10-Q 1 0001.txt FORM 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549-1004 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _______________. Commission file No. _______ COFFEE HOLDING CO., INC. (Exact name of registrant as specified in its charter) Nevada 11-2238111 (state or other jurisdiction of (IRS employer incorporation or organization) identification number) 4401 First Avenue, Brooklyn, New York 11232 (address of principal executive offices) (zip code) Registrant's telephone number, including area code (718) 832-0800 Securities registered pursuant to Section 12(b) of the Act: None ---- (Title of Class) Securities registered pursuant to Section 12(g) of the Act: None ---- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes___ No X. As of September 30, 2000, the Registrant had 3,999,650 shares of common stock, par value $.001 per share, outstanding. PART I COFFEE HOLDING CO., INC. ITEM 1. FINANCIAL STATEMENTS COFFEE HOLDING CO., INC. INDEX TO UNAUDITED CONDENSED FINANCIAL STATEMENTS PAGE ---- CONDENSED BALANCE SHEETS APRIL 30, 2000 AND OCTOBER 31, 1999 F-2 CONDENSED STATEMENTS OF OPERATIONS SIX AND THREE MONTHS ENDED APRIL 30, 2000 AND 1999 F-3 CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY) SIX MONTHS ENDED APRIL 30, 2000 F-4 CONDENSED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED APRIL 30, 2000 AND 1999 F-5 NOTES TO CONDENSED FINANCIAL STATEMENTS F-6/9 * * * F-1 COFFEE HOLDING CO., INC. CONDENSED BALANCE SHEETS APRIL 30, 2000 AND OCTOBER 31, 1999

April October ASSETS 30, 2000 31, 1999 ------ ---------- ----------- (Unaudited) (See Note 1) Current assets: Cash $ 25,652 $ 265,044 Due from broker 136,247 281,064 Accounts receivable, net of allowance for doubtful accounts of $232,210 and $227,210 2,077,910 2,416,700 Inventories 1,640,847 1,478,485 Cash equivalents restricted under credit facility 250,000 Prepaid expenses and other current assets 24,676 59,565 ---------- ---------- Total current assets 4,155,332 4,500,858 Property and equipment, at cost, net of accumulated depreciation of $2,023,920 and $1,908,410 1,899,937 1,983,317 Deposits and other assets 27,423 27,423 ---------- ---------- TOTALS $6,082,692 $6,511,598 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) --------------------------------- Current liabilities: Line of credit borrowings $2,551,326 Current portion of term loan 235,772 $ 87,312 Current portion of obligations under capital leases 134,894 202,743 Accounts payable and accrued expenses 2,524,733 3,709,297 ---------- ---------- Total current liabilities 5,446,725 3,999,352 Term loan, net of current portion 192,119 Line of credit borrowings 2,445,130 Obligations under capital leases, net of current portion 46,161 Loans from related parties 426,875 148,014 ---------- ---------- Total liabilities 5,873,600 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 (538,893) (804,175) ---------- ---------- Total stockholders' equity (deficiency) 209,092 (319,178) ---------- ---------- Totals $6,082,692 $6,511,598 ========== ==========

See Notes to Condensed Financial Statements. F-2 COFFEE HOLDING CO., INC. CONDENSED STATEMENTS OF OPERATIONS SIX AND THREE MONTHS ENDED APRIL 30, 2000 AND 1999 (Unaudited)

Six Months Three Months Ended April 30, Ended April 30, ------------------------- ------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- Net sales $10,065,011 $12,816,431 $ 4,837,226 $ 5,896,982 Cost of sales 8,427,225 10,862,350 4,067,711 4,976,859 ----------- ----------- ----------- ----------- Gross profit 1,637,786 1,954,081 769,515 920,123 ----------- ----------- ----------- ----------- Operating expenses: Selling and administrative 927,728 1,011,042 413,571 528,019 Officers' salaries 139,413 139,423 66,923 72,500 ----------- ----------- ----------- ----------- Totals 1,067,141 1,150,465 480,494 600,519 ----------- ----------- ----------- ----------- Income from operations 570,645 803,616 289,021 319,604 Interest expense 148,363 182,195 71,883 83,361 ----------- ----------- ----------- ----------- Income before income taxes 422,282 621,421 217,138 236,243 Provision for income taxes 157,000 109,000 ----------- ----------- ----------- ----------- Net income $ 265,282 $ 621,421 $ 108,138 $ 236,243 =========== =========== =========== =========== Basic earnings per share $.07 $.16 $.03 $.06 ==== ==== ==== ==== Basic weighted average common shares outstanding 3,999,650 3,999,650 3,999,650 3,999,650 =========== =========== =========== ===========

See Notes to Condensed Financial Statements. F-3 COFFEE HOLDING CO., INC. CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY) SIX MONTHS ENDED APRIL 30, 2000 (Unaudited)

Common Stock Additional ----------------------- Paid-in Accumulated Shares Amount Capital Deficit Total --------- ------ ---------- ----------- ---------- Balance, November 1, 1999 3,999,650 $4,000 $480,997 $(804,175) $(319,178) Capital contribution 262,988 262,988 Net income 265,282 265,282 --------- ------ -------- --------- --------- Balance, April 30, 2000 3,999,650 $4,000 $743,985 $(538,893) $ 209,092 ========= ====== ======== ========= =========

See Notes to Condensed Financial Statements. F-4 COFFEE HOLDING CO., INC. CONDENSED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED APRIL 30, 2000 AND 1999 (Unaudited)

2000 1999 ----------- --------- Operating activities: Net income $ 265,282 $ 621,421 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 115,510 123,736 Bad debts 5,000 Write-off of deferred mortgage costs 55,063 Changes in operating assets and liabilities: Due from broker 144,817 38,457 Accounts receivable 333,790 318,181 Inventories (162,362) (378,039) Prepaid expenses and other current assets 34,889 36,152 Deposits and other assets 12,768 Accounts payable and accrued expenses (1,184,564) (675,691) ----------- --------- Net cash provided by (used in) operating activities (447,638) 152,048 ----------- --------- Investing activities - purchases of property and equipment (32,130) (15,850) ----------- --------- Financing activities: Principal payments on mortgage note payable (600,000) Decrease in cash and cash equivalents restricted under mortgage note 432,965 Increase in cash equivalents restricted under credit facility (250,000) Principal payments on term loan (43,659) (43,657) Net advances under bank line of credit 106,196 200,510 Principal payments of obligations under capital leases (114,010) (105,774) Advances from (repayments to) related parties 278,861 (20,242) Capital contribution 262,988 ----------- --------- Net cash provided by (used in) financing activities 240,376 (136,198) ----------- --------- Net decrease in cash (239,392) -- Cash, beginning of period 265,044 -- ----------- --------- Cash, end of period $ 25,652 $ -- =========== ========= Supplemental disclosure of cash flow data: Interest paid $ 148,363 $ 170,229 =========== =========

See Notes to Condensed Financial Statements. F-5 COFFEE HOLDING CO., INC. NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS Note 1 - Business activities: Coffee Holding Co., Inc. (the "Company") conducts wholesale coffee operations, including manufacturing, roasting, packaging, marketing and distributing roasted and blended coffees for private labeled accounts and its own brands, and sells green coffees. The Company's sales are primarily to customers that are located throughout the United States. Note 2 - Basis of presentation: In the opinion of management, the accompanying unaudited condensed financial statements reflect all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position of the Company as of April 30, 2000, its results of operations for the six and three months ended April 30, 2000 and 1999, its changes in stockholders' equity for the six months ended April 30, 2000 and its cash flows for the six months ended April 30, 2000 and 1999. Information included in the balance sheet as of October 31, 1999 has been derived from the Company's audited balance sheet included in the Company's Annual Report on Form 10-K for the year ended October 31, 1999 (the "Form 10-K") previously filed with the Securities and Exchange Commission (the "SEC"). Pursuant to generally accepted accounting principles and the rules and regulations of the SEC for interim financial statements, certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted from these financial statements unless significant changes have taken place since the end of the most recent fiscal year. Accordingly, these unaudited condensed financial statements should be read in conjunction with the audited financial statements, the related notes to the financial statements and the other information in the Form 10-K. Operating results for the six month periods ended April 30, 2000 and 1999 are not necessarily indicative of the results that may be expected for the years ending October 31, 2000 and 1999. Note 3 - Inventories: Inventories at April 30, 2000 and October 31, 1999 consisted of the following: April October 30, 2000 31, 1999 ----------- ---------- Packed coffee $ 396,757 $ 211,620 Green coffee 817,654 892,344 Packaging supplies 426,436 374,521 ----------- ---------- Totals $1,640,847 $1,478,485 =========== ========== F-6 COFFEE HOLDING CO., INC. NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS Note 3 - Inventories (concluded): The Company uses futures and options contracts to hedge the effects of fluctuations in the price of green coffee beans, as further explained in Note 2 of the notes to financial statements in the Form 10-K. At April 30, 2000, the Company held options covering an aggregate of 1,725,000 pounds of green coffee beans which are exercisable in fiscal 2000 at prices ranging from $.95 to $1.10 per pound. The fair market value of these options, which was obtained from a major financial institution, was approximately $56,000 at April 30, 2000. Due from broker includes the effects of unrealized hedging gains of $186,010 at April 30, 2000 and unrealized hedging losses of $198,532 at October 31, 1999. Note 4 - Credit facility borrowings: The Company was obligated for borrowings during the six months ended April 30, 2000 and 1999 under a credit facility consisting of a revolving line of credit and a term loan that expire in November 2000, as further explained in Note 7 of the notes to financial statements in the Form 10-K. The line of credit provides for maximum of borrowings of $5,000,000. The outstanding balance under the line of credit of $2,551,326 at April 30, 2000 approximated the maximum amount that the Company could have borrowed based on its eligible trade accounts receivable and inventories as of that date. The term loan, which had an outstanding balance of $235,772 at April 30, 2000, provides for borrowings of up to the greater of 80% of the cost of eligible equipment or $500,000. As of April 30, 2000, the Company also had $250,000 in a noninterest bearing money market account that was deposited with the bank during the three months ended April 30, 2000 to secure outstanding borrowings under the credit facility. As of April 30, 2000, the Company had total borrowings under the credit facility of approximately $2,787,000 that are payable no later than November 2000 and a working capital deficiency of approximately $1,174,000. If management is unable to renegotiate the credit facility or obtain an alternate source of financing, the Company may not be able to continue to operate at its current level. Management believes but cannot assure that the credit facility will be renewed or alternate financing on favorable terms will be obtained. Note 5 - Income taxes: The Company's provision for income taxes for the six and three months ended April 30, 2000 and 1999 was comprised as follows:

Six Months Three Months Ended April 30, Ended April 30, --------------------- -------------------- 2000 1999 2000 1999 -------- -------- -------- -------- Federal $ 82,000 $ -- $ 53,000 $ -- State 35,000 -- 26,000 -- Local 40,000 -- 30,000 -- -------- -------- -------- -------- Provision for income taxes $157,000 $ -- $109,000 $ -- ======== ======== ======== ========

F-7 COFFEE HOLDING CO., INC. NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS Note 5 - Income taxes (concluded): The differences between the tax provision computed based on the Company's pre-tax income and the applicable statutory income tax rate and the Company's provisions for Federal, state and local income taxes for the six and three months ended April 30, 2000 and 1999 are set forth below:

Six Months Three Months Ended April 30, Ended April 30, -------------------- -------------------- 2000 1999 2000 1999 -------- --------- -------- --------- Tax provision at statutory rate of 34% $172,000 $ 211,000 $ 82,000 $ 81,000 Adjustments for effects of: State income taxes, net of Federal benefit 51,000 68,000 27,000 26,000 Change in valuation allowance (66,000) (279,000) (107,000) -------- --------- -------- --------- Provision for income taxes $157,000 $ -- $109,000 $ -- ======== ========= ======== =========

As explained in Note 9 of the notes to financial statements in the Form 10-K, the Company had estimated net operating loss carryforwards remaining as of October 31, 1999 of approximately $191,000 available to reduce future Federal, state and local taxable income. There were no other material temporary differences as of October 31, 1999. Due to the uncertainties related to the extent and timing of the Company's future taxable income, the Company had offset the estimated deferred tax assets of approximately $89,000 attributable to the potential benefits from the net operating loss carryforwards as of October 31, 1999 by an equivalent valuation allowance. During the first three months of the six months ended April 30, 2000, the Company reversed the estimated valuation allowance of $89,000 and reduced its provision for income taxes by $66,000 based on the actual benefits realized from the utilization of the remaining net operating loss carryforwards. The Company also had estimated net operating loss carryforwards of approximately $179,000, $415,000 and $800,000 available to reduce future Federal, state and local taxable income as of April 30, 1999, January 31, 1999 and October 31, 1998, respectively. There were no other material temporary differences as of any of those dates. Due to the uncertainties related to the extent and timing of the Company's future taxable income, the Company had also offset the estimated deferred tax assets of approximately $84,000, $191,000 and $363,000 attributable to the potential benefits from the net operating loss carryforwards as of April 30, 1999, January 31, 1999 and October 31, 1998, respectively, by equivalent valuation allowances. As a result of the reductions in the valuation allowances of $279,000 for the six months ended April 30, 2000 and $107,000 for the three months ended April 30, 1999, the Company did not recognize any provision or credit for Federal income taxes in either period. Note 6 - Earnings per share: The Company presents "basic" and, if applicable, "diluted" earnings per common share pursuant to the provisions of Statement of Financial Accounting Standards No. 128, "Earnings per Share" and certain other financial accounting pronouncements, as further explained in Note 2 of the notes to financial statements in the Form 10-K. Diluted earnings per share have not been presented because the Company had no potentially dilutive securities outstanding during the six and three months ended April 30, 2000 and 1999. F-8 COFFEE HOLDING CO., INC. NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS Note 7 - Major customer: Approximately 22% of the Company's sales were derived from one customer during the six months ended April 30, 2000 and 1999 (see Note 11 of the notes to financial statements in the Form 10-K). Note 8 - Stock option plan: As of April 30, 2000, no options had been granted under the Company's stock option plan (see Note 12 of the notes to financial statements in the Form 10-K). Note 9 - Related party balances and transactions: The Company had loans payable to its stockholders of $426,875 and $148,014 at April 30, 2000 and October 31, 1999, respectively. The loans are due on demand and bear interest at 10%. Interest expense totaled approximately $14,300 and $10,700 for the six and three months ended April 30, 2000, respectively, and was not material for the six and three months ended April 30, 1999. During the six months ended April 30, 2000, a stockholder made a capital contribution of $262,988 to the Company which represented a return of a portion of a dividend paid during a period in which the Company was taxed as an "S" Corporation. During the six months ended April 30, 1999, the Company loaned a total of $300,000 to a stockholder. The loans, which were repaid in February 1999, bore interest at 10% (interest income attributable to the loans was not material for the six months ended April 30, 1999). * * * F-9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward Looking Statements The Private Securities Litigation Reform Act of 1995 (the "Act") provides a safe harbor for forward-looking statements made by or on behalf of the Company. Coffee Holding and its representatives may from time to time make written or oral forward-looking statements, including statements contained in this report and in our other filings with the Securities and Exchange Commission. These statements use words such as "believes", "expects", "intends", "plans", "may", "will", "should", "anticipates" and other similar expressions. All statements which address operating performance, events or developments that the Company expects or anticipates will occur in the future, including statements relating to volume growth, share of sales or statements expressing general optimism about future operating results, are forward looking statements within the meaning of the Act. The forward looking statements are and will be based on management's then current views and assumptions regarding future events and operating performance. We cannot assure that anticipated results will be achieved since actual results may differ materially because of risks and uncertainties. We do not undertake to revise these statements to reflect subsequent developments. The following are some of the factors that could cause actual results to differ materially from in our forward-looking statements: o the impact of rapid or persistent fluctuations in the price of coffee beans; o fluctuations in the supply of coffee beans; o general economic conditions and conditions which affect the market for coffee; o the effects of any loss of major customers; o the effects of competition from other coffee manufacturers and other beverage alternatives; o changes in consumption of coffee; and o other risks which we identify in future filings with the SEC. You are strongly encouraged to consider these factors when evaluating forward looking statements in this annual report. We undertake no responsibility to update any forward-looking statements contained in this report. Six Months Ended April 30, 2000 Compared to Six Months Ended April 30, 1999 Net sales totaled $10,065,011 in the six months ended April 30, 2000, a decrease of $2,751,420 or 21% from $12,816,431 in the six months ended April 30, 1999. The Company's retail selling prices decreased slightly in response to gradually declining green coffee purchase prices. The decrease was partially offset by favorable pricing in the Company's wholesale green coffee business. In addition, the Company lost one of its largest wholesale customers in the quarter ended January 31, 2000. Although this customer made some purchases during the quarter ended April 30, 2000, those purchases were significantly below historical levels and are expected to continue to be below historical levels. The Company expects its net sales in the next fiscal quarter and for the fiscal year ended October 31, 2000 to be negatively impacted. Cost of sales in the six months ended April 30, 2000 was $8,427,225, or 84% of net sales, as compared to $10,862,350, or 85% of net sales in the six months ended April 30, 1999. The decrease in cost of sales was attributable to a gradual decline in green coffee purchase prices enabling the Company to purchase inventory at lower prices. Although green coffee purchase prices surged in November and December 1999, that surge was temporary and since the Company had a sufficient amount of inventory on hand prior to the price surge, it could forego purchases during the price surge. The Company's gross profit in the six months ended April 30, 2000 was $1,637,786, a decrease of $316,295 or 16% from $1,954,081 in the six months ended April 30, 1999. Gross profit as a percentage of net sales increased by 1% to 16% in the six months ended April 30, 2000 from 15% in the six months ended April 30, 1999. Margins improved primarily due to the overall decline in green coffee purchase prices. Selling and administrative expenses were $927,728 in the six months ended April 30, 2000, a decrease of $83,314 or 8% from $1,011,042 in the six months ended April 30, 1999. As a percentage of net sales, this change represented a 1% increase from 8% in the six months ended April 30, 1999 to 9% in the six months ended April 30, 2000. 1 Interest expense decreased $33,832 or 19% from $182,195 in the six months ended April 30, 1999 to $148,363 in the six months ended April 30, 2000. This decrease was due to lower borrowings on the Company's asset based line of credit. Primarily as a result of decreases in cost of sales, operating expenses and interest expense that exceeded the effects of the decrease in sales in the six months ended April 30, 2000, the Company had income of $422,282 before income taxes in the six months ended April 30, 2000 compared to income of $621,421 before income taxes in the six months ended April 30, 1999. The Company's provision for income taxes for the six months ended April 30, 2000 totaled $157,000 whereas it had no provision or credit for income taxes for the six months ended April 30, 1999. The differences between the tax provision computed based on the Company's pre-tax income and the applicable statutory income tax rate and the Company's provisions for Federal, state and local income taxes for the six months ended April 30, 2000 and 1999 are set forth below:

Six Months Ended April 30, --------------- 2000 1999 --------- --------- Tax provision at statutory rate of 34% $ 172,000 $ 211,000 Adjustments for effects of: State income taxes, net of Federal benefit 51,000 68,000 Change in valuation allowance (66,000) (279,000) --------- --------- Provision for income taxes $ 157,000 $ -- ========= =========

As further explained in Note 5 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 had offset the estimated deferred tax assets of approximately $89,000 attributable to the potential benefits from the net operating loss carryforwards as of October 31, 1999 by an equivalent valuation allowance. During the first three months of the six months ended April 30, 2000, the Company reversed the estimated valuation allowance of $89,000 and reduced its provision for income taxes by $66,000 based on the actual benefits realized from the utilization of the remaining net operating loss carryforwards. The Company had also offset the estimated deferred tax assets of approximately $84,000 and $363,000 attributable to the potential benefits from the net operating loss carryforwards as of April 30, 1999 and October 31, 1998, respectively, by equivalent valuation allowances due to the same uncertainties. As a result of the reduction in the valuation allowance of $279,000, the Company did not recognize any provision or credit for Federal income taxes for the six months ended April 30, 1999. As a result, the Company had net income of $265,282, or $.07 per share, in the six months ended April 30, 2000 compared to net income of $621,421, or $.16 per share, in the six months ended April 30, 1999. Three Months Ended April 30, 2000 Compared to Three Months Ended April 30, 1999 Net sales totaled $4,837,226 in the three months ended April 30, 2000, a decrease of $1,059,756 or 18% from $5,896,982 in the three months ended April 30, 1999. The Company's selling prices decreased slightly in response to gradually declining green coffee purchase prices. In addition, the Company lost one of its largest wholesale customers in the quarter ended January 31, 2000. Although this customer made some purchases during the quarter ended April 30, 2000, those purchases were significantly below historical levels and are expected to continue to be below historical levels. The Company expects its net sales in the next fiscal quarter and for the fiscal year ended October 31, 2000 to be negatively impacted. Cost of sales in the three months ended April 30, 2000 was $4,067,711, or 84% of net sales, as compared to $4,976,859, or 84% of net sales in the three months ended April 30, 1999. The decrease in cost of sales in the three months ended April 30, 2000 was attributable to a gradual decline in green coffee purchase prices enabling the Company to purchase inventory at lower prices. Although green coffee purchase prices surged in November and December 1999, that surge was temporary and the Company's inventory position enabled it to forego purchases during the price surge. The Company's gross profit in the three months ended April 30, 2000 was $769,515, a decrease of $150,608 or 16% from $920,123 in the three months ended April 30, 1999. Gross profit as a percentage of net sales remained at 16% in the three 2 months ended April 30, 2000 as compared to 16% in the three months ended April 30, 1999. Selling and administrative expenses were $413,571 in the three months ended April 30, 2000, a decrease of $114,448 or 22% from $528,019 in the three months ended April 30, 1999. As a percentage of net sales, this change represented a 1% decrease from 9% in the three months ended April 30, 1999 to 8% in the three months ended April 30, 2000. Interest expense decreased $11,478 or 14% from $83,361 in the three months ended April 30, 1999 to $71,883 in the three months ended April 30, 2000. Primarily as a result of decreases in cost of sales, operating expenses and interest expense that exceeded the effects of the decrease in sales in the three months ended April 30, 2000, the Company had income of $217,138 before income taxes in the three months ended April 30, 2000 compared to income of $236,243 before income taxes in the three months ended April 30, 1999. The Company's provision for income taxes for the three months ended April 30, 2000 totaled $109,000 whereas it had no provision or credit for income taxes for the three months ended April 30, 1999. The differences between the tax provision computed based on the Company's pre-tax income and the applicable statutory income tax rate and the Company's provisions for Federal, state and local income taxes for the three months ended April 30, 2000 and 1999 are set forth below:

Three Months Ended April 30, --------------- 2000 1999 --------- --------- Tax provision at statutory rate of 34% $ 82,000 $ 81,000 Adjustments for effects of: State income taxes, net of Federal benefit 27,000 26,000 Change in valuation allowance (107,000) --------- --------- Provision for income taxes $ 109,000 $ -- ========= =========

As explained above, the Company had utilized all of its remaining net operating loss carryforwards during the first three months of the six months ended April 30, 2000 and, accordingly, the Company's provision for income taxes during the three months ended April 30, 2000 was not affected by a change in any valuation allowance for deferred tax assets. As further explained in Note 5 of the notes to the financial statements elsewhere herein, the Company had offset the estimated deferred tax assets of approximately $84,000 and $191,000 attributable to the potential benefits from the net operating loss carryforwards as of April 30, 1999 and January 31, 1999, respectively, by equivalent valuation allowances due to the uncertainties related to the extent and timing of the Company's future taxable income. As a result of the reduction in the valuation allowance of $107,000, the Company did not recognize any provision or credit for Federal income taxes for the three months ended April 30, 1999. As a result, the Company had net income of $108,138, or $.03 per share, in the three months ended April 30, 2000 compared to net income of $236,243, or $.06 per share, in the three months ended April 30, 1999. Liquidity and Capital Resources The Company had net income of approximately $265,000 during the six months ended April 30,2000. As of April 30, 2000, the Company had total stockholders' equity of $209,000, which increased by $528,000 from its total stockholders' deficiency of $319,000 as of October 31, 1999. However, the Company had a cash balance of $26,000, which decreased by $239,000 from its cash balance of $265,000 as of October 31, 1999, and a working capital deficiency of approximately $1,291,000 as of April 30, 2000 compared to working capital of $502,000 as of October 31, 1999. The Company's working capital deficiency increased by $1,793,000 3 during the six months ended April 30, 2000 primarily as a result of the classification of borrowings of $2,787,000 under the Company's credit facility as short-term liabilities instead of long-term liabilities as of April 30, 2000, as further explained below. The Company has obtained a credit facility from Nationscredit Commercial Corp. that provides for a revolving line of credit of up to $5,000,000 based on eligible trade accounts receivable and inventories and a term loan for equipment purchases of up to $500,000. The line of credit provides for borrowings of up to 85% of the Company's eligible trade accounts receivable and 60% of its eligible inventories. The outstanding balance of approximately $2,551,000 under the line of credit as of April 30, 2000 approximated the maximum amount that the Company could borrow based on its eligible trade accounts receivable and inventories as of that date. Interest is payable monthly at the prime rate plus 1% (an effective rate of 10% at April 30, 2000). However, the credit facility expires on November 20, 2000. Accordingly, as of April 30, 2000 total credit facility borrowings of $2,787,000 were classified as short-term liabilities, whereas as of October 31, 1999 total credit facility borrowings of $2,637,000 were classified as long-term liabilities in the accompanying condensed balance sheets. During the six months ended April 30, 2000, the Company's operating activities used net cash of approximately $448,000 primarily as a result of an increase in inventories and a decrease in accounts payable and accrued expenses, which were partially offset by the effects of the net income generated during the period, adjusted to eliminate the effects of charges for depreciation and amortization, and an increase in amounts receivable from the Company's broker and customers. During the six months ended April 30, 2000, the Company used approximately $158,000 of its cash resources to reduce its term loan and capital lease obligations. Capital expenditures totaled $32,000 during the period and management expects that the Company's capital expenditures will approximate those made in fiscal 1999. It also received loans of $106,000 under the line of credit, short-term advances of $279,000 from a related party and a capital contribution of approximately $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. In addition, the Company deposited $250,000 in an interest-bearing money market account as required by its lender to secure its credit facility. Management believes, but cannot assure, that the Company will be able to finance its operations, including increases in accounts receivable and inventories, capital expenditures and debt repayments, during fiscal 2000 through cash provided by operating activities and/or short or long-term borrowings. The Company's line of credit with Nationscredit Commercial Corp. expires on November 20, 2000. Management is in discussions with the current lender to renew the line and with other lenders to replace the line, but there are no assurances that the Company will be able to renew or replace this line. In the event that the Company is unable to obtain a line of credit, management believes the Company could obtain loans by mortgaging its headquarters or by using its equipment as collateral. Year 2000 The Year 2000 issue concerns the possible inability of information systems and non-information systems with embedded technology to properly recognize and process date sensitive information beyond December 31, 1999. The Company did not experience any systems problems related to Year 2000 issues. The Company's information and non-information systems functioned normally. The Company's business with its suppliers and customers was not affected by Year 2000 issues. The Company did experience some reduction in inventory purchases from its wholesale customers in November and December 1999 as the customers did not want to carry a large inventory ahead of the Year 2000. The Company does not presently anticipate making any expenditures in the fiscal year ending October 31, 2000 for Year 2000 items. 4 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS Market risks relating to the Company's operations result primarily from changes in interest rates and commodity prices as further described below. Interest Rate Risks The Company is subject to market risk from exposure to fluctuations in interest rates. At April 30, 2000, the Company's long-term debt, other than capitalized leases, consisted of approximately $427,000 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 1% above a specified prime rate (an effective rate of 10% at April 30, 2000). The Company does not expect changes in interest rates to have a material effect on income or cash flows in fiscal 2000, although there can be no assurance that interest rates will not significantly change. Commodity Price Risks The supply and price of coffee beans are subject to volatility and are influenced by numerous factors which are beyond the Company's control. The Company uses coffee futures and options contracts for hedging purposes to minimize the effect of changing green coffee prices and, if needed, to supplement its supply. At April 30, 2000, the Company held options covering an aggregate of 1,725,000 pounds of green coffee beans, which are exercisable in fiscal 2000 at prices ranging from $.95 to $1.10 per pound. The price per pound of green coffee on April 28, 2000 was $.95. 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. (See Note 3 to the unaudited condensed financial statements elsewhere herein.) 5 PART II ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit Number Exhibit Name ------- ------------ 27 Financial Data Schedule (b) There were no reports on Form 8-K filed during the period covered by this report. 6 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. COFFEE HOLDING CO., INC. Signature Title Date /s/ Andrew Gordon Chief Executive Officer, October 25, 2000 ----------------- President and Treasurer Andrew Gordon (principal executive officer and principal financial officer) 7 INDEX TO EXHIBITS 27 Financial Data Schedule