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, 2005
|_| 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
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(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
4401 First Avenue, Brooklyn, New York 11232-0005
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (718) 832-0800
Securities registered under Section 12(b) of the Exchange Act:
Title of each class: Name of each exchange on which registered:
---------------------------------- ------------------------------------------
Common Stock, $0.001 Per Value American Stock Exchange
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|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The issuer's revenues for the year ended October 31, 2005 were $41,545,345.
The aggregate market value of the voting common equity held by non-affiliates of
the registrant, computed by reference to the closing price of the registrant's
common stock on the American Stock Exchange on December 30, 2005, was
$15,399,345.
As of December 30, 2005, the registrant had 5,529,830 shares of common stock,
par value $0.001 per share, outstanding.
Documents incorporated by Reference
Portions of the registrant's proxy statement for the annual meeting of
stockholders to be held on April 11, 2006, and to be filed pursuant to
Regulation 14A within 120 days after registrant's fiscal year ended October 31,
2005, are incorporated by reference in Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format: Yes |_| No |X|
TABLE OF CONTENTS
Page
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PART I
ITEM 1. DESCRIPTION OF BUSINESS...........................................1
ITEM 2. DESCRIPTION OF PROPERTY..........................................10
ITEM 3. LEGAL PROCEEDINGS................................................10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............10
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.........11
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION........11
ITEM 7. FINANCIAL STATEMENTS.............................................17
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..............................17
ITEM 8A. CONTROLS AND PROCEDURES..........................................18
ITEM 8B. OTHER INFORMATION................................................18
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.......19
ITEM 10. EXECUTIVE COMPENSATION...........................................19
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.......................19
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................19
ITEM 13. EXHIBITS.........................................................20
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES...........................20
SIGNATURES....................................................................31
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.
We were founded and incorporated in New York State in 1971 and have been a
family operated business for over 30 years. In 1998, we merged with Transpacific
International Group Corp. and became a Nevada corporation. In May 2005, we
concluded our initial public offering and our common stock began trading on the
American Stock Exchange under the symbol "JVA." Our fiscal year ends on October
31.
Our corporate offices are located at 4401 First Avenue, Brooklyn, New York
11232. Our telephone number is (718) 832-0800 and our website address is
www.coffeeholding.com.
Our Competitive Strengths
To achieve our growth objectives described below, we intend to leverage
the following competitive strengths:
National Distribution with Capacity For Growth. From 1991 to 2004, we
expanded our distribution to a national platform while operating from only our
East Coast location by making 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. 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. 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.
1
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;
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 have increased the number of our wholesale green
coffee customers, including coffee houses, single store operators, mall coffee
stores and mail order sellers, by 87.3% from 150 to 281. 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 15-year relationship with Green
Mountain Coffee Roasters, our largest wholesale green coffee customer. 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.
2
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.
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, Chief Executive Officer and Chief
Financial Officer, and David Gordon, our Executive Vice President - Operations,
have worked with Coffee Holding for 23 and 25 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.
Our Growth Strategy
We believe that significant growth opportunities exist by selectively
pursuing strategic acquisitions and alliances, targeting the rapidly growing
Hispanic market in the United States, 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 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 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 intend to further expand the market
presence of our branded products outside our primary Northeastern United States
market through other acquisitions and strategic alliances as opportunities
arise.
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, which
has historically been our leading brand by revenue, is a specialty espresso
coffee that targets espresso coffee drinkers and, in particular, Hispanic
consumers.
3
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.
In 2004, we established relationships with additional independent sales brokers
to market our products on a national scale.
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. In 2003, we
began 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."
4
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, 2005, we supplied coffee under approximately 46
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."
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.
5
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, 2005 was $.97 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.
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 2005,
substantially all of our green coffee purchases were from ten suppliers, which
accounted for approximately $25.6 million, or 85% of our total product
purchases. One of these suppliers, Rothfos Corporation, accounted for
approximately $13.0 million, or 43% of our total product purchases. An employee
of Rothfos Corporation is one of our directors. Another of these suppliers,
Atlantic (USA) Inc., accounted for approximately $2.5 million, or 8% of our
total product purchases. 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.
6
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.
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 $3.0 million, or 8%, $2.7
million, or 6%, and $11.3 million, or 28% of our net sales for the fiscal year
ended October 31, 2005 and $3.2 million, or 11%, $1.8 million, or 6%, and $6.0
million or 22%, for the fiscal year ended October 31, 2004, respectively.
Although our agreements with wholesale customers generally contain only
pricing terms, our contracts with certain customers, including Supervalu, also
contain 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.
7
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 have established relationships with 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 also hired a Florida sales
manager to increase our private label and branded coffee sales in Florida. In
addition, we employ a West Coast Brand Manager who markets 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 11 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.
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.
8
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 former
coffee division of Sara Lee Corporation which was recently purchased by
Segafredo Zanetti Group. Both The Kroger Co. and the former Sara Lee division
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 the former coffee division of Sara Lee Corporation
which was recently purchased by Segafredo Zanetti Group, 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 Cafe Caribe brand is competitive in the fast
growing Hispanic demographic and our S&W brand has been a popular and
recognizable brand on the West Coast for over 80 years.
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.
9
Employees
We have 74 full-time employees, 55 of whom are employed in the areas of
coffee roasting, blending and packaging and 19 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 $100,093,
beginning in January of 2005 through January of 2024.
We 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, 2006.
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.
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.
10
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the American Stock Exchange under the symbol
"JVA." We have not declared or paid any dividends on our common stock during the
last two fiscal years. At October 31, 2005, there were 405 holders of record of
an aggregate of 5,529,830 shares of our common stock issued and outstanding. No
shares of common stock were repurchased during fiscal 2005.
The following table sets forth the high and low sales prices of our common
stock for each quarter since it began trading on May 3, 2005.
2005
-------------------------------
High Low
-------------- --------------
3rd Quarter $ 10.60 $ 4.40
4th Quarter $ 15.75 $ 4.64
On May 6, 2005, we concluded the public offering of 1,400,000 shares of
our common stock at a price of $5.00 per share and on June 16, 2005 the
underwriters exercised their option to purchase an additional 210,000 shares of
our common stock at a price of $5.00 per share. After underwriting discounts and
commissions and offering expenses, we received net proceeds of $6,436,016 in the
offering, after giving effect to the over-allotment option. While we have not
yet used all of the offering proceeds, we used some of the proceeds to pay down
bank debt, to build up our inventories for sales expansion and for general
corporate purposes, including working capital and capital expenditures. We also
intend to use certain proceeds to implement a branded sales and marketing
campaign, to purchase equipment for our La Junta, Colorado facility and to grow
our food service distribution. As strategic opportunities arise, we may use the
proceeds of the offering to fund acquisitions, licensing and other strategic
alliances.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Cautionary Note on Forward Looking Statements
Some of the matters discussed under the caption "Management's Discussion
and Analysis or Plan of Operation," "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;
11
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;
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.
12
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. 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.
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.
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.
13
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 $56,000.
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. Each
additional one percent of potential inventory writedown would have
reduced operating income by approximately $45,000 for the year ended
October 31, 2005.
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 $264,900 could need to be written off if we do not remain
profitable.
Year Ended October 31, 2005 (Fiscal 2005) Compared to the Year Ended October 31,
2004 (Fiscal 2004)
Net Income. Net income increased $309,793, or 35.4%, to $1,185,135 or $.25
per share for the year ended October 31, 2005 compared to $875,342 or $.22 per
share for the year ended October 31, 2004. The increase in net income primarily
reflects increased net sales, offset in part by an increase in cost of sales.
Net Sales. Net sales totaled $41,545,345 for the year ended October 31, 2005, an
increase of $13,514,956 or 48.2% from $28,030,389 for the year ended October 31,
2004. The increase in net sales reflects a 20.6% increase in coffee pounds sold
from 26.2 million pounds in 2004 to 31.6 million pounds in 2005. The increase in
pounds of coffee sold is the result of increased sales of our private label,
branded and specialty green coffees. Sales of our Cafe Caribe brand, as measured
by Information Resources Incorporated data, increased approximately 21.0% over
fiscal 2004 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 7.3% to 281 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.
Cost of Sales. Cost of sales for the year ended October 31, 2005 was $33,875,973
or 81.5% of net sales, as compared to $20,927,506 or 74.7% of net sales for the
year ended October 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 $12.5 million due to increased
pounds sold and higher green coffee prices during the period as prices increased
$.23 per pound year to year, an increase in packaging costs associated with the
increase in net sales of approximately $1.0 million, and a decrease in net gains
on future contracts of $794,110. 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 2006. 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 2005. We had net gains on futures contracts of $827,928 for the
year ended October 31, 2005 compared to $1,622,038 for the year ended October
31, 2004. 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.
14
Gross Profit. Gross profit for the year ended October 31, 2005 was
$7,669,372, an increase of $566,489 or 8.0%, from $7,102,883 for the year ended
October 31, 2004. Gross profit as a percentage of net sales decreased by 6.8% to
18.5% for the year ended October 31, 2005 from 25.3% for the year ended October
31, 2004. The decrease in our margins is mainly attributable to decreased net
gains on future contracts during fiscal 2005 compared to fiscal 2004 and
increases in coffee prices.
Operating Expenses. Total operating expenses increased $297,881 or 5.5% to
$5,698,263 for the year ended October 31, 2005 from $5,400,382 for the fiscal
year ended October 31, 2004 due to increases in selling and administrative
expenses and bad debt expense, partially offset by decreased officers' salaries.
Selling and administrative expenses increased $107,123 or 2.3% to $4,854,018 for
the year ended October 31, 2005 from $4,746,895 for 2004. The increase in
selling and administrative expenses reflects several factors, including
increases of approximately $194,000 in insurance and $162,000 in shipping costs,
partially offset by decreases of $167,000 in office salaries and $83,000 in
payroll taxes.
The increase in insurance was due to the purchase of directors' and
officers' insurance following our initial public offering. The increase in
shipping costs was attributable to increased sales. The decrease in office
salaries and payroll was due to the departure of our Chief Financial Officer and
other administrative staff. Our President and Chief Executive Officer has since
assumed the duties previously associated with our Chief Financial Officer.
Officers' salaries decreased $48,328 to $574,245 for the year ended
October 31, 2005 from $622,573 for the year ended October 31, 2004. The decrease
was mainly due to our President and Chief Executive Officer's decision not to
accept a bonus for 2005.
Other Expense. Other expense decreased $73,643 or 55.0% from $133,964 for
the year ended October 31, 2004 to $60,321 for the year ended October 31, 2005.
The decrease was attributable to both an increase in interest income of $38,397
and a decrease in interest expense of $35,246.
Income Before Taxes. We had income of $1,910,788 before income taxes for
the year ended October 31, 2005 compared to income of $1,568,537 before income
taxes for the year ended October 31, 2004. The increase was attributable to
increased income from operations and decreased other expense.
Income Taxes. Our provision for income taxes for the year ended October
31, 2005 totaled $725,653 compared to $693,195 for the year ended October 31,
2004 as a result of increased income before taxes.
Liquidity and Capital Resources
As of October 31, 2005, we had working capital of $8,273,849 which
represented a $7,547,405 increase from our working capital of $726,444 as of
October 31, 2004, and total stockholders' equity of $10,641,622, which increased
by $7,645,801 from our total stockholders' equity of $2,995,821 as of October
31, 2004. Our working capital increased primarily due to proceeds from our
initial public offering, an increase of $2,238,289 in inventories, an increase
of $2,120,493 in the amount due from broker and an increase in our accounts
receivable of $1,153,821. Obligations under our line of credit borrowings also
decreased by $1,621,878. At October 31, 2005, the outstanding balance on our
line of credit was $1,063,167 compared to $2,685,045 at October 31, 2004. Total
stockholders' equity increased due to our initial public offering and net income
for the fiscal year.
15
As of October 31, 2005, we had a financing agreement with Merrill Lynch
Business Financial Services Inc. This line of credit is for a maximum
$4,000,000, expires on October 31, 2006 and requires monthly interest payments
at a rate of LIBOR plus 2.15%. This loan is secured by a blanket lien on all of
our assets.
The 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 October 31, 2005, we were in
compliance with all covenants contained in the credit facility.
We also lease machinery and equipment under a capital lease which expires
in July 2006. The interest rate on the capital lease is 7.347% per annum. The
outstanding balance on the capital lease equaled $1,329 at October 31, 2005
compared to $116,915 at October 31, 2004.
For the year ended October 31, 2005, our operating activities used net
cash of $3,879,082 as compared to the year ended October 31, 2004 when net cash
provided by operating activities was $1,616,465. The decreased cash flow from
operations for the year ended October 31, 2005 was primarily due to an increase
of $2,238,389 in inventories, an increase of $2,120,493 in the amount due from
broker and an increase of $1,423,821 in accounts receivable.
For the year ended October 31, 2005, our investing activities used net
cash of $474,147 as compared to the year October 31, 2004 when net cash used by
investing activities was $1,056,179. The decrease in net cash used by investing
activities for fiscal 2005 was due to decreased purchases of property and
equipment as the purchase of property and equipment from Premier Roasters
occurred in February 2004.
For the year ended October 31, 2005, our financing activities provided net
cash of $4,446,552 as compared to the year ended October 31, 2004 when net cash
provided by financing activities was $8,027. The increased cash flow from
financing activities was primarily due to net proceeds from our May 2005 initial
public offering of $6,436,016, offset in part by increased net cash payments
under our line of credit. Net cash used on our line of credit increased
$2,014,857 to net cash used of $1,621,878 for the year ended October 31, 2005
compared to net cash provided of $392,979 for the year ended October 31, 2004.
In addition, during fiscal 2005, we used $252,000 to fully pay off a term loan
we no longer utilize.
We expect to fund our operations, including paying our liabilities,
funding capital expenditures and making required payments on our debts, through
October 31, 2006 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.
16
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, 2005, our debt consisted of
$1,329 of fixed rate debt on our capital lease and $1,063,167 of variable rate
debt under our revolving line of credit. At October 31, 2005, interest on the
variable rate debt was payable primarily at 6.24% (or 2.15% above the one-month
LIBOR rate) for the revolving line of credit.
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.
At October 31, 2005, we held 300 options (generally with terms of two
months or less) covering an aggregate of 11,250,000 pounds of green coffee beans
at prices of $.975 to $1.00 per pound. The fair market value of these options,
which was obtained from major financial institutions, was $159,750 at October
31, 2005.
We acquire future contracts with longer terms (generally three to four
months) primarily for the purpose of guaranteeing an adequate supply of green
coffee. At October 31, 2005, we did not hold any future 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 7. FINANCIAL STATEMENTS
See pages F-1 through F-17 following the Exhibit Index of this Annual
Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
17
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 to ensure
that information required to be disclosed in the reports the Company files and
submits under the Exchange Act is (i) recorded, processed, summarized and
reported as and when required and (ii) accumulated and communicated to the
Company's management, including its principal executive officer and financial
officer, as appropriate to allow timely decisions regarding disclosure.
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
None.
18
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Information required by this item is incorporated by reference to the
Company's Proxy Statement for the Annual Meeting of Stockholders to be held on
April 11, 2006.
ITEM 10. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held on
April 11, 2006.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information required by this item is incorporated by reference to the
Company's Proxy Statement for the Annual Meeting of Stockholders to be held on
April 11, 2006.
The following table sets forth the aggregate information of our equity
compensation plans in effect as of October 31, 2005.
Equity Compensation Plan Information
Number of
securities
remaining
available for
Number of future issuance
securities to be under equity
issued upon Weighted-average compensation plans
exercise of exercise price of (excluding
outstanding outstanding securities
options, warrants options, warrants reflected in
Plan category and rights and rights 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
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference to the
Company's Proxy Statement for the Annual Meeting of Stockholders to be held on
April 11, 2006.
19
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:
o Index to Financial Statements.
o Report of Independent Registered Public Accountants.
o Balance Sheets as of October 31, 2005 and October 31, 2004.
o Statements of Income - Years Ended October 31, 2005 and 2004.
o Statements of Changes in Stockholders' Equity - Years Ended
October 31, 2005 and 2004.
o Statements of Cash Flows - Years Ended October 31, 2005 and 2004.
o Notes to Financial Statements.
See Exhibit Index following the signature page to this report.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this item is incorporated by reference to the
Company's Proxy Statement for the Annual Meeting of Stockholders to be held on
April 11, 2006.
20
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, thereunto duly authorized on January 27, 2006.
COFFEE HOLDING CO., INC.
By: /s/ Andrew Gordon
-----------------------------------
Andrew Gordon
President and Chief Executive Officer
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 President, Chief Executive Officer, Chief
-------------------------- Financial Officer, Treasurer and Director
Andrew Gordon (principal executive officer and principal
Date: January 27, 2006 financial and accounting officer)
/s/ David Gordon Executive Vice President -- Operations,
-------------------------- Secretary and Director
David Gordon
Date: January 27, 2006
/s/ Gerard DeCapua Director
--------------------------
Gerard DeCapua
Date: January 27, 2006
/s/ Daniel Dwyer Director
--------------------------
Daniel Dwyer
Date: January 27, 2006
/s/ Barry Knepper Director
--------------------------
Barry Knepper
Date: January 27, 2006
/s/ John Rotelli Director
--------------------------
John Rotelli
Date: January 27, 2006
/s/ Robert M. Williams Director
--------------------------
Robert M. Williams
Date: January 27, 2006
21
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 Amended and Restated Articles of Incorporation of Coffee Holding Co.,
Inc., (incorporated herein by reference to Exhibit 3.1 to the Coffee
Holding Co., Inc. Form 8-A, filed with the Securities and Exchange
Commission on May 2, 2005).
3.2 By-Laws of Coffee Holding Co., Inc. (incorporated herein by reference to
Exhibit 3.2 to the Coffee Holding Co., Inc. Form 8-A, filed with the
Securities and Exchange Commission on May 2, 2005).
4.1 Form of Stock Certificate of Coffee Holding Co., Inc. (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).
10.1 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. (incorporated herein by
reference to Exhibit 10.3 to the Coffee Holding Co., Inc. Annual Report on
Form 10-KSB, filed with the Securities and Exchange Commission on February
10, 2005).
10.4 Amendment to Working Capital Account Loan and Security Agreement with
Merrill Lynch Business Financial Services, Inc. (incorporated herein by
reference to Exhibit 10.4 to the Coffee Holding Co., Inc. Quarterly Report
on Form 10-QSB for the quarter ended January 31, 2005, filed with the
Securities and Exchange Commission on March 17, 2005).
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).
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).
22
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 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 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).
10.19 Coffee Holding Co., Inc. Non-Qualified Deferred Compensation Plan
(incorporated herein by reference to the Coffee Holding Co., Inc.
Quarterly Report on Form 10-QSB, filed with the Securities and Exchange
Commission on June 14, 2005).
11.1 Earnings Per Share.
31.1 Rule 13a-14(a)/15d-14(a) Certification.
32.1 Section 1350 Certification.
23
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, 2005 AND 2004 F-3
STATEMENTS OF INCOME - YEARS ENDED
OCTOBER 31, 2005 AND 2004 F-4
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY -
YEARS ENDED OCTOBER 31, 2005 AND 2004 F-5
STATEMENTS OF CASH FLOWS - YEARS ENDED
OCTOBER 31, 2005 AND 2004 F-6
NOTES TO FINANCIAL STATEMENTS F-7/17
* * *
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, 2005 and 2004 and the related statements of income, changes in
stockholders' equity and cash flows for each of the two years in the period
ended October 31, 2005. 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, 2005 and 2004 and the results of its operations and cash flows for
each of the two years in the period ended October 31, 2005, 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
January 9, 2006
The accompanying notes are an integral part of these financial statements.
F-2
COFFEE HOLDING CO., INC.
BALANCE SHEETS
OCTOBER 31, 2005 AND 2004
2005 2004
----------- -----------
- ASSETS -
CURRENT ASSETS:
Cash and cash equivalents $ 735,468 $ 642,145
Due from broker 2,994,394 873,901
Accounts receivable, net of allowance for doubtful accounts of $420,349
and $150,349 for 2005 and 2004, respectively 5,159,576 4,005,755
Inventories 4,496,578 2,258,289
Prepaid expenses and other current assets 284,170 676,395
Deferred tax asset 318,600 136,900
----------- -----------
TOTAL CURRENT ASSETS 13,988,786 8,593,385
Property and equipment, at cost, net of accumulated depreciation of $3,727,524 and
$3,354,418 for 2005 and 2004, respectively 2,379,952 2,286,936
Deposits and other assets 176,575 33,496
----------- -----------
TOTAL ASSETS $16,545,313 $10,913,817
=========== ===========
- LIABILITIES AND STOCKHOLDERS' EQUITY -
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 4,431,577 $ 4,658,836
Current portion of term loan -- 252,000
Current portion of obligations under capital lease 1,329 111,060
Line of credit borrowings 1,063,167 2,685,045
Income taxes payable - current 218,864 160,000
----------- -----------
TOTAL CURRENT LIABILITIES 5,714,937 7,866,941
Obligations under capital lease, net of current portion -- 5,855
Income taxes payable - deferred 53,700 45,200
Deferred compensation payable 135,054 --
----------- -----------
TOTAL LIABILITIES 5,903,691 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, 5,529,830
and 3,999,650 shares issued and outstanding for 2005 and 2004, respectively 5,530 4,000
Additional paid-in capital 7,327,023 867,887
Retained earnings 3,309,069 2,123,934
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 10,641,622 2,995,821
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'S EQUITY $16,545,313 $10,913,817
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
COFFEE HOLDING CO., INC.
STATEMENTS OF INCOME
YEARS ENDED OCTOBER 31, 2005 AND 2004
2005 2004
------------ ------------
NET SALES $ 41,545,345 $ 28,030,389
COST OF SALES 33,875,973 20,927,506
------------ ------------
GROSS PROFIT 7,669,372 7,102,883
------------ ------------
OPERATING EXPENSES:
Selling and administrative 4,854,018 4,746,895
Bad debt expense 270,000 30,914
Officers' salaries 574,245 622,573
------------ ------------
TOTALS 5,698,263 5,400,382
------------ ------------
INCOME FROM OPERATIONS 1,971,109 1,702,501
------------ ------------
OTHER INCOME (EXPENSE)
Interest income 50,363 11,966
Interest expense (110,684) (145,930)
------------ ------------
(60,321) (133,964)
INCOME BEFORE INCOME TAXES 1,910,788 1,568,537
Provision for income taxes 725,653 693,195
------------ ------------
NET INCOME $ 1,185,135 $ 875,342
============ ============
Basic and diluted earnings per share $ .25 $ .22
============ ============
Weighted average common shares outstanding:
Basic 4,721,327 3,999,650
============ ============
Diluted 4,776,757 3,999,650
============ ============
F-4
COFFEE HOLDING CO., INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 2005 AND 2004
Common Stock
----------------------------
$.001 Par Value
---------------------------- Additional
Number of Paid - in Retained
Shares Amount Capital Earnings Total
----------- ----------- ----------- ----------- -----------
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
Sale of common stock - net 1,520,180 1,520 6,434,496 -- 6,436,016
Issuance of common stock for services 10,000 10 24,640 -- 24,650
Net income -- -- -- 1,185,135 1,185,135
----------- ----------- ----------- ----------- -----------
Balance, October 31, 2005 5,529,830 $ 5,530 $ 7,327,023 $ 3,309,069 $10,641,622
=========== =========== =========== =========== ===========
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, 2005 AND 2004
2005 2004
------------ ------------
OPERATING ACTIVITIES:
Net income $ 1,185,135 $ 875,342
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Depreciation and amortization 373,106 363,612
Bad debts 270,000 30,914
Deferred taxes (173,200) (27,200)
Changes in operating assets and liabilities:
Due from broker (2,120,493) 20,222
Accounts receivable (1,423,821) (1,881,986)
Inventories (2,238,289) (476,865)
Prepaid expenses and other assets 281,821 (244,963)
Accounts payable and accrued expenses (227,259) 2,797,389
Income taxes payable 58,864 160,000
Deferred compensation payable 135,054 --
------------ ------------
Net cash (used in) provided by operating activities (3,879,082) 1,616,465
------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment (466,122) (1,039,479)
Security deposits (8,025) (16,700)
------------ ------------
Net cash (used in) investing activities (474,147) (1,056,179)
------------ ------------
FINANCING ACTIVITIES:
Principal payments on term loan (252,000) (84,000)
Net proceeds from IPO 6,436,016 --
Advances under bank line of credit 27,754,052 28,108,814
Principal payments under bank line of credit (29,375,930) (27,715,835)
Principal payments of obligations under capital leases (115,586) (221,306)
Payments to related parties -- (79,646)
------------ ------------
Net cash provided by financing activities 4,446,552 8,027
------------ ------------
NET INCREASE IN CASH 93,323 568,313
Cash, beginning of year 642,145 73,832
------------ ------------
CASH, END OF YEAR $ 735,468 $ 642,145
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA:
Interest paid $ 103,286 $ 145,930
============ ============
Income taxes paid $ 460,744 $ 370,850
============ ============
On June 10, 2005, 10,000 shares of restricted stock valued at $24,650 were
issued for services to be rendered.
F-6
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2005 AND 2004
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 coffee. 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 amounts.
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 increase earnings volatility in any particular period.
At October 31, 2005, the Company held 300 options (generally with terms of
two months or less) covering an aggregate of 11,250,000 pounds of green
coffee beans at prices of $.9750 to $1.00 per pound. The fair market value
of these options, which was obtained from major financial institutions,
was $159,750 at October 31, 2005.
At October 31, 2004, the Company held 101 options (generally with terms of
two months or less) 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 times the Company acquires future contracts with longer terms
(generally three to four months) primarily for the purpose of guaranteeing
an adequate supply of green coffee. At October 31, 2005, the Company did
not hold any future contracts.
F-7
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2005 AND 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
HEDGING (Continued):
At October 31, 2004, the Company held 90 future contracts for the purchase
of 3,375,000 pounds of coffee at an average price of $ .80 per pound. The
market price of coffee applicable to such contracts was $.77 per pound at
October 31, 2004.
The Company historically has had short-term contracts with some of its
customers (generally one or 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, 2005 and 2004, the Company recorded realized and unrealized gains and
losses respectively, on these contracts as follows:
YEARS ENDED
OCTOBER 31,
2005 2004
----------- -----------
Gross realized gains $ 4,081,339 $ 3,129,479
Gross realized losses $(3,264,522) $(1,415,205)
Unrealized gains and (losses) $ 11,111 $ (92,236)
ADVERTISING:
The Company expenses the cost of advertising and promotion as incurred.
Advertising costs charged to opet 6 6 rations totaled $172,339 and $163,007 in
2005 and 2004, 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 6).
F-8
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2005 AND 2004
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 the grant or award (or at an appropriate
subsequent measurement date) over the amount the employee 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. In December
2004, the Financial Accounting Standards Board ("FASB") issued SFAS 123
(revised 2004), "Share-Based Payment" ("SFAS 123(R)") which replaces SFAS
123 and supersedes APB Opinion No. 25. Refer to the "Recent Accounting
Pronouncements" section below in this Note 2 for additional information.
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" ("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 dilutitive common shares, such as those issuable upon the
exercise of stock options, were issued during the period.
The weighted average common shares outstanding used in the computation of
basic earnings per share were 4,721,327 and 3,999,650 for 2005 and 2004,
respectively. The weighted average common shares outstanding used in the
computation of diluted earnings per share were 4,776,757 and 3,999,650 for
2005 and 2004, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of cash and cash equivalents, due from broker,
accounts receivable, prepaid expenses and other current assets, accounts
payable and accrued expenses approximate fair value because of the
short-term nature of these instruments. The carrying value of line of
credit borrowings approximates fair value as the interest rate reflects
current market rates for such borrowings. 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.
F-9
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2005 AND 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
REVENUE RECOGNITION (Continued):
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.
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 AND ADMINISTRATIVE EXPENSES:
Included in the selling and administrative line item of the statement 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 $1,358,000 and $1,197,000 for the
years ended October 31, 2005 and 2004, respectively is included in selling
and administrative expenses.
RECLASSIFICATIONS:
Prior years financial statements may have been reclassified to conform
with current years presentation.
F-10
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2005 AND 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
RECENT ACCOUNTING PRONOUNCEMENTS:
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 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. As the
Company currently accounts for share-based payments using the intrinsic
method as allowed by APB Opinion No.25, adoption of the fair value method
under SFAS 123(R) will have an impact on its results of operations.
However, the extent of the impact cannot be predetermined at this time
because it will depend on levels of share-based payments granted in the
future.
In June 2005, FASB issued SFAS No. 154, Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 (Accounting Changes) and
FASB No. 3 (Reporting Accounting Changes in Interim Financial Statements),
that changes requirements for the accounting for and reporting of a change
in accounting principle. This Statement requires retrospective application
to prior periods' financial statements of changes in accounting principle
unless it is impracticable to determine either the period-specific effects
or the cumulative effect of the change. When it is impracticable to
determine the period-specific effects of an accounting change on one or
more individual prior periods presented, this Statement requires that the
new accounting principle be applied to the balances of assets and
liabilities as of the beginning of the earliest period for which
retrospective application is practicable and that a corresponding
adjustment be made to the opening balance of retained earnings (or other
appropriate components of equity or net assets in the statement of
financial position) for that period rather than being reported in an
income statement. When it is impracticable to determine the cumulative
effect of applying a change in accounting principle to all prior periods,
this Statement requires that the new accounting principle be applied as if
it were adopted prospectively from the earliest date practicable.
Statement 154 is effective for accounting changes and error corrections
made in fiscal years beginning after December 15, 2005 (calendar year
2006). Early adoption is permitted. The Company cannot estimate the impact
of this pronouncement at this time.
DUE FROM BROKER:
The Company invests in options and future contracts through three
brokerage firms. At October 31, 2005, the aggregate amount due to the
Company was $2,994,394.
F-11
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2005 AND 2004
NOTE 3 - INVENTORIES:
Inventories at October 31, 2005 and October 31, 2004 consisted of the
following:
2005 2004
------------ ------------
Packed coffee $ 1,276,050 $ 668,413
Green coffee 2,483,061 1,051,223
Packaging supplies 737,467 538,653
------------ ------------
Totals $ 4,496,578 $ 2,258,289
============ ============
NOTE 4 - PROPERTY AND EQUIPMENT:
Property and equipment at October 31, 2005 and 2004 consisted of the
following:
Estimated
Useful Life 2005 2004
------------ ------------ ------------
Building and improvements 30 years $ 1,393,516 $ 1,358,506
Machinery and equipment 7 years 3,784,129 3,444,305
Machinery & equip under capital lease 7 years 458,179 458,179
Automobile 3 years 43,617 43,617
Furniture & fixtures 7 years 287,035 195,747
------------ ------------
Totals 5,966,476 5,500,354
Less accumulated depreciation 3,727,524 3,354,418
------------ ------------
2,238,952 2,145,936
Land 141,000 141,000
------------ ------------
Totals $ 2,379,952 $ 2,286,936
============ ============
Depreciation expense totaled $373,106 and $363,612 in 2005 and 2004,
respectively.
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, expiring on October 31, 2005
and requiring 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%,
which was 6.24% at October 31, 2005.
In March 2005, this Agreement was further amended to increase the maximum
availability under the line of credit to $4,000,000. The expiration date
of this agreement was extended to October 31, 2006 and as of October 31,
2005, the Company was in compliance with all financial covenants. In April
2005, the Company entered into an additional term loan - line of credit
with Merrill Lynch Business Financial Services, Inc. in order to finance
the purchase of roasting equipment. This term loan was paid in full prior
to October 31, 2005.
F-12
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2005 AND 2004
NOTE 6 - INCOME TAXES:
The tax effects of the temporary differences that give rise to the
deferred tax assets and liabilities as of October 31,
2005 2004
---------- ----------
Deferred tax assets:
Accounts receivable $ 168,855 $ 61,300
Inventory 149,745 75,600
---------- ----------
$ 318,600 $ 136,900
========== ==========
Deferred tax liabilities:
Fixed assets $ 53,700 $ 45,200
========== ==========
The Company believes its net deferred tax asset to be fully realizable
based on estimated continuing profitable operations.
The Company's provision for income taxes in 2005 and 2004, all
attributable to continuing operations, consisted of the following:
2005 2004
---------- ----------
Federal $ 591,664 $ 468,349
State and local 133,989 224,846
---------- ----------
Total $ 725,653 $ 693,195
========== ==========
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:
2005 2004
---------- ----------
US Federal income tax statutory rate 34% 34%
State income taxes, net of federal tax benefit 4% 8%
Other --% 2%
---------- ----------
Effective tax rate 38% 44%
========== ==========
F-13
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2005 AND 2004
NOTE 7 - COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES:
a) The Company occupies warehouse facilities under an operating lease,
which expired on August 31, 2005. The lease was renewed for another year,
expiring on August 31, 2006, 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 $90,000 and $59,030 in 2005 and 2004,
respectively. Future minimum rental payments under this non-cancelable
operating lease in years subsequent to October 31, 2005 are $75,000 in
2006.
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, 2005 for each of the next five years and thereafter are as
follows:
October 31,
2006 $ 100,093
2007 100,093
2008 100,093
2009 100,093
2010 100,093
Thereafter 1,326,232
------------
$ 1,826,697
------------
OBLIGATIONS UNDER CAPITAL LEASES:
The Company is a lessee of machinery and equipment under a capital lease,
which expires in July 2006. The assets and liabilities under 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 lease
are included in depreciation expense and amounted to $66,307 and $62,712,
for the years ended October 31, 2005 and 2004, respectively.
Assets held under capital lease are as follows:
2005 2004
---------- ----------
Machinery and equipment $ 458,179 $ 458,179
Less: accumulated depreciation (239,064) (172,757)
---------- ----------
Total $ 219,115 $ 285,422
========== ==========
F-14
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2005 AND 2004
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued):
OBLIGATIONS UNDER CAPITAL LEASES (Continued):
Minimum annual future lease payments under the capital lease for the next
year and in the aggregate is $1,329. The interest rate of the capital
lease is 7.347% per annum, which approximates the Company's incremental
rate of borrowing at the time the lease was entered into.
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.
401 (K) RETIREMENT PLAN:
In 2004, the Company began a 401(k) Retirement Plan, which covers all the
full time employees who have completed one year of service and have
reached their 21st birthday. The Company matches 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 $53,000 and $13,000 for 2005 and 2004,
respectively.
MARKETING AGREEMENT:
In May 2005, the Company entered into a one-year agreement with a
marketing firm to enhance investor/shareholder relationships. The Company
will pay the firm $8,000 per month and at closing, issued 10,000 shares of
stock valued at $24,650 for services to be rendered.
NOTE 8 - CONCENTRATION 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. Although at October 31, 2005 and 2004 the Company did have cash
balances that exceeded the 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 broker. Exposure to credit risk is reduced by placing
such deposits and investments with major financial institutions and
monitoring their credit ratings.
Approximately 28% and 8% of the Company's sales were derived from two
customers in 2005. Those customers also accounted for approximately
$314,000 and $249,000 of the Company's account receivable balance as of
October 31, 2005. 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 at October 31, 2004. Concentration 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.
F-15
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2005 AND 2004
NOTE 8 - CONCENTRATION OF CREDIT RISK (Continued):
Management does not believe that credit risk was significant at October
31, 2005 or 2004.
NOTE 9 - 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, 2005, no options had been granted under the Plan.
NOTE 10 - MAJOR VENDORS/RELATED PARTY:
During fiscal 2005, substantially all of the Company's purchases were from
ten vendors. The ten vendors accounted for 85% of total purchases. Two of
these vendors accounted for 43% and 8% of total purchases, respectively.
These two vendors accounted for approximately $1,457,000 and $165,000 of
the Company's accounts payable at October 31, 2005, respectively.
During fiscal 2004, substantially all of the Company's purchases were from
ten vendors. The ten vendors accounted for 81% of total 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.
In addition, an employee of one of these two vendors is a director of the
Company. Purchases from that vendor totaled approximately $12,969,000 and
$6,075,000 in 2005 and 2004, 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 many alternate suppliers.
NOTE 11 - 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. The deferred amounts
are invested in a qualified rabbi trust and are classified on the
Company's balance sheet as other assets.
F-16
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2005 AND 2004
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 revenue generated by the sale
of these products.
NOTE 13 - COMMON STOCK:
The Company 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 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 of 1,400,000 shares, at $5.00 per share, concluded on May 6,
2005 and on June 16, 2005 the underwriters exercised their right to
purchase 210,000 additional shares of common stock (the over-allotment
option) at the public offering price less the underwriting discount (ten
percent). The Company paid $25,000 to Maxim upon the filing of a
registration statement for the offering with the United States Securities
and Exchange Commission, which amount was split between Joseph Stevens and
Maxim. The Company paid 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. The
Company also sold to Joseph Stevens and Maxim for an aggregate of $100,
warrants to purchase 70,000 shares of common stock at a price of $6.00 per
share. The warrants are exercisable for a period of five years and contain
provisions for anti-dilution and piggyback registration rights.
During 2005, a former shareholder returned 89,820 shares of common stock
for no consideration.
F-17