. The capital expenditures were used
to refurbish equipment and upgrade capacity and to purchase and install new
manufacturing and other equipment associated with production. The Company used
$667,000 of its cash resources to reduce its mortgage note, term loan, capital
lease and related party obligations and placed approximately $367,000 in
restricted cash and cash equivalent investments to secure the mortgage note
payable, as explained above. The Company also paid dividends of $422,000 to its
stockholders in fiscal 1998 to pay personal income taxes. The Company borrowed
approximately $271,000 under the line of credit during fiscal 1998 for working
capital purposes.
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, during fiscal 2000
through cash provided by operating activities and/or short or long-term
borrowings. The Company's line of credit with Nationscredit Commercial Corp.
expires on November 20, 2000. Management is in discussions with the current
lender to renew the line and with other lenders to replace the line, but there
are no assurances that the Company will be able to renew or replace this line.
In the event that the Company is unable to obtain a line of credit, management
believes the Company could obtain loans by mortgaging its headquarters or by
using its equipment as collateral.
Year 2000
The Year 2000 problem concerns the possible 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.
-10-
<PAGE>
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.
Item 7A. Quantitative And Qualitative Disclosures About Market Risks
Market risks relating to the Company's operations result primarily from
changes in interest rates and commodity prices as further described below.
Interest Rate Risks
The Company is subject to market risk from exposure to fluctuations in
interest rates. At October 31, 1999, the Company's long-term debt, other than
capitalized leases, consisted of approximately $148,000 of fixed rate debt and
approximately $2,700,000 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 9.25% at October 31,
1999). The Company does not expect changes in interest rates to have a material
effect on income or cash flows in fiscal 2000, although there can be no
assurance that interest rates will not significantly change.
Commodity Price Risks
See Note 2 to the financial statements, Summary of Significant Accounting
Policies - "Hedging" and "Recent Accounting Pronouncements," for additional
information regarding the Company's hedging program and Statement of Financing
Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging
Activities.
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 October 31, 1999, the Company held options covering an
aggregate of 3,525,000 pounds of green coffee beans, which are exercisable in
fiscal 2000 at prices ranging from $.85 to $1.05 per pound. The price per pound
of green coffee on October 31, 1999 was $1.00. 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 it customers in the
future. See also "Raw Materials" in Item 1 for additional information in
connection with commodity price risks.
Item 8. Financial Statements And Supplementary Data
See Item 14 herein.
-11-
<PAGE>
Item 9. Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure.
On May 15, 1998, Transpacific dismissed German W. Chacon ("Chacon") who
has been previously engaged as the principal accountant for Transpacific and had
previously audited its financial statements as of September 30, 1997 and for the
period from October 9, 1995 (date of inception) to September 30, 1997.
Chacon's reports on Transpacific's financial statements for the period
from October 9, 1995 to September 30, 1997 did not contain any adverse opinion
or disclaimer of opinion, qualifications or modifications as to uncertainty,
audit scope or accounting principles.
There were no disagreements between Transpacific and Chacon on any matter
of accounting principles or practice, financial statement disclosure or auditing
scope or procedure within the period from October 9, 1995 to September 30, 1997
and the subsequent interim period preceding its dismissal which disagreement, if
not resolved to Chacon's satisfaction, would have caused it to make reference to
such disagreement.
During the period from October 9, 1995 to September 30, 1997 and the
subsequent interim period preceding Chacon's dismissal, there were no
"reportable events" as set forth in Item 304(a)(1)(v) of Regulation S-K.
On May 15, 1998, Coffee Holding dismissed the accounting firm of Ira D.
Ganzfried & Company ("Ganzfried") which had been previously engaged as the
principal accountants for Coffee Holding and had previously audited its
financial statements as of October 31, 1996 and 1995 and for the years then
ended.
Ganzfried's reports on Coffee Holding's financial statements for the years
ended October 31, 1996 and 1995 did not contain any adverse opinion or
disclaimer of opinion, qualifications or modifications as to uncertainty, audit
scope or accounting principles.
There were no disagreements between Coffee Holding and Ganzfried on any
matter of accounting principles or practice, financial statement disclosure or
auditing scope or procedure for the years ended October 31, 1996 and 1995 and
the subsequent interim period preceding its dismissal which disagreement, if not
resolved to Ganzfried's satisfaction, would have caused it to make reference to
such disagreement.
For the years ended October 31, 1996 and 1995 and the subsequent interim
period preceding Ganzfried's dismissal, there were no "reportable events" as set
forth in Item 304(a)(1)(v) of Regulation S-K.
The decision to change accountants was approved by the Board of Directors
of the Company following the merger between Transpacific and Coffee Holding. The
Company does not have an audit committee.
On May 15, 1998, Coffee Holding engaged the accounting firm of J.H. Cohn
LLP as the principal accountant to audit its financial statements in subsequent
years. Neither Coffee Holding nor anyone acting on its behalf consulted with
J.H. Cohn LLP prior to engaging them regarding the application of accounting
principles to a specified transaction or the type of audit opinion that might be
rendered on the Coffee Holding or Transpacific financial statements for which
disclosure would be required by Item 304(a)(2) of Regulation S-K.
PART III
Item 10. Directors And Executive Officers Of Coffee Holding Co., Inc.
Set forth below is information concerning the Company's directors and
executive officers. The Company's board of directors currently consists of five
directors. Directors are elected by a plurality of the votes cast at the
Company's annual meeting of stockholders. Once elected, each director serves
until the next annual meeting of stockholders and until his or her successor is
duly elected and qualified, or until his or her earlier death, resignation or
removal. Officers are appointed by the directors, and, once appointed, each
officer serves until his or her successor is duly appointed, or until his or her
earlier death, resignation or removal.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Andrew Gordon .............. [39] Chief Executive Officer, President, Treasurer and Director
David Gordon ............... [35] Executive Vice President, Secretary and Director
Gerard DeCapua ............. [39] Director
Daniel Dwyer ............... [43] Director
Matthew Phillips ........... [46] Director
</TABLE>
-12-
<PAGE>
Andrew Gordon is Chief Executive Officer, President, Treasurer and a
Director of Coffee Holding. He was previously a Vice President from 1981 to
1997. He has been a Director of Coffee Holding since 1981. Mr. Gordon received
his B.B.A. degree from Emory University. He is the brother of David Gordon.
David Gordon is Executive Vice President--Operations, Secretary and a
Director of Coffee Holding. He was previously a Vice President and Operating
Manager from 1983 to 1997. He has been a Director of Coffee Holding since 1983.
Mr. Gordon attended Baruch College in New York City. He is the brother of Andrew
Gordon.
Gerard DeCapua has been a Director of Coffee Holding since 1997. He has
his own law practice in Rockville Centre, New York since 1985. Mr. DeCapua
received his law degree from Pace University.
Daniel Dwyer has been a Director of Coffee Holding since 1998. Mr. Dwyer
has been a senior coffee trader at Rothfos Corporation since 1995.
Matthew Phillips has been a Director of Coffee Holding since 1998. Since
1991, Mr. Phillips has been a Vice-President of Branco Peres International,
responsible for coffee trading operations.
The Company currently does not have any standing committees.
Item 11. Executive Compensation
The following table sets forth certain compensation information for the
Company's chief executive officer and each other executive officer whose salary
and bonus compensation exceeded $100,000 for the fiscal year ended October 31,
1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
---------------------------------------------
Name and Fiscal Salary Bonus All Other
Principal Position Year ($) ($) Compensation ($)(1)
--------------------------------------- ------ ------- ------ -------------------
<S> <C> <C> <C> <C>
Andrew Gordon ......................... 1999 160,000 50,000 8,896
Chief Executive Officer and President 1998 160,000 -- 24,379
1997 100,000 50,000 15,684
David Gordon .......................... 1999 160,000 50,000 6,970
Executive Vice President-- Operations 1998 130,000 -- 6,970
1997 100,000 50,000 8,268
</TABLE>
----------
(1) The amounts set forth consist of amounts paid by the Company for the use
of an automobile and automobile insurance.
The Company has a stock option plan under which stock options to purchase
shares of Company Common Stock may be granted to the Company's directors,
officers and other key employees and consultants. The Company has reserved
2,000,000 shares of its Common Stock for issuance under the stock option plan.
As of September 30, 2000, no options had been granted under the plan.
The Company does not have employment agreements with any of its officers.
Compensation of Directors
Directors do not receive any compensation for their services. They are,
however, reimbursed for travel expenses and other out-of-pocket costs incurred
in connection with attendance at board of directors and committee meetings.
Item 12. Security Stock Ownership Of Certain Beneficial Owners And Management
The following table sets forth information regarding ownership of shares
of the Company's common stock, as of October 4, 2000, by each person known to be
the owner of 5% or more of the Company's common stock, by each person who is a
director or executive officer and by all directors and executive officers as a
group.
When reviewing the following table, you should be aware that:
(i) The amounts and percentages of common stock and preferred stock
beneficially owned are reported on the basis of regulations of the
SEC governing the determination of beneficial ownership of
securities. Under the rules of the SEC, a person is deemed to be a
"beneficial owner" of a security if that person has
-13-
<PAGE>
or shares "voting power," which includes the power to vote or to
direct the voting of such security, or "investment power," which
includes the power to dispose of or to direct the disposition of
such security. A person is also deemed to be a beneficial owner of
any securities of which that person has a right to acquire
beneficial ownership within 60 days. Under these rules, more than
one person may be deemed a beneficial owner of the same securities
and a person may be deemed to be a beneficial owner of securities as
to which that person has no economic interest.
(ii) Unless otherwise indicated by footnote, each person identified in
the table below has sole voting power and investment power as to the
shares beneficially owned.
<TABLE>
<CAPTION>
Common Stock
-----------------------
Number of Percentage
Shares of Class
---------- ----------
<S> <C> <C>
Andrew Gordon(1).............................................. 1,970,378 49.3%
David Gordon(1)............................................... 1,970,378 49.3%
Gerard DeCapua ............................................... 100 *
Daniel Dwyer ................................................. 100 *
Matt Phillips ................................................ 100 *
Rachelle Gordon(2) ........................................... 1,740,000 43.5%
Rachelle Gordon Grantor
Retained Annuity Trust ..................................... 1,350,878 30.8%
Sterling Gordon .............................................. 199,600 5.0%
Judy Melnick ................................................. 199,600 5.0%
All directors and executive officers as a group (5 persons)(1) 2,590,178 64.8%
</TABLE>
----------
* Less than 1%.
(1) Includes 1,350,878 shares held by the Rachelle Gordon Grantor Retained
Annuity Trust, of which Andrew and David Gordon are the co-trustees with
the power to vote and dispose of the shares.
(2) Includes 1,350,878 shares held by the Rachelle Gordon Grantor Retained
Annuity Trust, of which Ms. Gordon is the grantor and beneficiary.
Item 13. Certain Relationships And Related Transactions
From time to time, certain of the Company's stockholders and directors and
officers make loans to the Company for working capital purposes.
At October 31, 1999, the Company had loans payable to certain of its
stockholders and directors and officers in the principal amounts as follows:
Rachelle Gordon -- $65,000
Sterling Gordon -- $43,000
David Gordon -- $38,000
Andrew Gordon -- $ 1,800
The loans are due on demand and bear interest at 10% per annum.
Andrew Gordon and David Gordon have each guaranteed the payment of the
Company's borrowings under its outstanding term loan from Naxtionscredit
Commercial Corp. up to $100,000 in principal, plus interest and other costs and
expenses.
Daniel Dwyer, a director of the Company, is a senior coffee trader for
Rothfos Corporation. Mr. Dwyer is responsible for the Company's account. The
Company paid Rothfos $4,379,708 for green coffee purchases in fiscal 1999 and
expects to pay it a similar amount in fiscal 2000.
Matthew Phillips, a director of the Company, is Vice President of Branco
Peres, International, responsible for coffee trading. The Company paid Branco
Peres $231,755 in fiscal 1999 for green coffee purchases.
-14-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, And Reports On Form 8-K
(a) The financial statements and financial statement schedules listed
below are filed as a part of this report. See Index to Financial Statements and
Financial Statement Schedules beginning on Page F-1.
1. Financial Statements:
-- Index to Financial Statements and Financial Statement
Schedules
-- Independent Auditors' Report
-- Balance sheets as of October 31, 1999 and 1998
-- Statements of Operations for the Years Ended October 31, 1999,
1998 and 1997
-- Statements of Changes in Stockholders' Equity (Deficiency) for
the Years Ended October 31, 1999, 1998 and 1997
-- Statements of Cash Flows for the Years Ended October 31, 1999,
1998 and 1997
-- Notes to Financial Statements
2. Financial Statement Schedules:
II. Valuation and Qualifying Accounts and Reserves for the Years
Ended October 31, 1999, 1998 and 1997
Other Schedules have been omitted because the information required
to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
(b) No reports on Form 8-K were filed by the Company during the fourth
quarter ended October 31, 1999.
(c) Exhibits
Exhibit
Number Exhibit Name
------- ----------------
3.1 Articles of Incorporation of the Company (incorporated herein
by reference to Exhibit 3.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended April 30, 1998).
3.2 Certificate of Amendment to the Article of Incorporation of
the Company (incorporated herein by reference to Exhibit 3.2
to the Company's Quarterly Report on Form 10-Q for the
quarter ended April 30, 1998).
3.3 The Company's By-Laws (incorporated herein by reference to
Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q for
the quarter ended April 30, 1998).
10.1 Lease with T&O Management Corp. dated August 15, 1997
(incorporated herein by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
April 30, 1998).
10.2 1998 Stock Option Plan (incorporated hereby reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended April 30, 1998).
16.1 Letter from German W. Chacon (incorporated by reference to
Exhibit 16(a) to the Form 8-K of Transpacific International
Group Corp. filed with the SEC on May 18, 1998).
16.2 Letter from Ira D. Ganzfried & Company (incorporated by
reference to Exhibit 16(b) to the Form 8-K of Transpacific
International Group Corp. filed with the SEC on May 18, 1998).
27* Financial Data Schedule.
----------
* Filed herewith
-15-
<PAGE>
COFFEE HOLDING CO., INC.
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
PAGE
----
(A) FINANCIAL STATEMENTS:
REPORTS OF INDEPENDENT ACCOUNTANTS............................ F-2/3
BALANCE SHEETS
OCTOBER 31, 1999 AND 1998................................... F-4
STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997................. F-5
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997................. F-6
STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997................. F-7
NOTES TO FINANCIAL STATEMENTS................................. F-8/15
(B) FINANCIAL STATEMENT SCHEDULE:
II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997................... S-1
Other schedules are omitted because of the absence of conditions under
which they are required or because the required information is given in
the financial statements or notes thereto.
* * *
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Coffee Holding Co., Inc.
We have audited the accompanying balance sheets of COFFEE HOLDING CO.,
INC. as of October 31, 1999 and 1998, and the related statements of operations,
changes in stockholders' equity (deficiency) and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits 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 1999 and 1998 financial statements referred to above
present fairly, in all material respects, the financial position of Coffee
Holding Co., Inc. as of October 31, 1999 and 1998, and its results of operations
and cash flows for the years then ended, in conformity with generally accepted
accounting principles.
Our 1999 and 1998 audits referred to above included the information in
Schedule II which presents fairly, in all material respects, when read in
conjunction with the 1999 and 1998 basic financial statements taken as a whole,
the information required to be set forth therein for the years ended October 31,
1999 and 1998.
J. H. COHN LLP
Roseland, New Jersey
January 28, 2000
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Coffee Holding Co., Inc.
We have audited the accompanying statements of income, changes in
stockholders' equity and cash flows of Coffee Holding Co., Inc. for the year
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements 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 1997 financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Coffee Holding Co., Inc. for the year ended December 31, 1997, in conformity
with generally accepted accounting principles.
Our 1997 audit referred to above included the information in Schedule II
which presents fairly, in all material respects, when read in conjunction with
the 1997 basic financial statements taken as a whole, the information required
to be set forth therein for the year ended October 31, 1997.
IRA D. GANZFRIED & COMPANY
Roseland, New Jersey
December 23, 1997
F-3
<PAGE>
COFFEE HOLDING CO., INC.
BALANCE SHEETS
OCTOBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Assets 1999 1998
----------- ----------- -----------
<S> <C> <C>
Current assets:
Cash .......................................................... $ 265,044
Due from broker ............................................... 281,064 $ 150,592
Accounts receivable, net of allowance for doubtful accounts
of $227,210 and $215,000 ................................. 2,416,700 2,243,798
Inventories ................................................... 1,478,485 1,359,954
Cash and cash equivalents restricted under mortgage note ...... 432,965
Prepaid expenses and other current assets ..................... 59,565 57,198
---------- ----------
Total current assets ..................................... 4,500,858 4,244,507
Property and equipment, at cost, net of accumulated depreciation
of $1,908,410 and $1,657,206 .................................. 1,983,317 2,123,429
Deferred mortgage costs, net of accumulated amortization of $48,611 56,784
Deposits and other assets ......................................... 27,423 99,323
---------- ----------
Totals ................................................... $6,511,598 $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 ........... 202,743 215,026
Accounts payable and accrued expenses ......................... 3,709,297 3,569,321
---------- ----------
Total current liabilities ................................ 3,999,352 4,471,659
Term loan, net of current portion ................................. 192,119 279,431
Line of credit borrowings ......................................... 2,445,130 2,320,513
Obligations under capital leases, net of current portion .......... 46,161 249,325
Loans from related parties ........................................ 148,014 131,197
---------- ----------
Total liabilities ........................................ 6,830,776 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 ........................................... (804,175) (1,413,079)
---------- ----------
Total stockholders' deficiency ........................... (319,178) (928,082)
---------- ----------
Totals ................................................... $6,511,598 $6,524,043
========== ==========
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
COFFEE HOLDINGS CO., INC.
STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales ......................................... $23,089,592 $25,853,791 $26,120,519
Cost of sales ..................................... 19,796,476 24,090,666 22,961,911
----------- ----------- -----------
Gross profit ...................................... 3,293,116 1,763,125 3,158,608
----------- ----------- -----------
Operating expenses:
Selling and administrative .................... 1,911,306 1,921,864 2,097,731
Officers' salaries ............................ 390,000 293,270 257,817
----------- ----------- -----------
Totals ................................... 2,301,306 2,215,134 2,355,548
----------- ----------- -----------
Income (loss) from operations ..................... 991,810 (452,009) 803,060
----------- ----------- -----------
Other income (expense):
Interest income ............................... 3,600 40,512 22,897
Interest expense .............................. (386,506) (363,445) (324,345)
Expenses in connection with reverse acquisition (327,087)
----------- ----------- -----------
Totals ................................... (382,906) (650,020) (301,448)
----------- ----------- -----------
Income (loss) before income taxes ................. 608,904 (1,102,029) 501,612
Provision for state and local income taxes ........ 64,173
----------- ----------- -----------
Net income (loss) ................................. $ 608,904 $(1,102,029) $ 437,439
=========== =========== ===========
Basic earnings per share .......................... $.15
====
Basic weighted average common shares outstanding .. 3,999,650
===========
Unaudited:
Historical income (loss) before income taxes .. $(1,102,029) $ 501,612
Pro forma:
Provision (credit) for income taxes ...... (424,000) 226,000
----------- -----------
Net income (loss) ........................ $ (678,029) $ 275,612
=========== ===========
Basic earnings (loss) per share .......... $(.17) $.07
===== ====
Basic weighted average common
shares outstanding ..................... 3,999,650 3,999,650
=========== ===========
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
COFFEE HOLDING CO., INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Common Stock
----------------------------------------
No Par Value $.001 Par Value Retained
------------------- -------------------- Additional Earnings
Number of Number of Paid-in (Accumulated
Shares Amount Shares Amount Capital Deficit) Total
--------- -------- --------- ------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, November 1, 1996..... 100 $ 460,000 $ (302,007) $ 157,993
Net income.................... 437,439 437,439
---- --------- ----------- -----------
Balance, October 31, 1997..... 100 460,000 135,432 595,432
Effect of reverse acquisition. (100) (460,000) 3,999,650 $4,000 $480,997 (24,224) 773
Net loss...................... (1,102,029) (1,102,029)
Dividends paid................ (422,258) (422,258)
---- --------- --------- ------ -------- ----------- -----------
Balance, October 31, 1998..... -- -- 3,999,650 4,000 480,997 (1,413,079) (928,082)
Net income.................... 608,904 608,904
---- --------- --------- ------ -------- ----------- -----------
Balance, October 31, 1999..... -- $ -- 3,999,650 $4,000 $480,997 $ (804,175) $ (319,178)
==== ========= -======== ====== ======== =========== ===========
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE>
COFFEE HOLDING CO., INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------- ------------ ---------
<S> <C> <C> <C>
Operating activities:
Net income (loss) ................................................... $ 608,904 $(1,102,029) $ 437,439
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ................................... 252,925 239,687 170,579
Bad debts ....................................................... 12,210 53,391 522,499
Write-off of deferred mortgage costs ............................ 55,063
Changes in operating assets and liabilities:
Due from broker ............................................... (130,472) 273,307 (299,922)
Accounts receivable ........................................... (185,112) 561,012 (730,028)
Inventories ................................................... (118,531) 19,429 (504,122)
Prepaid expenses and other current assets ..................... (2,367) (30,132) 2,736
Deposits and other assets ..................................... 71,900 (42,132) (47,469)
Accounts payable and accrued expenses ......................... 139,976 1,360,674 809,499
--------- ----------- ---------
Net cash provided by operating activities ................... 704,496 1,333,207 361,211
--------- ----------- ---------
Investing activities--purchases of property and equipment .............. (111,092) (347,260) (262,653)
--------- ----------- ---------
Financing activities:
Net advances from factor ............................................ 505,053
Principal payments on mortgage note payable ......................... (600,000) (50,000) (50,000)
(Increase) decrease in cash and cash equivalents
restricted under mortgage note ................................. 432,965 (366,895) (22,897)
Principal payments on term loan ..................................... (87,312) (87,312)
Net advances under bank line of credit .............................. 124,617 271,340
Principal payments of obligations under capital leases .............. (215,447) (185,483)
Advances from (repayments to) related parties ....................... 16,817 (344,018) (343,125)
Dividends paid ...................................................... (422,258)
--------- ----------- ---------
Net cash provided by (used in) financing activities (328,360) (1,184,626) 89,031
--------- ----------- ---------
Net increase (decrease) in cash ........................................ 265,044 (198,679) 187,589
Cash, beginning of year ................................................ -- 198,679 11,090
--------- ----------- ---------
Cash, end of year ...................................................... $ 265,044 $ -- $ 198,679
========= =========== =========
Supplemental disclosure of cash flow data:
Interest paid ....................................................... $ 335,267 $ 334,567 $ 324,345
========= =========== =========
Income taxes paid ................................................... $ 904 $ 104,664 $ 64,173
========= =========== =========
</TABLE>
Supplemental schedule of noncash investing and financing activities:
During 1998 and 1997, the Company purchased equipment at a cost of
$288,500 and $361,334, respectively, by incurring capital lease
obligations.
During 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 Financial Statements.
F-7
<PAGE>
COFFEE HOLDING CO., INC.
NOTES TO 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 $327,087 were charged to expense in 1998.
Information as to the unaudited pro forma results of operations of the
Company assuming the Merger had been consummated as of, and the results of
operations of Transpacific had been included from, November 1, 1996 has not been
presented because such pro forma results would not differ materially from the
historical results of operations for 1998 and 1997 reflected in the accompanying
historical statements of operations.
Note 2--Summary of significant accounting policies:
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Cash equivalents:
Cash equivalents represent highly liquid investments with maturities of
three months or less at the date of purchase.
Inventories:
Inventories are valued at the lower of cost (first-in, first-out basis) or
market.
F-8
<PAGE>
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Property and equipment:
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets.
Hedging:
The Company uses futures and options contracts to hedge the effects of
fluctuations in the price of green coffee beans. These transactions meet the
requirements for hedge accounting, including designation and correlation. To
obtain a proper matching of revenues and expenses, gains or losses arising from
open and closed hedging transactions are included in inventory as a cost of the
commodity and reflected in the statement of operations when the product is sold.
Risks arise from the possible inability of counterparties to meet the terms of
their contracts and from movements in the price of green coffee. Management
believes that the overall exposure to credit risk is minimal.
At October 31, 1999, the Company held options covering an aggregate of
3,525,000 pounds of green coffee beans which are exercisable in fiscal 2000 at
prices ranging from $.85 to $1.05 per pound. At October 31, 1998, the Company
held options covering an aggregate of 2,550,000 pounds of green coffee beans
which were exercisable in 1999 at prices ranging from $1.10 to $1.35 per pound.
The fair market value of these options, which was obtained from a major
financial institution, was approximately $271,000 and $167,000 at October 31,
1999 and 1998, respectively. Due from broker includes the effects of deferred
hedging losses of $198,532 and unrealized hedging gains of $123,222 at October
31, 1999 and 1998, respectively.
Deferred mortgage costs:
Costs incurred in connection with obtaining mortgage financing were
capitalized and were being amortized over the term of the mortgage using a
method that approximated the interest method. Amortization of deferred mortgage
costs was not material in 1999, 1998 and 1997. The unamortized balance of the
deferred mortgage costs was charged to operations in 1999 as a result of the
prepayment of the mortgage loan (see Note 6).
Advertising:
The Company expenses the cost of advertising and promotions as incurred.
Advertising costs charged to operations totaled $92,924, $140,397 and $99,600 in
1999, 1998 and 1997, respectively.
Income taxes:
Prior to the Merger on February 10, 1998, Coffee, with the consent of its
stockholders, had elected to be treated as an "S" Corporation under the Internal
Revenue Code. Accordingly, the Company's income or loss prior to that date was
allocated to Coffee's stockholders for inclusion in their personal Federal
income tax returns. Therefore, the Company was not required to record any
historical provision or credit for Federal income taxes for the period prior to
February 10, 1998.
The Company had also elected to be treated as an "S" Corporation for New
York state income tax purposes. However, New York imposes a tax on "S"
Corporation income at a reduced rate and New York City does not recognize "S"
Corporations. Therefore, the Company was required to record appropriate
historical provisions and credits for state and local income taxes in periods
prior and subsequent to February 10, 1998.
The Company accounts for income taxes pursuant to the asset and liability
method which requires deferred income tax assets and liabilities to be computed
annually for temporary differences between the financial statement and tax bases
of assets and liabilities that will result in taxable or deductible amounts in
the future based on enacted tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. The income tax provision or credit is the tax
payable or refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities.
F-9
<PAGE>
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock options:
In accordance with the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," the Company will recognize
compensation costs as a result of the issuance of stock options to employees
based on the excess, if any, of the fair value of the underlying stock at the
date of grant or award (or at an appropriate subsequent measurement date) over
the amount the employees must pay to acquire the stock. Therefore, the Company
will not be required to recognize compensation expense as a result of any grants
of stock options to employees at an exercise price that is equivalent to or
greater than fair value. The Company will also make pro forma disclosures, as
required by Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), of net income or loss as if a fair value
based method of accounting for stock options had been applied, if such amounts
differ materially from the historical amounts.
Earnings (loss) 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. Basic earnings (loss) per common share is calculated
by dividing net income or loss by the weighted average number of common shares
outstanding during each period. The calculation of diluted earnings per common
share is similar to that of basic earnings per common share, except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if all potentially dilutive common shares, such as
those issuable upon the exercise of stock options, were issued during the
period.
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 1998 and all of 1997 and it had no potentially dilutive securities
outstanding in 1999, 1998 and 1997, historical basic earnings per share is
presented in the accompanying statement of operations for 1999 and unaudited pro
forma earnings (loss) per share is presented in the accompanying statements of
operations for 1998 and 1997.
The weighted average common shares outstanding used in the computation of
basic earnings per share in 1999 was 3,999,650 which was the number of shares of
common stock actually outstanding during that year. The weighted average common
shares outstanding used in the computation of unaudited pro forma basic earnings
(loss) per share in 1998 and 1997 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).
Recent accounting pronouncements:
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which, as amended, is
effective for all fiscal years beginning after June 15, 2000. SFAS 133 requires
that all derivative financial instruments be recognized as either assets or
liabilities in the balance sheet and measured at fair value. Management is in
the process of evaluating the impact, if any, that SFAS 133 will have on the
Company's financial statements.
F-10
<PAGE>
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Recent accounting pronouncements (concluded):
The FASB and the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants had issued certain other accounting
pronouncements as of October 31, 1999 that will become effective in subsequent
periods; however, management of the Company does not believe that any of those
pronouncements would have significantly affected the Company's financial
accounting measurements or disclosures had they been in effect during 1999, 1998
and 1997.
Note 3--Inventories:
Inventories at October 31, 1999 and 1998 consisted of the following:
1999 1998
---- ----
Packed coffee ........................ $ 211,620 $ 395,655
Green coffee ......................... 892,344 755,305
Packaging supplies ................... 374,521 208,994
---------- ----------
Totals ............................. $1,478,485 $1,359,954
========== ==========
Note 4--Property and equipment:
Property and equipment at October 31, 1999 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
Estimated
Useful Life 1999 1998
---------- ---- ----
<S> <C> <C> <C>
Building and improvements .................. 30 years $1,232,659 $1,220,110
Machinery and equipment .................... 7 years 1,709,915 1,627,366
Machinery and equipment under capital leases 7 years 694,609 694,609
Furniture and fixtures ..................... 7 years 113,544 97,550
---------- ----------
3,750,727 3,639,635
Less accumulated depreciation .............. 1,908,410 1,657,206
---------- ----------
1,842,317 1,982,429
Land ....................................... 141,000 141,000
---------- ----------
Totals ................................... $1,983,317 $2,123,429
========== ==========
</TABLE>
Depreciation totaled $251,204, $234,525 and $165,417 in 1999, 1998 and 1997,
respectively.
Note 5--Cash and cash equivalents restricted under mortgage note:
Restricted cash and cash equivalents at October 31, 1998 consisted of
investments in the following interest-bearing accounts:
Cash in escrow ........................................... $ 71,039
Certificate of deposit ................................... 361,926
--------
Totals ................................................ $432,965
========
The restricted investments were pledged to secure a mortgage note payable
(see Note 6). The restricted investments were liquidated in March 1999 in
connection with the repayment of the mortgage note; accordingly, they were
classified as current assets in the accompanying October 31, 1998 balance sheet.
Note 6--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
F-11
<PAGE>
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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).
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. The mortgage note was repaid in
March 1999 and the remaining unamortized deferred mortgage costs of $55,063 were
charged to interest expense.
Note 7--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.
The factoring agreement provided for borrowings of up to (i) 80% of the
Company's eligible trade accounts receivable and (ii) 50% of its eligible
inventories up to a maximum of $400,000. The outstanding balance of $2,503,228
at October 31, 1997 approximated the maximum amount that the Company could
borrow based on its eligible trade accounts receivable and inventories as of
that date. Interest was payable monthly at the prime rate plus 2% and borrowings
up to $200,000, plus interest and other costs and expenses as defined, were
guaranteed by a stockholder.
The Company incurred costs of approximately $113,000 in connection with
the cancellation of the factoring agreement that were charged to interest
expense in 1998.
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 up to a
maximum of $5,000,000 through November 20, 2000 when the line of credit expires
and any outstanding balance must be repaid. The outstanding balance of
$2,445,130 and $2,320,513 at October 31, 1999 and 1998, respectively,
approximated the maximum amount that the Company could borrow based on its
eligible trade accounts receivable and inventories as of each date. Interest is
payable monthly at the prime rate plus 1% (an effective rate of 9.25% at October
31, 1999).
The term loan, which had an outstanding balance of $279,431 and $366,743
(including a current portion of $87,312) at October 31, 1999 and 1998,
respectively, provides for borrowings of up to the greater of 80% of the cost of
eligible equipment or $500,000. Principal is payable in monthly installments of
$7,276 plus interest which is also at the prime rate plus 1% until November 20,
2000 at which time the outstanding balance must also be repaid.
Two of the Company's stockholders have each guaranteed outstanding
borrowings under the credit facility of up to $100,000, plus interest and other
costs and expenses as defined.
Note 8--Loans from related parties:
The Company had loans payable to its stockholders of $148,014 and $131,197
at October 31, 1999 and 1998, respectively. The loans are due on demand, bear
interest at 10% and are subordinated to the balance outstanding under the
mortgage note payable. Interest expense was not material in 1999, 1998 and 1997.
Note 9--Income taxes:
As shown in the accompanying statements of operations, the Company had no
historical provision or credit for income taxes in 1999 and 1998 and a
historical provision for current state and local income taxes in 1997 comprised
as follows:
1997
----
State ........................................................ $ 4,173
Local ........................................................ 60,000
-------
Total historical ........................................... $64,173
=======
F-12
<PAGE>
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
As explained in Note 2, 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 provide for income taxes on its historical
income before income taxes of approximately $1,028,000 and $502,000 for the
period from November 1, 1997 to February 10, 1998 and the year ended October 31,
1997, respectively; 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
$2,130,000 for the period from February 11, 1998 to October 31, 1998. As a
result of the loss for the period from February 11, 1998 to October 31, 1998 and
certain other elections related to the termination of its "S" Corporation
election, the Company had net operating loss carryforwards as of October 31,
1998 of approximately $800,000 available to reduce future Federal, state and
local taxable income. There were no other material temporary differences as of
October 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 $363,000 attributable to the potential benefits from the net
operating loss carryforwards as of October 31, 1998 by an equivalent valuation
allowance and, accordingly, it did not recognize a credit for Federal income
taxes for the period from February 11, 1998 to October 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 year ended October 31, 1998.
Since the Company had pre-tax income of approximately $609,000 in 1999, it
had net operating loss carryforwards remaining as of October 31, 1999 of
approximately $191,000 available to reduce future Federal, state and local
taxable income which, if not used, will expire in 2013. There were no other
material temporary differences as of October 31, 1999. However, due to the
uncertainties related to the extent and timing of the Company's future taxable
income, the Company also offset the 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. The Company did not
recognize any provision or credit for Federal income taxes as a result of the
reduction in the valuation allowance of $274,000 during the year ended October
31, 1999.
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 1999, 1998 and 1997 are set forth below:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Tax provision (credit) at statutory rate of 34% . $ 207,000 $(374,000) $ 149,000
Adjustments for effects of:
State income taxes, net of Federal tax effect . 67,000 64,173
"S" Corporation election and termination of "S"
Corporation election ..................... 11,000 (149,000)
Change in valuation allowance ................. (274,000) 363,000
--------- --------- ---------
Historical provision ...................... $ -- $ -- $ 64,173
========= ========= =========
</TABLE>
The Company's "S" Corporation election was in effect for part of 1998 and
all of 1997. Unaudited pro forma historical provisions and credits for income
taxes assuming the Exchange had occurred on November 1, 1996 and the Company was
subject to Federal, state and local income taxes at full statutory rates for
1998 and 1997 (periods during which the "S" Corporation elections were in
effect) are set forth below:
1998 1997
---- ----
Federal ............................... $(262,000) $ 140,000
State ................................. (77,000) 41,000
Local ................................. (85,000) 45,000
--------- ---------
Total pro forma (unaudited) ......... $(424,000) $ 226,000
========= =========
F-13
<PAGE>
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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%.
Note 10--Lease commitments:
Operating lease:
The Company occupies warehouse facilities under an operating lease which
expires on August 31, 2002 unless renewed at the option of the Company for an
additional two years. The lease requires the Company to pay utilities and other
maintenance expenses. Rent charged to operations amounted to $46,800 in 1999 and
1998 and $3,900 in 1997. Future minimum rental payments under the noncancelable
operating lease in years subsequent to October 31, 1999 were as follows:
Year Ending
October 31, Amount
------------- -----------
2000 .......................................................... $ 46,800
2001 .......................................................... 46,800
2002 .......................................................... 39,000
--------
Total ............................................................. $132,600
========
Capital leases:
As of October 31, 1999, the Company was obligated under various capital
leases for machinery and equipment that expire at various dates through February
2001. Assets under capital leases are amortized over their estimated useful
lives of seven years. Amortization of $96,271, $77,246 and $25,810 was charged
to operations in 1999, 1998 and 1997, respectively. The future minimum lease
payments under capital leases and the net present value of the future minimum
lease payments at October 31, 1999 were as follows:
Total minimum lease payments .................................. $277,621
Less amount representing interest ............................. 28,717
--------
Present value of net minimum lease payments ................... 248,904
Less current portion .......................................... 202,743
--------
Long-term portion ............................................. $ 46,161
========
Note 11--Concentrations of credit risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents,
amounts due from broker and trade accounts receivable. The Company maintains its
cash and cash equivalents in bank and brokerage accounts the balances of which,
at times, may exceed Federal insurance limits. At October 31, 1999, the Company
had cash balances that exceeded Federal insurance limits by $263,000. The net
balance of the Company's investments in derivative financial instruments also
represents an amount due from a broker. Exposure to credit risk is reduced by
placing such deposits and investments with major financial institutions and
monitoring their credit ratings.
Approximately 20% of the Company's sales were derived from one customer
during 1999 and 1998. That customer also accounted for approximately $400,000 of
the Company's accounts receivable balance at October 31, 1999. Concentrations of
credit risk with respect to other trade receivables are limited due to the short
payment terms generally extended by the Company; by ongoing credit evaluations
of customers; and by maintaining an allowance for doubtful accounts that
management believes will adequately provide for credit losses.
Management does not believe that credit risk was significant at October
31, 1999.
F-14
<PAGE>
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 12--Stock option plan:
On February 10, 1998, the Company's stockholders consented to the adoption
of the Company's stock option plan (the "Plan") whereby incentive and/or
nonincentive stock options for the purchase of up to 2,000,000 shares of the
Company's common stock may be granted to the Company's directors, officers,
other key employees and consultants. Under the Plan, the exercise price of all
options must be at least 100% of the fair market value of the common stock on
the date of grant (the exercise price of an incentive stock option for an
optionee that holds more than 10% of the combined voting power of all classes of
stock of the Company must be at least 110% of the fair market value on the date
of grant).
As of October 31, 1999, no options had been granted under the Plan.
Note 13--Major vendors:
During 1999, substantially all of the Company's purchases were from nine
vendors. An employee of one of those vendors is a director of the Company.
Purchases from that vendor totaled approximately $4,400,000 in 1999. The nine
vendors also accounted for substantially all of the Company's accounts payable
at October 31, 1999. Management does not believe that the loss of any one vendor
would have a material adverse effect on the Company's operations due to the
availability of alternate suppliers.
* * *
F-15
<PAGE>
COFFEE HOLDING CO., INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Balance at Additions- Deductions Balance
Beginning Charged From at End
of Year to Income Reserves of Year
1999: -------- --------- -------- ---------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts ......... $215,000 $ 12,210 $227,210
======== ======== ========
1998:
Allowance for doubtful accounts ......... $254,317 $ 53,391 $ 92,708 $215,000
======== ======== ======== ========
1997:
Allowance for doubtful accounts ......... $134,200 $522,499 $402,382 $254,317
======== ======== ======== ========
</TABLE>
S-1
<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.
By: /S/ ANDREW GORDON
-----------------------------
Andrew Gordon
Dated: October 25, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on October 25, 2000 by the following persons on behalf
of the registrant and in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ ANDREW GORDON Chief Executive Officer, President, Treasurer and
------------------------------------------ Director (principal executive officer and principal
Andrew Gordon financial and accounting officer)
/s/ DAVID GORDON Executive Vice President--Operations, Secretary
------------------------------------------- and Director
David Gordon
/s/ GERARD DECAPUA Director
-------------------------------------------
Gerard DeCapua
/s/ DAN DWYER Director
-------------------------------------------
Dan Dwyer
/s/ MATT PHILLIPS Director
-------------------------------------------
Matt Phillips
</TABLE>
<PAGE>
Supplemental Information to be Furnished With Reports
Filed Pursuant to Section 15(d) of the Act by Registrants
Which Have Not Registered Securities Pursuant to Section 12 of the Act
Coffee Holding has not and does not intend to send an annual report to
stockholders or proxy materials to its stockholders.
<PAGE>
INDEX TO EXHIBITS
27 Financial Data Schedule
