10-Q 1 0001.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549-1004 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 1998 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. PART I COFFEE HOLDING CO., INC. ITEM 1. FINANCIAL STATEMENTS COFFEE HOLDING CO., INC. INDEX TO UNAUDITED FINANCIAL STATEMENTS PAGE ---- BALANCE SHEETS JULY 31, 1998 AND OCTOBER 31, 1997 F-2 STATEMENTS OF OPERATIONS NINE AND THREE MONTHS ENDED JULY 31, 1998 AND 1997 F-3 STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY NINE MONTHS ENDED JULY 31, 1998 F-4 STATEMENTS OF CASH FLOWS NINE MONTHS ENDED JULY 31, 1998 AND 1997 F-5 NOTES TO FINANCIAL STATEMENTS F-6/17 * * * F-1 COFFEE HOLDING CO., INC. BALANCE SHEETS JULY 31, 1998 AND OCTOBER 31, 1997
July October ASSETS 31, 1998 31, 1997 ------ ---------- ---------- (Unaudited) (See Note 1) Current assets: Cash $ 249,174 $ 198,679 Due from broker 307,047 423,899 Accounts receivable, net of allowance for doubtful accounts of $215,000 and $254,317 2,461,577 2,858,201 Inventories 1,584,828 1,379,383 Cash and cash equivalents restricted under mortgage note 370,237 66,070 Prepaid expenses and other current assets 27,756 27,066 ---------- ---------- Total current assets 5,000,619 4,953,298 Property and equipment, at cost, net of accumulated depreciation of $1,573,928 and $1,422,651 2,245,041 1,722,194 Deferred mortgage costs, net of accumulated amortization of $47,321 and $43,449 58,074 61,946 Deposits and other assets 152,300 57,191 ---------- ---------- Totals $7,456,034 $6,794,629 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Due factor $2,503,228 Mortgage note payable $ 612,500 650,000 Current portion of term loan 87,312 Current portion of obligations under capital leases 235,479 127,524 Accounts payable and accrued expenses 2,393,858 2,209,420 ---------- ---------- Total current liabilities 3,329,149 5,490,172 Term loan, net of current portion 301,260 Line of credit borrowings 2,634,750 Obligations under capital leases, net of current portion 328,095 233,810 Loans from related parties 75,492 475,215 ---------- ---------- Total liabilities 6,668,746 6,199,197 ---------- ---------- Commitments and contingencies Stockholders' equity: 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 Common stock, no par value; 200 shares authorized; 100 shares issued and outstanding 460,000 Additional paid-in capital 480,997 Retained earnings 302,291 135,432 ---------- ---------- Total stockholders' equity 787,288 595,432 ---------- ---------- Totals $7,456,034 $6,794,629 ========== ==========
See Notes to Financial Statements. F-2 COFFEE HOLDINGS CO., INC. STATEMENTS OF OPERATIONS NINE AND THREE MONTHS ENDED JULY 31, 1998 AND 1997 (Unaudited)
Nine Months Three Months Ended July 31, Ended July 31, --------------------------- -------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- Net sales $19,865,601 $18,547,105 $ 6,684,459 $ 7,010,081 Cost of sales 17,502,949 15,947,030 6,173,356 6,780,041 ----------- ----------- ----------- ----------- Gross profit 2,362,652 2,600,075 511,103 230,040 ----------- ----------- ----------- ----------- Operating expenses: Selling and administrative 1,444,010 1,221,400 543,091 344,336 Officers' salaries 261,587 183,771 98,412 65,969 ----------- ----------- ----------- ----------- Totals 1,705,597 1,405,171 641,503 410,305 ----------- ----------- ----------- ----------- Income (loss) from operations 657,055 1,194,904 (130,400) (180,265) ----------- ----------- ----------- ----------- Other expenses: Interest expense 261,972 298,315 75,569 132,891 Expenses in connection with reverse acquisition 180,000 ----------- ----------- ----------- ----------- Totals 441,972 298,315 75,569 132,891 ----------- ----------- ----------- ----------- Income (loss) before income taxes 215,083 896,589 (205,969) (313,156) Provision (credit) for state and local income taxes 24,000 113,000 (22,000) (29,534) ----------- ----------- ----------- ----------- Net income (loss) $ 191,083 $ 783,589 $ (183,969) $ (283,622) =========== =========== =========== =========== Basic loss per share $(.05) ===== Basic weighted average common shares outstanding 3,999,650 ========= Unaudited: Historical income (loss) before income taxes $ 215,083 $ 896,589 $ (313,156) Pro forma: Provision (credit) for income taxes 97,000 406,000 (138,000) ----------- ----------- ----------- Net income (loss) $ 118,083 $ 490,589 $ (175,156) =========== =========== =========== Basic earnings (loss) per share $.03 $.12 $(.04) ==== ==== ===== Basic weighted average common shares outstanding 3,999,650 3,999,650 3,999,650 =========== =========== ===========
See Notes to Financial Statements. F-3 COFFEE HOLDING CO., INC. STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY NINE MONTHS ENDED JULY 31, 1998 (Unaudited)
Common Stock ---------------------------------------------- No Par Value $.001 Par Value ------------------------ ------------------ Additional Number of Number of Paid-in Retained Shares Amount Shares Amount Capital Earnings Total ---------- ---------- --------- ------ -------- -------- -------- Balance, November 1, 1997, as adjusted 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 income 191,083 191,083 ---------- ---------- --------- ------ -------- -------- -------- Balance, July 31, 1998 -- $ -- 3,999,650 $4,000 $480,997 $302,291 $787,288 ========== ========== ========= ====== ======== ======== ========
See Notes to Financial Statements. F-4 COFFEE HOLDING CO., INC. STATEMENTS OF CASH FLOWS NINE MONTHS ENDED JULY 31, 1998 AND 1997 (Unaudited)
1998 1997 --------- --------- Operating activities: Net income $ 191,083 $ 783,589 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 166,477 159,752 Changes in operating assets and liabilities: Due from broker 116,852 (311,142) Accounts receivable 396,624 345,529 Inventories (205,445) (262,699) Prepaid expenses and other current assets (690) (9,402) Deposits and other assets (95,109) 9,032 Accounts payable and accrued expenses 185,211 (350,491) --------- --------- Net cash provided by operating activities 755,003 364,168 --------- --------- Investing activities - purchases of property and equipment (396,952) (180,453) --------- --------- Financing activities: Net repayments of amounts due factor (72,921) Principal payments on mortgage note payable (37,500) (37,500) (Increase) decrease in cash and cash equivalents restricted under mortgage note (304,167) 300 Principal payments on term loan (65,484) Net advances under bank line of credit 585,578 Principal payments of obligations under capital leases (86,260) Repayments of loans from related parties (399,723) --------- --------- Net cash used in financing activities (307,556) (110,121) --------- --------- Net increase in cash 50,495 73,594 Cash, beginning of period 198,679 11,090 --------- --------- Cash, end of period $ 249,174 $ 84,684 ========= ========= Supplemental disclosure of cash flow data: Interest paid $ 261,972 $ 298,315 ========= ========= Income taxes paid $ 104,664 =========
Supplemental schedule of noncash investing and financing activities: During the nine months ended July 31, 1998, the Company purchased equipment at a cost of $288,500 by incurring capital lease obligations. During the nine months ended July 31, 1998, the Company increased its obligations under the credit facility that provides it with the line of credit and term loan and decreased the balance payable to its factor through a direct transfer of $2,503,288 from the bank to the factor. See Notes to Financial Statements. F-5 COFFEE HOLDING CO., INC. NOTES TO UNAUDITED FINANCIAL STATEMENTS Note 1 - Business activities and reverse acquisition: Coffee Holding Co., Inc. ("Coffee"), which was incorporated in New York on January 22, 1971, conducts wholesale coffee operations, including manufacturing, roasting, packaging, marketing and distributing roasted and blended coffees for private labeled accounts and its own brands, and sells green coffees. The Company's sales are primarily to customers that are located throughout the United States. On February 10, 1998, the holders of all of the shares of Coffee's common stock consummated an exchange (the "Exchange") of their shares for shares of common stock of Transpacific International Group Corp. ("Transpacific"). Transpacific was incorporated in Nevada on October 9, 1995 and organized originally as a "blind pool" or "blank check" company for the purpose of either merging with or acquiring an operating company. It had been a development stage company with no significant operating activities or assets and liabilities prior to the Exchange. Transpacific, which had, effectively, 999,650 outstanding shares of common stock (with a par value of $.001 per share) prior to the Exchange, issued 3,000,000 shares of common stock in exchange for all of the 100 issued and outstanding shares of common stock (no par value) of Coffee. Concurrently, Coffee was merged into Transpacific (the "Merger") and Transpacific changed its name to Coffee Holding Co., Inc. Coffee Holding Co., Inc. after the Exchange, the Merger and the name change is referred to below as the "Company" or the "Combined Company." The "Company" is also used to refer to Coffee Holding Co., Inc. prior to the Exchange, the Merger and the name change. The stockholders of Coffee also owned 540,040 shares of common stock of Transpacific prior to the Exchange and, accordingly, they owned a total of 3,540,400 or 88.5% of the outstanding shares of the Combined Company immediately after the Exchange. Therefore, the Merger was treated, effective as of February 10, 1998, as a "purchase business combination" and a "reverse acquisition" for accounting purposes in which Transpacific was the "legal acquirer" and Coffee was the "accounting acquirer." The carrying values of the assets and liabilities of Transpacific, which were immaterial, were recorded at their historical carrying values as of February 10, 1998. Accordingly, the historical financial statements included herein only reflect the operations of Coffee for the period prior to February 10, 1998. All references to numbers of shares of common stock as of the dates or for periods prior to the Exchange have been restated to reflect the ratio of the number of common shares of Transpacific effectively exchanged for common shares of Coffee. Consulting and professional fees and other costs incurred in connection with the reverse acquisition totaling $180,000 were charged to expense during the nine months ended July 31, 1998. Information as to the unaudited pro forma results of operations of the Company 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 the nine months ended July 31, 1998 and 1997 reflected in the accompanying historical statements of operations. F-6 COFFEE HOLDING CO., INC. NOTES TO UNAUDITED FINANCIAL STATEMENTS Note 2 - Summary of significant accounting policies: Basis of presentation: In the opinion of management, the accompanying unaudited financial statements reflect all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position of the Company as of July 31, 1998, its results of operations for the nine and three months ended July 31, 1998 and 1997, its changes in stockholders' equity for the nine months ended July 31, 1998 and its cash flows for the nine months ended July 31, 1998 and 1997. Information included in the balance sheet as of October 31, 1997 has been derived from the Company's audited financial statements. Pursuant to generally accepted accounting principles and the rules and regulations of the Securities and Exchange Commission 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. Operating results for the nine and three month periods ended July 31, 1998 and 1997 are not necessarily indicative of the results that may be expected for the years ending October 31, 1998 and 1997. 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. 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 July 31, 1998, the Company held options covering an aggregate of 3,075,000 pounds of green coffee beans which are exercisable in fiscal 1998 at prices ranging from $1.15 to $1.45 per pound. The fair market value of these options, which was obtained from a major financial institution, was approximately $232,000 at July 31, 1998. Due from broker includes the effects of unrealized hedging losses of $14,327 and $299,934 at July 31, 1998 and October 31, 1997, respectively. F-7 COFFEE HOLDING CO., INC. NOTES TO UNAUDITED FINANCIAL STATEMENTS Note 2 - Summary of significant accounting policies (continued): Deferred mortgage costs: Costs incurred in connection with obtaining mortgage financing have been capitalized and are being amortized over the term of the mortgage using a method that approximates the interest method. Amortization of deferred mortgage costs were not material for the nine and three months ended July 31, 1998 and 1997. Advertising: The Company expenses the cost of advertising and promotions as incurred. Advertising costs charged to operations totaled $128,143 and $74,020 for the nine months ended July 31, 1998 and 1997, respectively, and $39,137 and $23,904 for the three months ended July 31, 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-8 COFFEE HOLDING CO., INC. NOTES TO UNAUDITED FINANCIAL STATEMENTS Note 2 - Summary of significant accounting policies (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 the nine months ended July 31, 1998 and all of the nine months and three months ended July 31, 1997 and it had no potentially dilutive securities outstanding during the nine months ended July 31, 1998 and 1997, historical basic earnings per share is presented in the accompanying statement of operations for only the three months ended July 31, 1998 and unaudited pro forma earnings (loss) per share is presented in the accompanying statements of operations for the nine months ended July 31, 1998 and the nine and three months ended July 31, 1997. F-9 COFFEE HOLDING CO., INC. NOTES TO UNAUDITED FINANCIAL STATEMENTS Note 2 - Summary of significant accounting policies (concluded): Earnings (loss) per share (concluded): The weighted average common shares outstanding used in the computation of basic earnings per share for the three months ended July 31, 1998 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 (loss) per share for the nine months ended July 31, 1998 and the nine and three months ended July 31, 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 is effective for all fiscal years beginning after June 15, 1999. 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. The FASB and the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants had issued certain other accounting pronouncements as of July 31, 1998 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 the nine months ended July 31, 1998 and 1997. Note 3 - Inventories: Inventories at July 31, 1998 and October 31, 1997 consisted of the following: July October 31, 1998 31, 1997 ---------- ---------- Packed coffee $ 273,218 $ 389,796 Green coffee 1,041,700 805,780 Packaging supplies 269,910 183,807 ---------- ---------- Totals $1,584,828 $1,379,383 ========== ========== F-10 COFFEE HOLDING CO., INC. NOTES TO UNAUDITED FINANCIAL STATEMENTS Note 4 - Property and equipment: Property and equipment at July 31, 1998 and October 31, 1997 consisted of the following: Estimated July October Useful Life 31, 1998 31, 1997 ----------- ---------- ---------- Building and improvements 30 years $1,195,840 $1,109,696 Machinery and equipment 7 years 1,697,694 1,399,084 Machinery and equipment under capital leases 7 years 694,609 406,109 Furniture and fixtures 7 years 89,826 88,956 ---------- ---------- 3,677,969 3,003,845 Less accumulated depreciation 1,573,928 1,422,651 ---------- ---------- 2,104,041 1,581,194 Land 141,000 141,000 ---------- ---------- Totals $2,245,041 $1,722,194 ========== ==========
Depreciation totaled $162,605 and $155,880 for the nine months ended July 31, 1998 and 1997, respectively, and $63,713 and $51,960 for the three months ended July 31, 1998 and 1997, respectively. Note 5 - Cash and cash equivalents restricted under mortgage note: Restricted cash and cash equivalents at July 31, 1998 and October 31, 1997 consisted of investments in the following interest-bearing accounts: July October 31, 1998 31, 1997 -------- ------- Cash in escrow $ 20,237 $66,070 Certificate of deposit 350,000 -------- ------- Totals $370,237 $66,070 ======== ======= Cash in escrow represents amounts held in accounts for the payment of principal, interest and various fees in connection with the New York City Industrial Development Agency ("NYCIDA") mortgage note payable (see Note 6). The Company did not comply with certain covenants, as defined, under the NYCIDA agreement at July 31, 1998 and October 31, 1997. As a result of its noncompliance at October 31, 1997, it was required to obtain an irrevocable letter of credit from ABN Amro Bank to secure the mortgage note and to pledge a $350,000 certificate of deposit to secure the letter of credit during the nine months ended July 31, 1998. F-11 COFFEE HOLDING CO., INC. NOTES TO UNAUDITED FINANCIAL STATEMENTS 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 NYCIDA. The mortgage note, which had an outstanding balance of $612,500 and $650,000 at July 31, 1998 and October 31, 1997, respectively, requires monthly payments of $4,167 plus interest based on a variable rate set weekly by Bear Stearns & Co. The final payment is due November 1, 2009. The payment of the note is secured by a first mortgage on the Company's land and building. The NYCIDA agreement contains certain financial covenants. At July 31, 1998 and October 31, 1997, the Company was not in compliance with the covenants. Accordingly, the mortgage note payable was due on demand and classified as a current liability, and the restricted investments securing the mortgage note (see Note 5) were classified as current assets, in the accompanying July 31, 1998 and October 31, 1997 balance sheets. 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 during the nine months ended July 31, 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 $2,634,750 at July 31, 1998 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 9.5% at July 31, 1998). The term loan, which had an outstanding balance of $388,572 (including a current portion of $87,312) at July 31, 1998, 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. F-12 COFFEE HOLDING CO., INC. NOTES TO UNAUDITED FINANCIAL STATEMENTS Note 8 - Loans from related parties: The Company had loans payable to its stockholders of $75,492 and $475,215 at July 31, 1998 and October 31, 1997, 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 for the nine and three months ended July 31, 1998 and 1997. Note 9 - Income taxes: As shown in the accompanying statements of operations, the Company had historical provisions and credits for income taxes for the nine and three months ended July 31, 1998 and 1997 that were attributable to state and local income taxes as set forth below:
Nine Months Three Months Ended July 31, Ended July 31, --------------------- -------------------- 1998 1997 1998 1997 -------- -------- -------- ------- State $ 5,000 $ 23,000 $ (3,000) $(10,534) Local 19,000 90,000 (19,000) (19,000) ------- -------- -------- -------- Total historical $24,000 $113,000 $(22,000) $(29,534) ======= ======== ======== ========
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 record a provision (credit) for Federal income taxes on its historical income (loss) before income taxes of approximately $1,028,000, $897,000 and $(313,000) for the period from November 1, 1997 to February 10, 1998 and the nine and three months ended July 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 $813,000 for the period from February 11, 1998 to July 31, 1998 and approximately $206,000 for the three months ended July 31, 1998, and it was not required to record any historical provision or credit for Federal income taxes during either period as further explained below. F-13 COFFEE HOLDING CO., INC. NOTES TO UNAUDITED FINANCIAL STATEMENTS Note 9 - Income taxes (continued): As a result of the loss for the period from February 11, 1998 to July 31, 1998 and certain other elections related to the termination of its "S" Corporation election, the Company had net operating loss carryforwards as of July 31, 1998 of approximately $307,000 available to reduce future Federal, state and local taxable income which, if not used, will expire in 2012. There were no other material temporary differences as of July 31, 1998. Due to the uncertainties related to the extent and timing of the Company's future taxable income, the Company offset the deferred tax assets of approximately $138,000 attributable to the potential benefits from the net operating loss carryforwards as of July 31, 1998 by an equivalent valuation allowance and, accordingly, it did not recognize a credit for Federal income taxes for either the period from February 11, 1998 to July 31, 1998 or the three months ended July 31, 1998. As a result of recording the valuation allowance for the period after February 10, 1998, and the "S" Corporation election for the period through February 10, 1998, the Company did not recognize any provision or credit for Federal income taxes for the nine months ended July 31, 1998. The differences between the tax provision or credit computed based on the Company's historical pre-tax income or loss and the applicable statutory income tax rate and the Company's historical provisions and credits for Federal, state and local income taxes for the nine and three months ended July 31, 1998 and 1997 are set forth below:
Nine Months Three Months Ended July 31, Ended July 31, ---------------------- --------------------- 1998 1997 1998 1997 ---------- --------- -------- ---------- Tax provision (credit) at statutory rate of 34% $ 73,000 $ 305,000 $(70,000) $(106,000) Adjustments for effects of: State income taxes, net of Federal benefit 24,000 113,000 (22,000) (29,534) "S" Corporation election and termination of "S" Corporation election (211,000) (305,000) 34,000 106,000 Change in valuation allowance 138,000 36,000 ---------- --------- -------- ---------- Historical provision $ 24,000 $ 113,000 $(22,000) $ (29,534) ========== ========= ======== ==========
The Company's "S" Corporation election was in effect for part of the nine months ended July 31, 1998 and all of the nine and three months ended July 31, 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 all of the nine months ended July 31, 1998 and 1997 and three months ended July 31, 1997 are set forth below:
Nine Months Ended July 31, -------------- Three Months 1998 1997 Ended July 31, 1997 ------- -------- ------------------- Federal $60,000 $252,000 $ (84,000) State 18,000 73,000 (26,000) Local 19,000 81,000 (28,000) ------- ---------- --------- Total pro forma (unaudited) $97,000 $406,000 $(138,000) ======= ======== =========
F-14 COFFEE HOLDING CO., INC. NOTES TO UNAUDITED FINANCIAL STATEMENTS Note 9 - Income taxes (concluded): 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 $35,100 and $11,700 for the nine and three months ended July 31, 1998, respectively. The Company had no obligations under noncancelable operating leases during the nine months ended July 31, 1997. Future minimum rental payments under the noncancelable operating lease in years subsequent to July 31, 1998 were as follows: Year Ending July 31, Amount ----------- -------- 1999 $ 46,800 2000 46,800 2001 46,800 2002 46,800 2003 3,900 -------- Total $191,100 ======== Capital leases: As of July 31, 1998, 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 $47,734 and $19,346 was charged to operations in the nine and three months ended July 31, 1998, respectively. The Company had no capital lease obligations during the nine months ended July 31, 1997. The future minimum lease payments under capital leases and the net present value of the future minimum lease payments at July 31, 1998 were as follows: Total minimum lease payments $645,391 Less amount representing interest 81,817 -------- Present value of net minimum lease payments 563,574 Less current portion 235,479 -------- Long-term portion $328,095 ======== F-15 COFFEE HOLDING CO., INC. NOTES TO UNAUDITED FINANCIAL STATEMENTS 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 July 31, 1998, the Company had cash balances that exceeded Federal insurance limits by $250,000. 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 the nine months ended July 31, 1998. That customer also accounted for approximately $227,000 of the Company's accounts receivable balance at July 31, 1998. 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 July 31, 1998 and October 31, 1997. 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 July 31, 1998, no options had been granted under the Plan. Note 13- Major vendors: During the nine months ended July 31, 1998, substantially all of the Company's purchases were from nine vendors that also accounted for substantially all of the Company's accounts payable at July 31, 1998. 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-16 COFFEE HOLDING CO., INC. NOTES TO UNAUDITED FINANCIAL STATEMENTS Note 14- Prior period adjustments: The Company's retained earnings balance as of November 1, 1997 has been retroactively adjusted to reflect prior period adjustments to annual financial statements it had previously issued that were attributable to the net effects of the unrecorded losses and income described below:
Retained earnings, November 1, 1997, as previously reported $1,044,786 ---------- Increase (decrease) from prior period adjustments: Write-off of uncollectible accounts receivable (268,182) Unrecorded unrealized losses on coffee futures (664,069) Unrecorded interest income on restricted cash 22,897 ---------- Total adjustments (909,354) ---------- Retained earnings, November 1, 1997, as adjusted $ 135,432 ==========
The accompanying financial statements also reflect adjustments to previously reported amounts of net income (loss) for the nine and three months ended July 31, 1997. The components of the adjustments and their effect on net income (loss) follow:
Nine Months Three Months Ended July Ended July 31, 1997 31, 1997 ---------- ------------ Unrecorded unrealized losses on coffee futures $ (360,168) $(209,358) Net income (loss), as previously reported 1,143,757 (74,264) ---------- --------- Net income (loss), as adjusted $ 783,589 $(283,622) ========== =========
* * * F-17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 (the "Act") provides a safe harbor for forward-looking statements made by or on behalf of Coffee Holding Co., Inc. (the "Company" or "Coffee"). Coffee and its representatives may from time to time make written or oral forward-looking statements, including statements contained in this report and in our other filings with the Securities and Exchange Commission ("SEC"). These statements use words such as "believes", "expects", "intends", "plans", "may", "will", "should", "anticipates" and other similar expressions. All statements which address operating performance, events or developments that the Company expects or anticipates will occur in the future, including statements relating to volume growth, share of sales or statements expressing general optimism about future operating results, are forward-looking statements within the meaning of the Act. The forward-looking statements are and will be based on management's then current views and assumptions regarding future events and operating performance. We cannot assure that anticipated results will be achieved since actual results may differ materially because of risks and uncertainties. We do not undertake to revise these statements to reflect subsequent developments. The following are some of the factors that could cause actual results to differ materially from in our forward-looking statements: o the impact of rapid or persistent fluctuations in the price of coffee beans; o fluctuations in the supply of coffee beans; o general economic conditions and conditions which affect the market for coffee; o the effects of any loss of major customers; o the effects of competition from other coffee manufacturers and other beverage alternatives; o changes in consumption of coffee; and o other risks which we identify in future filings with the SEC. You are strongly encouraged to consider these factors when evaluating forward looking statements in this report. We undertake no responsibility to update any forward-looking statements contained in this report. Nine Months Ended July 31, 1998 Compared to Nine Months Ended July 31, 1997 Net sales totaled $19,865,601 in the nine months ended July 31, 1998, an increase of $1,318,496 or 7% from $18,547,105 in the nine months ended July 31, 1997. The Company had a larger customer base than during the comparable time period in 1997 which led to increased sales. Cost of sales in the nine months ended July 31, 1998 was $17,502,949, or 88% of net sales, as compared to $15,947,030, or 86% of net sales in the nine months ended July 31, 1997. Cost of sales for the nine month period ended July 31, 1998 was higher as the Company continued to liquidate higher cost inventory. The Company's gross profit in the nine months ended July 31, 1998 was $2,362,652, a decrease of $237,423 or 9% from $2,600,075 in the nine months ended July 31, 1997. Gross profit as a percentage of net sales decreased by 2% to 12% in the nine months ended July 31, 1998 from 14% in the nine months ended July 31, 1997. The Company's gross profits were lower due mainly to management's decision to reduce prices on certain products to attract larger customers. Selling and administrative expenses were $1,444,010 in the nine months ended July 31, 1998, an increase of $222,610 or 18% from $1,221,400 in the nine months ended July 31, 1997. As a percentage of net sales, this change represented a 1% increase from 6% in the nine months ended July 31, 1997 to 7% in the nine months ended July 31, 1998. The Company's interest expense decreased $36,343 or 12% from $298,315 in the nine months ended July 31, 1997 to $261,972 in the nine months ended July 31, 1998. This decrease was the result of the lower interest rate on the Company's line of credit versus the rate of interest on the Company's prior factoring agreement. Other expenses in the nine months ended July 31, 1998 also included $180,000 of consulting and professional fees and other costs incurred in connection with the reverse acquisition (the "Reverse Acquisition") by Transpacific International Group Corp. that was effectively completed on February 10, 1998. 1 Primarily as a result of the decrease in gross profit, the increase in operating expenses and the charge for costs incurred in connection with the Reverse Acquisition, the Company had income of $215,083 before income taxes in the nine months ended July 31, 1998 compared to $896,589 in the nine months ended July 31, 1997. 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 taxes in the nine months ended July 31, 1998 and 1997 because it had elected to be taxed as an "S" Corporation during the period from November 1, 1997 to February 10, 1998 (the date of the Reverse Acquisition) and in the nine months ended July 31, 1997 and it had a pre-tax loss during the period from February 11, 1998 to July 31, 1998. Although the Company had potential benefits of approximately $307,000 from net operating loss carryforwards as of July 31, 1998, it did not record a credit for income taxes in the nine months ended July 31, 1998 due to the uncertainties related to the extent and timing of its future taxable income. The Company had a historical provision for state and local income taxes of $24,000 in the nine months ended July 31, 1998 compared to $113,000 in the nine months ended July 31, 1997 primarily as a result of the decrease in pre-tax income. Accordingly, the Company had historical net income of $191,083 in the nine months ended July 31, 1998 compared to $783,589 in the nine months ended July 31, 1997. The statement of operations included in the financial statements elsewhere herein presents unaudited pro forma provisions for income taxes, net income and related earnings per share information assuming the Company had not elected to be taxed as an "S" Corporation during any portion of the nine months ended July 31, 1998 and 1997. The Company would have had a provision for income taxes of approximately $97,000 in the nine months ended July 31, 1998 compared to $406,000 in the nine months ended July 31, 1997 assuming the "S" Corporation elections had not been made primarily as a result of the decrease in pro forma pre-tax income. The unaudited pro forma provisions 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 net income of $118,083, or $.03 per share, in the nine months ended July 31, 1998 compared to $490,589, or $.12 per share, in the nine months ended July 31, 1997. Three Months Ended July 31, 1998 Compared to Three Months Ended July 31, 1997 Net sales totaled $6,684,459 in the three months ended July 31, 1998, a decrease of $325,622 or 5% from $7,010,081 in the three months ended July 31, 1997. Lower retail selling prices resulted in the decline in net sales. Cost of sales in the three months ended July 31, 1998 was $6,173,356, or 92% of net sales, as compared to $6,780,041, or 97% of net sales in the three months ended July 31, 1997. The Company's gross profit in the three months ended July 31, 1998 was $511,103, an increase of $281,063 or 122% from $230,040 in the three months ended July 31, 1997. Gross profit as a percentage of net sales increased by 4% to 7% in the three months ended July 31, 1998 from 3% in the three months ended July 31, 1997. Selling and administrative expenses were $543,091 in the three months ended July 31, 1998, an increase of $198,755 or 58% from $344,336 in the three months ended July 31, 1997. As a percentage of net sales, this change represented a 3% increase from 5% in the three months ended July 31, 1997 to 8% in the three months ended July 31, 1998. The increase in selling expenses for the three months ended July 31, 1998 was the result of higher freight insurance and advertising expenses. The increase was also due to higher professional fees related to payments made to the Company's financial advisor for financial advisory services. Interest expense decreased $57,322 or 43% from $132,891 in the three months ended July 31, 1997 to $75,569 in the three months ended July 31, 1998. The decrease was due to lower interest rates payable on borrowings. Primarily as a result of the increase in gross profit, the increase in operating expenses and the decrease in interest expense, the Company had a loss of $205,969 before income taxes in the three months ended July 31, 1998 compared to a loss of $313,156 in the three months ended July 31, 1997. As a result of the termination of its "S" Corporation election effective February 10, 1998, the Company was subject to Federal, state and local income taxes during the entire three month period ended July 31, 1998 whereas it was not subject to Federal income taxes during the three month period ended July 31, 1997. Although the Company had a pre-tax loss for the three months ended July 31, 1998, it did not record any credit for federal income taxes related to the potential benefits from its net operating loss carryforwards as of July 31, 1998 due to the uncertainties related to the extent and timing of its future taxable income. Although the Company had a pre-tax loss for the three months ended July 31, 1998, it did not record any credit 2 for federal income taxes due to the "S" Corporation election. The Company had a historical credit for state and local income taxes of $22,000 in the three months ended July 31, 1998 compared to $29,534 in the three months ended July 31, 1997 primarily as a result of the decrease in the pre-tax loss. Accordingly, the Company had a historical net loss of $183,969 in the three months ended July 31, 1998 compared to $283,622 in the three months ended July 31, 1997. On an unaudited pro forma basis, the Company would have had a credit for income taxes of approximately $138,000 and a net loss of $175,156, or $.04 per share, in the three months ended July 31, 1997 assuming the "S" Corporation elections had not been made compared to the historical net loss of $183,969, or $.03 per share, in the three months ended July 31, 1998. Liquidity and Capital Resources As of July 31, 1998, the Company had working capital of approximately $1,671,000, an increase of $2,208,000 from its working capital deficiency of approximately $537,000 as of October 31, 1997. The Company's cash balance also increased by approximately $50,000 to $249,000 as of July 31, 1998 from $199,000 as of October 31, 1997. The working capital balance increased primarily as a result of the replacement of borrowings obtained under a factoring agreement that were payable on a short-term basis with borrowings obtained under a credit facility from Nationscredit Commercial Corp. The new credit facility 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 $2,635,000 as of July 31, 1998 approximated the maximum amount that the Company could borrow based on its eligible trade accounts receivable and inventories as of that date. Interest is payable monthly at the prime rate plus 1% (an effective rate of 9% at July 31, 1998). 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. The Company's current liabilities as of July 31, 1998 included a mortgage note payable with a balance of $613,000 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 $370,000. The Company repaid the mortgage note in full on March 3, 1999, and generated a portion of the funds required for the payment by liquidating the restricted investments. During the nine months ended July 31, 1998, net cash provided by operating activities totaled approximately $755,000 primarily as a result of the net income generated during that period, adjusted to eliminate the effects of charges for depreciation and amortization, and decreases in amounts receivable from the Company's broker and customers and an increase in accounts payable that were partially offset by an increase in inventories. In addition to repaying the outstanding balance under the factoring agreement through borrowings under the line of credit, the Company also borrowed approximately $586,000 under the line of credit for working capital purposes. During the nine months ended July 31, 1998, the Company used approximately $397,000 of its cash resources to purchase property and equipment and added property and equipment totaling $288,500 by entering into capital leases. The capital expenditures were made primarily to refurbish equipment, upgrade capacity and purchase and install new manufacturing and other equipment associated with production. Management expects that the Company's capital expenditures will be made at a reduced rate over at least the next twelve months. The Company also placed approximately $304,000 in restricted cash investments to secure the mortgage note, as explained above, and made payments aggregating approximately $189,000 to reduce its mortgage note, term loan and capital lease obligations. 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 its existing cash resources, cash provided by operating activities and/or borrowings under its credit facility. Year 2000 The Year 2000 problem concerns the inability of information systems and systems with embedded chip technology to properly recognize and process data-sensitive information beyond December 31, 1999. In the fall of 1997, the Company and its information technology consultant assessed the Company's personal computer hardware and its accounting software (which included accounts receivable and payroll and inventory management) for Year 2000 readiness. The Company concluded that its then accounting software and computer hardware and system were not Year 2000 compliant. The Company installed software modifications and upgrades to its accounting software in November 1997 at an approximate cost of $4,300. 3 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. 4 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS Interest Rate Risks The Company is subject to market risk from exposure to fluctuations in interest rates. At July 31, 1998, the Company's long-term debt, other than capitalized leases, consisted of approximately $75,000 of fixed rate debt and approximately $3,600,000 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 1998, 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" 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 July 31, 1998, the Company held options covering an aggregate of 3,075,000 pounds of green coffee beans, which are exercisable in fiscal 1998 at prices ranging from $1.15 to $1.45 per pound. The price per pound of green coffee on the close of business on July 31, 1998 was $1.29 per pound. 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. 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. 5 SIGNATURES Pursuant to the requirements 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, President, October 25, 2000 ----------------- Treasurer and Director Andrew Gordon (principal executive officer and principal financial officer) 6 INDEX TO EXHIBITS 27 Financial Data Schedule