Edgar Filing: COFFEE HOLDING CO INC

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------

FORM 10-QSB

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2004

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from to
-------- -------------------

Commission file number 333-00588-NY

COFFEE HOLDING CO., INC.
(Exact name of registrant as specified in its charter)

NEVADA 11-2238111
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

4401 FIRST AVENUE, BROOKLYN, NEW YORK 11232-0005
(Address of principal executive offices)
(Zip Code)

(718) 832-0800
(Registrant's telephone number including area code)

N/A
----------------------------------------------------

(Former name, former address and former fiscal year,
if changed from last Report)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|.

Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.

OUTSTANDING AT
CLASS JULY 31, 2004
--------------------- -----------------
Common Stock,
par value $.01 3,999,650

PART I

PAGE
----

ITEM 1. FINANCIAL STATEMENTS.....................................................................................1

Condensed Balance Sheets
July 31, 2004 (unaudited) and October 31, 2003.................................................................1

Condensed Statements of Operations
Three and Nine Months Ended July 31, 2004 and 2003 (unaudited).................................................2

Condensed Statements of Cash Flows
Nine Months Ended July 31, 2004 and 2003 (unaudited)...........................................................3

Notes To Condensed Financial Statements...........................................................................4

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................................................................8

ITEM 3. CONTROLS AND PROCEDURES................................................................................17

PART II

ITEM 1. LEGAL PROCEEDINGS .....................................................................................18

ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES ......................18

ITEM 3. DEFAULTS UPON SENIOR SECURITIES .......................................................................18

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...................................................18

ITEM 5. OTHER INFORMATION .....................................................................................18

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ......................................................................18

SIGNATURES.......................................................................................................19

PART I
ITEM I. FINANCIAL STATEMENTS

COFFEE HOLDING CO., INC.
CONDENSED BALANCE SHEETS
JULY 31, 2004 AND OCTOBER 31, 2003

JULY 31, October 31,
2004 2003
----------- -----------
(UNAUDITED)

- ASSETS -
CURRENT ASSETS:
Cash ......................................................................................... $ 104,044 $ 73,832
Due from broker .............................................................................. 319,790 894,123
Accounts receivable, net of allowance for doubtful accounts of $100,349 and $119,435,
respectively ............................................................................... 2,463,406 2,154,683
Inventories .................................................................................. 2,775,705 1,781,424
Prepaid expenses and other current assets .................................................... 359,856 431,432
Deferred tax asset ........................................................................... 94,400 103,700
---------- ----------
TOTAL CURRENT ASSETS ..................................................................... 6,117,201 5,439,194

Property and equipment, at cost, net of accumulated depreciation of $3,269,698 and $2,991,206,
respectively .................................................................................. 2,222,358 1,579,294
Deposits and other assets ......................................................................... 35,996 16,796
Loans to related parties .......................................................................... 11,491 --
---------- ----------
$8,387,046 $7,035,284
========== ==========

- LIABILITIES AND STOCKHOLDERS' EQUITY -
CURRENT LIABILITIES:
Current portion of term loan ................................................................. $ 84,000 $ 84,000
Current portion of obligations under capital lease ........................................... 125,336 130,551
Line of credit borrowings .................................................................... 2,895,661 --
Accounts payable and accrued expenses ........................................................ 2,231,866 1,861,447
Income taxes payable - current ............................................................... 89,156 --
---------- ----------
TOTAL CURRENT LIABILITIES ................................................................ 5,426,019 2,075,998

Term loan, net of current portion ................................................................. 189,000 252,000
Obligations under capital lease, net of current portion ........................................... -- 91,895
Line of credit borrowings ......................................................................... -- 2,376,066
Loans from related parties ........................................................................ -- 79,646
Income taxes payable - deferred ................................................................... 39,000 39,200
---------- ----------
TOTAL LIABILITIES ........................................................................ 5,654,019 4,914,805
---------- ----------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
Preferred stock, par value $.001 per share; 10,000,000 shares authorized; none issued ........ -- --
Common stock, par value $.001 per share; 30,000,000 shares authorized, 3,999,650 shares issued
and outstanding ............................................................................ 4,000 4,000
Additional paid-in capital ................................................................... 867,887 867,887
Retained earnings ............................................................................ 1,861,140 1,248,592
---------- ----------
TOTAL STOCKHOLDERS' EQUITY ............................................................... 2,733,027 2,120,479
---------- ----------
$8,387,046 $7,035,284
========== ==========

See notes to Condensed Financial Statements.

COFFEE HOLDING CO., INC.
CONDENSED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED JULY 31, 2004 AND 2003
(UNAUDITED)

NINE MONTHS ENDED THREE MONTHS ENDED
JULY 31, JULY, 31
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------

NET SALES ...................................... $ 18,577,528 $ 14,485,808 $ 6,396,568 $ 4,912,052

COST OF SALES .................................. 13,892,695 10,886,840 5,421,709 3,592,603
------------ ------------ ------------ ------------

GROSS PROFIT ................................... 4,684,833 3,598,968 974,859 1,319,449
------------ ------------ ------------ ------------

OPERATING EXPENSES:
Selling and administrative ................ 3,091,110 2,448,716 1,036,381 924,249
Officers' salaries ........................ 370,424 312,610 123,475 120,884
------------ ------------ ------------ ------------
TOTALS ................................ 3,461,534 2,761,326 1,159,856 1,045,133
------------ ------------ ------------ ------------

INCOME (LOSS) FROM OPERATIONS .................. 1,223,299 837,642 (184,997) 274,316
------------ ------------ ------------ ------------

OTHER INCOME (EXPENSE)
Interest income ............................. 9,195 6,835 2,692 2,005
Interest expense ............................ (137,846) (105,365) (56,250) (32,883)
------------ ------------ ------------ ------------
(128,651) (98,530) (53,558) (30,878)
------------ ------------ ------------ ------------

INCOME (LOSS) BEFORE INCOME TAXES .............. 1,094,648 739,112 (238,555) 243,438

Provision (credit) for income taxes ......... 482,100 298,300 (113,100) 76,700
------------ ------------ ------------ ------------

NET INCOME (LOSS) .............................. $ 612,548 $ 440,812 $ (125,455) $ 166,738
============ ============ ============ ============

Basic earnings (loss) per share ................ $ .15 $ .11 $ (.03) $ .04
============ ============ ============ ============

Basic weighted average common shares outstanding 3,999,650 3,999,650 3,999,650 3,999,650
============ ============ ============ ============

See notes to Condensed Financial Statements.

COFFEE HOLDING CO., INC.
CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 2004 AND 2003
(UNAUDITED)

2004 2003
------------ ------------

OPERATING ACTIVITIES:
Net income ................................................................................ $ 612,548 $ 440,812
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation ....................................................................... 290,653 152,924
Bad debts (recovery) ............................................................... (19,086) (12,154)
Deferred taxes ..................................................................... 9,100 (31,200)
Changes in operating assets and liabilities:
Due from broker ..................................................................... 574,333 (127,039)
Accounts receivable ................................................................. (289,637) 18,867
Inventories ......................................................................... (994,281) (494,666)
Prepaid expenses and other current assets ........................................... 71,576 (356,163)
Accounts payable and accrued expenses ............................................... 370,419 (424,751)
Income taxes payable ................................................................ 89,156 193,709
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES .............................. 714,781 (639,661)
------------ ------------

INVESTING ACTIVITIES:
Purchases of property and equipment ....................................................... (908,093) (31,450)
Disposal of fixed assets ................................................................. (25,624) --
Security deposits ......................................................................... (19,200) --
------------ ------------
NET CASH (USED IN) INVESTING ACTIVITIES .......................................... (952,917) (31,450)
------------ ------------

FINANCING ACTIVITIES:
Principal payments on term loan ........................................................... (63,000) (63,000)
Advances under bank line of credit ........................................................ 19,912,579 15,685,990
Principal payments under bank line of credit .............................................. (19,392,984) (14,843,189)
Principal payments of obligations under capital leases .................................... (97,110) (89,195)
Payments to related parties ............................................................... (91,137) (5,640)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ........................................ 268,348 684,966
------------ ------------

NET INCREASE IN CASH ........................................................................... 30,212 13,855

Cash, beginning of year .................................................................... 73,832 43,568
------------ ------------

CASH, END OF PERIOD ............................................................................ $ 104,044 $ 57,423
============ ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA:
Interest paid .............................................................................. $ 137,846 $ 105,365
============ ============
Income taxes paid .......................................................................... $ 194,300 $ 336,029
============ ============

See notes to Condensed Financial Statements.

COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
JULY 31, 2004 AND 2003
(UNAUDITED)

NOTE 1 - BUSINESS ACTIVITIES:

Coffee Holding Co., Inc. (the "Company"), conducts wholesale
coffee operations, including manufacturing, roasting,
packaging, marketing and distributing roasted and blended
coffees for private labeled accounts and its own brands, and
sells green coffees. The Company's sales are primarily to
customers that are located throughout the United States.

NOTE 2 - BASIS OF PRESENTATION:

In the opinion of management, the accompanying unaudited
condensed financial statements reflect all adjustments,
consisting of normal recurring accruals, necessary to present
fairly the financial position of the Company as of July 31,
2004, its results of operations and its cash flows for the
nine months ended July 31, 2004 and 2003. Information included
in the balance sheet as of October 31, 2003 has been derived
from the Company's audited balance sheet included in the
Company's Annual Report on Form 10-KSB for the year ended
October 31, 2003 (the "Form 10-KSB") previously filed with the
Securities and Exchange Commission (the "SEC"). Pursuant to
the rules and regulations of the SEC for interim financial
statements, certain information and disclosures normally
included in financial statements prepared in accordance with
accounting principles generally accepted in the United States
of America have been condensed or omitted from these financial
statements unless significant changes have taken place since
the end of the most recent fiscal year. Accordingly, these
unaudited condensed financial statements should be read in
conjunction with the audited financial statements and the
other information in the Form 10-KSB.

Operating results for the nine months ended July 31, 2004 are
not necessarily indicative of the results that may be expected
for the year ending October 31, 2004.

NOTE 3 - INVENTORIES:

Inventories at July 31, 2004 and October 31, 2003 consisted of
the following:

JULY 31, October 31,
2004 2003
---------- ----------
Packed coffee $1,022,004 $ 213,062
Green coffee 1,202,973 999,137
Packaging supplies 550,728 569,225
---------- ----------
Totals $2,775,705 $1,781,424
========== ==========

NOTE 4 - HEDGING:

The Company uses options and futures contracts to partially
hedge the effects of fluctuations in the price of green coffee
beans. Options and futures contracts are marked to market with
current recognition of gains and losses on such positions. The
Company does not defer such gains and losses since its
positions are not considered hedges for financial reporting
purposes. The Company's accounting for options and futures
contracts may increase earnings volatility in any particular
period.

COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
JULY 31, 2004 AND 2003
(UNAUDITED)

NOTE 4 - HEDGING (CONTINUED):

At July 31, 2004, the Company held 118 options (generally with
terms of two months or less) covering an aggregate of
4,425,000 pounds of green coffee beans at a price of $.675 and
$.725 per pound. The fair market value of these options, which
was obtained from a major financial institution, was $150,038
at July 31, 2004.

At July 31, 2003, the options contracts held by the Company
were immaterial.

The Company acquires futures contracts with longer terms
(generally three to four months) primarily for the purpose of
guaranteeing an adequate supply of green coffee. At July 31,
2004, the Company held 53 futures contracts for the purchase
of 1,987,500 pounds of coffee at an average price of $.707 per
pound for September 2004 contracts. The market price of coffee
applicable to such contracts was $.665 per pound at that date.

At July 31, 2003, the Company held 144 futures contracts for
the purchase of 5,400,000 pounds of coffee at an average price
of $.6155 per pound for September 2003 contracts. The market
price of coffee applicable to such contracts was $.47 per
pound at that date.

Included in cost of sales and due from broker for the three
and nine months ended July 31, 2004 and 2003, the Company
recorded realized and unrealized gains and losses
respectively, on these contracts as follows:

THREE MONTHS ENDED JULY 31,
---------------------------
2004 2003
--------- ---------
Realized gains and (losses) $(445,389) $ 238,072
Unrealized gains and (losses) $ 7,519 $(122,007)

NINE MONTHS ENDED JULY 31,
----------------------------
2004 2003
----------- -----------
Realized gains $ 1,039,052 $ 574,923
Unrealized (losses) $ (318,755) $ (98,344)

NOTE 5 - LINE OF CREDIT:

The outstanding balance under a line of credit agreement with
a bank was $2,895,661 at July 31, 2004. This amount is now
being reflected as short term at the balance sheet date, since
the principal loan balance is due in November of 2004.

COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
JULY 31, 2004 AND 2003
(UNAUDITED)

NOTE 6 - OBLIGATIONS UNDER CAPITAL LEASES:

The Company is a lessee of machinery and equipment under a
capital lease, which expires in June 2005. The asset and
liability under the capital lease is recorded at the lower of
the present value of the minimum lease payments or the fair
value of the asset. The asset is being depreciated over the
lease term.

Depreciation expense of assets under capital lease are
included in depreciation expense and amounted to $15,228 and
$45,684, for the three months and nine months ended July 31,
2004.

The interest rate on the capital lease is 8 1/3% per annum,
which approximates the Company's incremental rate of borrowing
at the time the lease was entered into.

NOTE 7 - COMMITMENTS AND CONTINGENCIES:

In February 2004, the Company entered into a lease for office
and warehouse space in La Junta City, Colorado with an
unrelated third party. This lease, which is at a monthly
rental of $8,341 beginning January 2005, expires on January
31, 2024.

The aggregate minimum future lease payments for the Colorado
location as of October 31, 2004 for each of the next five
years are as follows:

October 31,
-----------
2004 $ --
2005 83,411
2006 100,093
2007 100,093
2008 100,093
Thereafter 1,526,418
----------
$1,910,108
==========

NOTE 8 - EARNINGS PER SHARE:

The Company presents "basic" and, if applicable, "diluted"
earnings per common share pursuant to the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings
per Share". Diluted earnings per share have not been presented
because the Company had no potentially dilutive securities
outstanding during the three months and nine months ended July
31, 2004 and 2003.

NOTE 9 - ECONOMIC DEPENDENCY:

For the nine months ended July 31, 2004, sales to one customer
were in excess of 10% of the Company's total sales. Sales to
this customer were approximately $4,025,000 and the
corresponding accounts receivable at July 31, 2004 from this
customer was approximately $344,000.

For the nine months ended July 31, 2003, sales to two
customers were each in excess of 10% of the Company's total
sales. Sales to these customers were approximately $2,551,000
and $2,308,000 and the corresponding accounts receivable at
July 31, 2003 from these customers were approximately $127,000
and $201,700, respectively.

COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
JULY 31, 2004 AND 2003
(UNAUDITED)

NOTE 9 - ECONOMIC DEPENDENCY (CONTINUED):

For the nine months ended July 31, 2004, purchases from two
suppliers, were each in excess of 10% of the Company's total
purchases. Purchases from these suppliers were approximately
$5,071,000 and $1,382,000 and the corresponding accounts
payable to these suppliers at July 31, 2004 was approximately
$390,000 and $36,000, respectively.

For the nine months ended July 31, 2003, purchases from two
suppliers, were each in excess of 10% of the Company's total
purchases. Purchases from these suppliers were approximately
$3,082,000 and $1,063,000 and the corresponding accounts
payable to these suppliers at July 31, 2003 was approximately
$110,700 and $124,500, respectively.

NOTE 10 - 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 this facility and certain other assets.
The purchase price for these assets was $825,000, based upon
an independent appraisal. The Company has also reached an
agreement with the city of La Junta, Colorado to lease the
facility formerly operated by the seller.

The Company also entered into a 10 year (renewable for an
additional 10 years) licensing agreement with Del Monte Corp,
for the exclusive right to use the "S&W" and "Il Classico"
trademarks in the United States in connection with the
production, manufacture and sale of roasted whole bean and
ground coffee for distribution at the retail distribution
level. The Company will pay Del Monte Corp., 2% of net
revenues generated by the sale of these products.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

CAUTIONARY NOTE ON FORWARD LOOKING STATEMENTS

This report contains forward-looking statements made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements typically are identified by use of terms such as
"may," "will," "should," "plan," "expect," "anticipate," "estimate" and similar
words, although some forward-looking statements are expressed differently.
Forward-looking statements represent our management's judgment regarding future
events. Although we believe that the expectations reflected in such
forward-looking statements are reasonable, we can give no assurance that such
expectations will prove to be correct. All statements other than statements of
historical fact included in this prospectus regarding our financial position,
business strategy, products, products under development, markets, budgets,
plans, or objectives for future operations are forward-looking statements. We
cannot guarantee the accuracy of the forward-looking statements, and you should
be aware that our actual results could differ materially from those contained in
the forward-looking statements.

OVERVIEW

We are an integrated wholesale coffee roaster and dealer in the United
States and one of the few coffee companies that offers a broad array of coffee
products across the entire spectrum of consumer tastes, preferences and price
points. As a result, we believe that we are well positioned to increase our
profitability and endure potential coffee price volatility throughout varying
cycles of the coffee market and economic conditions.

Our operations have primarily focused on the following areas of the
coffee industry:

o the sale of wholesale specialty green coffee;

o the roasting, blending, packaging and sale of private label
coffee; and

o the roasting, blending, packaging and sale of our seven brands of
coffee.

Our operating results are affected by a number of factors including:

o the level of marketing and pricing competition from existing or
new competitors in the coffee industry;

o our ability to retain existing customers and attract new
customers;

o fluctuations in purchase prices and supply of green coffee and in
the selling prices of our products; and

o our ability to manage inventory and fulfillment operations and
maintain gross margins.

Our net sales are driven primarily by the success of our sales and
marketing efforts and our ability to retain existing customers and attract new
customers. For this reason, we have made the strategic decision to invest in
measures that will increase net sales. During the three months ended April 30,
2004, we acquired certain assets of Premier Roasters. See "- Overview - Recent
Developments." We also hired a West Coast Brand Manager to market our S&W brand
and to increase sales of S&W coffee to new customers and increased attendance at
trade shows to promote our food service and private label coffee business. In
the last twelve months, we also hired third party marketing specialists to
increase the sale of our branded coffee through label redesigns and new
distribution. As a result of these efforts, net sales increased in our specialty
green coffee, private label and branded coffee business lines in both dollars
and pounds sold since the date of the acquisition. In addition, we increased the
number of our customers in all three areas.

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.

Recent Developments. In February 2004, we acquired certain assets of
Premier Roasters, a roaster-dealer located in La Junta, Colorado, for $825,000.
The assets purchased by us include all of the operating equipment located at
Premier Roasters' La Junta and Rocky Ford, Colorado locations, as well as all
labels for all of Premier Roasters' coffee products. In connection with the
acquisition of these assets, we reached an agreement with the City of La Junta,
Colorado on a 20-year lease for a 50,000 square foot facility in La Junta. We
are using the assets that we purchased to expand our integrated wholesale coffee
roaster and dealer operations to the Western United States. In connection with
this transaction, we also entered into a licensing agreement with Del Monte
Corporation for the exclusive right to use the S&W and IL CLASSICO trademarks,
including Premium, Premium Decaf, French Roast, Colombian, Colombian Decaf,
Swiss Water Decaf, Kona, and Mellow'd Roast lines, in connection with the
production, manufacture and sale of ground coffee for distribution to retail
customers in the United States and certain other countries approved by Del Monte
Corporation.

We believe that our new La Junta, Colorado facility will allow us to
grow our business and increase sales to new and existing customers in the
Western United States. By operating out of two facilities, we will now be able
to compete aggressively throughout the United States as we have gained new
economies of scale in both manufacturing and logistical efficiencies which were
unavailable in the past while operating solely out of our New York facility. In
addition, we intend to broaden our customer base and increase penetration with
existing customers by expanding the S&W label from a well-known brand on the
West coast to a well-known brand throughout the entire continental United
States.

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. 101,
"Revenue Recognition in Financial Statements" ("SAB 101").
Under SAB 101, revenue is recognized at the point of passage
to the customer of title and risk of loss, when there is
persuasive evidence of an arrangement, the sales price is
determinable, and collection of the resulting receivable is
reasonably assured. We generally recognize revenue at the time
of shipment. Sales are reflected net of discounts and returns.

o Our allowance for doubtful accounts is maintained to provide
for losses arising from customers' inability to make required
payments. If there is deterioration of our customers' credit
worthiness and/or there is an increase in the length of time
that the receivables are past due greater than the historical
assumptions used, additional allowances may be required.

o Inventories are stated at cost (determined on an average cost
basis). Based on our assumptions about future demand and
market conditions, inventories are written-down to market
value. If our assumptions about future demand change and/or
actual market conditions are less favorable than those
projected, additional write-downs of inventories may be
required.

o We account for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS No. 109"). Under SFAS No. 109, deferred tax
assets and liabilities are determined based on the
liabilities, using enacted tax rates in effect for the year in
which the differences are expected to reverse. Deferred tax
assets are reflected on the balance sheet when it is
determined that it is more likely than not that the asset will
be realized.

COMPARISON OF RESULTS OF OPERATIONS

NINE MONTHS ENDED JULY 31, 2004 COMPARED TO THE NINE MONTHS ENDED JULY 31, 2003

Net Income. Net income increased $171,736, or 39.0%, to $612,548 or
$.15 per share for the nine months ended July 31, 2004 compared to $440,812 or
$.11 per share for the nine months ended July 31, 2003. The increase in net
income primarily reflects increased net sales, increased margins on our branded
coffee and private label coffee products and increased margins on specialty
green coffee sales.

Net Sales. Net sales totaled $18,577,528 for the nine months ended July
31, 2004, an increase of $4,091,720 or 28.2% from $14,485,808 for the nine
months ended July 31, 2003. The increase in net sales reflects initial sales of
$601,573 under our license of the S&W brand which we signed in February 2004,
$510,803 from an increase in pounds sold of private label coffee to existing
customers and $93,328 from an increase in pounds sold of branded coffees to
existing customers. Sales of our Cafe Caribe brand, as measured by Information
Resources Incorporated data, increased approximately 25% over the comparable
2003 period due in part to the efforts of our third party marketing specialists
through label redesigns and new distribution. The increase in net sales also
reflects increased sales of specialty green coffee in the amount of $2,882,016.
The number of our customers in the specialty green coffee area grew
approximately 11.1% to 272 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 nine months ended July 31, 2004
was $13,892,695 or 74.8% of net sales, as compared to $10,866,840 or 75.0% of
net sales for the nine months ended July 31, 2003. Cost of sales consists
primarily of the cost of green coffee and packaging materials and realized and
unrealized gains or losses on hedging activity. The increase in cost of sales
reflects a $419,731 increase in packaging costs associated with the increase in
net sales and $2,601,546 from higher green coffee prices during the period as
prices increased $.10 per pound year to year, partially offset by net gains on
future contracts. As the price of coffee is cyclical and volatile and subject to
many factors, including weather, politics and economics, we are unable to
predict the purchase price of green coffee for fiscal 2004. We began to acquire
futures contracts with longer terms (generally three to six months) primarily
for the purpose of guaranteeing an adequate supply of green coffee at favorable
prices beginning in the latter half of fiscal 2000 and continuing through fiscal
2004. As the price of specialty green coffee beans continued to increase, we
used our favorable inventory position to increase our margins. We had net gains
on futures contracts of $720,297 for the nine months ended July 31, 2004
compared to $476,579 for the comparable period in 2003. The use of these
derivative financial instruments has enabled us to mitigate the effect of
changing prices, to increase our margins as coffee prices have increased and to
be more competitive with our pricing.

Gross Profit. Gross profit for the nine months ended July 31, 2004 was
$4,684,833, an increase of $1,085,865 or 30.2%, from $3,598,968 for the nine
months ended July 31, 2003. Gross profit as a percentage of net sales increased
by 0.4% to 25.2% for the nine months ended July 31, 2004 from 24.8% for the same
period in 2003. Gains on futures contracts, reduced pricing pressure from
national brands and new business with favorable pricing terms allowed us to
increase our margins as the price of green coffee has increased. As previously
discussed, we believe that our favorable inventory position will allow us to
increase our sales and ultimately our margins if coffee prices continue to rise.

Operating Expenses. Total operating expenses increased $700,208 or
25.4% to $3,461,534 for the nine months ended July 31, 2004 from $2,761,326 for
the same period in 2003 due to increases in selling and administrative expenses
and officers' salaries. Selling and administrative expenses increased $642,394
or 26.2% to $3,091,110 for the nine months ended July 31, 2004 from $2,448,716
for the same period in 2003. The increase in selling and administrative expenses
reflects several factors, including increases of $231,724 in shipping expenses,
$140,686 in office salaries, $81,223 in sales commissions, $48,953 in rent and
$43,118 in utilities.

We acquired certain assets of Premier Roasters and entered into a lease
to operate from our new La Junta facility in February 2004. Prior to commencing
operations in La Junta, we incurred expenses associated with repairing and
maintaining equipment located at the facility so that such equipment could meet
our need and our roasting and blending requirements. We also incurred expenses
associated with the hiring of 25 new employees at the facility. In addition,
because many S&W brand customers had previously placed orders with Premier
Roasters, they initially did not require additional inventory to be shipped. As
a result, sales out of our La Junta facility were initially slower than
expected. However, in April 2004, these customers began to replace their
existing inventories of S&W brand products, resulting in increased sales.
Although we will continue to incur increased operating expenses from operating
out of two facilities, we expect to gain new economies of scale in both
manufacturing and logistical efficiencies which were unavailable in the past
while operating solely out of our New York facility. We believe that this will
allow us to compete aggressively throughout the United States.

The increase in shipping expenses reflects the increase in pounds of
coffee sold, higher rates caused by increased fuel surcharges and gasoline
prices, and the addition of new customers during the period. The increase in
commissions reflects the hiring of a West Coast Brand Manager to market our S&W
brand as well as increases in sales of S&W coffee to new customers. We believe
that these changes reflect our strategic decision to invest in measures that
will increase net sales on a present and future basis. The increase in office
salaries reflects normal salary increases to non-officer employees in our New
York facility and the addition of new personnel in our Colorado facility. The
increases in rent and utilities reflect the increased costs of operating two
facilities.

Officers' salaries increased $57,814 to $370,424 for the nine months
ended July 31, 2004 from $312,610 for the nine months ended July 31, 2003. The
increase was due to salary increases for senior officers.

Other Expense. Other expense increased $30,121 or 30.6% from $98,530
for the nine months ended July 31, 2003 to $128,651 for the nine months ended
July 31, 2004. The increase is attributable to increased interest expense due to
the higher balance in outstanding borrowings under our credit facility for the
nine months ended July 31, 2004 compared to 2003 due to higher inventory levels
necessitated by the operation of two facilities. Rates of interest on our
outstanding borrowings are tied to the prime rate. See "--Liquidity and Capital
Resources."

Income Before Taxes. We had income of $1,094,648 before income taxes
for the nine months ended July 31, 2004 compared to income of $739,112 before
income taxes for the nine months ended July 31, 2003. The increase was
attributable primarily to improved margins on the sale of our private label,
branded and specialty green coffee products due to a favorable inventory
position as coffee prices increased.

Income Taxes. Our provision for income taxes for the nine months ended
July 31, 2004 totaled $482,100 compared to $298,300 for the nine months ended
July 31, 2003 as a result of increased income before taxes.

THREE MONTHS ENDED JULY 31, 2004 COMPARED TO THE THREE MONTHS ENDED JULY 31,
2003

Net Income. Net income decreased $292,193 from net income of $166,738,
or $.04 per share, for the three months ended July 31, 2003 compared to a net
loss of $125,455, or a net loss of $.03 per share, for the three months ended
July 31, 2004. The decrease in net income primarily reflects increased cost of
sales due to higher green coffee prices, increased packaging costs associated
with increased sales and realized and unrealized losses on hedging activity
during the quarter.

Net Sales. Net sales totaled $6,396,568 for the three months ended July
31, 2004, an increase of $1,484,516 or 30.2% from $4,912,052 for the three
months ended July 31, 2003. The increase in net sales reflects sales of $438,752
under our license of the S&W brand, $95,036 from an increase in pounds sold of
private label coffee to existing customers and $84,046 from an increase in
pounds sold of branded coffees to existing customers. Sales of our Cafe Caribe
brand, as measured by Information Resources Incorporated data, increased
approximately 25% over the comparable 2003 period due in part to the efforts of
our third party marketing specialists through label redesigns and new
distribution. The increase in net sales also reflects increased sales of
specialty green coffee in the amount of $864,683. The number of our customers in
the specialty green coffee area grew approximately 6.7% to 272 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 increased $1,829,106 to $5,421,709, or
84.8% of net sales, for the three months ended July 31, 2004 as compared to
$3,592,603, or 73.1% of net sales, for the three months ended July 31, 2003.
Cost of sales consists primarily of the cost of green coffee and packaging
materials and realized and unrealized gains or losses on hedging activity. The
increase in cost of sales reflects a $74,293 increase in packaging costs
associated with the increase in net sales and $706,499 from higher green coffee
prices during the period as prices increased between $.10 and $.27 per pound
year to year. 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 the remainder of fiscal 2004 and
fiscal 2005. Increased factory labor costs of $100,000 also contributed to the
increase. The increase in cost of sales was also attributable to $437,870 in net
losses on futures contracts compared to net gains on futures of $116,005 for the
three months ended July 31, 2003. We began to acquire futures contracts with
longer terms (generally three to six months) primarily for the purpose of
guaranteeing an adequate supply of green coffee at favorable prices beginning in
the latter half of fiscal 2000 and continuing through fiscal 2004. In past
periods when the price of specialty green coffee beans was at historically low
levels and continuing during periods in which coffee prices were rising, our
hedging activity allowed us to develop a favorable inventory position, which in
turn increased our margins. In the third quarter of fiscal 2004, the price of
coffee decreased unexpectedly and we incurred losses on futures contracts as a
result. Despite these losses, we believe that we maintain a favorable inventory
position. We will continue to use our hedging activity to acquire green coffee
at favorable prices for the foreseeable future.

Gross Profit. Gross profit for the three months ended July 31, 2004 was
$974,859, a decrease of $344,590, or 26.1%, from $1,319,449 for the three months
ended July 31, 2003. Gross profit as a percentage of net sales decreased by
11.7% to 15.2% for the three months ended July 31, 2004 from 26.9% for the same
period in 2003. The decrease in gross profit primarily reflects the increased
cost of sales.

Operating Expenses. Total operating expenses increased $114,723 or
11.0% to $1,159,856 for the three months ended July 31, 2004 from $1,045,133 for
the same period in 2003 due to increases in selling and administrative expenses.
Selling and administrative expenses increased $112,132 or 12.1% to $1,036,381
for the three months ended July 31, 2004 from $924,249 for the same period in
2003. The increase in selling and administrative expenses reflects several
factors, including increases of $48,953 in rent, $42,015 in sales commissions,
$38,467 in office salaries, and $20,458 in utilities. The increase in
commissions reflects the hiring of a West Coast Brand Manager to market our S&W
brand as well as increases in sales of S&W coffee to new customers. We believe
that these changes reflect our strategic decision to invest in measures that
will increase net sales on a present and future basis. The increase in office
salaries reflects normal salary increases to non-officer employees in our New
York facility and the addition of new personnel in our Colorado facility. The
increase in rent and utilities reflects the increased costs of operating two
facilities.

Other Expense. Other expense increased $22,680 or 73.5% from $30,878
for the three months ended July 31, 2003 to $53,558 for the three months ended
July 31, 2004. The increase is attributable to increased interest expense due to
the higher balance in outstanding borrowings under our credit facility for the
three months ended July 31, 2004 compared to 2003 due to higher inventory levels
necessitated by the operation of two facilities. Rates of interest on our
outstanding borrowings are tied to the prime rate. See "--Liquidity and Capital
Resources."

Loss Before Taxes. We had a net loss of $238,255 before income taxes
for the three months ended July 31, 2004 compared to income of $243,438 before
income taxes for the three months ended July 31, 2003. The change was
attributable primarily to increased cost of sales and operating expenses,
partially offset by an increase in net sales.

Income Taxes. Our provision (credit) for income taxes for the three
months ended July 31, 2004 totaled ($113,100) compared to $76,700 for the three
months ended July 31, 2003 as a result of decreased income before taxes.

LIQUIDITY AND CAPITAL RESOURCES

As of July 31, 2004, we had working capital of $691,182 which
represented a $2,672,014 decrease from our working capital of $3,363,196 as of
October 31, 2003, and total stockholders' equity of $2,733,027, which increased
by $612,548 from our total stockholders' equity of $2,120,479 as of October 31,
2003. Our working capital decreased primarily due to the recategorization of the
outstanding balance under our line of credit to short-term liabilities
(liabilities due and payable in less than one year). The outstanding balance
under the line of credit was classified as short-term debt in our July 31, 2004
balance sheet since the agreement expires in November 2004, but was classified
as long-term debt in our October 31, 2003 balance sheet. At July 31, 2004, the
outstanding balance on our line of credit was $2,895,661 compared to $2,376,066
at October 31, 2003. This decrease in working capital was partially offset by a
$994,281 increase in inventories at July 31, 2004 compared to October 31, 2003.

We have a credit facility with Wells Fargo Business Credit. The credit
facility provides for a revolving line of credit of up to $5,000,000 based on
eligible trade accounts receivable and inventories and a term loan of up to
$750,000 based on eligible equipment. The line of credit provides for borrowings
of up to 85% of our eligible trade accounts receivable and 60% of eligible
inventories. On October 1, 2002, we extended our credit facility for an
additional two years to November 20, 2004 at lower interest rates. Interest on
the line of credit is payable monthly at the prime rate plus .25% (an effective
rate of 4.75% at July 31, 2004) and interest on the term loan is payable monthly
at the prime rate plus .50% (an effective rate of 5.00% at July 31, 2004).
Principal payments on the term loan are payable in monthly installments of
$7,000. Andrew Gordon and David Gordon, two of our directors and officers, each
have guaranteed borrowings under the credit facility up to $500,000.

In addition, our credit facility with Wells Fargo Business Credit
contains covenants that place restrictions on our operations. Among other
things, these covenants: require that a portion of our cash flow from operations
be dedicated to servicing our debt; limit our ability to obtain additional
capital through financings without the consent of the lender; limit our ability
to pay dividends or make other distributions to our stockholders and acquire or
retire our common stock without the consent of the lender; and prohibit us from
forming or acquiring subsidiaries, merging with or into other companies or
selling all or substantially all of our assets without the consent of the
lender. These restrictions could adversely impact our ability to implement our
business plan, or raise additional capital, if needed. In addition, if we
default under our existing credit facility or if our lender demands payment of a
portion or all of our indebtedness, we may not have sufficient funds to make
such payments. We are currently in compliance with all covenants contained in
the credit facility. We intend to renegotiate the terms of our credit facility,
including the covenants, prior to its expiration in November 2004.

As indicated above, as of July 31, 2004, the line of credit with Wells
Fargo Business Credit had an outstanding balance of $2,895,661 as compared to an
outstanding balance of $2,376,066 at October 31, 2003. The outstanding balance
under the term loan was $273,000 as of July 31, 2004, and was $336,000 at
October 31, 2003. We were in compliance with all required financial covenants at
July 31, 2004.

We also lease machinery and equipment under a capital lease which
expires in July 2005. The interest rate on the capital lease is 8-1/3% per
annum. The outstanding balance on the capital lease was $125,336 at July 31,
2004 compared to $222,446 at October 31, 2003.

We had loans payable to our stockholders, all of whom are members of
the Gordon family, of $79,646 at October 31, 2003. The loans were repaid during
the quarter ended July 31, 2004. We do not intend to borrow additional amounts
from our stockholders.

For the nine months ended July 31, 2004, our operating activities
provided net cash of $714,781 as compared to the nine months ended July 31, 2003
when net cash used in operating activities was $639,661. The increased cash flow
from operations for the nine months ended July 31, 2004 was primarily due to a
decrease of $574,333 in cash due from broker, $612,548 in net income, $370,419
in decreased accounts payable, offset in part by $994,281 in increased inventory
levels and a $289,637 increase in accounts receivable.

For the nine months ended July 31, 2004, our investing activities used
net cash of $952,917 as compared to the nine months ended July 31, 2003 when net
cash used by investing activities was $31,450. The decreased cash flow from
investing activities for the nine months ended July 31, 2004 was primarily due
to the purchase of property and equipment from Premier Roasters in February
2004.

For the nine months ended July 31, 2004, our financing activities
provided net cash of $268,348 as compared to the nine months ended July 31, 2003
when net cash provided by financing activities was $684,996. The decreased cash
flow from financing activities was primarily due to net payments under our line
of credit and payments to related parties. Net payments on our line of credit
increased $1,362,396 to net cash used of $519,595 for the nine months ended July
31, 2004 compared to net cash provided of $842,801 for the nine months ended
July 31, 2003. In addition, we repaid $91,131 in loans to our stockholders
during the nine months ended July 31, 2004. We also lease machinery and
equipment under a capital lease which expires in July 2005. The interest rate on
the capital lease is 8-1/3% per annum. Management does not expect to incur other
significant capital expenditures in fiscal 2004.

In February, 2004, we acquired certain assets of Premier Roasters for
$825,000. In addition, we entered into an agreement with the City of La Junta,
Colorado to lease a 50,000 square foot facility for $8,341 per month. We do not
believe that the purchase price or costs associated with operating a second
facility will have a material effect on our future cash flow or liquidity
position. We believe that the costs associated with operating the second
facility will be mitigated by the new economies of scale in both manufacturing
and logistical efficiencies which were unavailable in the past while operating
solely out of our New York facility and increased sales to new and existing
customers in the Western United States.

We expect to fund our operations, including paying our liabilities,
funding capital expenditures and making required payments on our debts, through
October 31, 2005 with cash provided by operating activities and the use of our
credit facility. In addition, an increase in eligible accounts receivable and
inventory would permit us to make additional borrowings under our line of
credit. We also believe we could, if necessary, obtain additional loans by
mortgaging our headquarters. We have filed a registration statement on Form
SB-2, as amended, with the Securities and Exchange Commission in connection with
a public offering of 1,600,000 shares of our common stock, subject to
over-allotment. However, we cannot assure you as to the timing or the final
terms of the offering, or whether or not the offering will be consummated.

MARKET RISKS

Market risks relating to our operations result primarily from changes
in interest rates and commodity prices as further described below.

INTEREST RATE RISKS

We are subject to market risk from exposure to fluctuations in interest
rates. At July 31, 2004, our debt consisted of $125,336 of fixed rate debt on
the capital lease and $3,168,661 of variable rate debt under our revolving line
of credit and term loan. At July 31, 2004, interest on the variable rate debt
was payable primarily at 4.75% (or .25% above the prime rate) for the revolving
line of credit and at 5.00% (or .50% above the prime rate) for the term loan. We
do not expect changes in interest rates to have a material effect on results of
operations or cash flows in fiscal 2004, although there can be no assurance that
interest rates will not significantly change.

COMMODITY PRICE RISKS

The supply and price of coffee beans are subject to volatility and are
influenced by numerous factors which are beyond our control. Historically, we
have used short-term coffee futures and options contracts primarily for the
purpose of partially hedging and minimizing the effects of changing green coffee
prices, as further explained in Note 4 of the notes to financial statements. In
addition, during the latter half of fiscal 2000, we began to acquire futures
contracts with longer terms (generally three to 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 July 31, 2004, we held 118 options (generally with terms of two
months or less) covering an aggregate of 4,425,000 pounds of green coffee beans
at a price of $.675 and $.725 per pound. The fair market value of these options,
which was obtained from a major financial institution, was $150,038 at July 31,
2004.

We acquire futures contracts with longer terms (generally three to six
months) primarily for the purpose of guaranteeing an adequate supply of green
coffee. At July 31, 2004, we held 53 futures contracts for the purchase of
1,987,500 pounds of coffee at an average price of $.707 per pound for September
2004 contracts. The market price of coffee applicable to such contracts was
$.665 per pound at that date.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to
investors.

ITEM 3. CONTROLS AND PROCEDURES

Management, including our President and Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of our disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(f) and
15d-15(e)) as of the end of the period covered by this report. Based upon that
evaluation, the President and Chief Executive Officer and the Chief Financial
Officer concluded that the disclosure controls and procedures were effective, in
all material respects, to ensure that information required to be disclosed in
the reports that Coffee Holding files and submits under the Exchange Act is
recorded, processed, summarized and reported as and when required.

There have been no changes in Coffee Holding'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.

Part II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES

Coffee Holding did not purchase any of its equity securities during the
periods ended July 31, 2004 and does not currently have a stock repurchase
program in place.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

(a) None

(b) None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

31.1 Rule 13a - 14(a)/15d - 14a Certifications.

32.1 Section 1350 Certifications.

(b) Reports on Form 8-K

None

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Coffee Holding Co., Inc.
---------------------------------------------
(Registrant)

By: /s/ Andrew Gordon
-----------------------------------------
Andrew Gordon
President and Chief Executive Officer

September 14, 2004