U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 333-00588-NY
COFFEE HOLDING CO., INC.
(Exact name of registrant as specified in its charter)
NEVADA 11-2238111
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4401 FIRST AVENUE, BROOKLYN, NEW YORK 11232-0005
(Address of principal executive offices)
(Zip Code)
(718) 832-0800
(Registrant's telephone number including area code)
N/A
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed from last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
OUTSTANDING AT
CLASS JANUARY 31, 2005
-------------- ----------------
Common Stock,
par value $.01 3,999,650
PART I
PAGE
----
ITEM 1. FINANCIAL STATEMENTS.................................................1
Condensed Balance Sheets
January 31, 2005 (unaudited) and October 31, 2004..........................1
Condensed Statements of Income
Three Months Ended January 31, 2005 and 2004 (unaudited)...................2
Condensed Statements of Cash Flows
Three Months Ended January 31, 2005 and 2004 (unaudited)...................3
Notes To Condensed Financial Statements.......................................4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION...........8
ITEM 3. CONTROLS AND PROCEDURES............................................16
PART II
ITEM 1. LEGAL PROCEEDINGS .................................................17
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS .......17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ...................................17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...............17
ITEM 5. OTHER INFORMATION .................................................17
ITEM 6. EXHIBITS...........................................................17
SIGNATURES...................................................................18
i
PART I
ITEM I. FINANCIAL STATEMENTS
COFFEE HOLDING CO., INC.
CONDENSED BALANCE SHEETS
JANUARY 31, 2005 AND OCTOBER 31, 2004
- ASSETS -
2005 2004
--------------- ---------------
(UNAUDITED)
Current assets:
Cash $ 206,475 $ 642,145
Due from broker 940,152 873,901
Accounts receivable, net of allowance for doubtful accounts of $150,349 for
2005 and 2004, respectively 3,081,454 4,005,755
Inventories 2,987,010 2,258,289
Prepaid expenses and other current assets 649,413 676,395
Deferred tax asset 183,900 136,900
--------------- ---------------
Total current assets 8,048,404 8,593,385
Property and equipment, at cost, net of accumulated depreciation of $3,459,418
and $3,354,418 for 2005 and 2004, respectively 2,196,338 2,286,936
Deposits and other assets 41,521 33,496
--------------- ---------------
$ 10,286,263 $ 10,913,817
=============== ===============
- LIABILITIES AND STOCKHOLDERS' EQUITY -
Current liabilities:
Current portion of term loan $ - $ 252,000
Current portion of obligations under capital lease 74,319 111,060
Line of credit borrowings 3,480,045 2,685,045
Accounts payable and accrued expenses 3,082,758 4,658,836
Income taxes payable - current 195,500 160,000
--------------- ---------------
Total current liabilities 6,832,622 7,866,941
Obligations under capital lease, net of current portion 3,939 5,855
Income taxes payable-deferred 51,600 45,200
--------------- ---------------
Total liabilities 6,888,161 7,917,996
--------------- ---------------
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 2005 and 2004, respectively 4,000 4,000
Additional paid-in capital 867,887 867,887
Retained earnings 2,526,215 2,123,934
--------------- ---------------
Total stockholders' equity 3,398,102 2,995,821
--------------- ---------------
$ 10,286,263 $ 10,913,817
=============== ===============
See notes to Condensed Financial Statements.
1
COFFEE HOLDING CO., INC.
CONDENSED STATEMENTS OF INCOME
THREE MONTHS ENDED JANUARY 31, 2005 AND 2004
(UNAUDITED)
2005 2004
--------------- ---------------
Net sales $ 8,060,280 $ 5,847,948
Cost of sales 5,988,013 3,833,586
--------------- ---------------
Gross profit 2,072,267 2,014,362
--------------- ---------------
Operating expenses:
Selling, general and administrative 1,268,065 925,764
Officers' salaries 127,321 123,474
--------------- ---------------
Totals 1,395,386 1,049,238
--------------- ---------------
Income from operations 676,881 965,124
--------------- ---------------
Other income (expense):
Interest income 3,270 2,556
Interest expense (26,470) (40,381)
---------------- ----------------
Totals (23,200) (37,825)
---------------- ----------------
Income before income taxes 653,681 927,299
Provision for income taxes 251,400 408,500
--------------- ---------------
Net income $ 402,281 $ 518,799
=============== ===============
Basic and diluted earnings per share $ .10 $ .13
=============== ===============
Weighted average common shares outstanding 3,999,650 3,999,650
=============== ===============
See notes to Condensed Financial Statements.
2
COFFEE HOLDING CO., INC.
CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JANUARY 31, 2005 AND 2004
(UNAUDITED)
2005 2004
--------------- ---------------
Operating activities:
Net income $ 402,281 $ 518,799
Adjustments to reconcile net income to net cash (used) provided by
operating activities:
Depreciation and amortization 105,000 77,309
Deferred taxes (40,600) 1,500
Changes in operating assets and liabilities:
(Increase) in due from broker (66,251) (653,077)
Decrease in accounts receivable 924,301 14,181
(Increase) decrease in inventories (728,721) 73,390
Decrease in prepaid expenses and other current assets 26,982 225,651
(Decrease) in accounts payable and accrued expenses (1,576,078) (14,528)
Increase in income taxes payable 35,500 199,705
--------------- ---------------
Net cash (used) provided by operating activities (917,586) 442,930
---------------- ---------------
Investing activities:
Security deposits (8,025) -
Purchases of property and equipment (14,402) (24,301)
---------------- ----------------
Net cash (used) by investing activities (22,427) (24,301)
---------------- ----------------
Financing activities:
Principal payments on term loan (252,000) (21,000)
Advances under bank line of credit 3,480,045 5,879,837
Principal payments under bank line of credit (2,685,045) (6,209,372)
Principal payments of obligations under capital leases (38,657) (31,843)
Repayments of advances from related parties - 1,195
--------------- ---------------
Net cash provided (used) in financing activities 504,343 (381,183)
--------------- ----------------
Net (decrease) increase in cash (435,670) 37,446
Cash, beginning of period 642,145 73,832
--------------- ---------------
Cash, end of period $ 206,475 $ 111,278
=============== ===============
Supplemental disclosure of cash flow data:
Interest paid $ 32,366 $ 40,381
=============== ===============
Income taxes paid $ 256,500 $ 7,449
=============== ===============
See notes to Condensed Financial Statements.
3
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2005 AND 2004
(UNAUDITED)
NOTE 1 - BUSINESS ACTIVITIES:
Coffee Holding Co., Inc. (the "Company"), conducts wholesale
coffee operations, including manufacturing, roasting,
packaging, marketing and distributing roasted and blended
coffees for private labeled accounts and its own brands, and
sells green coffees. The Company's sales are primarily to
customers that are located throughout the United States.
NOTE 2 - BASIS OF PRESENTATION:
In the opinion of management, the accompanying unaudited
condensed financial statements reflect all adjustments,
consisting of normal recurring accruals, necessary to present
fairly the financial position of the Company as of January 31,
2005, and its results of operations and its cash flows for the
three months ended January 31, 2005 and 2004. Information
included in the balance sheet as of October 31, 2004 has been
derived from the Company's audited balance sheet included in
the Company's Annual Report on Form 10-KSB for the year ended
October 31, 2004 (the "Form 10-KSB") previously filed with the
Securities and Exchange Commission (the "SEC"). Pursuant to
the rules and regulations of the SEC for interim financial
statements, certain information and disclosures normally
included in financial statements prepared in accordance with
accounting principles generally accepted in the United States
of America have been condensed or omitted from these financial
statements unless significant changes have taken place since
the end of the most recent fiscal year. Accordingly, these
unaudited condensed financial statements should be read in
conjunction with the audited financial statements and the
other information in the Form 10-KSB.
Operating results for the three months ended January 31, 2005
are not necessarily indicative of the results that may be
expected for the year ending October 31, 2005.
NOTE 3 - INVENTORIES:
Inventories at January 31, 2005 and October 31, 2004 consisted
of the following:
JANUARY 31, October 31,
2005 2004
---------- -----------
Packed coffee $1,175,210 $ 668,413
Green coffee 1,201,690 1,051,223
Packaging supplies 610,110 538,653
---------- ----------
Totals $2,987,010 $2,258,289
========== ==========
NOTE 4 - HEDGING:
The Company uses options and futures contracts to partially
hedge the effects of fluctuations in the price of green coffee
beans. Options and futures contracts are marked to market with
current recognition of gains and losses on such positions. The
Company does not defer such gains and losses since its
positions are not considered hedges for financial reporting
purposes. The Company's accounting for options and futures
contracts may increase earnings volatility in any particular
period.
4
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2005 AND 2004
(UNAUDITED)
NOTE 4 - HEDGING (CONTINUED):
At January 31, 2005, the Company held 330 options (generally
with terms of two months or less) covering an aggregate of
12,375,000 pounds of green coffee beans at prices aggregating
$.98, $1.00 and $1.05 per pound. The fair market value of
these options, which was obtained from a major financial
institution, was $1,012,688 at January 31, 2005.
At January 31, 2004, the Company held 100 options (generally
with terms of two months or less) covering an aggregate of
3,750,000 pounds of green coffee beans at a price of $.70 per
pound. The fair market value of these options, which was
obtained from a major financial institution, was $217,875 at
January 31, 2004.
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 January
31, 2005 and 2004, the Company did not hold any long futures
contracts.
The Company classifies its options and futures 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 three
months ended January 31, 2005 and 2004, the Company recorded
realized and unrealized gains and losses respectively, on
these contracts (using the specific identification method) as
follows:
THREE MONTHS ENDED JANUARY 31,
2005 2004
--------- ---------
Gross realized gains $ 809,263 $ 883,201
Gross realized losses $(296,443) $ (45,051)
Unrealized gains and (losses) $ 207,934 $(240,493)
NOTE 5 - LINE OF CREDIT:
In November 2004, 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 was originally to 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 is 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 also requires the Company
to comply with various financial covenants. On January 27,
2005, this agreement was amended to (a) reduce the maximum
line to $3,500,000, (b) reduce the interest rate to LIBOR plus
2.15% and (c) to include the approval of a letter of credit
availability limited to the lesser of $310,300 or the then
remaining availability under the line of credit. As of January
31, 2005, the Company was in compliance with all financial
covenants.
5
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2005 AND 2004
(UNAUDITED)
NOTE 6 - OBLIGATIONS UNDER CAPITAL LEASES:
The Company is a lessee of 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
$15,830 and $15,228 for the three months ended January 31,
2005 and 2004, respectively.
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 lease was entered into.
NOTE 7 - EARNINGS PER SHARE:
The Company presents "basic" and, if applicable, "diluted"
earnings per common share pursuant to the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings
per Share". Diluted earnings per share have not been presented
because the Company had no potentially dilutive securities
outstanding during the three months and ended January 31, 2005
and 2004.
NOTE 8 - ECONOMIC DEPENDENCY:
For the three months ended January 31, 2005, sales to one
customer were in excess of 10% of the Company's total sales.
Sales to this customer were approximately $1,839,000 and the
corresponding accounts receivable at January 31, 2005 from
this customer was approximately $480,000.
For the three months ended January 31, 2004, sales to two
customers were each in excess of 10% of the Company's total
sales. Sales to these customers were approximately $1,307,000
and $654,000 and the corresponding accounts receivable at
January 31, 2004 from these customers were approximately
$345,000 and $93,000, respectively.
For the three months ended January 31, 2005, purchases from
two suppliers, were in excess of 10% of the Company's total
purchases. Purchases from these suppliers were approximately
$2,657,000 and $693,000 and the corresponding accounts payable
to these suppliers at January 31, 2005 were approximately
$698,000 and $260,000, respectively.
For the three months ended January 31, 2004, purchases from
two suppliers, were in excess of 10% of the Company's total
purchases. Purchases from these suppliers were approximately
$823,000 and $739,000 and the corresponding accounts payable
to these suppliers at January 31, 2004 were approximately
$80,000 and $91,000, respectively.
6
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2005 AND 2004
(UNAUDITED)
NOTE 9 - ENGAGEMENT LETTER:
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 underwriter for a proposed public
offering of the Company's common stock. Subsequently, Maxim
and Joseph Stevens & Company, Inc. ("Joseph Stevens") entered
into an agreement pursuant to which Joseph Stevens agreed to
act as managing underwriter and Maxim agreed to participate in
the underwriting syndicate for the offering. The offering
would raise approximately $8 million. The underwriters 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, which amount
shall be split between Joseph Stevens and Maxim. If the public
offering is successfully completed, the Company shall pay to
Joseph Stevens and Maxim a non-accountable expense allowance
less amounts previously paid to Maxim, 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 Joseph Stevens and Maxim
for an aggregate of $100, warrants to purchase up to ten
percent of the shares being offered at 120% 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.
NOTE 10 - NON-QUALIFIED DEFERRED COMPENSATION PLAN:
In January 2005, the Company established the "Coffee Holding
Co., Inc. Non-Qualified Deferred Compensation Plan".
Currently, there is only one participant in the plan. Within
the plan guidelines, this employee is deferring a portion of
his current salary and bonus.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CAUTIONARY NOTE ON FORWARD LOOKING STATEMENTS
This report contains forward-looking statements made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements typically are identified by use of terms such as
"may," "will," "should," "plan," "expect," "anticipate," "estimate" and similar
words, although some forward-looking statements are expressed differently.
Forward-looking statements represent our management's judgment regarding future
events. Although we believe that the expectations reflected in such
forward-looking statements are reasonable, we can give no assurance that such
expectations will prove to be correct. All statements other than statements of
historical fact included in this prospectus regarding our financial position,
business strategy, products, products under development, markets, budgets,
plans, or objectives for future operations are forward-looking statements. We
cannot guarantee the accuracy of the forward-looking statements, and you should
be aware that our actual results could differ materially from those contained in
the forward-looking statements.
OVERVIEW
We are an integrated wholesale coffee roaster and dealer in the United
States. 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;
o the success of our hedging strategy; 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.
8
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 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 generally 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.
9
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.
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 $30,000.
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.
10
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
$132,300 could need to be written off if we do not remain
profitable.
COMPARISON OF RESULTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 2005 COMPARED TO THE THREE MONTHS ENDED JANUARY
31, 2004
Net Income. Net income decreased $116,518, or 22.5%, to $402,281 or
$.10 per share for the three months ended January 31, 2005 compared to $518,779
or $.13 per share for the three months ended January 31, 2004. The decrease in
net income primarily reflects an increase in cost of sales and operating
expenses offset by increased net sales.
Net Sales. Net sales totaled $8,060,820 for the three months ended
January 31, 2005, an increase of $2,212,332 or 37.8% from $5,847,948 for the
three months ended January 31, 2004. The increase in net sales reflects
increased sales of specialty green coffee of $1,067,511. The number of our
customers in the specialty green coffee area grew approximately 3.6% from
January 31, 2004 to 262 customers at January 31, 2005. 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
net sales also reflects increased sales of branded and private label coffee,
$375,000 of which is attributable to our license of the S&W brand which we
signed in February 2004. The increase in the price of the underlying commodity
(coffee) also contributed to the increase in net sales.
Cost of Sales. Cost of sales for the three months ended January 31,
2005 was $5,988,013 or 74.3% of net sales, as compared to $3,833,586 or 65.6% of
net sales for the three months ended January 31, 2004. 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
$1,400,000, an increase in packaging costs associated with the increase in net
sales of approximately $400,000 and approximately $76,000 from higher green
coffee prices during the period as prices increased $.30 per pound year to year,
partially offset by increased 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 four 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
$720,754 for the three months ended January 31, 2005 compared to $597,657 for
the comparable period in 2004. The use of these derivative financial instruments
has enabled us to mitigate the effect of changing prices during these periods
and to be more competitive with our pricing.
11
Gross Profit. Gross profit for the three months ended January 31, 2005
was $2,072,267, an increase of $57,905, or 2.9%, from $2,014,362 for the three
months ended January 31, 2004. Gross profit as a percentage of net sales
decreased by 8.7% to 25.7% for the three months ended January 31, 2005 from
34.4% for the same period in 2004. The increase in gross profit was primarily
attributable to increased net sales during the first three months of 2005
compared to the first three months of 2004, while the decrease in gross profit
as a percentage of net sales was due to an increase in costs of sales.
Operating Expenses. Total operating expenses increased $346,148 or
33.0% to $1,395,386 for the three months ended January 31, 2005 from $1,049,238
for the same period in 2004 partially due to increases in selling and
administrative expenses. Selling and administrative expenses increased $342,301
or 37.0% to $1,268,065 for the three months ended January 31, 2005 from $925,764
for the same period in 2004. The increase in selling and administrative expenses
reflects several factors, including increases of approximately $110,000 in rent
and utilities, $90,000 in insurance and benefits, $51,000 in shipping expenses,
$28,000 in depreciation and $23,000 in professional fees.
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 needs and our roasting and blending requirements. We also incurred expenses
associated with the hiring of 25 new employees at the facility. 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.
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. 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 increases in rent and
utilities and depreciation reflect the increased costs of operating two
facilities. The increase in professional fees is attributable to our proposed
public offering of common stock.
Officers' salaries increased $3,847 to $127,321 for the three months
ended January 31, 2005 from $123,474 for the nine months ended July 31, 2003.
Other Expense. Other expense decreased $14,625 or 38.7% from $37,825
for the three months ended January 31, 2004 to $23,200 for the three months
ended January 31, 2005, due to decreased borrowings between the periods.
Income Before Taxes. We had income of $653,681 before income taxes for
the three months ended January 31, 2005 compared to income of $927,299 before
income taxes for the three months ended January 31, 2004. The decrease was
attributable primarily to increased costs of sales and operating expenses.
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Income Taxes. Our provision for income taxes for the three months ended
January 31, 2005 totaled $251,400 (38.5% of Income before income taxes) compared
to $408,500 (44.1% of Income before income taxes) for the three months ended
January 31, 2004 as a result of decreased income before taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 2005, we had working capital of $1,215,782 which
represented a $489,338 increase from our working capital of $726,444 as of
October 31, 2004, and total stockholders' equity of $3,398,102, which increased
by $402,281 from our total stockholders' equity of $2,995,821 as of October 31,
2004. Our working capital increased primarily due to a decrease in accounts
payable and accrued expenses of $1,576,078 offset by an increase in line of
credit borrowings of $795,000. The increase in working capital was partially
offset by a $924,301 decrease in accounts receivable, net of allowance for
doubtful accounts, at January 31, 2005 compared to October 31, 2004. Our
receivables decreased due to increased collection efforts in the quarter, which
in turn led to payments of payables and decreased payable balances for the
quarter.
As of October 31, 2004, we had a credit facility with Wells Fargo
Business Credit 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.
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 of $3,500,000, expires on October 31, 2005 and
requires monthly interest payments at a rate of LIBOR plus 2.15% (an effective
rate of 4.74% at January 31, 2005). 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. As of January 31, 2005, we had $3,480,045
outstanding under the new line of credit as compared to an outstanding balance
of $2,685,045 under the Wells Fargo line of credit at October 31, 2004.
The new credit facility contains covenants that place restrictions on
our operations. Among other things, these covenants: require us to maintain
certain financial ratios; require us to maintain a minimum net worth; and
prohibit us from merging with or into other companies, acquiring all or
substantially all of the assets of 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
January 31, 2005, we believe we were in compliance with all covenants contained
in the credit facility.
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We also lease machinery and equipment under capital leases which expire
in July 2006. The interest rates on the capital leases vary from 6.75% to 7.6%
per annum. The outstanding balance on the capital leases aggregated $78,258 at
January 31, 2005 compared to $116,915 at October 31, 2004.
For the three months ended January 31, 2005, our operating activities
used net cash of $917,586 as compared to the three months ended January 31, 2004
when operating activities provided net cash of $442,930. The decreased cash flow
from operations for the three months ended January 31, 2005 was primarily due to
a decrease of $1,576,078 in accounts payable and accrued expenses and an
increase of $728,721 in inventories, partially offset by a decrease in accounts
receivable of $924,301.
For the three months ended January 31, 2005, our investing activities
used net cash of $22,427 as compared to the three months ended January 31, 2004
when net cash used by investing activities was $24,301.
For the three months ended January 31, 2005, our financing activities
provided net cash of $504,343 as compared to the three months ended January 31,
2004 when net cash used by financing activities was $381,183. The increased cash
flow from financing activities was primarily due to an increase in net payments
under our line of credit. Net payments on our line of credit increased to
$795,000 for the three months ended January 31, 2005 compared to net funding of
$329,535 for the three months ended January 31, 2004.
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. We have filed a registration statement on Form
SB-2, as amended, with the Securities and Exchange Commission in connection with
a proposed public offering of 1,400,000 shares of our common stock, subject to
over-allotment. However, we cannot assure you as to the timing or the final
terms of the offering, or whether or not the offering will be consummated.
MARKET RISKS
Market risks relating to our operations result primarily from changes
in interest rates and commodity prices as further described below.
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INTEREST RATE RISKS
We are subject to market risk from exposure to fluctuations in interest
rates. At January 31, 2005, our debt consisted of $78,258 of fixed rate debt on
the capital leases and $3,480,045 of variable rate debt under our line of
credit. At January 31, 2005, interest on the variable rate debt was payable
primarily at 4.99% (or 2.4% above LIBOR) for the line of credit. We do not
expect changes in interest rates to have a material effect on results of
operations or cash flows in fiscal 2005, although there can be no assurance that
interest rates will not significantly change.
COMMODITY PRICE RISKS
The supply and price of coffee beans are subject to volatility and are
influenced by numerous factors which are beyond 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 4 of the notes to financial statements. In
addition, during the latter half of fiscal 2000, we began to acquire futures
contracts with longer terms (generally three to four months) primarily for the
purpose of guaranteeing an adequate supply of green coffee. The use of these
derivative financial instruments has enabled 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.
At January 31, 2005, we held 330 options (generally with terms of two
months or less) covering an aggregate of 12,375,000 pounds of green coffee beans
at prices aggregating $.98, $1.00 and $1.05 per pound. The fair market value of
these options, which was obtained from a major financial institution, was
$1,012,688 at January 31, 2005.
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 January 31, 2005, we did not hold any longer-term futures contracts.
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 3. CONTROLS AND PROCEDURES
Management, including our President, Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our 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
President, Chief Executive Officer and Chief Financial Officer concluded that
the disclosure controls and procedures were effective, in all material respects,
to ensure that information required to be disclosed in the reports that we file
and submit under the Exchange Act is recorded, processed, summarized and
reported as and when required.
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There have been no changes in our internal control over financial
reporting identified in connection with the evaluation that occurred during our
last fiscal quarter that has materially affected, or that is reasonably likely
to materially affect, our internal control over financial reporting.
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Part II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. UNREGISTERED SALES OF EQUITY IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
(a) None
(b) None
ITEM 6. EXHIBITS
(a) Exhibits
10.4 Amendment to Working Capital Account Loan and Security
Agreement with Merrill Lynch Business Financial Services, Inc.
31.1 Rule 13a - 14(a)/15d - 14a Certification.
32.1 Section 1350 Certification.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Coffee Holding Co., Inc.
--------------------------------------------
(Registrant)
By: /s/ Andrew Gordon
----------------------------------------
Andrew Gordon
President, Chief Executive Officer and
Chief Financial Officer
March 17, 2005
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