DRAFT
January 25, 2001
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549-1004
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended October 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________.
Commission file No. _______
COFFEE HOLDING CO., INC.
(Exact name of registrant as specified in its charter)
Nevada 11-2238111
(state or other jurisdiction of (IRS employer
incorporation or organization) identification number)
4401 First Avenue, Brooklyn, New York 11232-0005
(address of principal executive offices) (zip code)
Registrant's telephone number, including area code (718) 832-0800
Securities registered pursuant to Section 12(b) of the Act:
None
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting common stock held by non-affiliates of
the Registrant cannot be determined as the common stock is not quoted or listed
on any quotation system or market.
As of October 31, 2000, the Registrant had 3,999,650 shares of common stock, par
value $.001 per share, outstanding.
1
PART I
COFFEE HOLDING CO., INC.
This document contains forward looking statements. Forward looking
statements are based on management's then current views and assumptions
regarding future events and operating performance. These statements are subject
to factors which could cause actual results to differ materially from those
statements. For a more detailed discussion of forward looking statements and the
factors which could cause actual results to differ, please refer to Item 7
herein.
ITEM 1. BUSINESS
Coffee Holding Co., Inc. (sometimes referred to herein as the "Company" or
"Coffee Holding") conducts wholesale coffee operations, including roasting,
blending, packaging, marketing and distributing coffees for sale under private
labels and under its own brands of specialty coffees. The Company also sells
unprocessed green coffee to specialty gourmet roasters. Coffee Holding's sales
are primarily to customers located throughout the United States.
Coffee Holding Co., Inc. was originally incorporated in New York in 1971.
Pursuant to an Agreement and Plan of Merger between Coffee Holding Co., Inc. and
Transpacific International Group Corp. (the "Merger Agreement"), Coffee Holding
merged with and into Transpacific International Group Corp. ("Transpacific") in
February, 1998, with Transpacific being the surviving corporation (the "Reverse
Acquisition"). After the merger, Transpacific changed its name to Coffee Holding
Co., Inc.
Transpacific was incorporated in Nevada in 1995 for the sole purpose of
acquiring or merging with an unspecified operating business. Transpacific had no
operating assets and did not engage in any business activities other than
seeking and investigating other businesses for potential merger or acquisition.
On August 12, 1996, Transpacific commenced a "blank check" offering pursuant to
Rule 419 of the Securities Act, selling 3,000 shares of common stock at $6.00
per share, which generated $18,000 in gross proceeds from approximately 35
different investors. Pursuant to Rule 419, all of the gross proceeds from the
offering, less 10%, and the shares of Transpacific purchased by the investors
were held in escrow pending distribution of a prospectus to each of them
describing any prospective business acquisition by Transpacific and the
subsequent confirmation of holders of at least 80% of the shares that they
elected to remain investors. All but one investor reconfirmed their investment
and the merger was consummated. Pursuant to the Merger Agreement, the
Transpacific common stock was split ten for one and 3,000,000 shares were issued
to Coffee Holding shareholders in exchange for the outstanding shares of Coffee
Holding.
All descriptions of the business of Coffee Holding contained in this Form
10-K prior to the date of the merger describe the operations of the New York
corporation named Coffee Holding Co., Inc. and, from the date of the merger, the
operations of the Nevada corporation currently named Coffee Holding Co., Inc.
Unless otherwise specifically stated herein, all descriptions of Coffee Holding
and its operations contained herein are as of the date of this Form 10-K.
Products
Coffee Holding's products can be divided into three categories:
(i) Private label coffee
(ii) Branded coffee; and
(iii) Wholesale green coffee
Private label coffee. Coffee Holding roasts, blends, packages and
distributes coffee under private labels for companies throughout the United
States and Canada. As of October 31, 2000, the Company supplied coffee to
approximately 35 different wholesale and retail companies. Coffee Holding is
currently the leading supplier for three of the largest wholesalers in the
United States.
In the year ended October 31, 2000 ("fiscal 2000"), approximately 48% of
Coffee Holding's sales revenue came from private label coffee sales, and, in
fiscal years 1999 and 1998, 50% and 42% of revenues, respectively, came from
those sales.
Branded coffee. Coffee Holding roasts, grinds and blends coffee according
to its own recipes and packages the coffee at its facilities. The Company then
sells the packaged coffee in its proprietary brand label to supermarkets,
wholesalers and individually owned stores throughout the United States, shipping
directly from its factory.
2
Coffee Holding's name brands of coffee are: Cafe Caribe, Cafe Supremo, Don
Manuel, Fifth Avenue and Via Roma. The Company has acquired trademark
registration rights for each of Coffee Holding's name brands. For further
information regarding these trademark registration rights, see
"Business--Trademarks and Domain Names." Each of Coffee Holding's name brands is
directed at a particular segment of the consumer coffee market.
Cafe Caribe, Coffee Holding's leading name brand by revenue, is a
specialty espresso coffee that targets espresso coffee drinkers, in particular,
the Latin American consumer market. Market research indicates that Latin
American coffee drinkers consume up to four times as much coffee than other
coffee drinkers and tend to be more brand loyal than other coffee drinkers.
Cafe Supremo is a specialty espresso that targets espresso drinkers of all
backgrounds and tastes. It is designed to introduce coffee drinkers to the
tastes of dark roasted coffee.
Don Manuel is a 100% Colombian coffee product made from the finest beans
Colombia produces. 100% Colombian coffee is an upscale quality product which
commands a substantial premium at retail compared to the more traditional brown
coffee blends.
Fifth Avenue is a blended coffee which has become popular as an
alternative for consumers who purchase private label or national branded coffee.
The Company also markets this brand to wholesalers who do not wish to undertake
the expense of developing a private label coffee program under their own name.
Via Roma is an Italian style espresso targeted at the more traditional
espresso drinker.
In fiscal 2000, sales of Coffee Holding's branded coffees comprised
approximately 9% of its sales revenues and, in fiscal 1999 and 1998, 6% and 10%
of revenues, respectively, came from those sales.
Wholesale Green Coffee. Coffee Holding sells and brokers green coffee
beans to small roasters and coffee shop operators located throughout the United
States.
Coffee Holding carries over 50 different varieties of green coffee beans.
Green gourmet coffee beans are sold unroasted, direct from the Company's
warehouse to the small roasters and gourmet coffee shop operators which then
roast the beans themselves. In fiscal 2000, wholesales of green coffee beans
accounted for approximately 43% of Coffee Holding's sales revenues, and, in
fiscal 1999 and 1998, approximately 44% and 48% of revenues, respectively, came
from such sales.
Although the overall coffee market is mature, the green coffee market
represents the fastest growing area of the industry, as the number of gourmet
coffee houses have been increasing in all areas of the United States. The
Company currently has approximately 200 customers in this area.
Raw Materials
Coffee is a commodity traded on the Commodities and Futures Exchange.
Coffee prices are subject to fluctuation. Over the past five years, the average
price per pound of coffee beans ranged from approximately $.72 to $3.18. The
price for coffee beans on the commodities market as of October 31, 2000, was
$.745
The Company purchases its green coffee from dealers located primarily
within the United States. The dealers supply the Company with coffee beans from
many countries, including Columbia, Mexico, Kenya, Indonesia, Brazil and
Ethiopia, among others. In fiscal 2000, substantially all of the Company's
purchases were from approximately nine dealers. Management does not believe that
the loss of any one dealer would have a material adverse effect on the Company's
operations due to the availability of alternate suppliers.
The supply and price of coffee beans are subject to volatility and are
influenced by numerous factors which are beyond Coffee Holding's control. Supply
and price can be affected by many factors such as weather, politics and
economics in the exporting countries. Increases in the cost of coffee beans can,
to a certain extent, be passed on to Coffee Holding's customers in the form of
higher prices for coffee beans and processed coffee. However, there can be no
assurance that the Company will be successful in passing coffee price increases
to customers without losses in sales volume or margin. Drastic or prolonged
increases in coffee prices could also adversely impact the Company's business as
it could lead to a decline in overall consumption of coffee. Similarly, rapid
decreases in the cost of coffee beans could force the Company to lower its sales
prices before realizing cost reductions in its purchases. In addition, a
worldwide supply shortage of gourmet coffee beans could have an adverse impact
on the Company.
3
Gourmet green coffee, unlike most coffee, does not trade on the commodity
market. Instead, it tends to trade on a negotiated basis at a substantial
premium over commodity coffee pricing, depending on the origin, supply and
demand at the time of purchase.
The Company from time to time engages in the purchase and sale of coffee
futures and option contracts to guard against the effects of fluctuations in the
price of green coffee beans and to supplement its supply of coffee, if
necessary. See "Item 7A - Quantitative and Qualitative Disclosures About Market
Risks" herein.
Trademarks and Domain Names
Coffee Holding holds trademarks, registered with the United States Office
of Patent and Trademark for all five of its proprietary coffee brands. Trademark
registrations are subject to periodic renewal and the Company anticipates
maintaining its registrations. The Company believes that its brands are
recognizable in the marketplace and that brand recognition is important to the
success of its branded coffee business.
Customers
Coffee Holding sells private label and its branded coffee to three of the
leading wholesalers in the United States: Supervalu, Nash Finch and Shurfine
International. For fiscal 2000, sales to these three companies accounted for
approximately 31% of Coffee Holding's total sales. Sales of green coffee beans
to Green Mountain Coffee Roasters accounted for approximately 17% of Coffee
Holding's total sales.
The Company historically has had short term contracts with some of these
customers (generally one to three years in duration) and although the Company
believes that it has a strong mutually beneficial relationship with those
companies, there can be no assurance that these relationships will continue. The
loss of any one of these relationships would likely have a material adverse
effect on the Company's business and results of operations. In fiscal 2000, the
Company experienced a significant loss in business from one of its largest
wholesale customers. See "Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Competition
The coffee market is highly competitive. Coffee Holding competes with
other suppliers and distributors of green coffee beans, whole coffee beans and
roasted coffees. The Company's whole bean coffees compete directly against
specialty coffees sold at retail through supermarkets and a growing number of
specialty coffee stores.
Private Label Competition. There are approximately four major producers of
coffee for private label sale in the United States. Many other companies produce
coffee for sale on a regional basis. Coffee Holding's main competitors are
Kroger and Chock Full O' Nuts. Both Kroger and Chock Full O' Nuts, a division of
Sara Lee, are larger and have more financing and resources than Coffee Holding
does and therefore are able to devote more resources to product development and
marketing. The Company believes that it remains competitive by providing a high
level of quality and customer service. Private label coffee also competes with
all of the branded coffee on the market. Chock Full O' Nuts also produces
branded coffees which compete directly with their private label products.
Brand Competition. Coffee Holding's proprietary brand coffees compete with
many other brand coffees which are sold in supermarkets and specialty stores.
The branded coffee market is dominated by three large companies: Kraft General
Foods, Inc., Proctor & Gamble Co. and Sara Lee, who also market gourmet coffee
in addition to non-gourmet coffee. Coffee Holding's large competitors have
greater access to capital than the Company and have a greater ability to conduct
marketing and promotions. The Company believes that, while its competitors'
brands may be more recognizable nationwide, its proprietary brands are well
recognized in the Northeastern United States and are distinguished by their
distinctive flavors.
Wholesale Green Coffee Competition. There are many green coffee dealers
throughout the United States. Many of these dealers have greater financial
resources than Coffee Holding. However, Coffee Holding believes that it has both
the knowledge and the capability to assist small specialty gourmet coffee
roasters with developing and growing their business. Because the Company is also
a roaster as well as a seller of green coffee, it can provide its roasting
experience as a value added service to its gourmet roaster customers. While
other coffee merchants may be able to offer a lower price for coffee beans,
Coffee Holding markets itself as a partner to small roasters, with the ability
to help them market their specialty coffee products and develop a customer base.
The assistance the Company provides its customers includes training, coffee
blending and market identification.
4
Marketing
The Company markets its private label and wholesale coffee through trade
shows, industry publications, face to face contact and through the use of
non-exclusive independent food and beverage sales brokers. The Company also uses
its web site (www.coffeeholding.com) as a method of marketing itself and its
coffee products.
For its private label and brand coffees, the Company will from time to
time, in conjunction with retailers and with wholesalers, conduct in-store
promotions (e.g. coupons, price reductions, two for one sales).
The Company evaluates opportunities for growth consistent with its core
business. The Company recently established relationships with additional
independent sales brokers to market the Company's products in the western United
States, an area of the country where the Company has historically not marketed
and sold its coffee. The Company is also considering the possibility of using
web site auctions to market coffee.
Seasonality
Historically, consumer coffee consumption is greater in the winter months
as compared to the other seasons.
Employees
Coffee Holding has 27 full-time employees, 22 of which are employed in the
areas of coffee roasting, blending and packaging and five of which are in
administration and sales. None of its employees are represented by unions or
collective bargaining agreements. The Company's management believes that the
Company maintains a good working relationship with its employees. In order to
supplement its internal sales staff, Coffee Holding sometimes uses independent
national and regional sales brokers who work on a commission basis.
ITEM 2. PROPERTIES
Coffee Holding is headquartered at 4401 First Avenue, Brooklyn, New York
where it owns the land and an approximately 15,000 square foot building. The
building houses the Company's executive offices as well as the Company's plant
where it roasts, blends and packages its coffee.
Coffee Holding also leases a 7,500 square foot warehouse located at 4425A
First Avenue in Brooklyn from T & O Management. T& O Management is not
affiliated with the Company or any of its officers, directors or shareholders.
The Company pays an annual rent of $46,800. The lease expires on August 31,
2002.
Coffee Holding also uses a variety of independent, bonded commercial
warehouses to store its green coffee beans.
Coffee Holding's management believes that the Company's facilities are
adequate for its current operations and for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its business, Coffee Holding is a party to
litigation involving its operations. The Company does not believe that the
outcome of any current litigation will have a material adverse effect upon its
business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this report on
Form 10-K, no matters were submitted to a vote of security holders.
5
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is not quoted or listed on any quotation system
or market. The Company does not know of any firm that makes a market for the
Common Stock.
The number of registered holders of the Company's common stock at October
31, 2000 and at January 23, 2001 was 472.
In January 1998, prior to the date of the merger with Transpacific, Coffee
Holding, while it was still a privately held "S" corporation, paid a
distribution in the amount of $422,258 to its stockholders to pay personal
income taxes. Since the January 1998 payment, the Company has never paid any
cash dividends on its common stock and has no intention to do so in the
foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following selected data should be read in conjunction with the audited
financial statements of the Company and management's discussion and analysis of
the Company's financial condition and results of operations included elsewhere
herein:
As of or for the Year Ended October 31,
------------------------------------------------------------------------
2000 1999 1998 1997
------------ ------------ ------------ ------------
Operating data:
Net sales $20,097,548 $ 23,089,592 $ 25,853,791 $ 26,120,519
Cost of sales 16,673,790 19,796,476 24,090,666 22,961,911
------------ ------------ ------------ ------------
Gross profit 3,423,758 3,293,116 1,763,125 3,158,608
Operating expenses 2,647,629 2,301,306 2,215,134 2,355,548
------------ ------------ ------------ ------------
Income (loss) from operations 776,129 991,810 (452,009) 803,060
Other income (expense), net (A) (375,795) (382,906) (650,020) (301,448)
------------ ------------ ------------ ------------
Income (loss) before income taxes 400,334 608,904 (1,102,029) 501,612
Provision for income taxes (B) 119,000 64,173
------------ ------------ ------------ ------------
Net income (loss) (B) $ 281,334 $ 608,904 $ (1,102,029) $ 437,439
============ ============ ============ ============
Basic earnings per share (B) $ .07 $ .15
============ ============
Basic weighted average common
shares outstanding 3,999,650 3,999,650
============ ============
Pro forma (B):
Historical income (loss) before
income taxes $ (1,102,029) $ 501,612
Unaudited pro forma:
Provision (credit) for income taxes (496,000) 226,000
------------ ------------
Net income (loss) $ (606,029) $ 275,612
============ ============
Basic income (loss) per share $ (.15) $ .07
============ ============
Basic weighted average
common shares outstanding 3,999,650 3,999,650
============ ============
Dividends $ -- $ -- $ 422,258 $ --
============ ============ ============ ============
Balance sheet data:
Total assets $ 5,997,477 $ 6,511,598 $ 6,524,043 $ 6,794,629
============ ============ ============ ============
Long-term obligations (including
current portion) $ 3,101,239 $ 3,121,479 $ 3,882,804 $ 1,486,549
============ ============ ============ ============
Stockholders' equity (deficiency) $ 225,144 $ (319,178) $ (928,082) $ 595,432
============ ============ ============ ============
(A) Includes consulting and professional fees and other costs incurred in
connection with the reverse acquisition totaling $327,087 in fiscal 1998.
(B) As further explained in Notes 2 and 7 to the financial statements
elsewhere herein, prior to the reverse acquisition on February 10, 1998,
the Company had elected to be treated as an "S" Corporation. Therefore, it
was not required to record any historical provisions or credits for
Federal income taxes, although it was required to record provisions for
state and local taxes at full or reduced rates, in periods prior to
February 10, 1998. The unaudited pro forma provisions and credits for
income taxes in fiscal 1998 and 1997 assume that the Company had not made
the "S" Corporation elections during any portion of those fiscal years and
reflect an effective rate of approximately 45% for each period. There were
no provisions or credits for income taxes in fiscal 1999 due primarily to
the utilization of a portion of the Company's net operating loss
carryforwards and the inability of the Company to recognize benefits from
the remainder as a result of the uncertainties related to the extent and
timing of its future taxable income. The total provision for income taxes
in fiscal 2000 was lower than expected based on statutory rates due
primarily to the utilization of the remainder of the Company's net
operating loss carryforwards.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the "Act") provides
a safe harbor for forward-looking statements made by or on behalf of the
Company. Coffee Holding and its representatives may from time to time make
written or oral forward-looking statements, including statements contained in
this report and in our other filings with the SEC. These statements use words
such as "believes", "expects", "intends", "plans", "may", "will", "should",
"anticipates" and other similar expressions. All statements which address
operating performance, events or developments that the Company expects or
anticipates will occur in the future are forward-looking statements within the
meaning of the Act. The forward-looking statements are and will be based on
management's then current views and assumptions regarding future events and
operating performance. We cannot assure that anticipated results will be
achieved since actual results may differ materially because of risks and
uncertainties. We do not undertake to revise these statements to reflect
subsequent developments.
The following are some of the factors that could cause actual results to
differ materially from our forward-looking statements:
o the impact of rapid or persistent fluctuations in the price of
coffee beans;
o fluctuations in the supply of coffee beans;
o general economic conditions and conditions which affect the market
for coffee;
o the effects of any loss of major customers;
o the effects of competition from other coffee manufacturers and other
beverage alternatives;
o changes in consumption of coffee; and
o other risks which we identify in future filings with the SEC.
You are strongly encouraged to consider these factors when evaluating
forward-looking statements in this annual report. We undertake no responsibility
to update any forward-looking statements contained in this report.
Year Ended October 31, 2000 (fiscal 2000) Compared to Year Ended
October 31, 1999 (fiscal 1999)
Net sales totaled $20,097,548 in fiscal 2000, a decrease of $2,992,044 or
13% from $23,089,592 in fiscal 1999. Coffee pounds sold were approximately 16
million pounds, unchanged from fiscal 1999.
The Company experienced a significant loss in business from an important
wholesale customer. This customer's purchases in fiscal 2000 were approximately
one million pounds lower than its purchases in fiscal 1999 which negatively
impacted net sales by approximately $1,000,000. Sales to this customer in fiscal
2001 are expected to be at a level similar to fiscal 2000. The number of the
Company's customers in the gourmet green coffee area increased from
approximately 150 to approximately 200 in fiscal 2000. These customers are
predominately independent gourmet coffee shops. Sales to new customers in this
area historically start slowly because many of these shops are start up
ventures. The Company believes that its customer base and sales will grow in
this area.
The Company's selling prices decreased steadily throughout fiscal 2000.
Beginning at the end of 1998, the purchase price of green coffee began a gradual
decline that, with the exception of brief price surges, continued through to the
end of fiscal 2000. Declines in green coffee purchase prices eventually led to
declines in selling prices. Selling prices of products which use commodity
coffee react fairly quickly to changes in green coffee purchase prices. Gourmet
green coffee selling prices tend to react more slowly
6
to changes in purchase prices because demand for gourmet coffee is less price
sensitive. The Company also experienced some pricing pressure in the private
label area as some of the Company's larger competitors cut their prices in order
to increase market share. The Company is unable to predict how long and to what
extent pricing pressure in the private label area will continue.
Cost of sales in fiscal 2000 was $16,673,790, or 83% of net sales, as
compared to $19,796,476, or 86% of net sales in fiscal 1999. Cost of sales
consists primarily of the cost of green coffee and packaging materials. The
decrease in cost of sales was attributable to the decline in green coffee
purchase prices. As the price of coffee is cyclical and volatile and subject to
many factors, including weather, politics and economics, the Company is unable
to predict the purchase price of green coffee in fiscal 2001.
The Company's gross profit in fiscal 2000 was $3,423,758, an increase of
$130,642 or 4% from $3,293,116 in fiscal 1999. Gross profit as a percentage of
net sales increased by 3% to 17% in fiscal 2000 from 14% in fiscal 1999. Margins
improved primarily due to lower inventory costs as a result of the overall
decline in green coffee purchase prices. Margins were particularly favorable in
gourmet green coffee sales, as pricing in this area decreased more slowly
relative to the decrease in green coffee purchase prices.
Selling and administrative expenses were $2,317,629 in fiscal 2000, an
increase of $406,323 or 21% from $1,911,306 in fiscal 1999. As a percentage of
net sales, this change represented a 4% increase from 8% in fiscal 1999 to 12%
in fiscal 2000. The increase was primarily attributable to an increase in
freight expenses, commissions, professional fees incurred in connection with the
preparation of reports filed by the Company with the Securities and Exchange
Commission and a one time settlement of litigation in the amount of $75,000.
Freight expenses were approximately $130,000 higher in fiscal 2000 due in part
to fuel surcharges by the carriers as a result of higher gasoline costs and
shipping costs incurred as the Company shipped more products to the Western
United States. Increased commission expenses of approximately $59,000 included
amortization of pre-paid commissions in the amount of $28,000.
Interest expense increased $20,353 or 5% from $386,506 in fiscal 1999 to
$406,859 in fiscal 2000. The increase was attributable to higher interest rates
on outstanding borrowings. Rates of interest on the Company's outstanding
borrowings are tied to the prime rate. As the prime rate rose in fiscal 2000,
the Company's rate of interest payable on its outstanding borrowings also rose.
Other income (expense), which consisted of interest expense and interest
income in fiscal 2000, was a net expense of $375,795. Other income (expense) in
fiscal 1999 was a net expense of $382,906.
The Company had income of $400,334 before income taxes in fiscal 2000
compared to income of $608,904 before income taxes in fiscal 1999. The decline
was attributable primarily to the increase in selling and administrative
expenses.
The Company's provision for income taxes for the year ended October 31,
2000 totaled $119,000 whereas it had no provision or credit for income taxes for
the year ended October 31, 1999. The difference between the tax provision
computed based on the Company's pre-tax income and the applicable statutory
income tax rate and the Company's provisions for Federal, state and local taxes
for the year ended October 31, 2000 and 1999 are set forth below:
Year Ended
October 31
-------------------------
2000 1999
--------- ---------
Tax provision at statutory rate of 34%
Adjustments for the effects of: $ 140,000 $ 207,000
State income taxes, net of Federal
benefit 45,000 67,000
Net change in valuation allowance (66,000) (274,000)
--------- ---------
Provision for income taxes $ 119,000 $ --
========= =========
As further explained in Note 7 of the notes to the financial statements
elsewhere herein, the Company had estimated net operating loss carryforwards
remaining as of October 31, 1999 of approximately $191,000 available to reduce
future Federal, state and local taxable income. Due to the uncertainties related
to the extent and timing of the Company's future taxable income, the Company
7
had offset the estimated deferred tax assets of approximately $89,000
attributable to the potential benefits from the net operating loss carryforwards
as of October 31, 1999 by an equivalent allowance. The Company had pre-tax
income of approximately $400,000 for the year ended October 31, 2000; however,
it was only able to use net operating loss carryforwards of $145,000. As a
result, the Company reversed the valuation allowance of $89,000 that it had
established to offset the remaining deferred tax assets attributable to the
estimated potential benefits from the net operating loss carryforwards as of
October 31, 1999, of which $23,000 was attributable to the reduction in the
estimate of net operating loss carryforwards and $66,000 was attributable to the
reduction in the provision for income taxes that is shown in the table above for
benefits actually realized from the net operating loss carryforwards.
As further explained below, the Company did not record a provision or
credit for income taxes in fiscal 1999 as a result of the utilization of a
portion of its net operating loss carryforwards and the uncertainties as of
October 31, 1999 as to its ability to generate taxable income and utilize the
benefits from its remaining net operating loss carryforwards.
As a result, the Company had net income of $281,334, or $.07 per share, in
fiscal 2000 compared to net income of $608,904, or $.15 per share, in fiscal
1999.
Year Ended October 31, 1999 (fiscal 1999) Compared to Year Ended
October 31, 1998 (fiscal 1998)
Net sales totaled $23,089,592 in fiscal 1999, a decrease of $2,764,199 or
11% from $25,853,791 in fiscal 1998. Although coffee sold increased by
approximately 3 million pounds or 23% from 13 million pounds in fiscal 1998 to
16 million pounds in fiscal 1999, sales revenues decreased primarily due to
lower prices for green coffee sold by the Company.
Cost of sales in fiscal 1999 was $19,796,476, or 86% of net sales, as
compared to $24,090,666, or 93% of net sales in fiscal 1998. Cost of sales
consists primarily of the cost of green coffee and packaging materials. The
decrease in cost of sales in fiscal 1999 was attributable to lower purchase
prices for green coffee. Beginning around the end of fiscal 1998, the purchase
price of coffee began to decline gradually and fiscal 1999 saw continuing
decreases in the purchase price. As the price of coffee is cyclical and volatile
and subject to many factors, including weather, politics and economics, the
Company is unable to predict the purchase price of coffee in fiscal 2000 and
beyond.
The Company's gross profit in fiscal 1999 was $3,293,116, an increase of
$1,529,991 or 87% from $1,763,125 in fiscal 1998. Gross profit as a percentage
of net sales increased by 7% to 14% in fiscal 1999 from 7% in fiscal 1998. The
increase in gross profit as a percentage of sales was primarily attributable to
increased margins on sales of private label and wholesale green coffee as
purchase prices for green coffee gradually declined throughout the year.
Selling and administrative expenses were $1,911,306 in fiscal 1999, a
decrease of $10,558 or 1% from $1,921,864 in fiscal 1998. As a percentage of net
sales, this change represented a 1% increase from 7% in fiscal 1998 to 8% in
fiscal 1999.
Interest expense increased $23,061 or 6% from $363,445 in fiscal 1998 to
$386,506 in fiscal 1999. The increase in fiscal 1999 was attributable primarily
to additional average borrowings on the Company's credit line. The amount in
fiscal 1998 included costs incurred in connection with the cancellation of a
factoring agreement.
Other income (expense) in fiscal 1999 was a net expense of $382,906
compared to a net expense of $650,020 in fiscal 1998 which included $327,087 of
consulting and professional fees and other costs incurred in connection with the
reverse acquisition by Transpacific that was effectively completed on February
10, 1998.
Primarily as a result of the increase in gross profit, the increase in
other operating expenses and the absence of the charge for costs incurred in
connection with the reverse acquisition, the Company had income of $608,904
before income taxes in fiscal 1999 compared to a loss of $1,102,029 before
income taxes in fiscal 1998.
As further explained in Notes 2 and 7 of the notes to the financial
statements elsewhere herein, the Company was not required to record a provision
for Federal income tax in fiscal 1998 because it had elected to be taxed as an
"S" Corporation prior to the reverse acquisition on February 10, 1998 and it had
a pre-tax loss for the period from February 11, 1998 to October 31, 1998.
Although the Company had potential benefits of approximately $363,000 from the
net operating loss carryforwards as of October 31, 1998, it did not record a
credit for income taxes based on its pre-tax loss due to the uncertainties
related to the extent and timing of its future taxable income. The Company did
not record a provision for income taxes based on its pre-tax income in fiscal
1999 because it used a portion of the benefits available from the net operating
loss carryforwards that were available as of October 31, 1998. Although the
Company had estimated potential benefits of approximately $89,000 from the net
operating loss carryforwards as of October 31,
8
1999, it did not record a credit for income taxes based on its net operating
loss carryforwards due to the uncertainties related to the extent and timing of
its future taxable income. Since the Company had no historical provisions or
credits for income taxes in fiscal 1999 and 1998, it had historical net income
of $608,904 in fiscal 1999 compared to a historical net loss of $1,102,029 in
fiscal 1998.
The statement of operations included in the financial statements elsewhere
herein presents an unaudited pro forma credit for income taxes, net loss and
related loss per share information for 1998 assuming the Company had not elected
to be taxed as an "S" Corporation. The Company would have had a credit for
income taxes of approximately $496,000 in fiscal 1998 assuming the "S"
Corporation elections had not been made and it would have been able to carryback
its net operating losses. The unaudited total pro forma credit for Federal,
state and local income taxes reflects an effective rate of approximately 45% in
fiscal 1998 based on the respective statutory rates. On an unaudited pro forma
basis, the Company would have had a net loss of $606,029, or $.15 per share, in
fiscal 1998 compared to the Company's historical net income of $608,904, or $.15
per share, in fiscal 1999.
Liquidity and Capital Resources
As of October 31, 2000, the Company had working capital of approximately
$1,062,000, which increased by approximately $560,000 from its working capital
of approximately $502,000 as of October 31, 1999, and a total stockholders'
equity of $225,000, which increased by $544,000 from its total stockholders'
deficiency of $319,000 as of October 31, 1999. The Company's working capital
increased primarily as a result of net income generated, additional borrowings
under its credit facility and a capital contribution from a stockholder.
As of November 29, 2000, the Company extended the maturity of its credit
facility with Wells Fargo Business Credit from November 20, 2000 until November
20, 2002, and amended certain terms of the facility (see Note 5 of the notes to
the financial statements). The credit facility, as amended, 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 of up to $600,000 based on eligible
equipment. 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. Interest on the line of credit is payable monthly at the prime rate
plus .5% (an effective rate of 9.5% at January 10, 2001). Interest on the term
loan is payable monthly at the prime rate plus .75% (an effective rate of 9.75%
at January 10, 2001). Principal payments on the term loan are payable monthly at
$7,276 and beginning January 1, 2001, are payable monthly at $10,000. Andrew
Gordon and David Gordon, directors and officers of the Company, each have
guaranteed borrowings under the credit facility up to $500,000.
As of October 31, 2000, the line of credit had an outstanding balance of
$2,618,000, which approximated the maximum amount that the Company could borrow
based on its eligible trade accounts receivable and inventory as of that date as
compared to an outstanding balance of $2,445,000 at October 31, 1999. The
outstanding balance under the term loan was $192,000 as at October 31, 2000, and
was $600,000 as at November 29, 2000 as the Company borrowed the maximum amount
of the term loan upon the amendment of the credit facility. The Company had on
deposit $261,000 in a cash collateral account to secure the outstanding
borrowings under the credit facility. The outstanding balance under the line of
credit and a portion of the outstanding balance under the term loan were
classified as long-term liabilities in the Company's October 31, 2000 balance
sheet based on the amended terms of the credit facility whereby the Company may
either defer payments until, or make installment payments, through November 20,
2002.
The Company had loans payable to its stockholders, all of whom are members
of the Gordon family, of $245,000 at October 31, 2000. The loans are due on
demand and bear interest at 10%. The Company borrows from its stockholders, from
time-to-time to supplement short-term working capital needs. The stockholders
are under no obligation to make such loans.
In fiscal 2000, the Company's operating activities provided net cash of
$2,400 as compared to fiscal 1999 when net cash provided by operating activities
was $704,000. The decrease principally reflects a decrease in net income of
$328,000, and a decrease in accounts payable and accrued expenses of $1,038,000,
partially offset by decreases in amounts due from broker of $143,000 and
accounts receivable of $306,000.
During fiscal 2000, the Company used $95,000 of its cash resources to
purchase property and equipment. Capital expenditures were slightly below those
made in fiscal 1999 and management does not believe that the Company's capital
expenditures will be significant in fiscal 2001. Capital expenditures have
decreased as compared to fiscal 1998 and fiscal 1997 when the Company purchased
and installed new equipment and refurbished existing equipment to upgrade its
production capabilities.
The Company also used $689,000 of cash in fiscal 2000, which included
$399,000 to make interest payments and pay administrative fees on its credit
facility, $87,000 to reduce its term loan and $203,000 to reduce capital lease
obligations. In addition, the Company deposited $261,000 in a cash collateral
account to secure outstanding borrowings under its credit facility.
9
During fiscal 2000, the Company received short term advances of $97,000
from related parties and a capital contribution of $263,000 from a stockholder
which represented a return of a portion of a dividend paid during a period in
which the Company was taxed as an "S" corporation.
The Company anticipates, but cannot assure, that it will be able to fund
its operations, including paying its liabilities, funding capital expenditures
and making required payments on its debts, in fiscal 2001 through cash provided
by operating activities and borrowings under its credit facility. This
expectation assumes that the Company is able to generate a sufficient level of
sales in order to increase net income and eligible accounts receivable. An
increase in eligible accounts receivable and inventory would permit the Company
to make additional borrowings under its line of credit. The Company also
believes it could, if necessary, obtain additional loans by mortgaging its
headquarters.
Year 2000
The Year 2000 issue concerns the possible inability of information systems
and non-information systems with embedded technology to properly recognize and
process date sensitive information beyond December 31, 1999. The Company did not
experience any systems problems related to Year 2000 issues. The Company's
information and non-information systems functioned normally. The Company's
business with its suppliers and customers was not affected by Year 2000 issues,
although the Company did experience some reduction in inventory purchases from
its wholesale customers in November and December 1999 as the customers did not
want to carry a large inventory ahead of the Year 2000. The Company does not
presently anticipate making any expenditures in the fiscal year ending October
31, 2001 for Year 2000 items.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Market risks relating to the Company's operations result primarily from
changes in interest rates and commodity prices as further described below.
Interest Rate Risks
The Company is subject to market risk from exposure to fluctuations in
interest rates. At October 31, 2000, the Company's long-term debt, other than
capitalized leases, consisted of approximately $245,000 of fixed rate debt and
approximately $2,800,000 of variable rate debt under its revolving line of
credit and term loan. Interest on the variable rate debt was payable primarily
at .5% above the prime rate, with a portion of the variable rate debt payable at
.75% above the prime rate. The Company does not expect changes in interest rates
to have a material effect on results of operations or cash flows in fiscal 2001,
although there can be no assurance that interest rates will not significantly
change.
Commodity Price Risks
The supply and price of coffee beans are subject to volatility and are
influenced by numerous factors which are beyond the Company's control.
Historically, the Company has used short-term coffee futures and options
contracts primarily for the purpose of partially hedging and minimizing the
effects of changing green coffee prices, as further explained in Note 2 of the
notes to financial statements in this Annual Report. In addition, during the
latter half of fiscal 2000, the Company began to acquire futures contracts with
longer terms (generally three to four months) primarily for the purpose of
guaranteeing an adequate supply of green coffee. The use of these derivative
financial instruments has enabled the Company to mitigate the effect of changing
prices although it generally remains exposed to loss when prices surge
significantly in a short period of time. The Company generally has been able to
pass green coffee price increases through to its customers, thereby maintaining
its gross profits. However, the Company cannot predict whether it will be able
to pass inventory price increases through to its customers in the future.
At October 31, 2000, the Company held options covering an aggregate of
1,875,000 pounds of green coffee beans which are exercisable at $.725 per pound.
The fair market value of these options, which was obtained from a major
financial institution, was approximately $27,000 at October 31, 2000.
At October 31, 2000, the Company held longer-term futures contracts for
the purchase of 412,500 pounds of coffee at an average price of $1.04 per pound.
The fair market price of coffee applicable to such contracts was $.744 per pound
at that date. Generally, such contracts are marked to market on a daily basis,
and realized gains and losses are included in cost of sales.
10
The table below provides information about the Company's green coffee
inventory and futures contracts that are sensitive to changes in commodity
prices, specifically green coffee prices. For inventory, the table presents the
carrying amount and fair value at October 31, 2000. For the future contracts,
the table presents the notional amounts in pounds, the weighted average contract
prices, and the total dollar contract amount by expected maturity dates, the
latest of which occurs within one year from the reporting date. Contract amounts
are used to calculate the contractual payments and quantity of green coffee to
be exchanged under the futures contracts.
October 31, 2000
---------------------
Carrying Fair
Amount Value
-------- -----
On balance sheet commodity position
and related derivatives
Green coffee inventory $813,320 $813,320
Fair value
Related derivatives
Futures contracts (long):
Contract volumes (412,500 pounds)
Weighted average price (per pound) $ 1.04
Contract amount $429,000
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On May 15, 1998, Transpacific dismissed German W. Chacon ("Chacon") who
has been previously engaged as the principal accountant for Transpacific and had
previously audited its financial statements as of September 30, 1997 and for the
period from October 9, 1995 (date of inception) to September 30, 1997.
Chacon's reports on Transpacific's financial statements for the period
from October 9, 1995 to September 30, 1997 did not contain any adverse opinion
or disclaimer of opinion, qualifications or modifications as to uncertainty,
audit scope or accounting principles.
There were no disagreements between Transpacific and Chacon on any matter
of accounting principles or practice, financial statement disclosure or auditing
scope or procedure within the period from October 9, 1995 to September 30, 1997
and the subsequent interim period preceding its dismissal which disagreement, if
not resolved to Chacon's satisfaction, would have caused it to make reference to
such disagreement.
During the period from October 9, 1995 to September 30, 1997 and the
subsequent interim period preceding Chacon's dismissal, there were no
"reportable events" as set forth in Item 304(a)(1)(v) of Regulation S-K.
On May 15, 1998, Coffee Holding dismissed the accounting firm of Ira D.
Ganzfried & Company ("Ganzfried") which had been previously engaged as the
principal accountants for Coffee Holding and had previously audited its
financial statements as of October 31, 1996 and 1995 and for the years then
ended.
11
Ganzfried's reports on Coffee Holding's financial statements for the years
ended October 31, 1996 and 1995 did not contain any adverse opinion or
disclaimer of opinion, qualifications or modifications as to uncertainty, audit
scope or accounting principles.
There were no disagreements between Coffee Holding and Ganzfried on any
matter of accounting principles or practice, financial statement disclosure or
auditing scope or procedure for the years ended October 31, 1996 and 1995 and
the subsequent interim period preceding its dismissal which disagreement, if not
resolved to Ganzfried's satisfaction, would have caused it to make reference to
such disagreement.
For the years ended October 31, 1996 and 1995 and the subsequent interim
period preceding Ganzfried's dismissal, there were no "reportable events" as set
forth in Item 304(a)(1)(v) of Regulation S-K.
The decision to change accountants was approved by the Board of Directors
of the Company following the merger between Transpacific and Coffee Holding. The
Company does not have an audit committee.
On May 15, 1998, Coffee Holding engaged the accounting firm of J.H. Cohn
LLP as the principal accountant to audit its financial statements in subsequent
years. Neither Coffee Holding nor anyone acting on its behalf consulted with
J.H. Cohn LLP prior to engaging them regarding the application of accounting
principles to a specified transaction or the type of audit opinion that might be
rendered on the Coffee Holding or Transpacific financial statements for which
disclosure would be required by Item 304(a)(2) of Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF COFFEE HOLDING CO., INC.
Set forth below is information concerning the Company's directors and
executive officers. The Company's board of directors currently consists of five
directors. Directors are elected by a plurality of the votes cast at the
Company's annual meeting of stockholders. Once elected, each director serves
until the next annual meeting of stockholders and until his or her successor is
duly elected and qualified, or until his or her earlier death, resignation or
removal. Officers are appointed by the directors, and, once appointed, each
officer serves until his or her successor is duly appointed, or until his or her
earlier death, resignation or removal.
Name Age Position
---- --- --------
Andrew Gordon........... [39] Chief Executive Officer, President, Treasurer
and Director
David Gordon............ [36] Executive Vice President, Secretary and
Director
Gerard DeCapua.......... [39] Director
Daniel Dwyer............ [44] Director
Matthew Phillips........ [46] Director
Andrew Gordon is Chief Executive Officer, President, Treasurer and a
Director of Coffee Holding. He was previously a Vice President from 1981 to
1997. He has been a Director of Coffee Holding since 1981. Mr. Gordon received
his B.B.A. degree from Emory University. He is the brother of David Gordon.
David Gordon is Executive Vice President--Operations, Secretary and a
Director of Coffee Holding. He was previously a Vice President and Operating
Manager from 1983 to 1997. He has been a Director of Coffee Holding since 1983.
Mr. Gordon attended Baruch College in New York City. He is the brother of Andrew
Gordon.
Gerard DeCapua has been a Director of Coffee Holding since 1997. He has
had his own law practice in Rockville Centre, New York since 1985. Mr. DeCapua
received his law degree from Pace University.
Daniel Dwyer has been a Director of Coffee Holding since 1998. Mr. Dwyer
has been a senior coffee trader at Rothfos Corporation since 1995.
Matthew Phillips has been a Director of Coffee Holding since 1998. Since
1991, Mr. Phillips has been a Vice-President of Branco Peres International,
responsible for coffee trading operations.
The Company currently does not have any standing committees.
12
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain compensation information for the
Company's chief executive officer and each other executive officer whose salary
and bonus compensation exceeded $100,000 for the fiscal year ended October 31,
2000.
Summary Compensation Table
Annual Compensation
---------------------------------------
Name and Salary Bonus All Other
Principal Position Fiscal Year ($) ($)(1) Compensation ($)(2)
------------------ ----------- ------ ------ -------------------
Andrew Gordon 2000 155,000 - 13,671
Chief Executive 1999 160,000 50,000 8,896
Officer and President 1998 160,000 - 24,379
David Gordon 2000 125,000 40,000 6,919
Executive Vice 1999 160,000 50,000 6,970
President - Operations 1998 130,000 - 6,970
----------
(1) Amounts shown as bonuses were earned in the fiscal year shown.
(2) The amounts set forth consist of amounts paid by the Company for the use
of an automobile and automobile insurance.
The Company has a stock option plan under which stock options to purchase
shares of Company Common Stock may be granted to the Company's directors,
officers and other key employees and consultants. The Company has reserved
2,000,000 shares of its Common Stock for issuance under the stock option plan.
As of October 31, 2000, no options had been granted under the plan.
Compensation of Directors
Directors do not receive any compensation for their services. They are,
however, reimbursed for travel expenses and other out-of-pocket costs incurred
in connection with attendance at board of directors and committee meetings.
ITEM 12. SECURITY STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding ownership of shares
of the Company's common stock, as of October 31, 2000, by each person known to
be the owner of 5% or more of the Company's common stock, by each person who is
a director or executive officer and by all directors and executive officers as a
group.
When reviewing the following table, you should be aware that:
(i) The amounts and percentages of common stock and preferred stock
beneficially owned are reported on the basis of regulations of the
SEC governing the determination of beneficial ownership of
securities. Under the rules of the SEC, a person is deemed to be a
"beneficial owner" of a security if that person has or shares
"voting power," which includes the power to vote or to direct the
voting of such security, or "investment power," which includes the
power to dispose of or to direct the disposition of such security. A
person is also deemed to be a beneficial owner of any securities of
which that person has a right to acquire beneficial ownership within
60 days. Under these rules, more than one person may be deemed a
beneficial owner of the same securities and a person may be deemed
to be a beneficial owner of securities as to which that person has
no economic interest.
(ii) Unless otherwise indicated by footnote, each person identified in
the table below has sole voting power and investment power as to the
shares beneficially owned.
13
Common Stock
------------------------
Number of Percentage
Shares of Class
--------- ----------
Andrew Gordon(1) 1,970,378 49.3%
David Gordon(1) 1,970,378 49.3%
Gerard DeCapua 100 *
Daniel Dwyer 100 *
Matt Phillips 100 *
Rachelle Gordon(2) 1,740,000 43.5%
Rachelle Gordon Grantor
Retained Annuity Trust 1,350,878 30.8%
Sterling Gordon 199,600 5.0%
Judy Melnick 199,600 5.0%
All directors and executive
officers as a group (5 persons)(1) 2,590,178 64.8%
----------
* Less than 1%.
(1) Includes 1,350,878 shares held by the Rachelle Gordon Grantor Retained
Annuity Trust, of which Andrew and David Gordon are the co-trustees with
the power to vote and dispose of the shares.
(2) Includes 1,350,878 shares held by the Rachelle Gordon Grantor Retained
Annuity Trust, of which Ms. Gordon is the grantor and beneficiary.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From time to time, certain of the Company's stockholders and directors and
officers make loans to the Company for working capital purposes.
At October 31, 2000, the Company had loans payable to certain of its
stockholders and directors and officers in the principal amounts as follows:
Rachelle Gordon - $38,633
Sterling Gordon - $47,884
David Gordon - $90,371
Andrew Gordon - $68,373
The loans are unsecured, due on demand and bear interest at 10% per annum.
Andrew Gordon and David Gordon have each guaranteed the payment of the
Company's borrowings under its outstanding credit facilities from Wells Fargo
Business Credit up to $500,000.
Daniel Dwyer, a director of the Company, is a senior coffee trader for
Rothfos Corporation. Mr. Dwyer is responsible for the Company's account. The
Company paid Rothfos approximately $3,500,000 for green coffee purchases in
fiscal 2000 and expects to pay it a similar amount in fiscal 2001.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The financial statements and financial statement schedules listed
below are filed as a part of this report. See Index to Financial Statements and
Financial Statement Schedules beginning on Page F-1.
1. Financial Statements:
- Index to Financial Statements and Financial Statement
Schedules
- Report of Independent Public Accountants.
14
- Balance sheets as of October 31, 2000 and 1999
- Statements of Operations for the Years Ended October 31, 2000,
1999 and 1998
- Statements of Changes in Stockholders' Equity (Deficiency) for
the Years Ended October 31, 2000, 1999 and 1998
- Statements of Cash Flows for the Years Ended October 31, 2000,
1999 and 1998
- Notes to Financial Statements
2. Financial Statement Schedules:
II. Valuation and Qualifying Accounts and Reserves for the Years Ended
October 31, 2000, 1999 and 1998
Other Schedules have been omitted because the information required
to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
(b) No reports on Form 8-K were filed by the Company during the fourth
quarter ended October 31, 2000.
(c) Exhibits
Exhibit
Number Exhibit Name
------ ------------
3.1 Articles of Incorporation of the Company, as amended (incorporated
herein by reference to Exhibit 3.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended April 30, 1998).
3.2 Certificate of Amendment of Articles of Incorporation of Coffee
Holding Co., Inc. (incorporated herein by reference to Exhibit 3.2 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
April 30, 1998)
3.3 The Company's By-Laws, as amended (incorporated herein by reference
to Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended April 30, 1998).
10.1 Lease with T&O Management Corp. dated August 15, 1997 (incorporated
herein by reference to Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended April 30, 1998).
10.2 1998 Stock Option Plan (incorporated hereby reference to Exhibit 10.2
to the Company's Quarterly Report on Form 10-Q for the quarter ended
April 30, 1998).
10.3* Loan and Security Agreement dated as of November 21, 1997 between the
Company and NationsCredit Commercial Corporation.
10.4* First Amendment to Loan and Security Agreement dated as of May 22,
1998 between the Company and NationsCredit Commercial Corporation.
10.5* Second Amendment dated as of November 29, 2000 to Loan and Security
Agreement between the Company and Wells Fargo Business Credit, Inc.,
as assignee.
10.6* Term Note dated as of November 29, 2000 made by the Company in favor
of Wells Fargo Business Credit, Inc. in the principal amount of
$600,000.
16.1 Letter from German W. Chacon (incorporated by reference to Exhibit
16(a) to the Form 8-K of Transpacific International Group Corp. filed
with the SEC on May 18, 1998).
16.2 Letter from Ira D. Ganzfried & Company (incorporated by reference to
Exhibit 16(b) to the Form 8-K of Transpacific International Group
Corp. filed with the SEC on May 18, 1998).
27* Financial Data Schedule.
----------
* Filed herewith
** To be filed by Amendment
15
Supplemental Information to be Furnished With Reports
Filed Pursuant to Section 15(d) of the Act by Registrants
Which Have Not Registered Securities Pursuant to Section 12 of the Act
Coffee Holding has not and does not intend to send an annual report to
stockholders or proxy materials to its stockholders.
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, hereunto duly authorized.
COFFEE HOLDING CO., INC.
By: /s/ Andrew Gordon
---------------------------------
Andrew Gordon
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on January 29, 2001 by the following persons on behalf of
the registrant and in the capacities indicated.
Signature Title
--------- -----
/s/ Andrew Gordon Chief Executive Officer, President, Treasurer
---------------------- and Director (principal executive officer and
Andrew Gordon principal financial and accounting officer)
/s/ David Gordon Executive Vice President--Operations, Secretary
---------------------- and Director
David Gordon
/s/ Gerard DeCapua Director
----------------------
Gerard DeCapua
/s/ Dan Dwyer Director
----------------------
Dan Dwyer
/s/ Matt Philips Director
----------------------
Matt Phillips
17
COFFEE HOLDING CO., INC.
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
PAGE
----
(A) FINANCIAL STATEMENTS:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
BALANCE SHEETS OCTOBER 31, 2000 AND 1999 F-3
STATEMENTS OF OPERATIONS YEARS ENDED
OCTOBER 31, 2000, 1999 AND 1998 F-4
STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY (DEFICIENCY) YEARS ENDED
OCTOBER 31, 2000, 1999 AND 1998 F-5
STATEMENTS OF CASH FLOWS YEARS ENDED
OCTOBER 31, 2000, 1999 AND 1998 F-6
NOTES TO FINANCIAL STATEMENTS F-7/17
(B) FINANCIAL STATEMENT SCHEDULE:
II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998 S-1
Other schedules are omitted because of the absence of conditions under
which they are required or because the required information is given in
the financial statements or notes thereto.
* * *
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Coffee Holding Co., Inc.
We have audited the accompanying balance sheets of COFFEE HOLDING CO., INC. as
of October 31, 2000 and 1999, and the related statements of operations, changes
in stockholders' equity (deficiency) and cash flows for the years ended October
31, 2000, 1999 and 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Coffee Holding Co., Inc. as of
October 31, 2000 and 1999, and its results of operations and cash flows for the
years ended October 31, 2000, 1999 and 1998, in conformity with generally
accepted accounting principles.
Our audits referred to above included the information in Schedule II which
presents fairly, in all material respects, when read in conjunction with the
basic financial statements taken as a whole, the information required to be set
forth therein.
J. H. COHN LLP
Roseland, New Jersey
December 29, 2000
F-2
COFFEE HOLDING CO., INC.
BALANCE SHEETS
OCTOBER 31, 2000 AND 1999
ASSETS 2000 1999
----------- -----------
Current assets:
Cash $ 153,844 $ 265,044
Due from broker 138,555 281,064
Accounts receivable, net of allowance for
doubtful accounts of $200,510 and $227,210 2,066,964 2,416,700
Inventories 1,466,050 1,478,485
Prepaid expenses and other current assets 68,582 59,565
----------- -----------
Total current assets 3,893,995 4,500,858
Property and equipment, at cost, net of
accumulated depreciation of $2,161,398
and $1,908,410 1,825,648 1,983,317
Cash equivalents restricted under credit
facility 261,038
Deposits and other assets 16,796 27,423
----------- -----------
Totals $ 5,997,477 $ 6,511,598
=========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Current portion of term loan $ 114,552 $ 87,312
Current portion of obligations under
capital leases 46,161 202,743
Accounts payable and accrued expenses 2,671,094 3,709,297
----------- -----------
Total current liabilities 2,831,807 3,999,352
Term loan, net of current portion 77,563 192,119
Line of credit borrowings 2,617,702 2,445,130
Obligations under capital leases, net
of current portion 46,161
Loans from related parties 245,261 148,014
----------- -----------
Total liabilities 5,772,333 6,830,776
----------- -----------
Commitments and contingencies
Stockholders' equity (deficiency):
Preferred stock, par value $.001 per
share; 10,000,000 shares
authorized; none issued -- --
Common stock, par value $.001 per
share; 30,000,000 shares
authorized, 3,999,650 shares issued
and outstanding 4,000 4,000
Additional paid-in capital 743,985 480,997
Accumulated deficit (522,841) (804,175)
----------- -----------
Total stockholders' equity
(deficiency) 225,144 (319,178)
----------- -----------
Totals $ 5,997,477 $ 6,511,598
=========== ===========
See Notes to Financial Statements.
F-3
COFFEE HOLDING CO., INC.
STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
2000 1999 1998
------------ ------------ -----------
Net sales $ 20,097,548 $ 23,089,592 $25,853,791
Cost of sales 16,673,790 19,796,476 24,090,666
------------ ------------ -----------
Gross profit 3,423,758 3,293,116 1,763,125
------------ ------------ -----------
Operating expenses:
Selling and administrative 2,317,629 1,911,306 1,921,864
Officers' salaries 330,000 390,000 293,270
------------ ------------ -----------
Totals 2,647,629 2,301,306 2,215,134
------------ ------------ -----------
Income (loss) from operations 776,129 991,810 (452,009)
------------ ------------ -----------
Other income (expense):
Interest income 31,064 3,600 40,512
Interest expense (406,859) (386,506) (363,445)
Expenses incurred in connection
with reverse acquisition (327,087)
------------ ------------ -----------
Totals (375,795) (382,906) (650,020)
------------ ------------ -----------
Income (loss) before income taxes 400,334 608,904 (1,102,029)
Provision for income taxes 119,000
------------ ------------ -----------
Net income (loss) $ 281,334 $ 608,904 $(1,102,029)
============ ============ ===========
Basic earnings per share $ .07 $ .15
============ ===========
Basic weighted average common
shares outstanding 3,999,650 3,999,650
============ ===========
Unaudited:
Historical loss before income
taxes $(1,102,029)
Pro forma:
Credit for income taxes (496,000)
-----------
Net loss $ (606,029)
===========
Basic loss per share $ (.15)
===========
Basic weighted average
common shares outstanding 3,999,650
===========
See Notes to Financial Statements.
F-4
COFFEE HOLDING CO., INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
Common Stock
------------------------------------------------------- Retained
No Par Value $.001 Par Value Earnings
-------------------------- ------------------------- Additional (Accum-
Number of Number of Paid-in ulated
Shares Amount Shares Amount Capital Deficit) Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, November 1, 1997 100 $ 460,000 $ 135,432 $ 595,432
Effect of reverse acquisition
and related transactions (100) (460,000) 3,999,650 $ 4,000 $ 480,997 (24,224) 773
Net loss (1,102,029) (1,102,029)
Dividends paid (422,258) (422,258)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, October 31, 1998 -- -- 3,999,650 4,000 480,997 (1,413,079) (928,082)
Net income 608,904 608,904
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, October 31, 1999 -- -- 3,999,650 4,000 480,997 (804,175) (319,178)
Capital contribution 262,988 262,988
Net income 281,334 281,334
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, October 31, 2000 -- $ -- 3,999,650 $ 4,000 $ 743,985 $ (522,841) $ 225,144
=========== =========== =========== =========== =========== =========== ===========
See Notes to Financial Statements.
F-5
COFFEE HOLDING CO., INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
2000 1999 1998
----------- ----------- -----------
Operating activities:
Net income (loss) $ 281,334 $ 608,904 $(1,102,029)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 252,988 252,925 239,687
Bad debts 44,091 12,210 53,391
Write-off of deferred mortgage
financing costs 55,063
Changes in operating assets
and liabilities:
Due from broker 142,509 (130,472) 273,307
Accounts receivable 305,645 (185,112) 561,012
Inventories 12,435 (118,531) 19,429
Prepaid expenses and other
current assets (9,017) (2,367) (30,132)
Deposits and other assets 10,627 71,900 (42,132)
Accounts payable and
accrued expenses (1,038,203) 139,976 1,360,674
----------- ----------- -----------
Net cash provided by
operating activities 2,409 704,496 1,333,207
----------- ----------- -----------
Investing activities - purchases
of property and equipment (95,319) (111,092) (347,260)
----------- ----------- -----------
Financing activities:
Principal payments on mortgage
note payable (600,000) (50,000)
(Increase) decrease in cash and
cash equivalents restricted under
credit facility and mortgage note (261,038) 432,965 (366,895)
Principal payments on term loan (87,316) (87,312) (87,312)
Net advances under bank line of credit 172,572 124,617 271,340
Principal payments of obligations
under capital leases (202,743) (215,447) (185,483)
Advances from (repayments to)
related parties 97,247 16,817 (344,018)
Dividends paid (422,258)
Capital contribution 262,988
----------- ----------- -----------
Net cash used in financing
activities (18,290) (328,360) (1,184,626)
----------- ----------- -----------
Net increase (decrease) in cash (111,200) 265,044 (198,679)
Cash, beginning of year 265,044 -- 198,679
----------- ----------- -----------
Cash, end of year $ 153,844 $ 265,044 $ --
=========== =========== ===========
Supplemental disclosure of
cash flow data:
Interest paid $ 399,045 $ 335,267 $ 334,567
=========== =========== ===========
Income taxes paid $ 12,519 $ 904 $ 104,664
=========== =========== ===========
See Notes to Financial Statements.
F-6
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business activities and reverse acquisition:
Coffee Holding Co., Inc. ("Coffee"), which was incorporated in New York on
January 22, 1971, conducts wholesale coffee operations, including
manufacturing, roasting, packaging, marketing and distributing roasted and
blended coffees for private labeled accounts and its own brands, and sells
green coffees. The Company's sales are primarily to customers that are
located throughout the United States.
On February 10, 1998, the holders of all of the shares of Coffee's common
stock consummated an exchange (the "Exchange") of their shares for shares
of common stock of Transpacific International Group Corp.
("Transpacific"). Transpacific was incorporated in Nevada on October 9,
1995 and organized originally as a "blind pool" or "blank check" company
for the purpose of either merging with or acquiring an operating company.
It had been a development stage company with no significant operating
activities or assets and liabilities prior to the Exchange.
Transpacific, which had, effectively, 999,650 outstanding shares of common
stock (with a par value of $.001 per share) prior to the Exchange, issued
3,000,000 shares of common stock in exchange for all of the 100 issued and
outstanding shares of common stock (no par value) of Coffee. Concurrently,
Coffee was merged into Transpacific (the "Merger") and Transpacific
changed its name to Coffee Holding Co., Inc.
Coffee Holding Co., Inc. after the Exchange, the Merger and the name
change is referred to below as the "Company" or the "Combined Company."
The "Company" is also used to refer to Coffee Holding Co., Inc. prior to
the Exchange, the Merger and the name change.
The stockholders of Coffee also owned 540,040 shares of common stock of
Transpacific prior to the Exchange and, accordingly, they owned a total of
3,540,400 or 88.5% of the outstanding shares of the Combined Company
immediately after the Exchange. Therefore, the Merger was treated,
effective as of February 10, 1998, as a "purchase business combination"
and a "reverse acquisition" for accounting purposes in which Transpacific
was the "legal acquirer" and Coffee was the "accounting acquirer." The
carrying values of the assets and liabilities of Transpacific, which were
immaterial, were recorded at their historical carrying values as of
February 10, 1998. Accordingly, the historical financial statements
included herein only reflect the operations of Coffee for the period prior
to February 10, 1998. All references to numbers of shares of common stock
as of the dates or for periods prior to the Exchange have been restated to
reflect the number of common shares of Transpacific effectively exchanged
for common shares of Coffee.
Consulting and professional fees and other costs incurred in connection
with the reverse acquisition totaling $327,087 were charged to expense in
1998.
Information as to the unaudited pro forma results of operations of the
Company assuming the Merger had been consummated as of, and the results of
operations of Transpacific had been included from, November 1, 1997 has
not been presented because such pro forma results would not differ
materially from the historical results of operations for 1998 reflected in
the accompanying historical statements of operations.
F-7
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies:
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those
estimates.
Cash equivalents:
Cash equivalents represent highly liquid investments with maturities
of three months or less at the date of purchase.
Inventories:
Inventories are valued at the lower of cost (first-in, first-out
basis) or market.
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 options and futures contracts to partially hedge
the effects of fluctuations in the price of green coffee beans.
Options and futures contracts are marked to market with current
recognition of gains and losses on such positions. The Company does
not defer such gains and losses since its positions are not
considered hedges for financial reporting purposes. The Company's
accounting for options and futures contracts may have the effect of
increasing earnings volatility in any particular period.
At October 31, 2000, the Company held options (generally with terms
of two months or less) covering an aggregate of 1,875,000 pounds of
green coffee beans at a price of $.725 per pound. At October 31,
1999, the Company held options covering an aggregate of 3,525,000
pounds of green coffee beans at prices ranging from $.85 to $1.05
per pound. The fair market value of these options, which was
obtained from a major financial institution, was approximately
$27,000 and $271,000 at October 31, 2000 and 1999, respectively.
The Company began to acquire futures contracts during the year ended
October 31, 2000 with longer terms (generally three to four months)
primarily for the purpose of guaranteeing an adequate supply of
green coffee. At October 31, 2000, the Company held longer-term
futures contracts for the purchase of 412,500 pounds of coffee at an
average price of $1.04 per pound. The market price of coffee
applicable to such contracts was $.744 per pound at that date.
F-8
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies (continued):
Deferred financing costs:
Costs incurred in connection with obtaining financing are
capitalized and amortized over the term of the related loan using a
method that approximates the interest method.
Advertising:
The Company expenses the cost of advertising and promotions as
incurred. Advertising costs charged to operations totaled $70,108,
$92,924 and $140,397 in 2000, 1999 and 1998, respectively.
Income taxes:
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.
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.
F-9
COFFEE HOLDING CO., INC.
NOTES TO 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 no potentially dilutive securities outstanding
in 2000 and 1999, only historical basic earnings per share amounts
are presented in the accompanying statement of operations for those
years.
Since the Company had elected to be taxed as an "S" Corporation, it
was not required to provide for Federal income taxes and it was only
required to provide for state income taxes at a reduced rate prior
to the date of the Exchange. SEC rules and regulations prohibit the
presentation of earnings (loss) per common share amounts on a
historical basis for the periods during which the "S" Corporation
elections were in effect; instead, they require the presentation of
basic and, if applicable, diluted unaudited pro forma earnings
(loss) per common share amounts in the statements of operations for
such periods assuming that the Company had been subject to Federal
and state income taxes at statutory rates applicable to those
companies that had not made "S" Corporation elections. Since the
Company had elected to be taxed as an "S" Corporation for part of
1998 and it had no potentially dilutive securities outstanding in
1998, only the unaudited pro forma loss per share amount is
presented in the accompanying statement of operations for that year.
F-10
COFFEE HOLDING CO., INC.
NOTES TO 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 in 2000 and 1999 was the
3,999,650 shares of common stock actually outstanding during those
years. The weighted average common shares outstanding used in the
computation of unaudited pro forma basic loss per share in 1998 was
also 3,999,650 based on the assumption that the 3,999,650 shares
effectively issued as of February 10, 1998, the date of the Exchange
(see Note 1), had been outstanding from the beginning of that year.
Recent accounting pronouncements:
In June 1998, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"), which, as amended, requires that all derivative
financial instruments be recognized as either assets or liabilities
in the balance sheet and measured at fair value. The Company will be
required to implement SFAS 133 in the first quarter of its fiscal
year ending October 31, 2001. Management does not believe that the
adoption of SFAS 133 will have a significant impact on results of
operations.
The FASB and the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants had issued
certain other accounting pronouncements as of October 31, 2000 that
will become effective in subsequent periods. In December 1999, the
Securities and Exchange Commission issued Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements" ("SAB 101").
SAB 101 summarizes certain staff views in applying generally
accepted accounting principles to revenue recognition in financial
statements. The Company will be required to implement SAB 101 no
later than the fourth quarter of its fiscal year ending October 31,
2001. However, management of the Company does not believe that any
of those other pronouncements would have significantly affected the
Company's financial accounting measurements or disclosures had they
been in effect during the years ended October 31, 2000, 1999 and
1998 or that they will have a significant affect at the time they
become effective.
Reclassifications:
Certain accounts in the 1999 and 1998 financial statements have been
reclassified to conform to the 2000 presentation.
Note 3 - Inventories:
Inventories at October 31, 2000 and 1999 consisted of the following:
2000 1999
---------- ----------
Packed coffee $ 280,764 $ 211,620
Green coffee 813,320 892,344
Packaging supplies 371,966 374,521
---------- ----------
Totals $1,466,050 $1,478,485
========== ==========
F-11
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
Note 4 - Property and equipment:
Property and equipment at October 31, 2000 and 1999 consisted of the
following:
Estimated
Useful Life 2000 1999
----------- ---------- ----------
Building and improvements 30 years $1,244,285 $1,232,659
Machinery and equipment 7 years 2,194,351 1,709,915
Machinery and equipment under
capital leases 7 years 288,500 694,609
Furniture and fixtures 7 years 118,910 113,544
---------- ----------
3,846,046 3,750,727
Less accumulated depreciation
(including $103,035 and $206,859
arising from capital leases) 2,161,398 1,908,410
---------- ----------
1,684,648 1,842,317
Land 141,000 141,000
---------- ----------
Totals $1,825,648 $1,983,317
========== ==========
Depreciation totaled $252,988, $251,204 and $234,525 in 2000, 1999 and
1998, respectively.
During 1998, the Company effectively acquired equipment at a cost of
$288,500 by incurring capital lease obligations. These noncash
transactions are not reflected in the accompanying 1998 statement of cash
flows.
Note 5 - Credit facility and other borrowings:
As of October 31, 2000, the Company was obligated for aggregate borrowings
of $2,809,817 under a credit facility provided by Bank of America
Commercial Finance Corporation ("BACFC"), formerly Nationscredit
Commercial Corp., that was scheduled to expire on November 20, 2000. The
credit facility consisted of a revolving line of credit and a term loan.
The line of credit provided 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. The outstanding balance of $2,617,702 and
$2,445,130 at October 31, 2000 and 1999, respectively, approximated the
maximum amount that the Company could borrow based on its eligible trade
accounts receivable and inventories as of each date. Interest was payable
monthly at the prime rate plus 1% (an effective rate of 10.5% at October
31, 2000).
F-12
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
Note 5 - Credit facility and other borrowings (concluded):
The term loan, which had an outstanding balance of $192,115 and $279,431
(including a current portion of $114,552 and $87,312) at October 31, 2000
and 1999, respectively, provided for borrowings of up to the greater of
80% of the cost of eligible equipment or $500,000. Principal was payable
in monthly installments of $7,276 plus interest which was also at the
prime rate plus 1%.
Two of the Company's stockholders had each guaranteed outstanding
borrowings under the credit facility of up to $100,000 at October 31,
2000, plus interest and other costs and expenses as defined, and the
Company also had $261,038 in an interest bearing money market account that
was deposited with BACFC during the year ended October 31, 2000 to secure
outstanding borrowings under the credit facility.
As a result of amendments to the agreements with Wells Fargo Business
Credit, the assignee of BACFC, that became effective on November 29, 2000,
interest on borrowings under the line of credit and the term loan will be
payable monthly at .5% and .75% above the prime rate, respectively; the
credit facility will not expire until November 20, 2002; the maximum
amount of borrowings under the term loan increased from $500,000 to
$600,000; term loan principal payments will increase from $7,276 to
$10,000 per month commencing January 1, 2001; the amount of borrowings
guaranteed by each of the two stockholders increased to $500,000; and the
Company's ability to continue to use the credit facility will become
subject to its ability to meet specified financial covenants and ratios.
In addition, the outstanding balance under the line of credit and a
portion of the outstanding balance under the term loan were classified as
long-term liabilities in the accompanying October 31, 2000 balance sheet
based on the Company's ability to either defer payments until, or make
installment payments through, November 20, 2002.
The Company was obligated for variable rate borrowings under a $600,000
mortgage note until it was prepaid in March 1999. The Company wrote off
deferred financing costs of approximately $55,000 in connection with the
prepayment of the mortgage note in 1999, and it incurred costs of $113,000
in connection with the cancellation of a factoring agreement that were
charged to interest expense in 1998. During 1998, the Company increased
its obligations under the credit facility and decreased the balance
payable to its factor through a direct transfer of $2,503,288 from the
bank to the factor. This was a noncash transaction that is not reflected
in the accompanying 1998 statement of cash flows.
F-13
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
Note 6 - Loans from related parties:
The Company had loans payable to its stockholders of $245,261 and $148,014
at October 31, 2000 and 1999, respectively. The loans are due on demand
and bear interest at 10%. Interest expense totaled approximately $34,000,
$12,000 and $12,000 in 2000, 1999 and 1998, respectively.
Note 7 - Income taxes:
The Company's historical provision for income taxes in 2000 consisted of
the following:
2000
--------
Federal $ 72,000
State and local 47,000
--------
Total historical $119,000
========
The Company had no historical provision or credit for income taxes in 1999
and 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 2000, 1999 and 1998 are set
forth below:
2000 1999 1998
--------- --------- ---------
Tax provision (credit) at statutory
rate of 34% $ 140,000 $ 207,000 $(374,000)
Adjustments for effects of:
State income taxes, net of Federal
tax effect 45,000 67,000
"S" Corporation election and
termination of "S" Corporation
election 11,000
Net change in valuation allowance (66,000) (274,000) 363,000
--------- --------- ---------
Historical provision $ 119,000 $ -- $ --
========= ========= =========
As explained in Note 2, prior to February 10, 1998, the date of the
Exchange, the Company had elected to be taxed as an "S" Corporation and,
accordingly, it was not required to provide for any Federal income tax on
its historical income before income taxes of approximately $1,028,000 for
the period from November 1, 1997 to February 10, 1998.
F-14
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
Note 7 - Income taxes (continued):
Although the Company became subject to Federal, state and local income
taxes at full statutory rates for periods subsequent to the date of the
Exchange, it had a historical loss before income taxes of approximately
$2,130,000 for the period from February 11, 1998 to October 31, 1998; as a
result of that loss and certain other elections related to the termination
of its "S" Corporation election, the Company had net operating loss
carryforwards as of October 31, 1998 of approximately $800,000 available
to reduce future Federal, state and local taxable income. There were no
other material temporary differences as of October 31, 1998. Due to the
uncertainties related to the extent and timing of the Company's future
taxable income, the Company offset the deferred tax assets of
approximately $363,000 attributable to the potential benefits from the net
operating loss carryforwards as of October 31, 1998 by an equivalent
valuation allowance and, accordingly, it did not recognize any credits for
income taxes for the period from February 11, 1998 to October 31, 1998. As
a result of recording the valuation allowance of approximately $363,000
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 provisions or credits for income taxes for the year ended October 31,
1998.
Since the Company had pre-tax income of approximately $609,000 in 1999, it
still had net operating loss carryforwards remaining as of October 31,
1999 of approximately $191,000 available to reduce future Federal, state
and local taxable income. There were no other material temporary
differences as of October 31, 1999. Due to the continuing uncertainties
related to the extent and timing of the Company's future taxable income,
the Company also offset the remaining deferred tax assets of approximately
$89,000 attributable to the potential benefits from its net operating loss
carryforwards as of October 31, 1999 by an equivalent valuation allowance.
As a result of the reduction in the valuation allowance of $274,000 from
$363,000 at October 31, 1998 to $89,000 at October 31, 1999, the Company
did not recognize any provisions or credits for income taxes for the year
ended October 31, 1999.
The Company had pre-tax income of approximately $400,000 for the year
ended October 31, 2000; however, it was only able to use net operating
loss carryforwards of $145,000. As a result, the Company reversed the
valuation allowance of $89,000 that it had established to offset the
remaining deferred tax assets attributable to the estimated potential
benefits from the net operating loss carryforwards as of October 31, 1999,
of which $23,000 was attributable to the reduction in the estimate of net
operating loss carryforwards and $66,000 was attributable to the reduction
in the provision for income taxes for benefits actually realized from the
net operating loss carryforwards.
F-15
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
Note 7 - Income taxes (concluded):
The Company's "S" Corporation election was in effect for part of 1998.
Unaudited pro forma historical credits 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
1998 are set forth below:
1998
--------
Federal $310,000
State and local 186,000
--------
Total pro forma (unaudited) $496,000
========
The unaudited total pro forma credit for income taxes reflects an
effective rate for Federal, state and local income taxes of approximately
45% for 1998.
Note 8 - Commitments and contingencies:
Operating lease:
The Company occupies warehouse facilities under an operating lease
which expires on August 31, 2002 unless renewed at the option of the
Company for an additional two years. The lease requires the Company
to pay utilities and other maintenance expenses. Rent charged to
operations amounted to $46,800 in 2000, 1999 and 1998. Future
minimum rental payments under the noncancelable operating lease in
years subsequent to October 31, 2000 totaled $85,800, of which
$46,800 is payable in 2001 and $39,000 is payable in 2002.
Capital leases:
As of October 31, 2000, the Company remained obligated under one
capital lease for machinery and equipment that expires in February
2001. Assets under capital leases are amortized over their estimated
useful lives of seven years. Amortization of $99,300, $96,271 and
$77,246 was charged to operations in 2000, 1999 and 1998,
respectively. The future minimum lease payments under the remaining
capital lease as of October 31, 2000 and the net present value of
the future minimum lease payments through the expiration of the
lease in 2001 were as follows:
Total minimum lease payments $47,043
Less amount representing interest 882
-------
Present value of net minimum lease payments $46,161
=======
Legal proceedings:
The Company is a party to various legal proceedings. In the opinion
of management, these actions are routine in nature and will not have
any material adverse effects on the Company's financial statements
in subsequent years.
F-16
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
Note 9 - Concentrations of credit risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents, amounts due from broker and trade accounts receivable. The
Company maintains its cash and cash equivalents in bank and brokerage
accounts the balances of which, at times, may exceed Federal insurance
limits. At October 31, 2000, the Company had cash balances that exceeded
Federal insurance limits by approximately $160,000. 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 17%, 20% and 20% of the Company's sales were derived from
one customer during 2000, 1999 and 1998, respectively. That customer also
accounted for approximately $121,000 of the Company's accounts receivable
balance at October 31, 2000. Concentrations of credit risk with respect to
other trade receivables are limited due to the short payment terms
generally extended by the Company; by ongoing credit evaluations of
customers; and by maintaining an allowance for doubtful accounts that
management believes will adequately provide for credit losses.
Management does not believe that credit risk was significant at October
31, 2000.
Note 10- Stock option plan:
On February 10, 1998, the Company's stockholders consented to the adoption
of the Company's stock option plan (the "Plan") whereby incentive and/or
nonincentive stock options for the purchase of up to 2,000,000 shares of
the Company's common stock may be granted to the Company's directors,
officers, other key employees and consultants. Under the Plan, the
exercise price of all options must be at least 100% of the fair market
value of the common stock on the date of grant (the exercise price of an
incentive stock option for an optionee that holds more than 10% of the
combined voting power of all classes of stock of the Company must be at
least 110% of the fair market value on the date of grant).
As of October 31, 2000, no options had been granted under the Plan.
Note 11- Major vendors:
During 2000, substantially all of the Company's purchases were from nine
vendors. The nine vendors also accounted for substantially all of the
Company's accounts payable at October 31, 2000. An employee of one of
those vendors is a director of the Company. Purchases from that vendor
totaled approximately $3,500,000, $4,400,000 and $4,500,000 in 2000, 1999
and 1998, respectively. 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-17
COFFEE HOLDING CO., INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
De-
Balance at Additions- ductions Balance
Beginning Charged From at End
of Year to Income Reserves of Year
-------- -------- -------- --------
2000:
Allowance for
doubtful accounts $227,210 $ 44,091 $ 70,791 $200,510
======== ======== ======== ========
1999:
Allowance for
doubtful accounts $215,000 $ 12,210 $227,210
======== ======== ========
1998:
Allowance for
doubtful accounts $254,317 $ 53,391 $ 92,708 $215,000
======== ======== ======== ========
S-1
INDEX TO EXHIBITS
10.4 First Amendment to Loan and Security Agreement dated as of May 22, 1998
between the Company and NationsCredit Commercial Corporation.
10.5 Second Amendment dated as of November 29, 2000 to Loan and Security
Agreement between the Company and Wells Fargo Business Credit, Inc., as
assignee.
10.6 Term Note dated as of November 29, 2000 made by the Company in favor of
Wells Fargo Business Credit, Inc. in the principal amount of $600,000.
27 Financial Data Schedule
18