UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549-1004
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________.
Commission file No. _______
COFFEE HOLDING CO., INC.
(Exact name of registrant as specified in its charter)
Nevada 11-2238111
(state or other jurisdiction of (IRS employer
incorporation or organization) identification number)
4401 First Avenue, Brooklyn, New York 11232
(address of principal executive offices) (zip code)
Registrant's telephone number, including area code (718) 832-0800
Securities registered pursuant to Section 12(b) of the Act:
None
----
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
None
----
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No X .
As of September 30, 2000, the Registrant had 3,999,650 shares of common stock,
par value $.001 per share, outstanding.
<PAGE>
PART I
COFFEE HOLDING CO., INC.
ITEM 1. FINANCIAL STATEMENTS
<PAGE>
COFFEE HOLDING CO., INC.
INDEX TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
PAGE
CONDENSED BALANCE SHEETS
JANUARY 31, 1999 AND OCTOBER 31, 1998 F-2
CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 1999 AND 1998 F-3
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
THREE MONTHS ENDED JANUARY 31, 1999 F-4
CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JANUARY 31, 1999 AND 1998 F-5
NOTES TO CONDENSED FINANCIAL STATEMENTS F-6/11
* * *
F-1
<PAGE>
COFFEE HOLDING CO., INC.
CONDENSED BALANCE SHEETS
JANUARY 31, 1999 AND OCTOBER 31, 1998
<TABLE>
<CAPTION>
January October
ASSETS 31, 1999 31, 1998
------ ----------- ------------
(Unaudited) (See Note 1)
<S> <C> <C>
Current assets:
Due from broker $ 60,260 $ 150,592
Accounts receivable, net of allowance for doubtful
accounts of $215,000 2,372,390 2,243,798
Inventories 1,636,324 1,359,954
Cash and cash equivalents restricted under mortgage note 436,389 432,965
Prepaid expenses and other current assets 21,046 57,198
Loans receivable from stockholder 300,000
----------- -----------
Total current assets 4,826,409 4,244,507
Property and equipment, at cost, net of accumulated
depreciation of $1,716,714 and $1,657,206 2,071,698 2,123,429
Deferred mortgage costs, net of accumulated amortization
of $49,901 and $48,611 55,494 56,784
Deposits and other assets 99,323 99,323
----------- -----------
Totals $ 7,052,924 $ 6,524,043
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
Current liabilities:
Mortgage note payable $ 587,502 $ 600,000
Current portion of term loan 87,312 87,312
Current portion of obligations under capital leases 219,386 215,026
Accounts payable and accrued expenses 3,226,581 3,569,321
----------- -----------
Total current liabilities 4,120,781 4,471,659
Term loan, net of current portion 257,603 279,431
Line of credit borrowings 2,909,807 2,320,513
Obligations under capital leases, net of current portion 192,452 249,325
Loans from related parties 115,185 131,197
----------- -----------
Total liabilities 7,595,828 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 (1,027,901) (1,413,079)
----------- -----------
Total stockholders' deficiency (542,904) (928,082)
----------- -----------
Totals $ 7,052,924 $ 6,524,043
=========== ===========
</TABLE>
See Notes to Condensed Financial Statements.
F-2
<PAGE>
COFFEE HOLDING CO., INC.
CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Net sales $6,919,449 $6,856,895
Cost of sales 5,885,491 5,147,866
---------- ----------
Gross profit 1,033,958 1,709,029
---------- ----------
Operating expenses:
Selling and administrative 483,023 493,167
Officers' salaries 66,923 90,675
---------- ----------
Totals 549,946 583,842
---------- ----------
Income from operations 484,012 1,125,187
Interest expense 98,834 96,902
---------- ----------
Income before income taxes 385,178 1,028,285
Provision for income taxes 113,000
---------- ----------
Net income $ 385,178 $ 915,285
========== ==========
Basic earnings per share $.10
====
Basic weighted average common shares outstanding 3,999,650
==========
Unaudited:
Historical income before income taxes $1,028,285
Pro forma:
Provision for income taxes 463,000
----------
Net income $ 565,285
==========
Basic earnings per share $.14
====
Basic weighted average common shares outstanding 3,999,650
==========
</TABLE>
See Notes to Condensed Financial Statements.
F-3
<PAGE>
COFFEE HOLDING CO., INC.
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
THREE MONTHS ENDED JANUARY 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional
------------------------ Paid-in Accumulated
Shares Amount Capital Deficit Total
------------ ------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance, November 1, 1998 3,999,650 $ 4,000 $480,997 $(1,413,079) $(928,082)
Net income 385,178 385,178
--------- -------- -------- ----------- ---------
Balance, January 31, 1999 3,999,650 $ 4,000 $480,997 $(1,027,901) $(542,904)
========= ======== ======== =========== =========
</TABLE>
See Notes to Condensed Financial Statements.
F-4
<PAGE>
COFFEE HOLDING CO., INC.
CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JANUARY 31, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
--------- -----------
<S> <C> <C>
Operating activities:
Net income $ 385,178 $ 915,285
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 60,798 49,236
Changes in operating assets and liabilities:
Due from broker 90,332 (322,929)
Accounts receivable (128,592) 781,437
Inventories (276,370) (354,539)
Prepaid expenses and other current assets 36,152 (690)
Deposits and other assets 691
Accounts payable and accrued expenses (342,740) 116,521
--------- -----------
Net cash provided by (used in) operating activities (175,242) 1,185,012
--------- -----------
Investing activities:
Purchases of property and equipment (7,777) (47,560)
Loans to stockholder (300,000)
--------- -----------
Net cash used in investing activities (307,777) (47,560)
--------- -----------
Financing activities:
Principal payments on mortgage note payable (12,498) (12,500)
(Increase) decrease in cash and cash equivalents restricted
under mortgage note (3,424) 22,897
Principal payments on term loan (21,828)
Net advances under bank line of credit 589,294 (790,022)
Principal payments of obligations under capital leases (52,513) (31,882)
Repayments of loans from related parties (16,012) (435,861)
--------- -----------
Net cash used in financing activities 483,019 (1,247,368)
--------- -----------
Net increase (decrease) in cash -- (109,916)
Cash, beginning of period -- 198,679
--------- -----------
Cash, end of period $ -- $ 88,763
========= ===========
Supplemental disclosure of cash flow data:
Interest paid $ 98,834 $ 96,602
========= ===========
</TABLE>
Supplemental schedule of noncash investing and financing activities:
During the three months ended January 31, 1998, the Company
increased its obligations under the credit facility that provides it
with the line of credit and term loan and decreased the balance
payable to its factor through a direct transfer of $2,503,288 from
the bank to the factor.
See Notes to Condensed Financial Statements.
F-5
<PAGE>
COFFEE HOLDING CO., INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Note 1 - Business activities and reverse acquisition:
Coffee Holding Co., Inc. ("Coffee"), which was incorporated in New
York on January 22, 1971, conducts wholesale coffee operations,
including manufacturing, roasting, packaging, marketing and
distributing roasted and blended coffees for private labeled
accounts and its own brands, and sells green coffees. The Company's
sales are primarily to customers that are located throughout the
United States.
On February 10, 1998, the holders of all of the shares of Coffee's
common stock consummated an exchange (the "Exchange") of their
shares for shares of common stock of Transpacific International
Group Corp. ("Transpacific"). Transpacific was incorporated in
Nevada on October 9, 1995 and organized originally as a "blind pool"
or "blank check" company for the purpose of either merging with or
acquiring an operating company. It had been a development stage
company with no significant operating activities or assets and
liabilities prior to the Exchange.
Transpacific, which had, effectively, 999,650 outstanding shares of
common stock (with a par value of $.001 per share) prior to the
Exchange, issued 3,000,000 shares of common stock in exchange for
all of the 100 issued and outstanding shares of common stock (no par
value) of Coffee. Concurrently, Coffee was merged into Transpacific
(the "Merger") and Transpacific changed its name to Coffee Holding
Co., Inc.
Coffee Holding Co., Inc. after the Exchange, the Merger and the name
change is referred to below as the "Company" or the "Combined
Company." The "Company" is also used to refer to Coffee Holding Co.,
Inc. prior to the Exchange, the Merger and the name change.
The stockholders of Coffee also owned 540,040 shares of common stock
of Transpacific prior to the Exchange and, accordingly, they owned a
total of 3,540,400 or 88.5% of the outstanding shares of the
Combined Company immediately after the Exchange. Therefore, the
Merger was treated, effective as of February 10, 1998, as a
"purchase business combination" and a "reverse acquisition" for
accounting purposes in which Transpacific was the "legal acquirer"
and Coffee was the "accounting acquirer." The carrying values of the
assets and liabilities of Transpacific, which were immaterial, were
recorded at their historical carrying values as of February 10,
1998. Accordingly, the historical financial statements included
herein only reflect the operations of Coffee for the period prior to
February 10, 1998. All references to numbers of shares of common
stock as of the dates or for periods prior to the Exchange have been
restated to reflect the ratio of the number of common shares of
Transpacific effectively exchanged for common shares of Coffee.
Information as to the unaudited pro forma results of operations of
the Company for the three months ended January 31, 1998 assuming the
Merger had been consummated as of, and the results of operations of
Transpacific had been included from, November 1, 1997 has not been
presented because such pro forma results would not differ materially
from the historical results of operations for the three months ended
January 31, 1998 reflected in the accompanying historical statements
of operations.
F-6
<PAGE>
COFFEE HOLDING CO., INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Note 2 - Basis of presentation:
In the opinion of management, the accompanying unaudited condensed
financial statements reflect all adjustments, consisting of normal
recurring accruals, necessary to present fairly the financial
position of the Company as of January 31, 1999, its results of
operations and cash flows for the three months ended January 31,
1999 and 1998 and its changes in stockholders' equity for the three
months ended January 31, 1999. Information included in the balance
sheet as of October 31, 1998 has been derived from the Company's
audited balance sheet included in the Company's Annual Report on
Form 10-K for the year ended October 31, 1998 (the "Form 10-K")
previously filed with the Securities and Exchange Commission (the
"SEC"). Pursuant to generally accepted accounting principles and the
rules and regulations of the SEC for interim financial statements,
certain information and disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted from these financial
statements unless significant changes have taken place since the end
of the most recent fiscal year. Accordingly, these unaudited
condensed financial statements should be read in conjunction with
the audited financial statements, the related notes to the financial
statements and the other information in the Form 10-K.
Operating results for the three month periods ended January 31, 1999
and 1998 are not necessarily indicative of the results that may be
expected for the years ending October 31, 1999 and 1998.
Note 3 - Inventories:
Inventories at January 31, 1999 and October 31, 1998 consisted of
the following:
January October
31, 1999 31, 1998
---------- ----------
Packed coffee $ 244,575 $ 395,655
Green coffee 1,010,571 755,305
Packaging supplies 381,178 208,994
---------- ----------
Totals $1,636,324 $1,359,954
========== ==========
The Company uses futures and options contracts to hedge the effects
of fluctuations in the price of green coffee beans, as further
explained in Note 2 of the notes to financial statements in the Form
10-K. At January 31, 1999, the Company held options covering an
aggregate of 600,000 pounds of green coffee beans which are
exercisable in fiscal 1999 at prices ranging from $1.20 to $1.30 per
pound. The fair market value of these options, which was obtained
from a major financial institution, was approximately $97,000 at
January 31, 1999. Due from broker includes the effects of unrealized
hedging gains of $54,403 and $123,222 at January 31, 1999 and
October 31, 1998, respectively.
F-7
<PAGE>
COFFEE HOLDING CO., INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Note 4 - Mortgage note payable:
On June 1, 1989, the Company financed the purchase of land and
building through the issuance of a mortgage note payable in the
principal amount of $1,050,000 to the New York City Industrial
Development Agency (the "NYCIDA"). The mortgage note, which had an
outstanding balance of $587,502 and $600,000 at January 31, 1999 and
October 31, 1998, respectively, required monthly payments of $4,167
plus interest based on a variable rate set weekly by Bear Stearns &
Co. The final payment was due on November 1, 2009. The payment of
the note was secured by a first mortgage on the Company's land and
building and the Company's restricted investments which had an
aggregate outstanding balance of $436,389 and $432,965 at January
31, 1999 and October 31, 1998, respectively (see Note 5 of the notes
to financial statements in the Form 10-K).
At January 31, 1999 and 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 and the outstanding
balance of the restricted investments that secured the mortgage note
was classified as a current asset in the accompanying January 31,
1999 and October 31, 1998 condensed balance sheets.
In March 1999, the restricted investments were liquidated, the
mortgage note was repaid and the remaining unamortized deferred
mortgage costs of $55,063 were charged to interest expense.
Note 5 - Credit facility borrowings:
The Company was obligated for borrowings under a factoring agreement
until November 21, 1997 when it obtained a credit facility from
Nationscredit Commercial Corp. consisting of a revolving line of
credit and a term loan, as further explained in Note 7 of the notes
to financial statements in the Form 10-K.
The Company incurred costs of approximately $113,000 in connection
with the cancellation of the factoring agreement that were charged
to interest expense during the three months ended January 31, 1998.
The line of credit provides for maximum of borrowings of $5,000,000.
The outstanding balance under the line of credit of $2,909,807 at
January 31, 1999 approximated the maximum amount that the Company
could have borrowed based on its eligible trade accounts receivable
and inventories as of that date. The term loan, which had an
outstanding balance of $344,915 (including a current portion of
$87,312) at January 31, 1999, provides for borrowings of up to the
greater of 80% of the cost of eligible equipment or $500,000.
F-8
<PAGE>
COFFEE HOLDING CO., INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Note 6 - Income taxes:
As shown in the accompanying statements of operations, the Company
had no historical provision or credit for income taxes in the three
months ended January 31, 1999 and a historical provision for current
state and local income taxes in the three months ended January 31,
1998 comprised as follows:
State $ 23,000
Local 90,000
--------
Total historical $113,000
========
As explained in Notes 2 and 9 of the notes to financial statements
in the Form 10-K, prior to February 10, 1998, the date of the
Exchange, the Company with the consent of its stockholders, had
elected to be taxed as an "S" Corporation and, accordingly, it was
not required to record a provision for Federal income taxes on its
historical income before income taxes of approximately $1,028,000
for the three months ended January 31, 1998; however, it was
required to provide for state income taxes at a reduced rate and New
York City income taxes at the same rates as companies that had not
made such an election during those periods.
Although the Company became subject to Federal, state and local
income taxes at full statutory rates for periods subsequent to the
date of the Exchange, it had a historical loss before income taxes
of approximately $2,130,000 for the period from February 11, 1998 to
October 31, 1998. Based on the Company's income before income taxes
of approximately $385,000 for the three months ended January 31,
1999, the loss of approximately $2,130,000 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 of approximately
$415,000 and $800,000 available to reduce future Federal, state and
local taxable income as of January 31, 1999 and October 31, 1998,
respectively. The net operating loss carryforwards available as of
January 31, 1999 will expire in 2013 if not used. There were no
other material temporary differences as of January 31, 1999 and
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 $191,000 and $363,000
attributable to the potential benefits from the net operating loss
carryforwards as of January 31, 1999 and October 31, 1998,
respectively, by equivalent valuation allowances. As a result of
recording the reduction in the valuation allowance, the Company did
not recognize any provision or credit for Federal income taxes for
the three months ended January 31, 1999.
F-9
<PAGE>
COFFEE HOLDING CO., INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Note 6 - Income taxes (concluded):
The differences between the tax provision computed based on the
Company's historical pre-tax income and the applicable statutory
income tax rate and the Company's historical provisions for Federal,
state and local income taxes for the three months ended January 31,
1999 and 1998 are set forth below:
<TABLE>
<CAPTION>
Three Months
Ended January 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C> <C>
Tax provision at statutory rate of 34% $ 130,000 $ 350,000
Adjustments for effects of:
State income taxes, net of Federal benefit 42,000 113,000
"S" Corporation election and termination
of "S" Corporation election (350,000)
Change in valuation allowance (172,000)
--------- ---------
Historical provision $ -- $ 113,000
========= =========
</TABLE>
The Company's "S" Corporation election was in effect for all of the
three months ended January 31, 1998. Unaudited pro forma historical
provisions for income taxes assuming the Exchange had occurred on
November 1, 1997 and the Company was subject to Federal, state and
local income taxes at full statutory rates for all of the three
months ended January 31, 1998 are set forth below:
Federal $287,000
State 83,000
Local 93,000
--------
Total pro forma (unaudited) $463,000
========
The unaudited pro forma provisions for income taxes reflect an
effective rate of approximately 45% for the 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 7 - Earnings per share:
The Company presents "basic" and, if applicable, "diluted" earnings
per common share pursuant to the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128") and certain other financial accounting pronouncements, as
further explained in Note 2 of the notes to financial statements in
the Form 10-K.
F-10
<PAGE>
COFFEE HOLDING CO., INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Note 7 - Earnings per share (concluded):
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
all of the three months ended January 31, 1998 and it had no
potentially dilutive securities outstanding during the three months
ended January 31, 1998, historical basic earnings per share is
presented in the accompanying condensed statement of operations for
only the three months ended January 31, 1999 and unaudited pro forma
earnings per share is presented in the accompanying condensed
statements of operations for the three months ended January 31,
1998.
The weighted average common shares outstanding used in the
computation of basic earnings per share for the three months ended
January 31, 1999 was 3,999,650 which was the number of shares of
common stock actually outstanding during that period. The weighted
average common shares outstanding used in the computation of
unaudited pro forma basic earnings per share for the three months
ended January 31, 1998 was also 3,999,650, which reflects the
retroactive adjustment of the number of common shares of
Transpacific actually outstanding to include only the 999,650 shares
effectively outstanding as of the date of the Exchange and the
3,000,000 shares of common stock issued to the stockholders of
Coffee in connection with the Exchange (see Note 1).
Note 8 - Major customer:
Approximately 23% and 20% of the Company's sales were derived from
one customer during the three months ended January 31, 1999 and
1998, respectively (see Note 11 of the notes to financial statements
in the Form 10-K).
Note 9 - Stock option plan:
As of January 31, 1999, no options had been granted under the
Company's stock option plan (see Note 12 of the notes to financial
statements in the Form 10-K).
Note 10- Other related party transactions:
During the three months ended January 31, 1999, the Company loaned a
total of $300,000 to a stockholder. The loans, which were repaid in
February 1999, bore interest at 10% (interest income attributable to
the loans was not material for the three months ended January 31,
1999).
* * *
F-11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the "Act") provides
a safe harbor for forward-looking statements made by or on behalf of the Coffee
Holding Co., Inc. (the "Company" or "Coffee"). Coffee and its representatives
may from time to time make written or oral forward-looking statements, including
statements contained in this report and in our other filings with the Securities
and Exchange Commission ("SEC"). These statements use words such as "believes",
"expects", "intends", "plans", "may", "will", "should", "anticipates" and other
similar expressions. All statements which address operating performance, events
or developments that the Company expects or anticipates will occur in the
future, including statements relating to volume growth, share of sales or
statements expressing general optimism about future operating results, are
forward-looking statements within the meaning of the Act. The forward-looking
statements are and will be based on management's then current views and
assumptions regarding future events and operating performance. We cannot assure
that anticipated results will be achieved since actual results may differ
materially because of risks and uncertainties. We do not undertake to revise
these statements to reflect subsequent developments.
The following are some of the factors that could cause actual results to
differ materially from our forward-looking statements:
o the impact of rapid or persistent fluctuations in the price of coffee
beans;
o fluctuations in the supply of coffee beans;
o general economic conditions and conditions which affect the market for
coffee;
o the effects of any loss of major customers;
o the effects of competition from other coffee manufacturers and other
beverage alternatives;
o changes in consumption of coffee; and
o other risks which we identify in future filings with the SEC.
You are strongly encouraged to consider these factors when evaluating
forward-looking statements in this report. We undertake no responsibility to
update any forward-looking statements contained in this report.
Three Months Ended January 31, 1999 Compared to Three Months Ended January 31,
1998
Net sales from continuing operations totaled $6,919,449 in the three
months ended January 31, 1999, an increase of $62,554 or 1% from $6,856,895 in
the three months ended January 31, 1998. Although selling prices for retail
coffee were lower in the first quarter, coffee pounds sold increased from the
comparable period a year ago.
Cost of sales in the three months ended January 31, 1999 was $5,885,491,
or 85% of net sales, as compared to $5,147,866, or 75% of net sales in the three
months ended January 31, 1998. Cost of sales was higher due primarily to high
green coffee purchase prices.
The Company's gross profit in the three months ended January 31, 1999 was
$1,033,958, a decrease of $675,071 or 40% from $1,709,029 in the three months
ended January 31, 1998. Gross profit as a percentage of net sales decreased by
10% to 15% in the three months ended January 31, 1999 from 25% in the three
months ended January 31, 1998. The decrease of gross profit as a percentage of
sales was primarily attributable to lower margins as selling prices for retail
coffee declined and green coffee purchase prices were high.
Selling and administrative expenses were $483,023 in the three months
ended January 31, 1999, a decrease of $10,144 or 2% from $493,167 in the three
months ended January 31, 1998. As a percentage of net sales, selling and
administrative expenses were relatively unchanged at 7% for the three months
ended January 31, 1999 and 1998.
Interest expense increased $1,932 or 2% from $96,902 in the three months
ended January 31, 1998 to $98,834 in the three months ended January 31, 1999.
Primarily as a result of the increase in cost of sales and the decrease in
gross profit, the Company had income of $385,178 before income taxes in the
three months ended January 31, 1999 compared to $1,028,285 in the three months
ended January 31, 1998.
As further explained in Note 6 of the notes to the financial statements
elsewhere herein, the Company was not required to record a provision for Federal
income taxes in the three months ended January 31, 1998 because it had elected
to be taxed as an "S"
1
<PAGE>
Corporation prior to February 10, 1998 (the date of the reverse acquisition with
Transpacific International Group Corp.). As a result of its pre-tax loss during
the period from February 11, 1998 to October 31, 1998 and its pre-tax income
during the three months ended January 31, 1999, the Company had potential
benefits from the net operating loss carryforwards of approximately $363,000 as
of October 31, 1998 and $191,000 as of January 31, 1999. The Company did not
record any credits for income taxes based on the potential benefits from its net
operating loss carryforwards as of those dates due to the uncertainties related
to the extent and timing of its future taxable income. As a result of the use of
a portion of the benefits available from the net operating loss carryforwards as
of October 31, 1998 to offset its pre-tax income in the three months ended
January 31, 1999 and the uncertainties related to its ability to realize any
benefits from the net operating loss carryforwards remaining as of January 31,
1999, the Company did not record any provisions for income taxes in the three
months ended January 31, 1999. The Company had a historical provision for state
and local income taxes of $113,000 in the three months ended January 31, 1998.
Accordingly, the Company had historical net income of $385,178 in the three
months ended January 31, 1999 compared to $915,285 in the three months ended
January 31, 1998.
The statement of operations included in the financial statements elsewhere
herein presents unaudited pro forma income taxes, net income and related
earnings per share information assuming the Company had not elected to be taxed
as an "S" Corporation during the three months ended January 31, 1998. The
Company would have had a provision for income taxes of approximately $463,000 in
the three months ended January 31, 1998 assuming the "S" Corporation elections
had not been made. The unaudited pro forma provision for income taxes reflects
an effective rate of approximately 45% comprised of an 11% rate for state and
local income taxes, net of the related Federal income tax effect, and a
statutory Federal income tax rate of 34%. On an unaudited pro forma basis, the
Company would have had net income of $565,285, or $.14 per share, in the three
months ended January 31, 1998 compared to historical net income of $385,178, or
$.10 per share, in the three months ended January 31, 1999.
Liquidity and Capital Resources
As of January 31, 1999, the Company had working capital of approximately
$706,000, which increased by $933,000 from its working capital deficiency of
$227,000 as of October 31, 1998, and a total stockholders' deficiency of
$543,000, which decreased by $385,000 from its total stockholders' deficiency of
approximately $928,000 as of October 31, 1998. The Company had no unrestricted
cash balances as of January 31, 1999 and October 31, 1998. The Company's working
capital increased primarily as a result of the net income it generated and the
additional borrowings under its credit facility during the three months ended
January 31, 1999.
The Company's current liabilities as of January 31, 1999 included a
mortgage note payable with a balance of $588,000 that was due on demand as a
result of a violation of certain covenants. The note was collateralized by
restricted cash investments with an approximate balance of $436,000. The Company
repaid the mortgage note in full on March 3, 1999, and generated a portion of
the funds required for the payments by liquidating the restricted investments.
The Company has obtained a credit facility from Nationscredit Commercial
Corp. that provides for a revolving line of credit of up to $5,000,000 based on
eligible trade accounts receivable and inventories and a term loan for equipment
purchases of up to $500,000. The line of credit provides for borrowings of up to
85% of the Company's eligible trade accounts receivable and 60% of its eligible
inventories. The outstanding balance of approximately $2,910,000 as of January
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 8.75% at
January 31, 1999). Assuming the Company has sufficient collateral, substantially
all of the balances outstanding under the credit facility will not have to be
repaid until November 20, 2000.
During the three months ended January 31, 1999, the Company's operating
activities used approximately $175,000, primarily as a result of the increase in
inventories and decrease in accounts payable exceeding the cash from net income
generated during the period, adjusted to eliminate the effects of charges for
depreciation and amortization.
During the three months ended January 31, 1999, the Company used
approximately $87,000 of its cash resources to reduce its mortgage note, term
loan and capital lease obligations and $300,000 to fund a short-term loan to a
stockholder. Capital expenditures were insignificant during the period and
management expects that the Company's capital expenditures will be substantially
below those made in fiscal 1998. The Company also borrowed approximately
$589,000 under the line of credit during the period 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, over the next twelve
months through cash provided by operating activities and/or borrowings under its
credit facility.
2
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Year 2000
The Year 2000 problem concerns the inability of information systems and
systems with embedded chip technology to properly recognize and process
data-sensitive information beyond December 31, 1999. In the fall of 1997, the
Company and its information technology consultant assessed the Company's
personal computer hardware and its accounting software (which included accounts
receivable and payroll and inventory management) for Year 2000 readiness. The
Company concluded that its then accounting software and computer hardware and
system were not Year 2000 compliant.
The Company installed software modifications and upgrades to its
accounting software in November 1997 at an approximate cost of $4,300.
In April and August 1999, the Company replaced its computer hardware and
operating systems, including its server and three workstations. The Company also
added an additional workstation. The total cost of the equipment, installation
and follow-up support was approximately $18,800. The Company also paid its
consultant $1,400 to oversee installation of the operating system.
As of June 30, 2000, with regard to Year 2000, the Company had not
experienced any disruptions in its internal information systems or its business
activities with its suppliers and customers.
3
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ITEM 3. 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 January 31, 1999, the Company's long-term debt, other than
capitalized leases, consisted of approximately $115,000 of fixed rate debt and
approximately $3,800,000 of variable rate debt under its revolving line of
credit, term loan and mortgage note payable. Interest on the variable rate debt
was payable primarily at 1% above a specified prime rate. The Company does not
expect changes in interest rates to have a material effect on income or cash
flows in fiscal 1999, although there can be no assurance that interest rates
will not significantly change.
Commodity Price Risks
See Note 3 to the unaudited condensed financial statements "Inventory" for
additional information regarding the Company's hedging program.
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 January 31, 1999, the Company held options covering an
aggregate of 600,000 pounds of green coffee beans, which are exercisable in
fiscal 1999 at prices ranging from $1.20 to 1.30 per pound. The price per pound
of green coffee on January 31, 1999 was $1.04. The Company generally has been
able to pass green coffee price increases through to its customers, thereby
maintaining its gross profits. However, the Company cannot predict whether it
will be able to pass inventory price increases through to its customers in the
future.
4
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PART II
ITEM 4. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Exhibit Name
------- ------------
27 Financial Data Schedule
(b) There were no reports on Form 8-K filed during the period covered by this
report.
ITEM 5. OTHER INFORMATION
The Company's non-binding letter of intent with Chock Full O'Nuts
("Chock") whereby the Company would be acquired by Chock expired by its terms on
February 28, 1999. The parties were unable to reach a definitive merger
agreement.
5
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, hereunto duly authorized.
COFFEE HOLDING CO., INC.
Signature Title Date
--------- ----- ----
/s/ Andrew Gordon Chief Executive Officer, October 25, 2000
------------------ President and Treasurer
Andrew Gordon (principal executive officer and
principal financial officer)
6
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INDEX TO EXHIBITS
27 Financial Data Schedule
