10QSB 1 e13170_10qsb.txt FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 --------------------- FORM 10-QSB (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended January 31, 2002 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 number 333-00588-NY Coffee Holding Co., Inc. (Exact name of registrant as specified in its charter) Nevada 11-2238111 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4401 First Avenue, Brooklyn, New York 11232-0005 (Address of principal executive offices) (Zip Code) (718) 832-0800 (Registrant's telephone number including area code) N/A ---------------------------------------------------- (Former name, former address and former fiscal year, if changed from last Report) 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 Exchange Act of 1934 during the preceding twelve 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 the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Outstanding at Class March 1, 2002 ---------------------------- -------------------------------- Common Stock, par value $.01 3,999,650 TABLE OF CONTENTS PART I -- FINANCIAL INFORMATION Item 1. Financial Statements. Condensed Balance Sheets January 31, 2002 (unaudited) and October 31, 2001.....................................................1 Unaudited Condensed Statements of Income For The Three Months Ended January 31, 2002 and 2001..........................................2 Unaudited Condensed Statements of Cash Flows For The Three Months Ended January 31, 2002 and 2001..........................................3 Notes to Unaudited Financial Statements ....................................4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................6 PART II -- OTHER INFORMATION Item 1. Legal Proceedings ...................................................11 Item 2. Changes in Securities and Use of Proceeds ...........................11 Item 3. Defaults upon Senior Securities .....................................11 Item 4. Submission of Matters to a Vote of Security Holders .................11 Item 5. Other Information ...................................................11 Item 6. Exhibits and Reports on Form 8-K ....................................11 Signatures...................................................................12 i Part I - FINANCIAL INFORMATION Item 1. Financial Statements COFFEE HOLDING CO., INC. CONDENSED BALANCE SHEETS JANUARY 31, 2002 AND OCTOBER 31, 2001 January 31, October 31, 2002 2001 ---------- ----------- (unaudited) - ASSETS - Current assets: Cash $ 221,262 $ 199,434 Due from broker 242,428 274,565 Accounts receivable, net of allowance for doubtful accounts of $200,510 for each period 1,714,387 1,901,749 Inventories 1,370,102 1,351,150 Prepaid expenses and other current assets 41,202 40,889 ---------- ----------- Total current assets 3,589,381 3,767,787 Property and equipment, at cost, net of accumulated depreciation of $2,491,349 and $2,423,403 1,587,618 1,648,798 Cash equivalents restricted under credit facility 279,518 279,518 Deposits and other assets 16,796 16,796 ---------- ----------- $5,473,313 $ 5,712,899 ---------- ----------- - LIABILITIES AND STOCKHOLDERS' EQUITY - Current liabilities: Current portion of term loan $ 120,000 $ 120,000 Line of credit borrowings 2,256,863 -- Accounts payable and accrued expenses 1,487,968 1,747,366 Income taxes payable 140,100 222,315 Loans from related parties 148,099 160,980 ---------- ----------- Total current liabilities 4,153,030 2,250,661 Term loan, net of current portion 350,000 380,000 Line of credit borrowings -- 2,339,216 ---------- ----------- Total liabilities 4,503,030 4,969,877 ---------- ----------- Commitments and contingencies Stockholders' equity: Preferred stock, par value $.001 per share; 10,000,000 shares authorized; none issued -- -- Common stock, par value $.001 per share; 30,000,000 shares authorized, 3,999,650 shares issued and outstanding 4,000 4,000 Additional paid-in capital 743,985 743,985 Retained earnings (Accumulated deficit) 222,298 (4,963) ---------- ----------- Total stockholders' equity 970,283 743,022 ---------- ----------- $5,473,313 $ 5,712,899 ---------- ----------- 1 COFFEE HOLDING CO., INC. CONDENSED STATEMENTS OF INCOME THREE MONTHS ENDED JANUARY 31, 2002 AND 2001 (Unaudited) 2002 2001 ---------- ---------- Net sales $4,497,042 $5,534,028 Cost of sales 3,254,713 4,152,043 ---------- ---------- Gross profit 1,242,329 1,381,985 ---------- ---------- Operating expenses: Selling and administrative 746,927 613,702 Officers' salaries 85,654 75,000 ---------- ---------- Totals 832,581 688,702 ---------- ---------- Income from operations 409,748 693,283 Interest expense - net 37,387 116,784 ---------- ---------- Income before income taxes 372,361 576,499 Provision for income taxes 145,100 265,000 ---------- ---------- Net income $ 227,261 $ 311,499 ---------- ---------- Basic earnings per share $ 06 $ 08 ---------- ---------- Basic weighted average common shares outstanding 3,999,650 3,999,650 ---------- ---------- 2 COFFEE HOLDING CO., INC. CONDENSED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED JANUARY 31, 2002 AND 2001 (Unaudited) 2002 2001 --------- --------- Operating activities: Net income $ 227,261 $ 311,499 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 67,945 63,000 Changes in operating assets and liabilities: Due from broker 32,137 14,736 Accounts receivable 187,362 (77,391) Inventories (18,952) 212,227 Prepaid expenses and other current assets (313) (12,392) Accounts payable and accrued expenses (259,398) (777,812) Income taxes payable (82,215) -- --------- --------- Net cash provided by (used in) operating activities 153,827 (266,133) --------- --------- Investing activities: Purchases of property and equipment (6,765) (2,500) --------- --------- Financing activities: Proceeds from term loan -- 407,885 Payments on term loan (30,000) (10,000) Net repayments under bank line of credit (82,353) (155,282) Principal payments of obligations under capital leases -- (26,988) Advances from (payments to) related parties (12,881) 2,997 --------- --------- Net cash (used) provided by financing activities (125,234) 218,612 --------- --------- Net increase (decrease) in cash 21,828 (50,021) Cash, beginning of period 199,434 153,844 --------- --------- Cash, end of period $ 221,262 $ 103,823 --------- --------- Supplemental disclosure of cash flow data: Interest paid $ 38,376 $ 147,630 --------- --------- Income taxes paid $ 227,315 $ 84,015 --------- --------- 3 COFFEE HOLDING CO., INC. NOTES TO FINANCIAL STATEMENTS JANUARY 31, 2002 AND 2001 (Unaudited) 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 January 31, 2002, its results of operations and its cash flows for the three months ended January 31, 2002 and 2001. Information included in the balance sheet as of October 31, 2001 has been derived from the Company's audited balance sheet included in the Company's Annual Report on Form 10-KSB for the year ended October 31, 2001 (the "Form 10-KSB") previously filed with the Securities and Exchange Commission (the "SEC"). Pursuant to accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America 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 and the other information in the Form 10-KSB. Operating results for the three months ended January 31, 2002 are not necessarily indicative of the results that may be expected for the year ending October 31, 2002. Note 3 - Inventories: Inventories at January 31, 2002 and October 31, 2001 consisted of the following: January 31, October 31, 2002 2001 ---------- ---------- Packed coffee $ 580,409 $ 364,861 Green coffee 429,073 566,873 Packaging supplies 360,620 419,416 ---------- ---------- Totals $1,370,102 $1,351,150 ---------- ---------- 4 Note 4 - 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 increase earnings volatility in any particular period. At January 31, 2002, the Company held options (generally with terms of two months or less) covering an aggregate of 750,000 pounds of green coffee beans at a price of $0.45 per pound. The fair market value of these options, which was obtained from a major financial institution, was $6,375 at January 31, 2002. The Company also holds futures contracts with longer terms (generally three to four months) primarily for the purpose of guaranteeing an adequate supply of green coffee. At January 31, 2002, the Company held futures contracts for the purchase of 7,725,000 pounds of coffee at average prices of $.46, $.51 and $.58 per pound for the March 2002, May 2002 and December 2002 contracts, respectively. The market price of coffee applicable to such contracts was $.45, $.4765 and $.5475 per pound at that date, respectively. Note 5 - Line of credit: The outstanding balance under a line of credit agreement with a bank was $2,256,863 at January 31, 2002. This amount is being reflected as short term since the agreement expires in November of 2002. The agreement does however call for automatic two year extension privileges if written cancellation notice has not been received within sixty days prior to maturity. 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". Diluted earnings per share have not been presented because the Company had no potentially dilutive securities outstanding during the three months ended January 31, 2002 and 2001. Note 7 - Major customer: Approximately 24% and 11% of the Company's sales were derived from one customer during the three months ended January 31, 2002 and 2001, respectively. 5 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 provides a safe harbor for forward-looking statements made by or on behalf of Coffee Holding. 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 Coffee Holding expects or anticipates will occur in the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The forward-looking statements are and will be based on management's then current views and assumptions regarding future events and operating performance. Coffee Holding cannot assure that anticipated results will be achieved since actual results may differ materially because of risks and uncertainties. Coffee Holding does 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 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 may identify in future filings with the SEC. You are strongly encouraged to consider these factors when evaluating forward-looking statements in this quarterly report. Coffee Holding undertakes no responsibility to update any forward-looking statements contained in this report. Three Months Ended January 31, 2002 Compared to the Three Months Ended January 31, 2001 Net sales totaled $4,497,042 for the three months ended January 31, 2002, a decrease of $1,036,986 or 18.7% from $5,534,028 in the three months ended January 31, 2002. The decrease in net sales reflects the significant decline in the price of coffee over the prior period and the effect of the economic downturn in the United States in general. The number of Coffee Holding's customers in the gourmet green coffee area grew approximately 8% to 220 during the three months ended January 31, 2002. These customers are predominately independent gourmet/specialty roasters, some of whom own their own retail outlets. Sales to new customers in this area historically start slowly because many of these companies are start up ventures. 6 Because the gourmet green coffee area is the fastest growing segment of the coffee market, Coffee Holding believes that its customer base and sales will grow in this area. Coffee Holding also believes that historically low coffee prices will continue to encourage consumers to purchase higher quality gourmet coffee relative to supermarket brands. Coffee Holding's selling prices decreased steadily throughout fiscal 2001 due to the decline in the price of green coffee. Beginning at the end of 1998, the purchase price of green coffee began a decline that, with the exception of brief price surges, continued through to the end of the first quarter of fiscal 2002. 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 to changes in purchase prices because demand for gourmet coffee is less price sensitive. Coffee Holding also experienced some pricing pressure in the private label area as some of Coffee Holding's larger competitors cut their prices in order to increase market share. Coffee Holding is unable to predict how long and to what extent pricing pressure in the private label area will continue. Cost of sales in the three months ended January 31, 2002 was $3,254,713, or 72% of net sales, as compared to $4,152,043, or 75% of net sales in the three months ended January 31, 2001. Cost of sales consists primarily of the cost of green coffee and packaging materials and unrealized gains or losses on hedging activity. The decrease in cost of sales primarily 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, Coffee Holding is unable to predict the purchase price of green coffee in the remainder of fiscal 2002. The low price of coffee allowed Coffee Holding to increase its inventory position, locking in additional margins on previously contracted business. Coffee Holdings believes that its increased inventory position will allow it to increase its sales and margins in the event that coffee prices begin to rise. Coffee Holding's gross profit in the first quarter of fiscal 2002 was $1,242,329, a decrease of $139,656, or 10%, from $1,381,985 in the three months ended January 31, 2001. However, gross profit as a percentage of net sales increased by 3% to 28% in the first quarter of fiscal 2002 from 25% in fiscal 2001. 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. As discussed above, Coffee Holding believes that its increased inventory position will allow it to increase its sales and margins in the event that coffee prices begin to rise. Total operating expenses increased $143,879, or 21%, to $832,581 in the first quarter of fiscal 2002 from $688,702 in the first quarter of fiscal 2001 due to increases in selling, general and administrative expenses and officer's salaries. Selling and administrative expenses were $746,927 in the first quarter of fiscal 2002, an increase of $133,225, or 22%, from $613,702 in the first quarter of 2001. As a percentage of net sales, this change represented a 6% increase from 11% in the three months ended January 31, 2001 to 17% in the three months ended January 31, 2002. The increase was primarily attributable to increased slotting fees and increased promotional activity on branded and private label coffee. Advertising and promotional expenses are expected to continue to increase as Coffee Holding participates in national and regional shows to promote its brands and its private label products. Operating expenses also increased due to a $10,654, or 14%, increase in officer's salaries to $85,654 in the three months ended January 31, 2002 from $75,000 in the three months ended January 31, 2001. Interest expense decreased $79,397, or 68%, from $116,784 in the three months ended January 31, 2001 to $37,387 in the three months ended January 31, 2002. The decrease was attributable to a $205,557 decrease in the outstanding balance on its outstanding line of credit with Wells Fargo Business Credit, a $120,000 decrease in the outstanding balance of the term loan and a $19,173 reduction in capital lease obligations. The decrease is also attributable to lower interest rates on outstanding borrowings. Rates of interest on Coffee Holding's outstanding borrowings are tied to the prime rate. As the prime rate 7 declined from the prior period, Coffee Holding's rate of interest payable on its outstanding borrowings also declined. The lower contractual rates on Coffee Holding's term loan and line of credit, each of which was amended in November 2000, also contributed to the decline. See "--Liquidity and Capital Resources." Coffee Holding had income of $372,361 before income taxes in the first quarter of fiscal 2002 compared to income of $576,499 before income taxes in the first quarter of fiscal 2001. The decrease was attributable primarily to the decrease in gross profit and the increase in operating expenses. Coffee Holding's provision for income taxes for the three months ended January 31, 2002 totaled $145,100 compared to $265,000 for the three months ended January 31, 2001. As a result, Coffee Holding had net income of $227,261, or $.06 per share, in the first quarter of fiscal 2002 compared to net income of $311,499, or $.08 per share, in the first quarter of fiscal 2001. Liquidity and Capital Resources As of January 31, 2002, Coffee Holding had a working capital deficit of approximately $564,000, which decreased by $2,081,000 from its working capital of approximately $1,517,000 as of October 31, 2001, and a total stockholders' equity of $970,283, which increased by $227,261 from its total stockholders' equity of $743,022 as of October 31, 2001. Coffee Holding's working capital decreased primarily as a result of the reclassification of the line of credit borrowing as a short term obligation. If extended pursuant to the terms of the line of credit this obligation would be reclassified as a long-term obligation. As of November 29, 2000, Coffee Holding 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 Coffee Holding'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 5.25% at January 31, 2002). Interest on the term loan is payable monthly at the prime rate plus 75% (an effective rate of 5.50% at January 31, 2002). Principal payments on the term loan are payable monthly at $10,000. Andrew Gordon and David Gordon, directors and officers of Coffee Holding, each have guaranteed borrowings under the credit facility up to $500,000. As of January 31, 2002, the line of credit had an outstanding balance of $2,256,863 as compared to an outstanding balance of $2,339,216 at October 31, 2001. The outstanding balance under the term loan was $470,000 as of January 31, 2002, and was $500,000 at October 31, 2001. Coffee Holding had on deposit $279,518 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 short-term liabilities in Coffee Holding's January 31, 2002 balance sheet based on the amended terms of the credit facility whereby Coffee Holding may either defer payments until, or make installment payments, through November 20, 2002. This amount is being reflected as short term since the agreement expires in November of 2002. The agreement does however call for automatic two year extension privileges if written cancellation notice has not been received within sixty days prior to maturity. Coffee Holding was in compliance with all required financial covenants at January 31, 2002. Coffee Holding had loans payable to its stockholders, all of whom are members of the Gordon family, of $148,099 at January 31, 2002. The loans are due on demand and bear interest at 10% per annum. Coffee Holding 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. 8 In the first quarter of fiscal 2002, Coffee Holding's operating activities provided net cash of approximately $154,000 as compared to the first quarter of fiscal 2001 when net cash used in operating activities was approximately $266,000. The improved cash flow from operations in the first quarter of fiscal 2002 was primarily due to the fact that only $259,398 was used to pay down accounts payable and accrued expenses in the first quarter of 2002 as compared to a $777,812 outlay of cash for these items in the first quarter of 2001. During fiscal 2002, Coffee Holding used $6,765 of its cash resources to purchase property and equipment. Coffee Holding will purchase a state-of-the-art double line brick pack machine at a cost of approximately $400,000 in fiscal 2002. The machine will allow Coffee Holding to increase its production capacity and diversify its product mix. Management does not expect to incur other significant capital expenditures in fiscal 2002. Coffee Holding also used $125,234 of cash in financing activities in the three months ended January 31, 2002, including $82,353 to reduce its bank line of credit, $30,000 in payments on the term loan and $12,881 in the repayment of principal and interest on loans to related parties. Coffee Holding expects to fund its operations, including paying its liabilities, funding capital expenditures and making required payments on its debts, in fiscal 2002 through cash provided by operating activities. Coffee Holding expects that it will generate sufficient cash to continue its business for the next twelve months. In additional, an increase in eligible accounts receivable and inventory would permit Coffee Holding to make additional borrowings under its line of credit. Coffee Holding also believes it could, if necessary, obtain additional loans by mortgaging its headquarters. Market Risks Market risks relating to Coffee Holding's operations result primarily from changes in interest rates and commodity prices as further described below. Interest Rate Risks Coffee Holding is subject to market risk from exposure to fluctuations in interest rates. At January 31, 2002, Coffee Holding's debt consisted of approximately $148,000 of fixed rate debt and approximately $2,727,000 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. Coffee Holding does not expect changes in interest rates to have a material effect on results of operations or cash flows in fiscal 2002, 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 Coffee Holding's control. Historically, Coffee Holding 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 4 of the notes to financial statements in this quarterly report. In addition, during the latter half of fiscal 2000, Coffee Holding 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 Coffee Holding to mitigate the effect of changing prices although it generally remains exposed to loss when prices decline significantly in a short period of time. Coffee Holding generally has been able to pass green coffee price increases through to its customers, thereby maintaining its gross profits. However, Coffee Holding cannot predict whether it will be able to pass inventory price increases through to its customers in the future. 9 At January 31, 2002, Coffee Holding held options (generally with terms of two months or less) covering an aggregate of 750,000 pounds of green coffee beans at a price of $.45 per pound. The fair market value of these options, which was obtained from a major financial institution, was $6,375 at January 31, 2002. Coffee Holding also holds futures contracts with longer terms (generally three to four months) primarily for the purpose of guaranteeing an adequate supply of green coffee. At January 31, 2002, Coffee Holding held futures contracts for the purchase of 7,725,000 pounds of coffee at average prices of $.46, $.51 and $.58 per pound for the March 2002, May 2002 and December 2002 contracts, respectively. The market price of coffee applicable to such contracts was $.45, $.4765 and $.5475 per pound at that date, respectively. 10 Part II -- OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) None (b) Reports on Form 8-K None 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Coffee Holding Co., Inc. ---------------------------------------------- (Registrant) By: /s/ Andrew Gordon ------------------------------------------ Andrew Gordon President and Chief Executive Officer (Principal Executive Officer and Principal Accounting Officer) March 15, 2002 12