U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 33-960-70-LA
THANKSGIVING COFFEE COMPANY, INC.
(Exact name of small business issuer
as specified in its charter)
California 94-2823626
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
19100 South Harbor Drive
Fort Bragg, California 95437
(Address of principal executive Officers) (Zip Code)
Issuer's telephone number, including area code: (707) 964-0118
(Former name, former address and former fiscal year,
if changed since last report.)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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 \ \
As of November 12, 1998, there were issued and outstanding
1,236,744 shares of common stock of the issuer.
Transition Small Business Disclosure Format (check one):
Yes \ \ No \X\
<PAGE>
THANKSGIVING COFFEE COMPANY, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
Balance Sheet at September 30, 1998 and
December 31, 1997 . . . . . . . . . . . . . . . . . 1
Statements of Income for the Three Months
Ended September 30, 1998 and September 30,
1997 and for the Nine Months Ended
September 30, 1998 and September 30, 1997 . . . . . 3
Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and September 30, 1997 . . 4
Notes to Financial Statements . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . 12
Item 2. Changes in Securities . . . . . . . . . . . . . . . 12
Item 3. Defaults Upon Senior Securities . . . . . . . . . . 12
Item 4. Submission of Matters to a vote of Security-
Holders . . . . . . . . . . . . . . . . . . . . . . 12
Item 5. Other Information . . . . . . . . . . . . . . . . . 12
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . 12
<PAGE>
THANKSGIVING COFFEE COMPANY, INC.
Balance Sheet
ASSETS
Sept. 30, 1998 December 31, 1997
Unaudited Audited
CURRENT ASSETS
Cash $59,041 $46,872
Short Term Investments 5,130 31,519
Accounts Receivable 387,220 417,221
Note Receivable -
Griswold 10,000 56,973
Employee Receivable 5,304 6,041
Inventory 422,847 513,303
Other Receivable & 46,563 180,381
Prepaids _________ _________
Total Current Assets 936,105 1,252,310
PROPERTY AND EQUIPMENT
Property Fixtures &
Equipment 2,096,329 2,045,464
Accumulated Depreciation (1,175,170) (1,049,873)
_________ _________
Total Property &
Equipment 921,159 995,591
OTHER ASSETS
Deposits And Other
Assets 73,531 35,329
Note Receivable -
Griswold 32,027 32,027
Intangibles, Net Of 264,703 281,192
Amortization _________ _________
Total Other Assets 370,261 348,548
Total Assets 2,227,525 2,596,449
========= =========
-1-<PAGE>
THANKSGIVING COFFEE COMPANY, INC.
Balance Sheet
LIABILITIES AND STOCKHOLDERS' EQUITY
Sept. 30, 1998 December 31, 1997
Unaudited Audited
CURRENT LIABILITIES
Accounts Payable $426,449 $426,810
Notes Payable - Banks 621,636 621,636
Loan Payable - Shareholder 60,884 24,625
Accrued Liabilities 112,912 74,724
Current Portion of Long- 139,873 108,459
Term Debt _________ _________
Total Current
Liabilities 1,361,754 1,256,254
LONG-TERM LIABILITIES
Notes Payable - Long-Term 300,006 429,044
Notes Payable - Shareholder 0 58,827
Deferred Income Taxes 0 66,535
_________ _________
Total Long Term
Liabilities 300,006 554,406
STOCKHOLDERS' EQUITY
Common Stock - No Par Value
1,960,000 Shares
Authorized; 1,236,744
Shares Issued And
Outstanding At
September 30, 1998 872,816 872,816
Additional Paid-In Capital 24,600 24,600
Unrealized Gain on
Investments 0 3,656
Retained Earnings (331,651) (115,283)
_________ _________
Total Stockholders' 565,765 785,789
Equity _________ _________
Total Liabilities & 2,227,525 2,596,449
Equity ========= =========
-2-<PAGE>
THANKSGIVING COFFEE COMPANY, INC.
Statements Of Income (Unaudited)
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1997 1998 1997
Net Sales 1,377,239 1,607,749 4,170,343 4,591,555
Cost Of Sales 779,638 997,128 2,499,237 2,509,225
_________ _________ _________ _________
Gross Profit 597,601 610,621 1,671,106 2,082,330
OPERATING EXPENSES
Selling, General &
Administration 475,641 836,492 1,723,161 2,330,131
Depreciation & 42,676 33,219 126,082 106,097
Amortization _________ _________ _________ _________
Total Operating Expenses 518,317 869,711 1,849,243 2,436,228
_________ _________ _________ _________
Operating Income
(Loss) 79,284 (259,090) (178,137) (353,898)
OTHER (INCOME) EXPENSE
Interest (Income) (281) 1,703 (1,800) (1,275)
Interest Expense 29,311 39,605 96,553 96,135
Misc. (Income) Expense 1,296 (4,430) 9,375 (7,099)
_________ _________ _________ _________
Total Other (Income) 30,326 36,878 104,128 87,761
Expense _________ _________ _________ _________
Income (Loss) Before 48,958 (295,968) (282,265) (441,659)
Taxes _________ _________ _________ _________
Tax Expense (Credit) 0 (6,239) (65,897) (6,239)
Net Income (Loss) 48,958 (289,729) (216,368) (435,420)
========= ========= ========= =========
-3-<PAGE>
THANKSGIVING COFFEE COMPANY, INC.
Statements Of Cash Flow (Unaudited)
Nine Months Ended
Sept. 30, 1998 Sept. 30, 1997
CASH FLOWS FROM OPERATING
ACTIVITIES
Net Income (Loss) $ (216,368) $ (435,420)
Non Cash Items Included Net
Income (Loss)
Depreciation &
Amortization 139,955 123,525
(Increase) Decrease In:
Receivables 30,738 (179,773)
Inventory 90,456 (326,953)
Commodities Options
Account 26,389 (7,264)
Prepaid Expenses/
Other Receivables 133,817 (52,051)
Deposits/Other (38,200) (40,582)
Increase (Decrease) In:
Accounts Payable (361) 316,263
Accrued Liabilities 38,188 (5,569)
Deferred Inc. Taxes (66,535) 0
_______ ________
Net Cash Provided By
Operating Activities 138,079 (607,824)
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase Of Equipment (50,034) (223,403)
Purchase Of Intangible
Assets 0 6,113
Proceeds from Sale of
Equipment 1,000 0
Unrealized Gain (Loss) on
Investments (3,656) 0
Adjustment to Retained 0 (72,135)
Earnings _______ ________
Net Cash Used By (52,690) (289,425)
Investing Activities _______ ________
CASH FLOWS FROM FINANCING
ACTIVITIES
(Repayment) Proceeds of (120,192) 593,293
(Increase) Decrease of 46,973 (10,002)
________ _______
Net Cash Used By (73,219) 583,291
======== =======
-4-<PAGE>
THANKSGIVING COFFEE COMPANY, INC.
Statements Of Cash Flow (Unaudited) (continued)
Nine Months Ended
Sept. 30, 1998 Sept. 30, 1997
Net Increase (Decrease) In
Cash 12,169 (313,958)
Cash, As Of January 1, 1998 46,872 399,038
And 1997 ________ _________
Cash, As Of June 30, 1998 $ 59,041 $ 85,080
And 1997 ======== =========
-5-<PAGE>
THANKSGIVING COFFEE COMPANY, INC.
Notes to Financial Statements (Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted
accounting principles and reflect all adjustments necessary for
a fair presentation of the information reported (which consists
only of normal recurring adjustments). Because the Company's
sales have fluctuated significantly from quarter to quarter due
to the holiday season and due to a variety of other factors,
the results of operations for the nine months ended
September 30, 1998 are not necessarily indicative of the
results to be expected for the full year. The consolidated
financial statements should be read in conjunction with the
financial statements, including notes thereto, for the fiscal
years ended December 31, 1997 and 1996, which are included in
the Company's Form 10-K for the year ended December 31, 1997.
At September 30, 1998 there were total borrowings of
$1,122,399, including an outstanding balance of $601,636 plus
accrued interest under the Company's line of credit agreement
with Wells Fargo & Company ("Wells Fargo"). This agreement is
due to expire on December 10, 1998. If the Company is not able
to renew, replace or extend its line of credit on comparable
terms or at all, the Company may be unable to fund its working
capital requirements and the Company's business would be
materially and adversely affected.
-6-<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Form 10-QSB contains certain forward looking statements,
which are subject to certain risks and uncertainties, including
but not limited to fluctuations in the availability and costs
of green coffee beans, availability and sufficiency of trade
credit and other financing sources, competition in the
Company's businesses, inability to secure adequate capital to
fund its operations and working capital requirements, inability
to successfully implement its business plan, inability to
successfully extend the credit line with Wells Fargo and other
risks identified in the Company's Form 10-K for the year ended
December 31, 1997.
On October 10, 1996, the Company completed its public offering
of common stock. 235,744 shares were sold for an aggregate of
$1,118,720. The Company currently has 1,236,744 shares issued
and outstanding.
The Company continues to sublease its retail coffee shop in
Fort Bragg, California (the "Cafe") to a third party which
sells the Company's coffee products. The sublease is due to
expire in January, 2001.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 Compared With Three Months
Ended September 30, 1997
Consolidated net sales for the three months ended September 30,
1998 were $1,377,239, a decrease of 14% from net sales of
$1,607,749 for the same period in 1997. This decrease in net
sales was primarily due to the fact that net sales for the
three months ended September 30, 1997 included coffee bean
sales by the Company's former green bean subsidiary,
Sustainable Harvest, Inc. ("Sustainable Harvest") and retail
sales by the Cafe. Net sales for the three months ended
September 30, 1998 do not include any such bean sales as
Sustainable Harvest was sold by the Company on December 31,
1997, and the Cafe discontinued operations at the end February,
1998. Mail order sales in the three months ended September 30,
1998 decreased compared to the same period in 1997 due to the
decrease in direct mailings to customers which was a cost-
cutting measure implemented by the Company.
-7-<PAGE>
The Company's core sales (exclusive of the sales from
Sustainable Harvest, the Cafe and the Company's retail bakery -
- the "Bakery") grew 5% or over $200,000 for the three months
ended September 30, 1998 compared to the same period in 1997.
The Bakery's sales grew 4% or approximately $40,000 during the
nine months ended September 30, 1998.
Gross margin (gross profit as a percentage of net sales)
increased from 38% for the three months ended September 30,
1997 to 43% in the same period in 1998. This increase is in
part due to an accounting change effective October 1, 1997 to
record labor expenses for the Bakery as part of cost of sales,
rather than as part of selling, general and administrative
expenses. In addition, in the three months ended September 30,
1998 the Company completed the implementation of unit price
increases in organic, shade grown and other selected varieties
of coffees that began in March of 1998.
The Company's core gross margins (exclusive of the Bakery, the
Cafe and Sustainable Harvest) increased from 39% for the three
months ended September 30, 1997 to 46% in the same period of
1998, due primarily to lower costs of certain specialty green
beans (including organic, shade grown, and Asian beans) and
price increases implemented in its shade and non organic coffee
lines. Management expects its gross margins to improve through
the end of the year due to the availability of lower-cost green
beans for which the Company has already contracted, as well as
the continuation of the effect of unit price increases
mentioned above. However, there can be no assurance that the
Company will be successful in implementing price increases
without losses in sales volume or gross margin.
Selling, general and administrative expenses decreased 43%,
from $836,492 (52% of net sales) in the three months ended
September 30, 1997 to $475,641 (35% of net sales) for the same
period in 1998. The decrease in selling, general and
administration expense is primarily due to the following
factors: an accounting change effective October 1, 1997 to
record labor expenses (of approximately $75,000 for the three
months ended September 30, 1998) for the Bakery as part of cost
of sales, rather than as part of selling, general and
administrative expenses; the Company having no expenses for the
Cafe and Sustainable Harvest in the three months ended
September 30, 1998 (such expenses being approximately $65,000
and $40,000 respectively in the three months ended September
30, 1997); and a decrease in mail order expenses because of the
elimination of a new catalogue and corresponding mailing
expenses.
Core selling, general and administrative expenses (exclusive of
the Bakery, the Cafe and Sustainable Harvest) decreased 27% or
$150,000 in the three months ended September 30, 1998 compared
to the same period in 1997 mainly due to lower mail order
expenses and decreases in total wages.
-8-<PAGE>
Depreciation and amortization expense increased 28% from
$33,219 for the three months ended September 30, 1997 to
$42,676 for the same period in 1998 as a result of higher fixed
assets.
Interest expense decreased 26% from $39,605 for the three
months ended September 30, 1997 to $29,311 for the same period
in 1998, as a result of paying down old leases. Interest
expense as a percentage of net sales decreased from 2.5% for
the three months ended September 30, 1997 to 2.1% for the three
months ended September 30, 1998.
Even though the Company incurred a gain for the three months
ended September 30, 1998, it did not incur any tax expense.
Management deemed the recording of any tax liability as
unnecessary since the Company has sufficient tax loss carry
forwards to offset taxable income in the foreseeable future.
As a result of the foregoing factors, the Company incurred a
net profit of $48,958 for the three months ended September 30,
1998 compared with a net loss of $289,729 for the three months
ended September 30, 1997.
Nine Months Ended September 30, 1998 Compared With Nine Months
Ended September 30, 1997.
Consolidated net sales for the nine months ended September 30,
1998 were $4,170,343, a decrease of 9% compared to net sales of
$4,591,555 for the same period in 1997. This decrease was
primarily due to the fact that net sales for the nine months
ended September 30, 1998 do not include any sales from
Sustainable Harvest and only sales for the first two months of
fiscal 1998 for the Cafe. The Company's core net sales
(exclusive of the Bakery, the Cafe and Sustainable Harvest)
grew 6% for the nine months ended September 30, 1998 compared
to the same period in 1997. The net sales of the Bakery grew
12% or approximately $60,000 during the nine month period ended
September 30, 1998.
Gross margin (gross profit as a percentage of net sales)
decreased from 45% for the nine months ended September 30, 1997
to 40% for the same period in 1998. This decrease is in part
due to an accounting change effective October 1, 1997 to record
labor expenses for the Bakery and the Cafe as part of cost of
sales, rather than as part of selling, general and
administrative expenses.
The Company's core gross margins (exclusive of revenues from
the Bakery, the Cafe and Sustainable Harvest) declined from 46%
for the nine months ended September 30, 1997 to 43% in the same
period of 1998, due primarily to higher costs of certain
specialty green beans (including organic, shade grown, Asian
and African beans).
-9-<PAGE>
Selling, general and administrative expenses decreased 26% from
$2,330,131 (51% of net sales) in the nine months ended
September 30, 1997 to $1,723,161 (41% of net sales) in the nine
months ended September 30, 1998. The decrease in selling,
general and administration expense is primarily due to the
following factors: an accounting change effective October 1,
1997 to record labor expenses (of approximating $300,000 for
the ninth months ending September 30, 1998) for the Bakery and
the Cafe as part of cost of sales, rather than as part of
selling, general and administrative expenses; the Company
having no expenses associated with Sustainable Harvest for the
nine months ended September 30, 1998 (such expenses being
approximately $141,000 for the twelve months ended December 31,
1997) and expenses for the Cafe for only the first two months
of fiscal 1998(a decline of $65,000 from the twelve months
ended December 31, 1997); and decreasing mail order expenses.
Core selling, general and administrative expenses (exclusive of
the Bakery, the Cafe and Sustainable Harvest) decreased 7% or
$117,000 in the nine months ended September 30, 1998 compared
to the same period in fiscal 1997 because of lower amounts in
most of the expense categories.
Depreciation and amortization expense increased 19% from
$106,097 for the nine months ended September 30, 1997 to
$126,082 for the same period in 1998 as a result of equipment
purchases in the intervening period.
Interest expense remained stable from $96,135 for the nine
months ended September 30, 1997 to $96,553 for the nine months
ended September 30, 1998, as a result of borrowings staying
approximately the same. Interest expense as a percentage of
net sales increased from 2.1% for the nine months ended
September 30, 1997 to 2.3% for the nine months ended
September 30, 1998.
Because the Company incurred a loss for the nine months ended
September 30, 1998, it did not incur any tax expense.
As a result of the foregoing factors, the Company incurred a
net loss of $216,368 for the nine months ended September 30,
1998 compared with a net loss of $435,420 for the nine months
ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had a working capital
deficiency of $425,649. Net cash provided by operating
activities was $138,079 for the nine months ended September 30,
1998, compared to $607,824 used by operating activities for the
nine months ended September 30, 1997. The increase in net cash
provided by operating activities during the nine months ended
September 30, 1998 was primarily due to the sale of Sustainable
Harvest which resulted in the following: a decrease in
-10-<PAGE>
inventory of $90,456 compared to the same period in 1997; a
decrease in prepaid expenses of $133,817 compared to the same
period in 1998 because of lower mail order expenses; and an
increase in accrued liabilities of $38,188 compared to the same
period in 1997. As compared to September 30, 1997, accounts
receivable, inventory and accounts payable increased by
$179,773, $326,953 and $316,263 respectively as of September
30, 1998.
Net cash used in investing activities, which primarily
consisted of the roaster and one delivery van replacement, was
$50,234 for the nine months ended September 30, 1998 as
compared to $223,403 during the same period in fiscal 1997.
This decrease is primarily attributable to a decrease in
equipment expenditures in accordance with management's budget
and business plan.
Included in net cash used by financing activities during the
nine months ended September 30, 1998 was $120,192 net repayment
of notes payables primarily for equipment capital leases; in
the same period for fiscal 1997 the Company received net
proceeds of $593,293 from notes payable.
At September 30, 1998 the Company had total borrowings of
$1,122,399, including an outstanding balance of $601,636 under
the Company's line of credit with Wells Fargo which extends to
December 10, 1998. Borrowings under the line of credit are
secured by the Company's accounts receivable, inventory,
equipment, fixtures and improvements. The terms of this
facility contain certain limitations and covenant restrictions,
including limits on the incurrence of additional indebtedness,
which if violated could be used as a basis for termination of
the agreement.
The Company is dependent on successfully executing its business
plan to achieve profitable operations, obtaining additional
sources of borrowings (including normal trade credit), and
securing favorable financing arrangements (including lease
financing) to finance its immediate working capital needs.
There can be no assurance that the Company will be successful
in this regard. If the Company is not able to renew, replace
or extend its line of credit on comparable terms or at all, the
Company may be unable to fund its working capital requirements
and the Company's business would be materially and adversely
affected.
The seasonal availability of green bean coffee in the first
quarter of the year and increased sales in the last quarter
historically creates a high use of cash and a buildup in
inventories in the first quarter, with a corresponding decrease
in inventory and increase in cash in the last quarter. Past
seasonal patterns are not necessarily indicative of future
results. There can be no assurance that sales will increase in
future quarters.
-11-<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- Not Applicable -
ITEM 2. CHANGES IN SECURITIES
- Not Applicable -
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- Not Applicable -
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders held on
October 9, 1998, its shareholders voted upon the following
proposals:
Proposal No. 1 - Election of Four Directors:
Shares Against
Shares For or Withheld Abstentions
Roy Doughty 994,460 0 0
Joan Katzeff 994,460 1,000 0
Paul Katzeff 994,460 1,000 0
Larry Leigon 994,460 0 0
Proposal No. 2 - Ratification of Sallmann, Yang and Alameda,
An Accountancy Corporation, as Independent Public Accountants
for the Company.
Shares For Shares Against Abstentions
994,150 0 0
ITEM 5. OTHER INFORMATION
- Not Applicable -
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27.1 Financial Data Schedule (electronic
only).
b. Form 8-K
No reports on Form 8-K were filed during the period from
June 30, 1998 through September 30, 1998.
-12-<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange
Act, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THANKSGIVING COFFEE COMPANY, INC.
Name Title Date
/s/ Paul Katzeff Chief Executive Officer November 12, 1998
________________
Paul Katzeff
/s/ Joan Katzeff President November 12, 1998
________________
Joan Katzeff
-13-<PAGE>
EXHIBIT INDEX
27.1 Financial Data Schedule (electronic only).
-14-<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEET AND STATEMENTS OF INCOME, WHICH ARE
INCLUDED IN THE COMPANY'S FORM 10-QSB FILED HEREWITH, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 59
<SECURITIES> 5
<RECEIVABLES> 425
<ALLOWANCES> (38)
<INVENTORY> 423
<CURRENT-ASSETS> 936
<PP&E> 2,096
<DEPRECIATION> (1,175)
<TOTAL-ASSETS> 2,228
<CURRENT-LIABILITIES> 1,362
<BONDS> 300
0
0
<COMMON> 873
<OTHER-SE> (307)
<TOTAL-LIABILITY-AND-EQUITY> 2,228
<SALES> 4,170
<TOTAL-REVENUES> 4,170
<CGS> 2,499
<TOTAL-COSTS> 2,499
<OTHER-EXPENSES> 1,953
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 97
<INCOME-PRETAX> (282)
<INCOME-TAX> (66)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (216)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
