UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549-1004
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended October 31, 2004
[ ] 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. 333-00588-NY
COFFEE HOLDING CO., INC.
(Exact name of small business issuer 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)
Issuer's telephone number: (718) 832-0800
Securities registered under Section 12(b) of the Exchange Act:
NONE
(Title of Class)
Securities registered under Section 12(g) of the Exchange Act:
NONE
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and no disclosure will 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-KSB or any amendment to
this Form 10-KSB. [X]
The issuer's revenues for the year ended October 31, 2004 were $28,030,389.
The aggregate market value of the voting common equity 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 December 31, 2004, the registrant had 3,999,650 shares of common stock,
par value $.001 per share, outstanding.
Transitional Small Business Disclosure Format: Yes |_| No |X|
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. DESCRIPTION OF BUSINESS..................................................................1
ITEM 2. DESCRIPTION OF PROPERTY.................................................................11
ITEM 3. LEGAL PROCEEDINGS.......................................................................11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................................12
PART II
ITEM 5. MARKET FOR COMMON EQUITY and RELATED STOCKHOLDER MATTERS................................12
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS..............................12
ITEM 7. FINANCIAL STATEMENTS....................................................................20
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....20
ITEM 8A. CONTROLS AND PROCEDURES.................................................................20
ITEM 8B. OTHER INFORMATION.......................................................................20
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.......................................21
ITEM 10. EXECUTIVE COMPENSATION..................................................................22
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.........................................................23
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........................................25
ITEM 13. EXHIBITS................................................................................25
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES..................................................28
SIGNATURES......................................................................................................29
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL OVERVIEW
PRODUCTS AND OPERATIONS. We are an integrated wholesale coffee roaster
and dealer in the United States. Our core products can be divided into three
categories:
o WHOLESALE GREEN COFFEE: unroasted raw beans imported from around the
world and sold to large and small roasters and coffee shop
operators;
o PRIVATE LABEL COFFEE: coffee roasted, blended, packaged and sold
under the specifications and names of others, including supermarkets
that want to have their own brand name on coffee to compete with
national brands; and
o BRANDED COFFEE: coffee roasted and blended to our own specifications
and packaged and sold under our seven brand names in different
segments of the market.
Our private label and branded coffee products are sold throughout the
United States and Canada to supermarkets, wholesalers, and individually owned
and multi-unit retail customers. Our unprocessed green coffee, which includes
over 70 types of coffee from all over the world, is sold to specialty gourmet
roasters.
We conduct our operations in accordance with strict freshness and
quality standards. All of our private label and branded coffee is produced from
high quality coffee beans that are deep roasted for full flavor using a slow
roasting process that has been perfected utilizing our more than thirty years of
experience in the coffee industry. In order to ensure freshness, our products
are delivered to our customers within 72 hours of roasting. We believe that our
long history has enabled us to develop a loyal customer base.
GEOGRAPHIC EXPANSION. In February 2004, we acquired certain assets of
Premier Roasters, a roaster-dealer located in La Junta, Colorado, for $825,000.
The assets purchased by us include all of the operating equipment located at
Premier Roasters' La Junta and Rocky Ford, Colorado locations, as well as all
labels for all of Premier Roasters' coffee products. In connection with the
acquisition of these assets, we reached an agreement with the City of La Junta,
Colorado on a 20-year lease for a 50,000 square foot facility in La Junta. We
are using the assets that we purchased to expand our integrated wholesale coffee
roaster and dealer operations in the Western United States. In connection with
this transaction, we also entered into a licensing agreement with Del Monte
Corporation for the exclusive right to use the S&W and IL CLASSICO trademarks in
connection with the production, manufacture and sale of ground coffee for
distribution to retail customers in the United States and certain other
countries approved by Del Monte Corporation.
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OUR INDUSTRIES
The United States coffee market consists of two distinct product
categories:
o Commercial ground roast, mass-merchandised coffee; and
o Specialty coffees, which include:
o Gourmet coffees (premium grade Arabica coffees sold in whole bean
and ground form);
o Espresso-based beverages; and
o Premium coffees (upscale coffees mass-marketed by the leading
coffee companies).
SPECIALTY GREEN COFFEE. Specialty green coffee, or what is sometimes
called gourmet coffee, is high quality Arabica bean coffee. The Arabica bean is
widely considered in the industry to be superior to its counterpart, the Robusta
bean, which is used mainly in non-specialty coffee. High quality Arabica beans
usually grow at high elevations, absorb little moisture and mature slowly. These
factors result in beans with a mild aroma and a bright, pleasing flavor that is
suitable for specialty coffee. Although the overall coffee industry is mature,
the specialty green coffee market continues to be a fast growing segment.
We have observed several industry trends that have contributed to the
increase in demand for specialty coffee, including:
o According to the Specialty Coffee Association, the estimated number
of specialty coffee retail outlets grew from 585 units in 1989 to
17,400 units by the end of 2003;
o Increasing demand for all premium food products, including specialty
coffee, where the difference in price from the commercial brands is
small compared to the perceived improvement in product quality and
taste;
o Greater consumer awareness of specialty coffee as a result of its
increasing availability;
o Ease of preparation of specialty coffees resulting from the
increased use of automatic drip coffee makers and home espresso
machines; and
o The overall low price of Arabica coffee beans, which has allowed
consumers to afford higher end specialty 100% Arabica coffees.
HISPANIC COFFEE MARKET IN THE UNITED STATES. Hispanics are now the
fastest growing and largest minority demographic in the United States. Some
attractive features about the Hispanic coffee market in the United States are:
o According to Information Resources Inc., Spanish espresso beverages'
total volume sales increased by 12% from April 2003 to April 2004.
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o According to the United States Census Bureau, Hispanic Americans are
the largest minority group in the United States as of January 2003
with 37 million people residing throughout the United States.
o According to a May 2004 report by the Selig Center for Economic
Growth, the purchasing power of Hispanic consumers will reach $992
billion by 2009.
COFFEE COMMODITY MARKET. Due to oversupply, in 2002 and 2003 coffee
prices plummeted to 30-year lows. The price decrease was an 82 percent drop from
four years earlier. In 2003, coffee-producing nations received approximately
$5.5 billion for their beans, less than half what they made in the late 1980s.
The oversupply has gone largely unnoticed in the United States, the world's
largest coffee consumer because Americans have not seen equally steep price
declines for coffee products. Changes in prices have been obscured by the
dramatic expansion in the variety of upscale coffees available to ordinary
consumers. Selling for over $2.00 per cup in many gourmet shops, coffee has
become an affordable luxury.
OUR COMPETITIVE STRENGTHS
To achieve our growth objectives described below, we intend to leverage
the following competitive strengths:
NATIONAL DISTRIBUTION WITH CAPACITY FOR GROWTH. Since 1991, we have
been able to expand our distribution to a national platform while operating from
only our East Coast location. We have recently made capital investments to
improve our roasting, packaging and fulfillment infrastructure to support the
production and distribution of large quantities of fresh coffee products
throughout the United States. We believe that our new La Junta, Colorado
facility will allow us to continue to grow our business by further increasing
our presence in the Western United States. By operating out of two facilities,
we have gained new economies of scale in both manufacturing and logistical
efficiencies and are confident that we can compete aggressively throughout the
United States. These two facilities allow us to reduce our freight and shipping
costs to the Western United States, thereby enabling us to be more competitive
in bidding for new business. In addition, our presence in Colorado has increased
the number of potential customers we have because of our proximity to the West
Coast.
POSITIONED TO PROFITABLY GROW THROUGH VARYING CYCLES OF THE COFFEE
MARKET. We believe that we are one of the few coffee companies to offer a broad
array of branded and private label roasted ground coffees and wholesale green
coffee across the spectrum of consumer tastes, preferences and price points.
While many of our competitors engage in distinct segments of the coffee
business, we sell products in each of the following areas:
o Retail branded coffee;
o Retail private label coffee;
o Wholesale specialty green and gourmet whole bean coffees;
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o Food service;
o Instant coffees; and
o Niche products.
Our branded and private label roasted ground coffees are sold
predominantly at competitive and value price levels while some of our other
branded and specialty coffees are sold predominantly at the premium price
levels. Premium price level coffee is high-quality gourmet coffee, such as AA
Arabica coffee, which sells at a substantial premium over traditional retail
canned coffee, while competitive and value price level coffee is mainstream or
traditional canned coffee. Because of this diversification, we believe that our
profitability is not dependent on any one area of the coffee industry and,
therefore, is less sensitive than our competition to potential coffee commodity
price and overall economic volatility.
WHOLESALE GREEN COFFEE MARKET PRESENCE. As a large roaster/dealer of
green coffee, we believe that we are favorably positioned to increase our
specialty coffee sales. Since 1998, we increased the number of our wholesale
green coffee customers, including coffee houses, single store operators, mall
coffee stores and mail order sellers, by 75% from 150 to 262. We are a charter
member of the Specialty Coffee Association of America and one of the largest
distributors of Swiss Water Processed Decaffeinated Coffees along the East
Coast. In addition, although we do not have any formalized, material agreements
or long-term contracts with it, we have a 14-year relationship with our largest
wholesale green coffee customer, Green Mountain Coffee Roasters. Our 30-plus
years of experience as a roaster and a dealer of green coffee allows us to
provide our roasting experience as a value added service to our gourmet roaster
customers. The assistance we provide to our customers includes training, coffee
blending and market identification. We believe that our relationships with
wholesale green coffee customers and our focus on selling green coffee as a
wholesaler has enabled us to participate in the growth of the specialty coffee
market while mitigating the risks associated with the competitive retail
specialty coffee environment.
DIVERSE PORTFOLIO OF DIFFERENTIATED BRANDED COFFEES. Currently, our
highest net profit margin is on our branded coffees. We have amassed a portfolio
of five proprietary name brands sold to supermarkets, wholesalers and
individually-owned stores in the United States, including brands for specialty
espresso, Latin espresso, Italian espresso, 100% Colombian coffee and blended
coffee. In addition, we have entered into a licensing agreement with Del Monte
Corporation for the exclusive right to use the S&W and IL CLASSICO trademarks in
the United States and other countries approved by Del Monte Corporation in
connection with the production, manufacture and sale of roasted whole bean and
ground coffee for distribution to retail customers. We plan to broaden our
customer base and increase penetration with existing customers by expanding the
S&W label from a well-known brand on the West Coast to a well-known brand
throughout the United States. Our existing portfolio of differentiated brands
combined with our management expertise serve as a platform to add additional
name brands through acquisition or licensing agreements which target product
niches and segments that do not compete with our existing brands. In addition,
we have added a group of third-party marketing specialists to help grow our
branded coffee sales. These specialists have redesigned our packaging and labels
and have assisted in extending our product lines to include instant cappuccinos,
large can coffees and trial-sized mini-brick packages.
MANAGEMENT HAS EXTENSIVE EXPERIENCE IN THE COFFEE INDUSTRY. We have
been a family operated business for three generations. Throughout this time, we
have remained profitable through varying cycles in the coffee industry and the
economy. Andrew Gordon, our President and Chief Executive Officer, and David
Gordon, our Executive Vice President - Operations, have worked with Coffee
Holding for 22 and 24 years, respectively. David Gordon is an original member of
the Specialty Coffee Association of America. Andrew Gordon publishes a weekly
report on the coffee commodity industry. We believe that our employees and
management are dedicated to our vision and mission, which is to produce high
quality products, as well as to provide quality and responsive service to our
customers.
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OUR GROWTH STRATEGY
We believe that significant growth opportunities exist by selectively
pursuing strategic acquisitions and alliances, targeting the rapidly growing
Hispanic market, increasing penetration with existing customers by adding new
products, and developing our food service business. By capitalizing on this
strategy, we hope to continue to grow our business with our commitment to
quality and personalized service to our customers. We do not intend to compete
on price alone nor do we intend to expand sales at the expense of profitability.
SELECTIVELY PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES. We intend to
expand our operations by acquiring coffee companies, seeking strategic alliances
and acquiring or licensing brands which complement our business objectives.
Consistent with this strategy, in February 2004, we acquired certain assets of
Premier Roasters and we have entered into a licensing agreement with Del Monte
Corporation for the exclusive right to use the S&W and IL CLASSICO trademarks in
the United States and other countries approved by Del Monte Corporation in
connection with the production, manufacture and sale of roasted whole bean and
ground coffee for distribution at the retail level. We are using the assets we
purchased from Premier Roasters and our new facility in La Junta, Colorado to
expand our private label coffee and branded coffee operations in the Western
United States. We believe that our Western United States presence recently
enabled us to win a competitive bidding process to be the supplier of ground
roast private label coffee for four West Coast divisions of Albertson's, Inc.,
the second largest food and drug retailer in the United States according to
Hoover's Online. We intend to further expand the market presence of our branded
products outside our primary Northeastern United States market through other
acquisitions and strategic alliances.
GROW OUR CAFE CARIBE PRODUCT. The Hispanic population in the United
States is growing at nine times the average rate and now represents the largest
minority demographic in the United States, according to 2000 census data. We
believe there is significant opportunity for our Cafe Caribe brand to gain
market share among Hispanic consumers in the United States. Cafe Caribe is a
specialty espresso coffee that targets espresso coffee drinkers and, in
particular, Hispanic consumers. Although Cafe Caribe has historically been our
leading brand by revenue, we have not implemented a comprehensive marketing
program that targets Hispanic consumers.
FURTHER MARKET PENETRATION OF OUR NICHE PRODUCTS. We intend to capture
additional market share through our existing distribution channels by
selectively adding or introducing new brand names and products across multiple
price points, including:
o Specialty blends;
o Private label "value" blends and trial-sized mini-brick packages;
o Specialty instant coffees;
o Instant cappuccinos and hot chocolates; and
o Tea line products.
We recently established relationships with additional independent sales brokers
to market our products on a national scale.
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DEVELOP OUR FOOD SERVICE BUSINESS. We plan to expand further into the
food service business by developing new distribution channels for our products.
Currently, we have a limited presence in the food service market. We have
commenced marketing our upscale restaurant and Colombian coffee brands to
hotels, restaurants, office coffee services companies and other food service
retailers. In addition, we have expanded our food service offerings to include
instant cappuccinos, tea products and an equipment program for our customers. We
attend at least ten annual trade shows held by various buying groups which
provide us a national audience to market our food service products.
OUR CORE PRODUCTS
Our core products can be divided into three categories:
o WHOLESALE GREEN COFFEE: unroasted raw beans imported from around the
world and sold to large and small roasters and coffee shop
operators;
o PRIVATE LABEL COFFEE: coffee roasted, blended, packaged and sold
under the specifications and names of others, including supermarkets
that want to have their own brand name on coffee to compete with
national brands; and
o BRANDED COFFEE: coffee roasted and blended to our own specifications
and sold under our seven brand names in different segments of the
market.
WHOLESALE GREEN COFFEE. The specialty green coffee market represents
the fastest growing area of our industry. The number of gourmet coffee houses
have been increasing in all areas of the United States. The growth in specialty
coffee sales has created a marketplace for higher quality and differentiated
products which can be priced at a premium in the marketplace. As a large
roaster/dealer of green coffee, we are favorably positioned to increase our
specialty coffee sales. We sell green coffee beans to small roasters and coffee
shop operators located throughout the United States and carry over 70 different
varieties. Specialty green coffee beans are sold unroasted, direct from
warehouses to small roasters and gourmet coffee shop operators which then roast
the beans themselves. We sell from as little as one bag (132 pounds) to a full
truckload (44,000 pounds) depending on the size and need of the customer. We
believe that we can increase sales of wholesale green coffee without venturing
into the highly competitive retail specialty coffee environment and that we can
be as profitable or more profitable than our competition in this segment by
selling "one bag at a time" rather than "one cup at a time."
PRIVATE LABEL COFFEE. We roast, blend, package and sell coffee under
private labels for companies throughout the United States and Canada. Our
private label coffee is sold in cans, brick packages and instants in a variety
of sizes. As of October 31, 2004, we supplied coffee under approximately 42
different labels to wholesalers and retailers, including Supervalu, C&S
Wholesale and Nash Finch, three of the largest grocery wholesalers in North
America according to Private Label Magazine. We produce private label coffee for
customers who desire to sell coffee under their own name but do not want to
engage in the manufacturing process. Our private label customers seek a quality
similar to the national brands at a lower cost, which represents a better value
for the consumer.
BRANDED COFFEE. We roast and blend our branded coffee according to our
own recipes and package the coffee at our facilities in Brooklyn, New York and
La Junta, Colorado. We then sell the packaged coffee under our brand labels to
supermarkets, wholesalers and individually owned stores throughout the United
States.
We hold trademarks for each of our proprietary name brands and have the
exclusive right to use the S&W and IL CLASSICO trademarks in the United States
in connection with the production, manufacture and sale of roasted whole bean
and ground coffee for distribution at the retail level. For further information
regarding our trademark rights, see "Business--Trademarks."
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Each of our name brands is directed at a particular segment of the
coffee market. Our branded coffees are:
o CAFE CARIBE is a specialty espresso coffee that targets espresso
coffee drinkers and, in particular, the Hispanic consumer market;
o S&W is an upscale canned coffee established in 1921 and includes
Premium, Premium Decaf, French Roast, Colombian, Colombian Decaf,
Swiss Water Decaf, Kona, Mellow'd Roast and IL CLASSICO lines;
o 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;
o DON MANUEL is produced from the finest 100% Colombian coffee beans.
Don Manuel is an upscale quality product which commands a
substantial premium compared to the more traditional brown coffee
blends. We also use this known trademark in our food service
business because of the high brand quality;
o FIFTH AVENUE is a blended coffee that has become popular as an
alternative for consumers who purchase private label or national
branded coffee. We also market this brand to wholesalers who do not
wish to undertake the expense of developing a private label coffee
program under their own name;
o VIA ROMA is an Italian espresso targeted at the more traditional
espresso drinker; and
o IL CLASSICO is an S&W brand espresso product.
OTHER PRODUCTS
We also offer several niche products, including:
o trial-sized mini-brick coffee packages;
o specialty instant coffees;
o instant cappuccinos and hot chocolates; and
o tea line products.
RAW MATERIALS
Coffee is a commodity traded on the Commodities and Futures Exchange
subject to price fluctuations. Over the past five years, the average price per
pound of coffee beans ranged from approximately $.41 to $1.45. The price for
coffee beans on the commodities market as of October 31, 2004 was $.745 per
pound. Specialty green coffee, unlike most coffee, is not tied directly to the
commodities cash markets. 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. We are a licensed Fair Trade dealer
of Fair Trade certified coffee. Fair Trade certified coffee helps small coffee
farmers to increase their incomes and improve the prospects of their communities
and families by guaranteeing farmers a minimum price of five cents above the
current market price. Although we may purchase Fair Trade certified coffee from
time to time, we are not obligated to do so and we do not have any commitments
to purchase Fair Trade certified coffee. All of our specialty green coffees, as
well as all of the other coffees we import for roasting, are subject to multiple
levels of quality control.
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We purchase our green coffee from dealers located primarily within the
United States. The dealers supply us with coffee beans from many countries,
including Colombia, Mexico, Kenya, Indonesia, Brazil and Uganda. In fiscal 2004,
substantially all of our green coffee purchases were from approximately ten
suppliers, which accounted for approximately $14.3 million, or 81% of our total
product purchases. One of these suppliers, Rothfos Corporation, accounted for
$6.1 million, or 34% of our total product purchases. An employee of Rothfos
Corporation is one of our directors. We do not have any formalized, material
agreements or long-term contracts with any of these suppliers. Rather, our
purchases are typically made pursuant to individual purchase orders. We do not
believe that the loss of any one supplier, including Rothfos, would have a
material adverse effect on our 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 our control. Supply and price
can be affected by factors such as weather, politics and economics in the coffee
exporting countries. Increases in the cost of coffee beans can, to a certain
extent, be passed on to our customers in the form of higher prices for coffee
beans and processed coffee. Drastic or prolonged increases in coffee prices
could also adversely impact our business as it could lead to a decline in
overall consumption of coffee. Similarly, rapid decreases in the cost of coffee
beans could force us to lower our sale prices before realizing cost reductions
in our purchases.
We subject all of our private unroasted green coffee to both a
pre-shipment sample approval and an additional sample approval upon arrival into
the United States. Once the arrival sample is approved, we then bring the coffee
to one of our facilities to roast and blend according to our own strict
specifications. During the roasting and blending process, samples are pulled off
the production line and tested on an hourly basis to ensure that each batch
roasted is consistent with the others and meets the strict quality standards
demanded by our customers and us.
OUR USE OF DERIVATIVES
Historically, we have 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 report. We 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 us to mitigate the effect of changing prices
although we generally remain exposed to loss when prices decline significantly
in a short period of time or remain at higher levels, preventing us from
obtaining inventory at favorable prices. We generally have been able to pass
green coffee price increases through to customers, thereby maintaining our gross
profits. However, we cannot predict whether we will be able to pass inventory
price increases through to our customers in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Commodity Price Risks."
TRADEMARKS
We hold trademarks, registered with the United States Office of Patent
and Trademark, for all five of our proprietary coffee brands and an exclusive
license for S&W and IL CLASSICO brands for sale in the United States. Trademark
registrations are subject to periodic renewal and we anticipate maintaining our
registrations. We believe that our brands are recognizable in the marketplace
and that brand recognition is important to the success of our branded coffee
business.
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CUSTOMERS
We sell our private label and our branded coffee to three of the
largest wholesalers in the United States (according to Supermarket News) and are
the exclusive coffee supplier for Supervalu and Nash Finch Co., the largest and
fourth largest wholesalers in the United States. We sell wholesale green coffee
to Green Mountain Coffee Roasters. Sales to Supervalu, Topco/Shurfine and Green
Mountain Coffee Roasters accounted for approximately 16.1%, 7.5% and 15.6% of
our net sales for the fiscal year ended October 31, 2003 and 11.0%, 6.0% and
22.0% for the fiscal year ended October 31, 2004, respectively.
Although our agreements with wholesale customers generally contain only
pricing terms, our contract with Supervalu also contains minimum and maximum
purchase obligations at fixed prices. Because our profits on a fixed-price
contract could decline if coffee prices increased, we acquire futures contracts
with longer terms (generally three to four months) primarily for the purpose of
guaranteeing an adequate supply of green coffee at favorable prices. Although
the use of these derivative financial instruments has enabled us to mitigate the
effect of changing prices, no strategy is effective to eliminate the pricing
risks and we generally remain exposed to loss when prices change significantly
in a short period of time, and we generally remain exposed to supply risk in the
event of non-performance by the counter-parties to any futures contracts.
MARKETING
We market our private label and wholesale coffee through trade shows,
industry publications, face-to-face contact and through the use of our internal
sales force and non-exclusive independent food and beverage sales brokers. We
also use our web site (www.coffeeholding.com) as a method of marketing our
coffee products and ourselves.
For our private label and branded coffees, we will, from time to time
in conjunction with retailers and with wholesalers, conduct in-store promotions,
such as product demonstrations, coupons, price reductions, two-for-one sales and
new product launches to capture changing consumer taste preference for upscale
canned coffees.
We evaluate opportunities for growth consistent with our business
objectives. We recently established relationships with additional independent
sales brokers to market our products in the Western United States, an area of
the country where we have not had a high penetration of sales. We have hired
third-party marketing specialists to act as brand managers that will focus
exclusively on developing sales of our ethnic espresso brands. In addition, we
have hired a West Coast Brand Manager to market our S&W and IL CLASSICO brands,
as well as our other branded and private label coffee products. We intend to
capture additional market share in our existing distribution channels by
selectively adding or introducing new brand names and products across multiple
price points, including niche specialty blends, private label "value" blends and
mini-brick, filter packages, instant cappuccinos and tea line products. We also
intend to add specialty instant coffees to our extensive line of instant coffee
products.
CHARITABLE ACTIVITIES
Coffee Holding is also a supporter of several coffee oriented
charitable organizations.
o For over 10 years, we have been members of Coffee Kids, an
international non-profit organization that helps to improve the
quality of life of children and their families in coffee-growing
communities in Mexico, Guatemala, Nicaragua and Costa Rica.
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o We are members of Grounds for Health, an organization that educates,
screens, and arranges treatment for women who have cancer and live
in the rural coffee growing communities of Mexico.
o We are a licensed Fair Trade dealer of Fair Trade certified coffee.
Fair Trade helps small coffee farmers to increase their incomes and
improve the prospects of their communities and families. It
guarantees farmers a minimum price of $1.26 per pound or five cents
above the current market price.
o Most recently, we are the administrative benefactors to a new
non-profit organization called Cup for Education. After discovering
the lack of schools, teachers, and basic fundamental learning
supplies in the poor coffee growing communities of Central and Latin
America, "Cup" was established by our employee, Karen Gordon, to
help build schools, sponsor teachers, and purchase basic supplies
such as books, chalk and other necessities for a proper education.
COMPETITION
The coffee market is highly competitive. We compete in the following
areas:
WHOLESALE GREEN COFFEE. There are many green coffee dealers throughout
the United States. Many of these dealers have greater financial resources than
we do. However, we believe that we have both the knowledge and the capability to
assist small specialty gourmet coffee roasters with developing and growing their
business. Our 30-plus years of experience as a roaster and a dealer of green
coffee allows us to provide our roasting experience as a value added service to
our gourmet roaster customers. While other coffee merchants may be able to offer
lower prices for coffee beans, we market ourselves as a value-added supplier to
small roasters, with the ability to help them market their specialty coffee
products and develop a customer base. The assistance we provide our customers
includes training, coffee blending and market identification. Because specialty
green coffee beans are sold unroasted to small coffee shops and roasters that
market their products to local gourmet customers, we do not believe that our
specialty green coffee customers compete with our private label or branded
coffee lines of business.
PRIVATE LABEL COMPETITION. There are several major producers of coffee
for private label sale in the United States. Many other companies produce coffee
for sale on a regional basis. Our main competitors are The Kroger Co. and the
coffee division of Sara Lee Corporation. Both The Kroger Co. and Sara Lee
Corporation are larger and have more financial and other resources than we do
and therefore are able to devote more resources to product development and
marketing. We believe that we remain competitive by providing a high level of
quality and customer service. This service includes ensuring that the coffee
produced for each label maintains a consistent taste and is delivered on time
and in the proper quantities. In addition, we provide our private label
customers with information on the coffee market on a regular basis.
BRANDED COMPETITION. Our proprietary brand coffees compete with many
other brands that are sold in supermarkets and specialty stores, primarily in
the Northeastern United States. The branded coffee market in both the Northeast
and elsewhere is dominated by three large companies: Kraft General Foods, Inc.,
The Procter & Gamble Company and Sara Lee Corporation, who also market specialty
coffee in addition to non-specialty coffee. Our large competitors have greater
access to capital and a greater ability to conduct marketing and promotions. We
believe that, while our competitors' brands may be more nationally recognizable,
our proprietary and licensed brands are just as competitive in the Northeastern
United States and have the potential to be competitive throughout the United
States.
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GOVERNMENT REGULATION
Our coffee roasting operations are subject to various governmental laws
and regulations, which require us to obtain licenses, relating to customs,
health and safety, building and land use, and environmental protection. Our
roasting facility is subject to state and local air-quality and emissions
regulation. If we encounter difficulties in obtaining any necessary licenses or
if we have difficulty complying with these laws and regulations, then we could
be subject to fines and penalties which could have a material adverse effect on
our profitability. In addition, our product offerings could be limited, thereby
reducing our revenues.
We believe that we are in compliance in all material respects with all
such laws and regulations and that we have obtained all material licenses and
permits that are required for the operation of our business. We are not aware of
any environmental regulations that have or that we believe will have a material
adverse effect on our operations.
EMPLOYEES
We have 62 full-time employees, 50 of whom are employed in the areas of
coffee roasting, blending and packaging and 12 of whom are in administration and
sales. None of our employees are represented by unions or collective bargaining
agreements. Our management believes that we maintain a good working relationship
with our employees. To supplement our internal sales staff, we sometimes use
independent national and regional sales brokers who work on a commission basis.
ITEM 2. DESCRIPTION OF PROPERTY
We are headquartered at 4401 First Avenue, Brooklyn, New York, where we
own the land and an approximately 15,000 square foot building. The building
houses our executive offices, as well as our plant where we roast, blend and
package our coffee.
We lease a 50,000 square foot facility located at 27700 Frontage Road
in La Junta, Colorado from the City of La Junta. We pay annual rent of $100,092,
beginning in January of 2005 through January of 2024.
We also lease a 7,500 square foot warehouse located at 4425A First
Avenue in Brooklyn from T & O Management. T & O Management is not affiliated
with us or any of our officers, directors or stockholders. We pay annual rent of
$90,000 for the latest one year extension of the lease through August 31, 2005.
We also use a variety of independent, bonded commercial warehouses to
store our green coffee beans. Our management believes that our facilities are
adequate for our current operations and for our contemplated operations in the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to, and none of our property is the subject of, any
pending legal proceedings other than routine litigation that is incidental to
our business. To our knowledge, no governmental authority is contemplating
initiating any such proceedings.
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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-KSB, no matters were submitted to a vote of security holders.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is not quoted or listed on any quotation system or
market. No firm makes a market for the common stock. The number of registered
holders of our common stock at October 31, 2004 was 473.
In January 1998, prior to the date of the merger with Transpacific,
while we were a privately held "S" corporation, we paid a distribution in the
amount of $422,258 to our stockholders to pay personal income taxes. Since the
January 1998 payment, we have never paid any cash dividends on our common stock
and have no intention of doing so in the foreseeable future. In addition, under
the terms of our credit facility with Wells Fargo Business Credit, we are
prohibited from paying cash dividends without the lender's written consent.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
CAUTIONARY NOTE ON FORWARD LOOKING STATEMENTS
Some of the matters discussed under the caption "Management's
Discussion or plan of Operations, "Business" and elsewhere in this annual report
include forward-looking statements made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. We have based these
forward-looking statements on our current expectations and projections about
future events, including, among other things:
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 our success in implementing our business strategy or introducing new
products;
o our ability to attract and retain customers;
o our success in expanding our market presence in new geographic
regions;
o the effects of competition from other coffee manufacturers and other
beverage alternatives;
o changes in tastes and preferences for, or the consumption of,
coffee;
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o our ability to obtain additional financing; and
o other risks which we identify in future filings with the SEC.
In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "could," "predict," "potential,"
"continue," "expect," "anticipate," "future," "intend," "plan," "believe,"
"estimate" and similar expressions (or the negative of such expressions). Any or
all of our forward looking statements in this annual report and in any other
public statements we make may turn out to be wrong. They can be affected by
inaccurate assumptions we might make or by known or unknown risks and
uncertainties. Consequently, no forward looking statement can be guaranteed. In
addition, we undertake no responsibility to update any forward-looking statement
to reflect events or circumstances which occur after the date of this annual
report.
OVERVIEW
We are an integrated wholesale coffee roaster and dealer in the United
States and one of the few coffee companies that offers a broad array of coffee
products across the entire spectrum of consumer tastes, preferences and price
points. As a result, we believe that we are well positioned to increase our
profitability and endure potential coffee price volatility throughout varying
cycles of the coffee market and economic conditions.
Our operations have primarily focused on the following areas of the
coffee industry:
o the sale of wholesale specialty green coffee;
o the roasting, blending, packaging and sale of private label coffee;
and
o the roasting, blending, packaging and sale of our seven brands of
coffee.
Our operating results are affected by a number of factors including:
o the level of marketing and pricing competition from existing or new
competitors in the coffee industry;
o our ability to retain existing customers and attract new customers;
o fluctuations in purchase prices and supply of green coffee and in
the selling prices of our products; and
o our ability to manage inventory and fulfillment operations and
maintain gross margins.
Our net sales are driven primarily by the success of our sales and
marketing efforts and our ability to retain existing customers and attract new
customers. For this reason, we have made the strategic decision to invest in
measures that will increase net sales. In February 2004, we acquired certain
assets of Premier Roasters. We also hired a West Coast Brand Manager to market
our S&W brand and to increase sales of S&W coffee to new customers and increased
attendance at trade shows to promote our food service and private label coffee
business. In the last twelve months, we also hired third party marketing
specialists to increase the sale of our branded coffee through label redesigns
and new distribution. As a result of these efforts, net sales increased in our
specialty green coffee, private label and branded coffee business lines in both
dollars and pounds sold since the date of the acquisition. In addition, we
increased the number of our customers in all three areas.
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Our net sales are also affected by the price of green coffee. We import
green coffee from Colombia, Mexico, Kenya, Brazil and Uganda. The supply and
price of coffee beans are subject to volatility and are influenced by numerous
factors which are beyond our control. For example, coffee crops in Brazil, which
produces one-third of the world's green coffee, are susceptible to frost in June
and July and drought in September, October and November. However, because we
purchase coffee from a number of countries and are able to freely substitute one
country's coffee for another in our products, price fluctuations in one country
generally have not had a material impact on the price we pay for coffee.
Accordingly, price fluctuations in one country generally have not had a material
effect on our results of operations, liquidity and capital resources. Because we
generally have been able to pass green coffee price increases through to
customers, increased prices of green coffee generally result in increased net
sales. However, increased green coffee prices also generally result in increased
cost of sales. Cost of sales consists primarily of the cost of green coffee and
packaging materials and realized and unrealized gains or losses on hedging
activity.
Historically, we have used short-term coffee futures and options
contracts primarily for the purpose of partially hedging and minimizing the
effects of changing green coffee prices and to reduce our cost of sales. In
addition, during the latter half of fiscal 2000, we began to acquire futures
contracts with longer terms, generally three to six months, primarily for the
purpose of guaranteeing an adequate supply of green coffee at favorable prices.
Although the use of these derivative financial instruments has enabled us to
mitigate the effect of changing prices, no strategy can entirely eliminate
pricing risks and we generally remain exposed to loss when prices decline
significantly in a short period of time, and we generally remain exposed to
supply risk in the event of non-performance by the counter-parties to any
futures contracts. If the hedges that we enter do not adequately offset the
risks of coffee bean price volatility or our hedges result in losses, our cost
of sales may increase, resulting in a decrease in profitability.
In February 2004, we acquired certain assets of Premier Roasters, a
roaster-dealer located in La Junta, Colorado, for $825,000. The assets purchased
by us include all of the operating equipment located at Premier Roasters' La
Junta and Rocky Ford, Colorado locations, as well as all labels for all of
Premier Roasters' coffee products. In connection with the acquisition of these
assets, we reached an agreement with the City of La Junta, Colorado on a 20-year
lease for a 50,000 square foot facility in La Junta. We are using the assets
that we purchased to expand our integrated wholesale coffee roaster and dealer
operations to the Western United States. In connection with this transaction, we
also entered into a licensing agreement with Del Monte Corporation for the
exclusive right to use the S&W and IL CLASSICO trademarks, including Premium,
Premium Decaf, French Roast, Colombian, Colombian Decaf, Swiss Water Decaf,
Kona, and Mellow'd Roast lines, in connection with the production, manufacture
and sale of ground coffee for distribution to retail customers in the United
States and certain other countries approved by Del Monte Corporation.
We believe that our new La Junta, Colorado facility will allow us to
grow our business and increase sales to new and existing customers in the
Western United States. By operating out of two facilities, we will now be able
to compete aggressively throughout the United States as we have gained new
economies of scale in both manufacturing and logistical efficiencies which were
unavailable in the past while operating solely out of our New York facility. In
addition, we intend to broaden our customer base and increase penetration with
existing customers by expanding the S&W label from a well-known brand on the
West coast to a well-known brand throughout the entire continental United
States.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Estimates are used
for, but not limited to, the accounting for the allowance for doubtful accounts,
inventories, income taxes and loss contingencies. Management bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances. Actual results could differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies, among others,
may be impacted significantly by judgment, assumptions and estimates used in the
preparation of the financial statements:
o We recognize revenue in accordance with Securities and Exchange
Commission Staff Accounting Bulletin No. 104, "Revenue Recognition"
("SAB 104"). Under SAB 104, revenue is recognized at the point of
passage to the customer of title and risk of loss, when there is
persuasive evidence of an arrangement, the sales price is
determinable, and collection of the resulting receivable is
reasonably assured. We generally recognize revenue at the time of
shipment. Sales are reflected net of discounts and returns.
o Our allowance for doubtful accounts is maintained to provide for
losses arising from customers' inability to make required payments.
If there is deterioration of our customers' credit worthiness and/or
there is an increase in the length of time that the receivables are
past due greater than the historical assumptions used, additional
allowances may be required. For example, every additional one
percent of our accounts receivable that becomes uncollectible, would
reduce our operating income by approximately $40,000.
o Inventories are stated at cost (determined on a first-in, first-out
basis). Based on our assumptions about future demand and market
conditions, inventories are subject to be written-down to market
value. If our assumptions about future demand change and/or actual
market conditions are less favorable than those projected,
additional write-downs of inventories may be required.
o We account for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS No. 109"). Under SFAS No. 109, deferred tax assets and
liabilities are determined based on the liabilities, using enacted
tax rates in effect for the year in which the differences are
expected to reverse. Deferred tax assets are reflected on the
balance sheet when it is determined that it is more likely than not
that the asset will be realized. Accordingly, our net deferred tax
asset of $91,700 could need to be written off if we do not remain
profitable.
YEAR ENDED OCTOBER 31, 2004 (FISCAL 2004) COMPARED TO THE YEAR ENDED OCTOBER 31,
2003 (FISCAL 2003)
Net Income. Net income increased $253,260, or 40.7%, to $875,342 or
$.22 per share for the year ended October 31, 2004 compared to $622,082 or $.16
per share for the year ended October 31, 2003. The increase in net income
primarily reflects increased net sales, increased margins on our branded coffee
and private label coffee products and increased margins on specialty green
coffee sales.
Net Sales. Net sales totaled $28,030,389 for the year ended October 31,
2004, an increase of $7,790,522 or 38.5% from $20,239,867 for the year ended
October 31, 2003. The increase in net sales reflects a 50.6% increase in coffee
pounds sold from 17.4 million pounds in 2003 to 26.2 million pounds in 2004. The
increase in pounds of coffee sold is the result of increased sales of our
private label, branded and specialty green coffees. The increase in net sales
also reflects sales of $1,631,000 under our license of the S&W brand which we
signed in February 2004. Sales of our Cafe Caribe brand, as measured by
Information Resources Incorporated data, increased approximately 32% over fiscal
2003 due in part to the efforts of our third party marketing specialists through
label redesigns and new distribution. The number of our customers in the
specialty green coffee area grew approximately 6.9% to 262 customers. 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. Because the
specialty green coffee area is the fastest growing segment of the coffee market,
we believe that our customer base and sales will grow in this area. The increase
in the price of the underlying commodity (coffee) also contributed to the
increase in net sales.
15
Cost of Sales. Cost of sales for the year ended October 31, 2004 was
$20,927,506 or 74.7% of net sales, as compared to $15,373,127 or 76.0% of net
sales for the year ended October 31, 2003. Cost of sales consists primarily of
the cost of green coffee and packaging materials and realized and unrealized
gains or losses on hedging activity. The increase in cost of sales reflects
increased purchases of green coffee in the amount of approximately $3,500,000,
an increase in packaging costs associated with the increase in net sales of
approximately $700,000 and approximately $1,400,000 from higher green coffee
prices during the period as prices increased $.16 per pound year to year,
partially offset by net gains on future contracts. As the price of coffee is
cyclical and volatile and subject to many factors, including weather, politics
and economics, we are unable to predict the purchase price of green coffee for
fiscal 2005. We began to acquire futures contracts with longer terms (generally
three to six months) primarily for the purpose of guaranteeing an adequate
supply of green coffee at favorable prices beginning in the latter half of
fiscal 2000 and continuing through fiscal 2004. As the price of specialty green
coffee beans continued to increase, we used our favorable inventory position to
increase our margins. We had net gains on futures contracts of $1,622,038 for
the year ended October 31, 2004 compared to $868,669 for the year ended October
31, 2003. The use of these derivative financial instruments has enabled us to
mitigate the effect of changing prices, to increase our margins as coffee prices
have increased and to be more competitive with our pricing.
Gross Profit. Gross profit for the year ended October 31, 2004 was
$7,102,883, an increase of $2,236,143 or 45.9%, from $4,866,740 for the year
ended October 31, 2003. Gross profit as a percentage of net sales increased by
1.3% to 25.3% for the year ended October 31, 2004 from 24.0% for the year ended
October 31, 2003. Gains on futures contracts, reduced pricing pressure from
national brands and new business with favorable pricing terms allowed us to
increase our margins as the price of green coffee has increased. As previously
discussed, we believe that our favorable inventory position will allow us to
increase our sales and ultimately our margins if coffee prices continue to rise.
Operating Expenses. Total operating expenses increased $1,408,057 or
35.3% to $5,400,382 for the year ended October 31, 2004 from $3,992,325 for 2003
due to increases in selling and administrative expenses and officers' salaries.
Selling and administrative expenses increased $1,276,344 or 36.4% to $4,777,809
for the year ended October 31, 2004 from $3,501,465 for 2003. The increase in
selling and administrative expenses reflects several factors, including
increases of approximately $320,000 in shipping expenses, $322,000 in office
salaries, $140,000 in sales commissions, $60,000 in maintenance, $71,000 in
utilities, $51,000 in travel and $64,000 in depreciation.
We acquired certain assets of Premier Roasters and entered into a lease
to operate from our new La Junta facility in February 2004. Prior to commencing
operations in La Junta, we incurred expenses associated with repairing and
maintaining equipment located at the facility so that such equipment could meet
our need and our roasting and blending requirements. We also incurred expenses
associated with the hiring of 25 new employees at the facility. In addition,
because many S&W brand customers had previously placed orders with Premier
Roasters, they initially did not require additional inventory to be shipped. As
a result, sales out of our La Junta facility were initially slower than
expected. However, in April 2004, these customers began to replace their
existing inventories of S&W brand products, resulting in increased sales.
Although we will continue to incur increased operating expenses from operating
out of two facilities, we expect to gain new economies of scale in both
manufacturing and logistical efficiencies which were unavailable in the past
while operating solely out of our New York facility. We believe that this will
allow us to compete aggressively throughout the United States.
16
The increase in shipping expenses reflects the increase in pounds of
coffee sold, higher rates caused by increased fuel surcharges and gasoline
prices, and the addition of new customers during the period. The increase in
commissions reflects the hiring of a West Coast Brand Manager to market our S&W
brand as well as increases in sales of S&W coffee to new customers. We believe
that these changes reflect our strategic decision to invest in measures that
will increase net sales on a present and future basis. The increase in office
salaries reflects normal salary increases to non-officer employees in our New
York facility and the addition of new personnel in our Colorado facility. The
increases in maintenance, utilities, travel and depreciation reflect the
increased costs of operating two facilities.
Officers' salaries increased $131,713 to $622,573 for the year ended
October 31, 2004 from $490,860 for the year ended October 31, 2003. The increase
was due to salary increases for senior officers and the hiring of a Chief
Financial Officer.
Other Expense. Other expense decreased $2,003 or 1.4% from $135,967 for
the year ended October 31, 2003 to $133,964 for the year ended October 31, 2004.
Income Before Taxes. We had income of $1,568,537 before income taxes
for the year ended October 31, 2004 compared to income of $738,448 before income
taxes for the year ended October 31, 2003. The increase was attributable
primarily to improved margins on the sale of our private label, branded and
specialty green coffee products due to a favorable inventory position as coffee
prices increased.
Income Taxes. Our provision for income taxes for the year ended October
31, 2004 totaled $693,195 compared to $116,366 for the year ended October 31,
2003 as a result of increased income before taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 2004, we had working capital of $726,444 which
represented a $2,636,752 decrease from our working capital of $3,363,196 as of
October 31, 2003, and total stockholders' equity of $2,995,821, which increased
by $875,342 from our total stockholders' equity of $2,120,479 as of October 31,
2003. Our working capital decreased primarily due to an increase in our accounts
payable of $2,797,389 and the recategorization of the outstanding balance under
our line of credit to short-term liabilities (liabilities due and payable in
less than one year). The outstanding balance under the line of credit was
classified as short-term debt in our October 31, 2004 balance sheet since the
agreement expires in November 2004, but was classified as long-term debt in our
October 31, 2003 balance sheet. At October 31, 2004, the outstanding balance on
our line of credit was $2,685,045 compared to $2,376,066 at October 31, 2003.
This decrease in working capital was partially offset by a $1,881,986 increase
in accounts receivable and a $476,865 increase in inventories at October 31,
2004 compared to October 31, 2003.
17
As of October 31, 2004, we had a credit facility with Wells Fargo
Business Credit that provided 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 $750,000 based on eligible equipment. The line of credit provided for
borrowings of up to 85% of our eligible trade accounts receivable and 60% of
eligible inventories.
As indicated above, as of October 31, 2004, the line of credit with
Wells Fargo Business Credit had an outstanding balance of $2,685,045 as compared
to an outstanding balance of $2,376,066 at October 31, 2003. The outstanding
balance under the term loan was $252,000 as of October 31, 2004, and was
$336,000 at October 31, 2003. We were in compliance with all required financial
covenants at October 31, 2004.
In November 2004, we refinanced our credit facility by entering into a
new financing arrangement with Merrill Lynch Business Financial Services Inc.
and terminating our prior agreement with Wells Fargo Business Credit. This new
line of credit is for a maximum $4,000,000, expires on October 31, 2005 and
requires monthly interest payments at a rate of LIBOR plus 2.4%. This loan is
secured by a blanket lien on all of our assets and the personal guarantees of
Andrew Gordon and David Gordon, two of our officers and directors.
The new credit facility contains covenants that place restrictions on
our operations. Among other things, these covenants: require that a portion of
our cash flow from operations be dedicated to servicing our debt; limit our
ability to obtain additional capital through financings without the consent of
the lender; limit our ability to pay dividends or make other distributions to
our stockholders and acquire or retire our common stock without the consent of
the lender; and prohibit us from forming or acquiring subsidiaries, merging with
or into other companies or selling all or substantially all of our assets
without the consent of the lender. These restrictions could adversely impact our
ability to implement our business plan, or raise additional capital, if needed.
In addition, if we default under our existing credit facility or if our lender
demands payment of a portion or all of our indebtedness, we may not have
sufficient funds to make such payments. As of the date of this report, we are in
compliance with all covenants contained in the credit facility.
We also lease machinery and equipment under capital leases which expire
in July 2006. The interest rate on the capital leases vary from 6.75% to 7.6%
per annum. The outstanding balance on the capital leases aggregated $116,915 at
October 31, 2004 compared to $222,446 at October 31, 2003.
We had loans payable to our stockholders, all of whom are members of
the Gordon family, of $79,646 at October 31, 2003. The loans were repaid during
the quarter ended July 31, 2004. We do not intend to borrow additional amounts
from our stockholders.
For the year ended October 31, 2004, our operating activities provided
net cash of $1,616,465 as compared to the year ended October 31, 2003 when net
cash used in operating activities was $744,226. The increased cash flow from
operations for the year ended October 31, 2004 was primarily due to $875,342 in
net income, $2,797,389 in increased accounts payable, offset in part by $467,865
in increased inventory levels and a $1,881,986 increase in accounts receivable.
For the year ended October 31, 2004, our investing activities used net
cash of $1,056,179 as compared to the year October 31, 2003 when net cash used
by investing activities was $62,758. The decreased cash flow from investing
activities for year was primarily due to the purchase of property and equipment
from Premier Roasters in February 2004.
For the year ended October 31, 2004, our financing activities provided
net cash of $8,027 as compared to the year ended October 31, 2003 when net cash
provided by financing activities was $837,248. The decreased cash flow from
financing activities was primarily due to decreased net cash borrowings under
our line of credit, principal payments on our capital lease and payments to
related parties. Net cash used on our line of credit decreased $745,714 to net
cash used of $308,079 for the year ended October 31, 2004 compared to net cash
used of $1,054,693 for the year ended October 31, 2003. In addition, we repaid
$79,646 in loans to our stockholders during the year ended October 31, 2004. We
also lease machinery and equipment under capital leases which expires in July
2006. The interest rate on the capital leases vary from 6.75% to 7.6% per annum.
Principal payments on our capital lease increased $100,785 to $221,306 for the
year ended October 31, 2004 from $120,521 for the year ended October 31, 2003.
18
In February, 2004, we acquired certain assets of Premier Roasters for
$825,000. In addition, we entered into an agreement with the City of La Junta,
Colorado to lease a 50,000 square foot facility for $8,341 per month. We do not
believe that the purchase price or costs associated with operating a second
facility will have a material effect on our future cash flow or liquidity
position. We believe that the costs associated with operating the second
facility will be mitigated by the new economies of scale in both manufacturing
and logistical efficiencies which were unavailable in the past while operating
solely out of our New York facility and increased sales to new and existing
customers in the Western United States.
We expect to fund our operations, including paying our liabilities,
funding capital expenditures and making required payments on our debts, through
October 31, 2005 with cash provided by operating activities and the use of our
credit facility. In addition, an increase in eligible accounts receivable and
inventory would permit us to make additional borrowings under our line of
credit. We also believe we could, if necessary, obtain additional loans by
mortgaging our headquarters.
MARKET RISKS
Market risks relating to our operations result primarily from changes
in interest rates and commodity prices as further described below.
INTEREST RATE RISKS
We are subject to market risk from exposure to fluctuations in interest
rates. At October 31, 2004, our debt consisted of $116,915 of fixed rate debt on
capital leases and $2,937,045 of variable rate debt under our revolving line of
credit and term loan. At October 31, 2004, interest on the variable rate debt
was payable primarily at 5.00% (or .25% above the prime rate) for the revolving
line of credit and at 5.25% (or .50% above the prime rate) for the term loan.
COMMODITY PRICE RISKS
The supply and price of coffee beans are subject to volatility and are
influenced by numerous factors which are beyond our control. Historically, we
have 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 report. In addition, during the latter half of fiscal 2000, we began to
acquire futures contracts with longer terms (generally three to six months)
primarily for the purpose of guaranteeing an adequate supply of green coffee.
The use of these derivative financial instruments has enabled us to mitigate the
effect of changing prices although we generally remain exposed to loss when
prices decline significantly in a short period of time and remain at higher
levels, preventing us from obtaining inventory at favorable prices. We generally
have been able to pass green coffee price increases through to customers,
thereby maintaining our gross profits. However, we cannot predict whether we
will be able to pass inventory price increases through to our customers in the
future.
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At October 31, 2004, we held 101 options (generally with terms of two
months or less) covering an aggregate of 3,787,500 pounds of green coffee beans
at a price of $.75 per pound. The fair market value of these options, which was
obtained from a major financial institution, was $49,200 at October 31, 2004.
We acquire futures contracts with longer terms (generally three to four
months) primarily for the purpose of guaranteeing an adequate supply of green
coffee. At October 31, 2004, we held 90 futures contracts for the purchase of
3,375,000 pounds of coffee at an average price of $.80 per pound for March 2005
contracts. The market price of coffee applicable to such contracts was $.77 per
pound at that date.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to
investors.
ITEM 7. FINANCIAL STATEMENTS
See pages F-1 through F-18 following the signature pages of this Annual
Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
Management, including the Company's President, Treasurer and Chief
Executive Officer (who is the Company's principal executive officer and
principal accounting officer), has evaluated the effectiveness of the Company's
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) as of the end of the period covered by this report. Based upon
that evaluation, the Company's President, Chief Executive Officer and Treasurer
concluded that the disclosure controls and procedures were effective, in all
material respects, to ensure that information required to be disclosed in the
reports the Company files and submits under the Exchange Act is recorded,
processed, summarized and reported as and when required.
There have been no changes in the Company's internal control over
financial reporting identified in connection with the evaluation that occurred
during the Company's last fiscal quarter that has materially affected, or that
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
ITEM 8B. OTHER INFORMATION
On December 1, 2004, Richard E. Pino was released from his position as
our Chief Financial Officer by mutual agreement of the parties. Mr. Pino's
departure did not result from any disagreement between Mr. Pino and management
or between Mr. Pino and our independent auditors.
20
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Set forth below is information concerning our directors and executive
officers. Our board of directors currently consists of six directors. Directors
are elected by a plurality of the votes cast at our 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.
DIRECTOR
NAME AGE(1) SINCE POSITION
-------------------------------------- ------ --------- --------------------------------------------------
Andrew Gordon......................... 43 1981 Chief Executive Officer, President, Treasurer and
Director
David Gordon.......................... 40 1983 Executive Vice President, Secretary and Director
Gerard DeCapua........................ 43 1997 Director
Daniel Dwyer.......................... 48 1998 Director
--------------
(1) At December 31, 2004.
Andrew Gordon has been our Chief Executive Officer, President,
Treasurer and one of our directors since 1997. He is responsible for managing
our overall business and has worked for Coffee Holding for over 21 years,
previously as a Vice President from 1993 to 1997. Mr. Gordon has worked in all
capacities of our business and serves as the direct contact with our major
private label accounts. In addition, Mr. Gordon publishes a weekly report that
is distributed to our customers and is perceived by many of his peers and
customers as a coffee market expert. Mr. Gordon received his Bachelor of
Business Administration degree from Emory University. He is the brother of David
Gordon.
David Gordon has been our Executive Vice President - Operations,
Secretary and one of our directors since 1995. He is responsible for managing
all aspects of our roasting and blending operations, including quality control,
and, has worked for Coffee Holding for over 23 years, previously as an Operating
Manager from 1989 to 1995. He is a charter member of the Specialty Coffee
Association of America. Mr. Gordon attended Baruch College in New York City. He
is the brother of Andrew Gordon.
Gerard DeCapua has served as a director of Coffee Holding since 1997.
Mr. DeCapua has had his own law practice in Rockville Centre, New York since
1986. Mr. DeCapua received his law degree from Pace University.
Daniel Dwyer has served as a director of Coffee Holding since 1998. Mr
Dwyer has been a senior coffee trader at Rothfos Corporation, a green coffee
bean supplier, since 1995. Mr. Dwyer is responsible for our account with
Rothfos. We paid Rothfos approximately $6.1 million for green coffee purchases
in fiscal 2004. All purchases are made on arms' length terms.
21
CODE OF ETHICS
The Company has not yet adopted a "code of ethics" as defined by Item
406 of Regulation S-B, as our securities are not currently quoted or listed on
any quotation system or market.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain compensation information for our
chief executive officer and each other executive officer whose salary and bonus
compensation exceeded $100,000 for the fiscal year ended October 31, 2004.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
---------------------------------------
ALL OTHER
NAME AND FISCAL SALARY BONUS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) (1) ($) (2)
------------------------------------- -------- --------- ---------- -------------
Andrew Gordon 2004 $269,500 $39,000 28,719
Chief Executive Officer and President 2003 245,000 33,000 28,719
2002 190,254 49,500 -
David Gordon 2004 $224,400 $39,000 9,887
Executive Vice President - Operations 2003 204,000 33,000 9,887
2002 153,467 49,500 -
----------------------
(1) Amounts shown as bonuses were earned in the fiscal year shown.
(2) The amounts set forth consist of amounts paid by Coffee Holding
for the use of an automobile and automobile insurance.
Our Board of Directors did not have a compensation committee in fiscal
2004. During that year, salaries and bonuses were determined by the Board of
Directors. Once established, the compensation committee will determine the
salaries and bonuses of Andrew Gordon and David Gordon.
STOCK OPTION PLAN
We have a stock option plan, Coffee Holding Co., Inc. 1998 Stock Option
Plan, under which non-qualified and incentive stock options to purchase shares
of common stock may be granted to our directors, officers and other key
employees and consultants. The plan was adopted by our Board of Directors and
approved by our stockholders on February 10, 1998. On June 21, 2004, the plan
was amended by our Board of Directors to reduce the number of shares of common
stock reserved for issuance under the plan from 2,000,000 to 800,000, subject to
adjustment for stock splits, stock dividends, reorganizations, mergers,
recapitalizations or other capital adjustments. The plan is administered by our
Board of Directors which may delegate our powers to a committee of the Board. No
options may be granted after February 10, 2008. The board or committee will
determine, at the time of grant, the purchase price of shares issuable pursuant
to exercise of stock options; provided that the purchase price of a share of
common stock under incentive stock options shall not be less than the fair
market value of a share on the date the option is granted. Unless earlier
terminated due to termination of employment or death or disability of the
optionee, each stock option shall terminate no later than ten years from the
date on which it is granted. Options are transferable only by will or the laws
of descent and distribution. No options have been granted under the plan.
22
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 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth information regarding ownership of
shares of our common stock, as of October 31, 2004, by each person known to be
the owner of 5% or more of our common stock, by each person who is a director or
executive officer and by all directors and executive officers as a group. Except
as otherwise indicated, each person and each group shown in the table has sole
voting and investment power with respect to the shares of common stock
indicated. For purposes of the table below, in accordance with Rule 13d-3 under
the Securities Exchange Act of 1934, as amended, a person is deemed to be the
beneficial owner, for purposes of any shares of common stock: (1) over which he
or she has or shares, directly or indirectly, voting or investment power; or (2)
of which he or she has the right to acquire beneficial ownership at any time
within 60 days after October 31, 2004. As used in this annual report, "voting
power" is the power to vote or direct the voting of shares and "investment
power" includes the power to dispose or direct the disposition of shares. Common
stock beneficially owned and percentage ownership were based on 3,999,650 shares
outstanding. The address of each beneficial owner is c/o Coffee Holding Co.,
Inc., 4401 First Avenue, Brooklyn, New York 11232-0005.
NAME OF BENEFICIAL OWNERS, AMOUNT AND NATURE OF
OFFICERS AND DIRECTORS BENEFICIAL OWNERSHIP PERCENTAGE
---------------------------- --------------------- -----------
Andrew Gordon....................... 619,500 15.5%
David Gordon........................ 619,500 15.5%
Gerard DeCapua...................... 100 *
Daniel Dwyer........................ 100 *
Rachelle L. Gordon(1)............... 1,343,202 33.5%
Sterling A. Gordon(2)............... 1,343,202 33.5%
All directors and executive
officers as a group (4 persons)..... 1,239,200 31.0%
---------------------------
* Less than 1%.
(1) Includes 273,602 shares owned by Ms. Gordon directly, 596,398 shares owned
by the Rachelle L. Gordon 2002 Grantor Retained Annuity Trust of which
Rachelle L. Gordon is the grantor, beneficiary and trustee, with sole power
to vote and dispose of the shares and 473,202 shares owned by Rachelle L.
Gordon's husband, Sterling A. Gordon. Pursuant to the terms of the Rachelle
L. Gordon 2002 Grantor Retained Annuity Trust, Ms. Gordon will receive
annual distributions of common stock based on the appraised value of our
common stock through 2004. Any shares remaining in the trust after such
distribution will be distributed in equal amounts to Andrew Gordon and
David Gordon. Ms. Gordon is the mother of Andrew Gordon and David Gordon.
(2) Includes 473,202 shares owned by Mr. Gordon directly, 596,398 shares owned
by the Sterling A. Gordon 2002 Grantor Retained Annuity Trust of which
Sterling A. Gordon is the grantor, beneficiary and trustee, with sole power
to vote and dispose of the shares and 273,602 shares owned by Sterling A.
Gordon's wife, Rachelle L. Gordon. Pursuant to the terms of the Sterling A.
Gordon 2002 Grantor Retained Annuity Trust, Mr. Gordon will receive annual
distributions of common stock based on the appraised value of our common
stock through 2004. Any shares remaining in the trust after such
distribution will be distributed in equal amounts to Andrew Gordon and
David Gordon. Mr. Gordon is the father of Andrew Gordon and David Gordon.
23
The following table sets forth the aggregate information of our equity
compensation plans in effect as of October 31, 2004.
EQUITY COMPENSATION PLAN INFORMATION
Number of securities
Number of securities remaining available for
to be issued Weighted-average exercise future issuance under equity
upon exercise of price of outstanding compensation plans
outstanding options, options, warrants and (excluding securities
Plan category warrants and rights rights reflected in column (a))
----------------------------- ------------------- ------------------------- ------------------------
(a) (b) (c)
Equity compensation plans
approved by security
holders................. -- -- 800,000
Equity compensation plans
not approved by security
holders................. -- -- --
Total................. -- -- 800,000
24
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From time to time, certain of our stockholders, directors and officers
have made loans to us for working capital purposes.
At October 31, 2003, we had loans payable to certain of our
stockholders, directors and officers, in the aggregate principal amount of
$79,646. The loans, which were unsecured, due on demand and bore interest at a
rate of 6% per year, were repaid prior to October 31, 2004.
In November 2004, we refinanced our credit facility by entering into a
new financing arrangement with Merrill Lynch Business Financial Services Inc.
This line of credit is for a maximum $4,000,000, expires on October 31, 2005 and
requires monthly interest payments at a rate of LIBOR plus 2.4%. This loan is
secured by a blanket lien on all of our assets and the personal guarantees of
Andrew Gordon and David Gordon, two of our officers and directors.
Daniel Dwyer, a director, is a senior coffee trader for Rothfos
Corporation, a coffee trading company. Mr. Dwyer is responsible for our account.
We paid Rothfos approximately $6.1 million for green coffee purchases in fiscal
2004. All purchases are made on arms' length terms.
ITEM 13. EXHIBITS
The financial statements listed below are filed as a part of this
report. See Index to Financial Statements beginning on Page F-1.
Financial Statements:
- Index to Financial Statements
- Report of Independent Public Accountants.
- Balance sheet as of October 31, 2004 and October 31, 2003.
- Statements of Operations for the Years Ended
October 31, 2004 and 2003.
- Statements of Changes in Stockholders' Equity for the
Years Ended October 31, 2004 and 2003.
- Statements of Cash Flows for the Years Ended
October 31, 2004 and 2003.
- Notes to Financial Statements.
25
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1 Agreement and Plan of Merger by and Among Transpacific
International Group Corp. and Coffee Holding Co., Inc.
(incorporated herein by reference to Exhibit 2 to
Post-Effective Amendment No. 1 to the Registration Statement
on Form SB-2 (file No. 333-00588-NY) as filed with the
Securities and Exchange Commission on November 10, 1997).
2.2 Asset Purchase Agreement, dated February 4, 2004, by and
between Coffee Holding Co., Inc. and Premier Roasters LLC
(incorporated herein by reference to Exhibit 2.1 to the
Current Report on Form 8-K dated February 4, 2004 as filed
with the SEC on February 20, 2004.)
3.1 Articles of Incorporation of Coffee Holding Co., Inc., as
amended (incorporated herein by reference to Exhibit 3.1 to
the Coffee Holding Co., Inc. Annual Report on Form 10-KSB for
the fiscal year ended October 31, 2002, filed with the
Securities and Exchange Commission on February 13, 2003).
3.2 Certificate of Amendment of Articles of Incorporation of
Coffee Holding Co., Inc. (incorporated herein by reference to
Exhibit 3.2 to the Coffee Holding Co., Inc. Quarterly Report
on Form 10-Q for the quarter ended April 30, 1998, filed with
the Securities and Exchange Commission on October 27, 2000).
3.3 By-Laws of Coffee Holding Co., Inc., as amended (incorporated
herein by reference to Exhibit 3.3 to the Coffee Holding Co.,
Inc. Quarterly Report on Form 10-Q for the quarter ended April
30, 1998, filed with the Securities and Exchange Commission on
October 27, 2000).
3.5 Certificate of Amendment of Articles of Incorporation of
Coffee Holding Co., Inc. (incorporated herein by reference to
Exhibit 3.5 to the Coffee Holding Co., Inc. Quarterly Report
on Form 10-QSB for the quarter ended April 30, 2001, filed
with the Securities and Exchange Commission on June 14, 2001).
4.1 Form of Stock Certificate of Coffee Holding Co., Inc.
(incorporated herein by reference to the initial filing of
this Registration Statement, filed with the Securities and
Exchange Commission on June 24, 2004).
10.1 Lease with T&O Management Corp. dated August 15, 1997
(incorporated herein by reference to Exhibit 10.1 to the
Coffee Holding Co., Inc. Quarterly Report on Form 10-Q for the
quarter ended April 30, 1998, filed with the Securities and
Exchange Commission on October 27, 2000).
10.2 1998 Stock Option Plan (incorporated herein by reference to
Exhibit 10.2 to the Coffee Holding Co., Inc. Quarterly Report
on Form 10-Q for the quarter ended April 30, 1998, filed with
the Securities and Exchange Commission on October 27, 2000).
10.3 Working Capital Management Account Loan and Security Agreement
with Merrill Lynch Business Financial Services Inc.
10.9 Capital Lease Agreement with HSBC Business Credit (USA), Inc.
(incorporated herein by reference to Exhibit 10.9 to Amendment
No. 1 to the Coffee Holding Co., Inc. Registration Statement
on Form SB-2/A, filed with the Securities and Exchange
Commission on August 12, 2004).
26
10.10 Sales contract with Supervalu and Cub Foods (incorporated
herein by reference to Exhibit 10.10 to Amendment No. 1 to the
Coffee Holding Co., Inc. Annual Report on Form 10-KSB/A for
the year ended October 31, 2002, filed with the Securities and
Exchange Commission on August 26, 2004) (confidential portions
have been redacted pursuant to a request for confidential
treatment and filed separately with the Securities and
Exchange Commission).
10.11 Sales contract with Shurfine Central (incorporated herein by
reference to Exhibit 10.11 to Amendment No. 1 to the Coffee
Holding Co., Inc. Annual Report on Form 10-KSB/A for the year
ended October 31, 2002, filed with the Securities and Exchange
Commission on August 26, 2004) (confidential portions have
been redacted pursuant to a request for confidential treatment
and filed separately with the Securities and Exchange
Commission).
10.12 Lease dated February 4, 2004 by and between Coffee Holding
Co., Inc. and the City of La Junta, Colorado (incorporated
herein by reference to Exhibit 10.12 to Amendment No. 1 to the
Coffee Holding Co., Inc. Registration Statement on Form
SB-2/A, filed with the Securities and Exchange Commission on
August 12, 2004).
10.13 Trademark License Agreement dated February 4, 2004 between Del
Monte Corporation and Coffee Holding Co, Inc. (incorporated
herein by reference to Exhibit 10.13 to the Coffee Holding
Co., Inc. Quarterly Report on Form 10-QSB/A for the quarter
ended April 30, 2004, filed with the Securities and Exchange
Commission on August 26, 2004).
10.14 Proposed employment agreement by and among Coffee Holding Co.,
Inc. and Andrew Gordon (incorporated herein by reference to
the Coffee Holding Co., Inc. Registration Statement on Form
SB-2, filed with the Securities and Exchange Commission on
June 24, 2004).
10.15 Proposed employment agreement by and among Coffee Holding Co.,
Inc. and David Gordon (incorporated herein by reference to the
Coffee Holding Co., Inc. Registration Statement on Form SB-2,
filed with the Securities and Exchange Commission on June 24,
2004).
10.17 Corporate Brands Agreement dated as of March 30, 2004 by and
between Albertson's, Inc. and Coffee Holding Co., Inc.
(incorporated herein by reference to Amendment No. 2 to the
Coffee Holding Co., Inc. Registration Statement on Form
SB-2/A, filed with the Securities and Exchange Commission on
October 25, 2004) (confidential portions have been redacted
pursuant to a request for confidential treatment and filed
separately with the Securities and Exchange Commission).
31.1 Rule 13a-14(a)/15d-14(a) Certification.
32.1 Section 1350 Certification.
27
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT AND NON-AUDIT FEES
Aggregate fees for professional services rendered for us by Lazar
Levine & Felix LLP for the fiscal years ended October 31, 2003 and October 31,
2004 are set forth below.
AUDIT FEES
2004 2003
------------ ------------
AUDIT $65,000 $58,500
--------------------------------------------------------
AUDIT RELATED FEES 38,515 4,744
--------------------------------------------------------
TAX FEES -- --
--------------------------------------------------------
ALL OTHER FEES -- --
--------------------------------------------------------
TOTAL $103,515 $63,244
Audit Fees were for professional services rendered for the audits of
our consolidated financial statements, quarterly review of the financial
statements included in Quarterly Reports on Form 10-QSB, consents, and other
assistance required to complete the year end audit of the consolidated financial
statements.
Audit-Related Fees were for assurance and related services reasonably
related to the performance of the audit or review of financial statements and
not reported under the caption Audit Fees.
Tax Fees were for professional services related to tax compliance, tax
authority audit support and tax planning.
There were no fees that were classified as All Other Fees for each of
our last two fiscal years.
At its regularly scheduled and special meetings, the Board of
Directors, in lieu of an established audit committee, considers and pre-approves
any audit and non-audit services to be performed by our independent accountants.
The Board of Directors has the authority to grant pre-approvals of non-audit
services.
28
ITEM 15. SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant 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
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
SIGNATURE TITLE
--------------------------------- ------------------------------------
/s/ Andrew Gordon Chief Executive Officer, President,
--------------------------------- Treasurer and Director (principal
Andrew Gordon executive officer and principal
Date: February 10, 2005 financial and accounting officer)
/s/ David Gordon Executive Vice President -- Operations,
--------------------------------- Secretary and Director
David Gordon
Date: February 10, 2005
/s/ Gerard DeCapua Director
---------------------------------
Gerard DeCapua
Date: February 10, 2005
/s/ Dan Dwyer Director
---------------------------------
Dan Dwyer
Date: February 10, 2005
29
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1 Agreement and Plan of Merger by and Among Transpacific
International Group Corp. and Coffee Holding Co., Inc.
(incorporated herein by reference to Exhibit 2 to
Post-Effective Amendment No. 1 to the Registration Statement
on Form SB-2 (file No. 333-00588-NY) as filed with the
Securities and Exchange Commission on November 10, 1997).
2.2 Asset Purchase Agreement, dated February 4, 2004, by and
between Coffee Holding Co., Inc. and Premier Roasters LLC
(incorporated herein by reference to Exhibit 2.1 to the
Current Report on Form 8-K dated February 4, 2004 as filed
with the SEC on February 20, 2004.)
3.1 Articles of Incorporation of Coffee Holding Co., Inc., as
amended (incorporated herein by reference to Exhibit 3.1 to
the Coffee Holding Co., Inc. Annual Report on Form 10-KSB for
the fiscal year ended October 31, 2002, filed with the
Securities and Exchange Commission on February 13, 2003).
3.2 Certificate of Amendment of Articles of Incorporation of
Coffee Holding Co., Inc. (incorporated herein by reference to
Exhibit 3.2 to the Coffee Holding Co., Inc. Quarterly Report
on Form 10-Q for the quarter ended April 30, 1998, filed with
the Securities and Exchange Commission on October 27, 2000).
3.3 By-Laws of Coffee Holding Co., Inc., as amended (incorporated
herein by reference to Exhibit 3.3 to the Coffee Holding Co.,
Inc. Quarterly Report on Form 10-Q for the quarter ended April
30, 1998, filed with the Securities and Exchange Commission on
October 27, 2000).
3.5 Certificate of Amendment of Articles of Incorporation of
Coffee Holding Co., Inc. (incorporated herein by reference to
Exhibit 3.5 to the Coffee Holding Co., Inc. Quarterly Report
on Form 10-QSB for the quarter ended April 30, 2001, filed
with the Securities and Exchange Commission on June 14, 2001).
4.1 Form of Stock Certificate of Coffee Holding Co., Inc.
(incorporated herein by reference to the initial filing of
this Registration Statement, filed with the Securities and
Exchange Commission on June 24, 2004).
10.1 Lease with T&O Management Corp. dated August 15, 1997
(incorporated herein by reference to Exhibit 10.1 to the
Coffee Holding Co., Inc. Quarterly Report on Form 10-Q for the
quarter ended April 30, 1998, filed with the Securities and
Exchange Commission on October 27, 2000).
10.2 1998 Stock Option Plan (incorporated herein by reference to
Exhibit 10.2 to the Coffee Holding Co., Inc. Quarterly Report
on Form 10-Q for the quarter ended April 30, 1998, filed with
the Securities and Exchange Commission on October 27, 2000).
10.3 Working Capital Management Account Loan and Security Agreement
with Merrill Lynch Business Financial Services Inc.
10.9 Capital Lease Agreement with HSBC Business Credit (USA), Inc.
(incorporated herein by reference to Exhibit 10.9 to Amendment
No. 1 to the Coffee Holding Co., Inc. Registration Statement
on Form SB-2/A, filed with the Securities and Exchange
Commission on August 12, 2004).
30
10.10 Sales contract with Supervalu and Cub Foods (incorporated
herein by reference to Exhibit 10.10 to Amendment No. 1 to the
Coffee Holding Co., Inc. Annual Report on Form 10-KSB/A for
the year ended October 31, 2002, filed with the Securities and
Exchange Commission on August 26, 2004) (confidential portions
have been redacted pursuant to a request for confidential
treatment and filed separately with the Securities and
Exchange Commission).
10.11 Sales contract with Shurfine Central (incorporated herein by
reference to Exhibit 10.11 to Amendment No. 1 to the Coffee
Holding Co., Inc. Annual Report on Form 10-KSB/A for the year
ended October 31, 2002, filed with the Securities and Exchange
Commission on August 26, 2004) (confidential portions have
been redacted pursuant to a request for confidential treatment
and filed separately with the Securities and Exchange
Commission).
10.12 Lease dated February 4, 2004 by and between Coffee Holding
Co., Inc. and the City of La Junta, Colorado (incorporated
herein by reference to Exhibit 10.12 to Amendment No. 1 to the
Coffee Holding Co., Inc. Registration Statement on Form
SB-2/A, filed with the Securities and Exchange Commission on
August 12, 2004).
10.13 Trademark License Agreement dated February 4, 2004 between Del
Monte Corporation and Coffee Holding Co, Inc. (incorporated
herein by reference to Exhibit 10.13 to the Coffee Holding
Co., Inc. Quarterly Report on Form 10-QSB/A for the quarter
ended April 30, 2004, filed with the Securities and Exchange
Commission on August 26, 2004).
10.14 Proposed employment agreement by and among Coffee Holding Co.,
Inc. and Andrew Gordon (incorporated herein by reference to
the Coffee Holding Co., Inc. Registration Statement on Form
SB-2, filed with the Securities and Exchange Commission on
June 24, 2004).
10.15 Proposed employment agreement by and among Coffee Holding Co.,
Inc. and David Gordon (incorporated herein by reference to the
Coffee Holding Co., Inc. Registration Statement on Form SB-2,
filed with the Securities and Exchange Commission on June 24,
2004).
10.17 Corporate Brands Agreement dated as of March 30, 2004 by and
between Albertson's, Inc. and Coffee Holding Co., Inc.
(incorporated herein by reference to Amendment No. 2 to the
Coffee Holding Co., Inc. Registration Statement on Form
SB-2/A, filed with the Securities and Exchange Commission on
October 25, 2004) (confidential portions have been redacted
pursuant to a request for confidential treatment and filed
separately with the Securities and Exchange Commission).
31.1 Rule 13a-14(a)/15d-14(a) Certification.
32.1 Section 1350 Certification.
31
COFFEE HOLDING CO., INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
FINANCIAL STATEMENTS:
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS F-2
BALANCE SHEETS AS OF OCTOBER 31, 2004 AND 2003 F-3
STATEMENTS OF OPERATIONS - YEARS ENDED
OCTOBER 31, 2004 AND 2003 F-4
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY -
YEARS ENDED OCTOBER 31, 2004 AND 2003 F-5
STATEMENTS OF CASH FLOWS - YEARS ENDED
OCTOBER 31, 2004 AND 2003 F-6
NOTES TO FINANCIAL STATEMENTS F-7/18
* * *
F-1
REPORT OF INDEPENDENT REGISTERED 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, 2004 and 2003 and the related statements of operations, changes
in stockholders' equity and cash flows for each of the two years in the period
ended October 31, 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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, 2004 and 2003 and the results of its operations and cash flows for
each of the two years in the period ended October 31, 2004, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Lazar Levine & Felix, LLP
------------------------------
LAZAR LEVINE & FELIX, LLP
New York, New York
December 10, 2004
F-2
COFFEE HOLDING CO., INC.
BALANCE SHEETS
OCTOBER 31, 2004 AND 2003
- ASSETS -
Current assets: 2004 2003
----------- -----------
Cash $ 642,145 $ 73,832
Due from broker 873,901 894,123
Accounts receivable, net of allowance for
doubtful accounts of $150,349 and $119,435 for
2004 and 2003, respectively 4,005,755 2,154,683
Inventories 2,258,289 1,781,424
Prepaid expenses and other current assets 676,395 431,432
Deferred tax asset 136,900 103,700
----------- -----------
Total current assets 8,593,385 5,439,194
Property and equipment, at cost, net of
accumulated depreciation of $3,354,418 and $2,991,206
for 2004 and 2003, respectively 2,286,936 1,579,294
Deposits and other assets 33,496 16,796
----------- -----------
$10,913,817 $ 7,035,284
=========== ===========
- LIABILITIES AND STOCKHOLDERS' EQUITY -
Current liabilities:
Current portion of term loan $ 252,000 $ 84,000
Current portion of obligations under capital lease 111,060 130,551
Line of credit borrowings 2,685,045 --
Accounts payable and accrued expenses 4,658,836 1,861,447
Income taxes payable - current 160,000 --
----------- -----------
Total current liabilities 7,866,941 2,075,998
Term loan, net of current portion -- 252,000
Obligations under capital lease, net of current portion 5,855 91,895
Line of credit borrowings -- 2,376,066
Loans from related parties -- 79,646
Income taxes payable-deferred 45,200 39,200
----------- -----------
Total liabilities 7,917,996 4,914,805
----------- -----------
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 for 2004 and 2003, respectively 4,000 4,000
Additional paid-in capital 867,887 867,887
Retained earnings 2,123,934 1,248,592
----------- -----------
Total stockholders' equity 2,995,821 2,120,479
----------- -----------
$10,913,817 $ 7,035,284
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
COFFEE HOLDING CO., INC.
STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 2004 AND 2003
2004 2003
------------ ------------
Net sales $ 28,030,389 $ 20,239,867
Cost of sales 20,927,506 15,373,127
------------ ------------
Gross profit 7,102,833 4,866,740
------------ ------------
Operating expenses:
Selling, general and administrative 4,777,809 3,501,465
Officers' salaries 622,573 490,860
------------ ------------
Totals 5,400,382 3,992,325
------------ ------------
Income from operations 1,702,501 874,415
------------ ------------
Other income (expense):
Interest income 11,966 9,000
Other income -- 1,640
Interest expense (145,930) (146,607)
------------ ------------
Totals (133,964) (135,967)
------------ ------------
Income before income taxes 1,568,537 738,448
Provision for income taxes 693,195 116,366
------------ ------------
Net income $ 875,342 $ 622,082
============ ============
Basic and diluted earnings per share $ .22 $ .16
============ ============
Weighted average common shares outstanding 3,999,650 3,999,650
============ ============
The accompanying notes are an integral part of these financial statements.
F-4
COFFEE HOLDING CO., INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 2004 AND 2003
Common Stock
-------------------------
$.001 Par Value
------------------------- Additional
Number of Paid - in Retained
Shares Amount Capital Earnings Total
---------- ---------- ---------- ---------- ----------
Balance, October 31, 2002 3,999,650 $ 4,000 $ 867,887 $ 626,510 $1,498,397
Net income -- -- -- 622,082 622,082
---------- ---------- ---------- ---------- ----------
Balance, October 31, 2003 3,999,650 4,000 867,887 1,248,592 2,120,479
NET INCOME -- -- -- 875,342 875,342
---------- ---------- ---------- ---------- ----------
BALANCE, OCTOBER 31, 2004 3,999,650 $ 4,000 $ 867,887 $2,123,934 $2,995,821
========== ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-5
COFFEE HOLDING CO., INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 2004 AND 2003
2004 2003
------------ ------------
Operating activities:
Net income $ 875,342 $ 622,082
Adjustments to reconcile net income to net cash (used) provided by operating
activities:
Depreciation and amortization 363,612 299,774
Bad debts 30,914 --
Deferred taxes (27,200) (38,300)
Changes in operating assets and liabilities:
Decrease (increase) in due from broker 20,222 (125,521)
(Increase) in accounts receivable (1,881,986) (371,261)
(Increase) in inventories (476,865) (363,280)
(Increase) in prepaid expenses and other current assets (244,963) (348,165)
Increase (decrease) in accounts payable and accrued expenses 2,797,389 (190,015)
Increase (decrease) in income taxes payable 160,000 (229,540)
------------ ------------
Net cash provided (used) by operating activities 1,616,465 (744,226)
------------ ------------
Investing activities:
Security deposits (16,700) --
Purchases of property and equipment (1,039,479) (62,758)
------------ ------------
Net cash (used) by investing activities (1,056,179) (62,758)
------------ ------------
Financing activities:
Principal payments on term loan (84,000) (84,000)
Advances under bank line of credit 28,108,814 21,358,723
Principal payments under bank line of credit (27,799,835) (20,304,030)
Principal payments of obligations under capital leases (221,306) (120,521)
Repayments of advances from related parties (79,646) (12,924)
------------ ------------
Net cash provided (used) in financing activities 8,027 837,248
------------ ------------
Net increase in cash 568,313 30,264
Cash, beginning of year 73,832 43,568
------------ ------------
Cash, end of year $ 642,145 $ 73,832
============ ============
Supplemental disclosure of cash flow data:
Interest paid $ 145,930 $ 143,682
============ ============
Income taxes paid $ 370,850 $ 396,295
============ ============
The accompanying notes are an integral part of these financial statements.
F-6
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2004 AND 2003
NOTE 1 - BUSINESS ACTIVITIES:
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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
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, 2004, the Company held 101 options covering an
aggregate of 3,787,500 pounds of green coffee beans at $.75 per
pound. The fair market value of these options, which was obtained
from a major financial institution, was approximately $49,200 at
October 31, 2004.
At October 31, 2003, the Company held 150 options covering an
aggregate of 5,625,000 pounds of green coffee beans at $.60 per
pound. The fair market value of these options, which was obtained
from a major financial institution, was approximately $95,813 at
October 31, 2003.
F-7
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2004 AND 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
HEDGING (CONTINUED):
The Company acquires futures contracts with longer terms (generally
three to four months) primarily for the purpose of guaranteeing an
adequate supply of green coffee. At October 31, 2004 and 2003, the
Company held 90 and 183 longer-term futures contracts for the
purchase of 3,375,000 and 6,862,500 pounds of coffee at an average
price of $.80 and $.65 per pound, respectively. The market price of
coffee applicable to such contracts was $.77 per pound at October 31,
2004 and $.62 per pound at October 31, 2003.
The Company historically has had short term contracts with some of
its customers (generally one to two years in duration). The Company
currently has agreements with two of its wholesale customers in which
it is the supplier at fixed prices for lines of private label ground
coffee. The Company is the exclusive supplier of one of these
customers. The agreements generally contain only pricing terms.
The Company classifies its options and future contracts as trading
securities and accordingly, unrealized holding gains and losses are
included in earnings and not reflected as a net amount in a separate
component of shareholders' equity until realized.
Included in cost of sales and due from broker for the years ended
October 31, 2004 and 2003, the Company recorded realized and
unrealized gain and losses respectively, on these hedging contracts
(using the specific identification method) as follows:
YEARS ENDED OCTOBER, 31
------------------------------
2004 2003
----------- ------------
Gross realized gain $ 3,129,479 $ 2,063,349
Gross realized loss $(1,415,205) $ (946,655)
Unrealized gain and (losses) $ (92,236) $ (248,025)
ADVERTISING:
The Company expenses the cost of advertising and promotions as
incurred. Advertising costs charged to operations totaled $163,007
and $143,130 in 2004 and 2003, 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 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 (see also Note 7).
F-8
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2004 AND 2003
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 per
common share are calculated by dividing net income 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 2004 and 2003, only historical
basic earnings per share amounts are presented in the accompanying
statement of operations for those years.
The weighted average common shares outstanding used in the
computation of basic earnings per share in 2004 and 2003 was the
3,999,650 shares of common stock actually outstanding during those
years.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of cash and cash equivalents, accounts
receivable and accounts payable approximate fair value because of the
short-term nature of these instruments. Fair value estimates are made
at a specific point in time, based on relevant market information
about the financial instrument when available. These estimates are
subjective in nature and involve uncertainties and matters of
significant judgment and therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
REVENUE RECOGNITION:
The Company recognizes revenue in accordance with Securities and
Exchange Commission Staff Accounting Bulletin No. 104, "Revenue
Recognition" ("SAB 104"). Under SAB 104, revenue is recognized at the
point of passage to the customer of title and risk of loss, when
there is persuasive evidence of an arrangement, the sales price is
determinable, and collection of the resulting receivable is
reasonably assured. The Company generally recognizes revenue at the
time of shipment.
The Company sells its products without the right of return. Returns
and allowances are recorded when a customer claims receipt of damaged
goods. The Company in turn seeks reimbursement from the shipper.
F-9
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2004 AND 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
REVENUE RECOGNITION (CONTINUED):
Slotting fees: Certain retailers require the payment of slotting fees
in order to obtain space for the Company's products on the retailer's
store shelves. The cost of these fees is recognized at the earlier of
the date cash is paid or a liability to the retailer is created.
These amounts are included in the determination of net sales.
Discounts and rebates: The cost of these incentives, are recognized
at the later of the date at which the related sale is recognized or
the date at which the incentive is offered. These amounts are
included in the determination of net sales. Incentives in the form of
free product are included in the determination of cost of sales.
Volume-based incentives: These incentives typically involve rebates
or refunds of a specific amount of cash consideration that are
redeemable only if the reseller completes a specified cumulative
level of sales transactions. Under incentive programs of this nature,
the Company estimates the anticipated cost of the rebate to each
underlying sales transaction with the customer.
Cooperative advertising: Under these arrangements, the Company will
agree to reimburse the reseller for a portion of the costs incurred
by the reseller to advertise and promote certain of the Company's
products. The Company will recognize the cost of cooperative
advertising programs in the period in which the advertising and
promotional activity first takes place. The costs of these incentives
are included in the determination of net sales.
MERCHANDISE COSTS:
In addition to product costs, net of discounts; inbound freight
charges; warehousing costs and certain production and operational
costs are included in the cost of sales line item of the statements
of income.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Included in the selling and administrative line item of the
statements of income are office salaries; commissions; freight out;
promotion; insurance; professional fees; other selling expenses and
other administrative expenses.
SHIPPING AND HANDLING FEES AND COSTS:
In accordance with EITF No. 00-10 "Accounting for Shipping and
Handling Fees and Costs", revenue received from shipping and handling
fees is reflected in net sales. Costs associated with shipping
product to customers aggregating approximately $1,197,000 and
$877,000 for the years ended October 31, 2004 and 2003, respectively
is included in selling and administrative expenses.
F-10
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2004 AND 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
RECENT ACCOUNTING PRONOUNCEMENTS:
In March 2004, the FASB reached a consensus on Emerging Issues Task
Force (EITF) Issue No. 03-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments," which
provides guidance to determine the meaning of other-than-temporary
impairment and its application to investments classified as either
available-for-sale or held-to-maturity (including individual
securities and investments in mutual funds), and investments
accounted for under the cost method or the equity method. The
guidance for evaluating whether an investment is other-than-
temporarily impaired should be applied in other-than-temporary
impairment evaluations made in reporting periods beginning after June
15, 2004. The adoption of Issue No. 03-1 has not had any impact on
the Company's financial statements and results of operations.
In April 2004, the EITF reached consensus on EITF Issue No. 03-6,
"Participating Securities and the Two Class Method under FASB
Statement No. 128" ("EITF 03-6"). EITF 03-06 addresses a number of
questions regarding the computation of earnings per share by
companies that have issued securities other than common stock that
contractually entitle the holder to participate in the dividends and
earnings o f the company when, and if, it declares dividends on its
common stock. EITF 03-6 also provides further guidance in applying
the two-class method of calculating earnings per share, clarifying
what constitutes a participating security and how to apply the
two-class method of computing earnings per share once it is
determined that a security is participating, including how to
allocate undistributed earnings to such a security. EITF 03-6 is
effective for fiscal periods beginning after March 31, 2004 and
requires retroactive restatement of prior earnings per share amounts.
The adoption of EITF No. 03-6 has not had a material impact on the
Company's financial statements and results of operations.
In August 2004, Section 409 of the Sarbanes-Oxley Act required
changes and enhancements to Form 8-K to provide "real time"
disclosure of current events for investors on a timelier basis. Under
Sec. 409, issuers now have only 4 business days to file Form 8-K's
and new reporting sections have been added.
In December 2004, the FASB issued a revision of SFAS No. 123
"Share-Based Payment" (No. 123R). The statement establishes standards
for the accounting for transactions in which an entity exchanges its
equity investments for goods and services. It also addresses
transactions in which an entity incurs liabilities in exchange for
goods or services that are based on the fair value of the entity's
equity instruments or that may be settled by the issuance of those
equity instruments. The statement does not change the accounting
guidance for share-based payments with parties other than employees.
The statement requires a public entity to measure the cost of
employee service received in exchange for an award of equity
instruments based on the grant-date fair value of the award (with
limited exception). That cost will be recognized over the period
during which an employee is required to provide service in exchange
for the award (usually the vesting period). A public entity will
initially measure the cost of employee services received in exchange
for an award of a liability instrument based on its current fair
value; the fair value of that award will be remeasured subsequently
at each reporting date through the settlement date. Changes in fair
value during the requisite service period will be recognized as
compensation over that period. The grant-date for fair value of
employee share options and similar instruments will be estimated
using option-pricing models adjusted for the unique characteristics
of these instruments. The Company will be required to comply with
this pronouncement for periods beginning after December 15, 2005.
F-11
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2004 AND 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED):
In November 2004, the FASB issued Statement No. 151, "Inventory
Costs". This statement amends the guidance in ARB 43 (Chapter 4 -
Inventory Pricing) to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs and wasted material
(spoilage). SFAS No. 151 requires that such items be recognized as
current period charges. SFAS 151 is effective for fiscal years
beginning after June 15, 2005 and is not expected to have a material
impact on the Company's financial statements and results of
operations.
In December 2004, the FASB issued Statement No. 152, "Accounting for
Real Estate Time-Sharing Transactions". This statement amends SFAS
No. 66 (Accounting for Sales of Real Estate) and SFAS No. 67
(Accounting for Costs and Initial Rental Operations of Real Estate
Projects). This standard, which is effective for financial statements
for fiscal years beginning after June 15, 2005, is not applicable to
the Company's current operations.
In December 2004, the FASB issued SFAS No. 153 "Exchange of
Non-monetary Assets - an amendment of APB Opinion No. 29". Statement
153 eliminates the exception to fair value for exchanges of similar
productive assets and replaces it with a general exception for
exchange transactions that do not have commercial substance, defined
as transactions that are not expected to result in significant
changes in the cash flows of the reporting entity. This statement is
effective for exchanges of non-monetary assets occurring after June
15, 2005. The application of this statement is not expected to have
an impact on the Company's financial statements considering the
Company's intermittent participation in exchanges of non-monetary
assets.
RECLASSIFICATIONS:
Certain accounts in the 2003 financial statements may have been
reclassified to conform to the 2004 presentation.
NOTE 3 - INVENTORIES:
Inventories at October 31, 2004 and 2003 consisted of the following:
2004 2003
--------------- ---------------
Packed coffee $ 668,413 $ 213,062
Green coffee 1,051,223 999,137
Packaging supplies 538,653 569,225
--------------- ---------------
Totals $ 2,258,289 $ 1,781,424
=============== ===============
F-12
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2004 AND 2003
NOTE 4 - PROPERTY AND EQUIPMENT:
Property and equipment at October 31, 2004 and 2003 consisted of the
following:
Estimated
Useful
Life 2004 2003
------------ ------------- -------------
Building and improvements 30 years $ 1,358,506 $ 1,252,448
Machinery and equipment 7 years 3,444,305 2,606,859
Machinery and equipment under capital leases 7 years 458,179 426,404
Automobile 3 years 43,617 -
Furniture and fixtures 7 years 195,747 143,789
------------- -------------
5,500,354 4,429,500
Less accumulated depreciation (including $172,757 arising
from capital leases) 3,354,418 2,991,206
------------- -------------
2,145,936 1,438,294
Land 141,000 141,000
------------- -------------
Totals $ 2,286,936 $ 1,579,294
============= =============
Depreciation expense totaled $ 363,612 and $ 299,774 in 2004 and
2003, respectively.
NOTE 5 - CREDIT FACILITY AND OTHER BORROWINGS:
As of October 31, 2004, the Company had a $5,750,000 credit facility
provided by Wells Fargo Business Credit. The credit facility
consisted of a $5,000,000 revolving line of credit and a $750,000
term loan secured by all the assets of the Company.
The line of credit provides for borrowing 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 term loan provides for
borrowings of up to the greater of 80% of the cost of eligible
equipment or $750,000.
As a result of amendments to prior agreements with Wells Fargo
Business Credit, that became effective on October 1, 2002, interest
on borrowings under the line of credit and the term loan are payable
monthly at the prime rate plus .25% and .50%, respectively (an
effective rate of 5% and 5.25% respectively, at October 31, 2004). In
addition, the credit facility will not expire until November 20,
2004; the maximum amount of borrowings under the term loan increased
form $600,000 to $750,000; term loan principal payments decreased
from $10,000 to $7,000 per month commencing November 1, 2002; the
amount of borrowings guaranteed by each of the two stockholders is
$500,000; a restricted cash collateral deposit aggregating
approximately $290,000 was used to reduced the outstanding line of
credit balance; 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. The term loan, has an outstanding
balance of $ 252,000 at October 31, 2004 and aggregate borrowing of
$2,685,045 were outstanding under its credit line facility at October
31, 2004. The line of credit can be withdrawn at Wells Fargo Business
Credit's option. The Company was in compliance with the required
financial covenants at October 31, 2004 and 2003.
F-13
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2004 AND 2003
NOTE 5 - CREDIT FACILITY AND OTHER BORROWINGS (CONTINUED):
The credit facility contains covenants that place restrictions on the
Company's operations. Among other things, these covenants: require
that the Company maintain a certain minimum cumulative net income;
require that a portion of the Company's cash flow from operations be
dedicated to servicing its debt; limit the Company's ability to
obtain additional capital through financings without the consent of
the lender; limit the Company's ability to pay dividends to
stockholders and acquire or retire common stock without the consent
of the lender; and prohibit the Company from forming or acquiring
subsidiaries, merging with or into other companies or selling all or
substantially all of its assets without the consent of the lender. A
breach of the Company of any financial or negative covenant
constitutes an event of default under the credit facility. The credit
facility and the Company's capital lease contain cross-default
provisions.
NEW FINANCING AGREEMENT:
In November 2004, subsequent to the balance sheet date, the Company
agreed to a new financing arrangement with "Merrill Lynch Business
Financial Services Inc." and terminated its prior agreement with
`Wells Fargo Business Credit". This new line of credit will be for a
maximum $4,000,000, expire on October 31, 2005 and require monthly
interest payments at a rate of LIBOR plus 2.4%. This loan will be
secured by a blanket lien on all the assets of the Company and the
personal guarantees of two of the Company's officer/shareholders and
will also require the Company to comply with various financial
covenants. As of October 31, 2004, the Company was not yet obligated
under this credit agreement.
NOTE 6 - LOANS FROM RELATED PARTIES:
The Company had loans payable to certain of its stockholders
aggregating $79,646 at October 31, 2003. The loans were due on demand
but payments were not expected to be required in 2004 and accordingly
were reflected as long term. These loans which bear interest at 6%
per annum were repaid prior to October 31, 2004. Interest expense
totaled approximately $ -0- and $5,400 in 2004 and 2003 respectively.
NOTE 7 - INCOME TAXES:
The tax effects of the temporary differences that give rise to
the deferred tax assets and liabilities as of October 31, 2004
and 2003 are as follows:
2004 2003
------------- -------------
Deferred tax assets:
Accounts receivable $ 61,300 $ 49,100
Inventory 75,600 54,600
------------- -------------
$ 136,900 $ 103,700
============= =============
Deferred tax liability:
Fixed assets $ 45,200 $ 39,200
============= =============
F-14
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2004 AND 2003
NOTE 7 - INCOME TAXES (CONTINUED):
The Company's provision for income taxes in 2004 and 2003 consisted
of the following:
2004 2003
----------- -----------
Federal $ 468,349 $ 150,004
State and local 224,846 (33,638)*
----------- -----------
Total $ 693,195 $ 116,366
=========== ===========
* Includes prior year over accrual of state franchise taxes.
A reconciliation of the difference between the expected income tax
rate using the statutory federal tax rate and the Company's effective
tax rate is as follows:
2004 2003
---------- ----------
US Federal income tax
statutory rate 34% 34%
State income taxes, net of
federal tax benefit 8% 8%
Other - benefit of tax refunds 2% (26%)
---------- ----------
Effective tax rate 44% 16%
========== ==========
NOTE 8 - COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES:
a) The Company occupies warehouse facilities under an
operating lease, which expired on August 31, 2002 and was
originally renewed for an additional two years. In August
2004, the company renewed this lease for another year
expiring on August 31, 2005, at a monthly rental of
$7,500. The lease requires the Company to pay utilities
and other maintenance expenses. Rent charged to operations
amounted to $59,030 and $50,076 in 2004 and 2003,
respectively. Future minimum rental payments under this
the non-cancelable operating lease in years subsequent to
October 31, 2004 are $75,000 in 2005.
The Company also uses a variety of independent, bonded
commercial warehouses to store its green coffee beans.
b) In February 2004, the Company entered into a lease for
office and warehouse space in La Junta City, Colorado,
with an unrelated third party. This lease, which is at a
monthly rental of $8,341 beginning January 2005, expires
on January 31, 2024.
The aggregate minimum future lease payments for the
Colorado location as of October 31, 2004 for each of the
next five years and thereafter are as follows:
October 31
----------
2005 $ 83,411
2006 100,093
2007 100,093
2008 100,093
2009 100,093
Thereafter 1,426,325
---------------
$ 1,910,108
===============
F-15
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2004 AND 2003
NOTE 8 - COMMITMENTS AND CONTINGENCIES:
OBLIGATION UNDER CAPITAL LEASES:
The Company has leased machinery and equipment under capital
leases, which expire through July 2006. The assets and
liabilities under the capital leases are recorded at the lower
of the present value of the minimum lease payments or the fair
value of the asset. The assets are being depreciated over the
lease term. Depreciation expense of assets under capital
leases are included in depreciation expense and amounted to
$62,712 and $60,915 for the years ended October 31, 2004 and
2003, respectively.
Assets held under capital leases are as follows:
2004 2003
--------- ---------
Machinery and equipment $ 458,179 $ 426,404
Less: accumulated depreciation (172,757) (91,372)
--------- ---------
$ 285,422 $ 335,032
========= =========
Minimum annual future lease payments under the capital leases
for each of the next two years and in the aggregate are:
Year ended October 31,
2005 $ 128,448
2006 6,035
-----------
Total minimum lease payments 134,483
Less: amount representing interest (17,568)
-----------
Present value of minimum lease payments 116,915
Less: current portion (111,060)
-----------
Long-term portion $ 5,855
===========
The interest rates on the capital leases vary from 6.75% to
7.6% per annum, which approximates the Company's incremental
rate of borrowing at the time the leases were entered into.
401 (K) RETIREMENT PLAN:
In 2004, the Company began a 401(k) Retirement Plan, which
covers all full time employees who have completed one year of
service and have reached their 21st birthday. The Company will
match 100% of the aggregate salary reduction contribution up
to the first 3% of compensation and 50% of aggregate
contribution of the next 2% of compensation. Contributions to
the plan aggregated approximately $13,000 for 2004.
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 a material adverse effect on the Company's
financial statements in subsequent years.
F-16
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2004 AND 2003
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, 2003, the Company did not
have cash balances that exceeded Federal insurance limits. Although
at October 31, 2004 the Company did have cash balances that exceeded
Federal insurance limits, they have not experienced any losses in
such accounts and monitor the soundness of the financial institutions
on a periodic basis. 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 22% and 11% of the Company's sales were derived from
two customers in 2004. Those customers also accounted for
approximately $400,000 and $458,000 of the Company's account
receivable balance as of October 31, 2004. Approximately 16% of the
Company's sales were derived from each of two customers during 2003.
Those customers also accounted for approximately $ 266,000 and $
61,700 of the Company's accounts receivable balance at October 31,
2003. 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, 2004 or 2003.
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 non-incentive 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). On June 21, 2004, the plan was
amended to reduce the number of shares of common stock reserved for
issuance under the plan from 2,000,000 to 800,000, subject to
adjustment for stock splits, stock dividends, reorganizations,
mergers, recapitalizations or other capital adjustments.
As of October 31, 2004, no options had been granted under the Plan.
F-17
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2004 AND 2003
NOTE 11 - MAJOR VENDORS/RELATED PARTY:
During fiscal 2004, substantially all of the Company's purchases were
from ten vendors. The ten vendors accounted for 81% of total product
purchases. Two of these vendors accounted for 34% and 11% of total
purchases, respectively. These two vendors accounted for
approximately $1,028,000 and $246,000 of the Company's accounts
payable at October 31, 2004, respectively.
During fiscal 2003, substantially all of the Company's purchases were
also from ten vendors. The ten vendors accounted for 84% of total
product purchases. Two of these vendors accounted for 31% and 11% of
total purchases, respectively. These two vendors accounted for
approximately $66,700 and $124,400 of the Company's accounts payable
at October 31, 2003, respectively.
In addition, an employee of one of these vendors is a director of the
Company. Purchases from that vendor totaled approximately $6,075,000
and $4,110,900 in 2004 and 2003, respectively. Management believes
that all transactions are made at arms length and 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.
NOTE 12 - PURCHASE OF ASSETS:
On February 4, 2004, the Company entered into an agreement to
purchase certain assets of an unrelated third party. The Company
purchased coffee roasting and blending equipment located in a
facility in Colorado, labels for private coffee products produced at
the facility and certain other assets. The purchase price for these
assets was $825,000, based upon an independent appraisal. The Company
has also reached an agreement with the city of La Junta, Colorado to
lease the facility formerly operated by the seller.
The Company also entered into a 10 year (renewable for an additional
10 years) licensing agreement with Del Monte Corp. for the exclusive
right to use the "S&W" and "Il Classico" trademarks in the United
States in connection with the production, manufacture and sale of
roasted whole bean and ground coffee for distribution at the retail
distribution level. The Company will pay Del Monte Corp., 2% of net
revenues generated by the sale of these products.
NOTE 13 - UNDERWRITERS AGREEMENT:
The Company has entered into an agreement with Maxim Group LLC
("Maxim") for Maxim to serve as the Company's financial advisors and
lead managing underwriters for a proposed public offering of the
Company's common stock which would raise approximately $10 million.
Maxim will have the right to purchase, for a period of forty-five
days following the public offering, up to an additional fifteen
percent of the number of shares of common stock offered to the public
by the Company, at the public offering price less the underwriting
discount (ten percent) to cover over-allotments, if any. The Company
paid $25,000 to Maxim upon execution of the agreement and paid an
additional $25,000 upon the filing of a registration statement for
the proposed offering with the United States Securities and Exchange
Commission. If the public offering is successfully completed, the
Company shall pay to Maxim a non- accountable expense allowance equal
to three percent of the gross proceeds derived from the public
offering including any proceeds derived from the over-allotment. The
Company has also agreed to sell to Maxim for an aggregate of $100,
warrants to purchase up to ten percent of the shares being offered at
110% of the offering price. The warrant shall be exercisable for a
period of five years and contain provisions for cashless exercise,
anti-dilution and piggyback registration rights. To date, no funds
have been raised under this agreement.
F-18