<PAGE>
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 March 31, 1999
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 May 12, 1999, there were issued and outstanding 1,236,744 shares issued
and share of common stock of the issuer.
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THANKSGIVING COFFEE COMPANY, INC.
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
Balance Sheet at March 31, 1999 and December 31, 1998.................. 3
Statements of Income for the Three Months Ended March 31, 1999 and
March 31, 1998......................................................... 5
Statements of Cash Flows for the Three Months Ended March 31, 1999 and
March 31, 1998......................................................... 6
Notes to Financial Statements.......................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................... 16
Item 2. Changes in Securities................................................ 16
Item 3. Defaults Upon Senior Securities...................................... 16
Item 4. Submission of Matters to a vote of Security-Holders.................. 16
Item 5. Other Information.................................................... 16
Item 6. Exhibits and Reports on Form 8-K..................................... 16
</TABLE>
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THANKSGIVING COFFEE COMPANY, INC.
Balance Sheet
ASSETS
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
Unaudited Audited
--------- -------
<S> <C> <C>
CURRENT ASSETS
Cash $ 116,260 $ 89,725
Short Term Investments 7,236 0
Accounts Receivable 365,206 412,634
Note Receivable - 10,000 10,000
Griswold
Employee Receivable 7,814 4,073
Inventory 391,565 473,718
Other Receivable &
Prepaids 85,261 79,956
---------- -----------
Total Current
Assets 983,342 1,070,106
PROPERTY AND EQUIPMENT
Property Fixtures &
Equipment 2,129,023 2,097,013
Accumulated
Depreciation (1,255,865) (1,210,609)
---------- -----------
Total Property &
Equipment 873,158 886,404
OTHER ASSETS
Deposits And Other
Assets 41,584 41,291
Note Receivable -
Griswold 22,027 22,027
Intangibles, Net Of
Amortization 261,952 264,481
---------- -----------
Total Other Assets 325,563 327,799
Total Assets 2,182,063 2,284,309
========== ===========
</TABLE>
See accompanying notes to financial statements.
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THANKSGIVING COFFEE COMPANY, INC.
Balance Sheet (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
Unaudited Audited
--------- -------
<S> <C> <C>
CURRENT LIABILITIES
Accounts Payable $ 374,927 $ 454,247
Notes Payable - Banks 75,150 75,150
Loan Payable - Shareholder 54,741 35,876
Accrued Liabilities 37,291 37,336
Current Portion of Long-
Term Debt 103,391 97,280
---------- -----------
Total Current
Liabilities 645,500 699,889
LONG-TERM LIABILITIES
Notes Payable - Long-Term 831,638 862,993
Notes Payable - Shareholder 0 22,000
Deferred Income Taxes 0 0
---------- -----------
Total Long Term
Liabilities 831,638 884,993
STOCKHOLDERS' EQUITY
Common Stock - No Par Value
1,960,000 Shares
Authorized; 1,236,744
Shares Issued And
Outstanding At
March 31, 1999 861,618 872,816
Additional Paid-In Capital 24,600 24,600
Unrealized Gain on
Investments 0 0
Retained Earnings (181,293) (197,989)
---------- -----------
Total Stockholders'
Equity 704,925 699,427
---------- -----------
Total Liab & Equity 2,182,063 2,284,309
========== ===========
</TABLE>
See accompanying notes to financial statements.
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<PAGE>
THANKSGIVING COFFEE COMPANY, INC.
Statements Of Income (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
---------- ---------
1999 1998
---------- ---------
<S> <C> <C>
Net Sales 1,268,191 1,348,033
Cost Of Sales 723,279 859,450
--------- ---------
Gross Profit 544,913 488,583
OPERATING EXPENSES
Selling, General &
Administration 452,919 650,863
Depreciation &
Amortization 44,073 42,660
--------- ---------
Total Operating
Expenses 496,992 693,523
--------- ---------
Operating Income
(Loss) 47,921 (204,940)
OTHER (INCOME) EXPENSE
Interest (Income) (962) 0
Interest Expense 30,011 32,475
Misc. (Income) Expense 2,175 7,077
--------- ---------
Total Other (Income)
Expense 31,225 39,552
--------- ---------
Income (Loss) Before
Taxes 16,696 (244,492)
--------- ---------
Tax Expense (Credit) 0 (162)
Net Income (Loss) 16,696 (244,330)
========= =========
</TABLE>
See accompanying notes to financial statements.
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<PAGE>
THANKSGIVING COFFEE COMPANY, INC.
Statements Of Cash Flow (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
Mar 31, 1999 Mar 31, 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net Income (Loss) $ 16,696 $(244,330)
Non Cash Items Included Net
Income (Loss)
Depreciation &
Amortization 49,433 46,302
(Increase) Decrease In:
Receivables 43,687 33,082
Inventory 82,153 104,017
Commodities Options
Account (7,235) 25,714
Prepaid Expenses/
Other Receivables (5,305) 65,278
Deposits/Other (293) (9,501)
Increase (Decrease) In:
Accounts Payable (79,320) 96,115
Accrued Liabilities (45) 28,299
Deferred Inc. Taxes 0 0
-------- ---------
Net Cash Provided By
Operating Activities 99,771 144,976
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase Of Equipment (32,010) (22,528)
Purchase Of Intangible
Assets 0 0
Repurchase of Common
Stock (11,198) 0
Unrealized Gain (Loss) on 0 (3,656)
Investments -------- ---------
Net Cash Used By
Investing Activities (43,208) (26,184)
-------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES
(Repayment) Proceeds of
Notes Payable (30,028) (32,408)
(Increase) Decrease of
Notes Receivable 0 0
-------- ---------
Net Cash Used By
Financing Activities (30,028) (32,408)
-------- ---------
</TABLE>
See accompanying notes to financial statements.
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<PAGE>
THANKSGIVING COFFEE COMPANY, INC.
Statements Of Cash Flow (Unaudited) (continued)
<TABLE>
<CAPTION>
Three Months Ended
Mar 31, 1999 Mar 31 1998
------------ -----------
<S> <C> <C>
Net Increase (Decrease) In
Cash 26,534 86,384
Cash, As Of January 1, 1999
And 1998 89,725 46,872
-------- --------
Cash, As Of March 31, 1999
And 1998 $116,259 $133,256
======== ========
</TABLE>
See accompanying notes to finacial statements.
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<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 three
months ended March 31, 1999 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, 1998 and 1997, which are included in the
Company's Form 10-K for the year ended December 31, 1998 filed on March 31,
1999.
At March 31, 1999 there were total borrowings of $1,064,920.
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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 renegotiate its credit agreement with Wells
Fargo and other risks identified in the Company's Form 10-K for the year ended
December 31, 1998.
On October 10, 1996, the Company completed its public offering of common stock.
235,744 shares were sold for an aggregate of $1,178,720. 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, among other things, the
Company's coffee products. The sublease extends through January, 2001.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 Compared With Three Months Ended March 31,
- ----------------------------------------------------------------------------
1998
- ----
Consolidated net sales for the three months ended March 31, 1999 were
$1,268,191, a decrease of 6% from net sales of $1,348,033 for the same period in
fiscal 1998. Income for the three months ended March 31, 1999, was $16,696
compared to a loss of $244,330 for the three months ended March 31 in fiscal
1998.
This decrease in net sales was due in part to the discontinued operations of the
Cafe at the end February, 1998, and a reduction of the Company's core sales
(exclusive of the sales of the Cafe and the Company's retail bakery --the
"Bakery") partially offset by sales increases at the Bakery.
The core Company's's sales decreased 7% or approximately $80,000 for the three
months ended March 31, 1999 compared to the same period in fiscal 1998.
Wholesale revenues declined approximately $65,000 which was due to lower volume
resulting from price increases initiated in fiscal 1998. Mail order sales in
the three months ended March 31, 1998, decreased approximately $15,000 compared
to the same period in fiscal 1998 due to the decrease in direct mailings to
customers.
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<PAGE>
The Mendocino Bakery sales grew 10% or nearly $14,000 during that same period
reflecting a better than expected January and higher pizza sales.
Consolidated gross margin (gross profit as a percentage of net sales) increased
from 36% for the three months ended March 31, 1998 to 43% in the same period in
1999. The Company continued to implement 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, and the Cafe)
increased from 40% for the three months ended March 31, 1998 to 46% in the same
period of fiscal 1999, 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 organic coffee lines.
Selling, general and administrative expenses decreased 30%, from $650,863 (48%
of net sales) in the three months ended March 31 1998 to $452,919 (36% of net
sales) for the same period in fiscal 1999. The decrease in selling, general and
administration expense is primarily due to a significant decrease in: mail order
expenses of about $75,000 because of the elimination of a new catalogue and
corresponding mailing expenses; personnel expenses of approximately $55,000;
marketing costs by nearly $38,000 and administrative costs of almost $38,000.
Depreciation and amortization expense increased 3% from $42,660 for the three
months ended March 31, 1998 to $44,073 for the same period in 1999 as a result
of the purchase of additional fixed assets.
Interest expense decreased 8% from $32,475 for the three months ended March 31,
1998 to $30,011 for the same period in fiscal 1999, as a result of decreased
total borrowings of $126,716 from the balance at March 31, 1998 to March 31,
1999. Interest expense as a percentage of net sales remained the same at 2.4%
for both the three months ended March 31, 1999 and for the three months ended
March 31, 1998.
Even though the Company incurred a gain for the three months ended March 31,
1999, 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
$16,696 for the three months ended March 31, 1999 compared with a net loss of
$244,330 for the three months ended March 31, 1998.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999 the Company had positive capital of $337,842. Net cash
provided by operating activities was $99,771 for the three months ended March
31, 1999 compared to $144,976 provided by operating activities for the three
months ended March 31 1998. The decrease in net cash provided by operating
activities was primarily due to decreases in inventory costs and receivables
offset by decreases in accounts payable. Inventory costs decreased by $82,153,
primarily as a result of lower green bean costs; receivables decreased $43,687 a
result of lower sales and good collections; accounts payable decreased by
$79,320 during the same period. In the corresponding three month period in
fiscal 1998, accounts receivable, inventory and prepaid expenses increased by
$33,082, $104,017 and $65,278 respectively; accounts payable increased $96,115
and accrued liabilities increased $28,299.
Net cash used in investing activities, which primarily were the purchase of a
van for approximately $17,000 and the cost to repurchase common stock from
shareholders for about $11,000, was $43,208 for the three months ended March 31,
1999 as compared to $26,184 during the same period in fiscal 1998. This increase
is consistent with management's budget and business plan.
Included in net cash used by financing activities during the three months ended
March 31, 1999 was $30,028 net repayment of notes payables primarily for
equipment capital leases; in the same period for fiscal 1998 the Company's net
repayment of notes payable was $32,408.
At March 31 1999, the Company had total borrowings of $1,064,920, including
$591,608 outstanding under the new note payable dated January 6, 1999.
Borrowings are secured by the Company's accounts receivable, inventory,
equipment, fixtures and improvements. The loan terms contain certain
limitations and covenant restrictions, including limits on the incurrence of
additional indebtedness.
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 meet its credit obligations the Company's business could be
materially and adversely affected.
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<PAGE>
The Company maintained a revolving line of credit of up to $650,000 in fiscal
1998. The credit agreement was renewed in the fourth quarter of fiscal 1998;
however, in January 1999 this agreement was renegotiated and replaced with a two
year note payable in the principal amount of $601,636 with a balloon payment due
after the end of two years of $441,199.68. In the event that the Company is
unable to renegotiate this balloon payment before it becomes due, the Company's
business would be adversely effected. The company's aggregate amount of debt at
March 31,1999 is $1,064,920.
The Company anticipates that its existing capital resources and cash generated
from operations will be sufficient to meet its cash requirement for the next 12
months at its anticipated level of operations.
IMPACT OF THE YEAR 2000
Currently, many hardware and software systems represent year data with two
rather than four digits (e.g. "01" instead of "2001"). This may cause hardware
and software systems to produce erroneous results and/or to malfunction when
processing dates after December 31, 1999. As a result many companies' hardware
and software may need to be updated or replaced in order to correctly process
dates after December 31,.
The Company has reviewed and upgraded its information technology during the past
fourteen months. Since November of 1997, it has updated its main accounting
software at the cost of $6,000 and its LAN software for $4,200 in November of
1998. In January of 1999 the Company reviewed its hardware to assure compliance
not only for the year 2000 but also for leap year compatibility. This review,
which costs $300, did not require any change in equipment. The only information
technology that the Company has yet to change is its mail order software. This
change is anticipated to be completed in the summer of 1999 at a cost of
approximately $3,500. However, there can be no assurance that the Company will
be able to complete such change on that schedule. The Company has been informed
by its vendors that other information technology such as telephone and alarm
systems are either compliant or not date sensitive.
The Company is in the process of reviewing its non-information technology such
as roasters, fillers and sealers with embedded chips. The Company has received
verbal acknowledgment from manufacturers for the above that these roasters,
fillers and sealers are compliant or not date sensitive.
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<PAGE>
The Company's major bank, Wells Fargo, has publicly stated that their systems
will be year 2000 compliant.
The Company has begun to poll its vendors and customers as to their ability to
cope with the year 2000 computer and other related issues. The Company
anticipates having this vendor/customer program completed by August, 1999, and
preparing a contingency plan if its largest vendors and customers cannot be year
2000 compliant. There can be no assurances, however, that the Company will be
able to complete such program on that schedule or that any contingency plan
will be successful.
The Company generates alternative power through diesel generators to maintain
plant running schedules in the event of power failures. However, accounting
system applications would not operate and would have to be recorded manually
because of the unfavorable effect of generator power on computers. The
Company's's ability to run on these generators is directly related to its
ability to obtain diesel fuel. Currently there is no problem in procuring
diesel fuel. The Company has received verbal assurances from the local
telephone Company that telephones would continue to operate.
The Company expects that most reasonably likely worst case year 2000 compliance
scenarios to include failure of the Company's accounting systems and disruptions
in the operations of third parties due to their failure to attain year 2000
compliance. Any such failures could impact the Company by causing delays in:
(i) the delivery of coffee and other products to the Company, (ii) the obtaining
of customer orders and the delivery of the Company's products and (iii) the
receipt of payments from the Company's customers. The severity of these
possible problems would depend on the magnitude of the problem and how quickly
it could be corrected or an alternative implemented, which is unknown at the
time.
The project is estimated to be completed not later than December 31, 1999, which
is prior to any anticipated impact on its operating systems. The Company
believes that with modifications to existing software and conversions to new
software, the year 2000 issue will not pose significant operation problems for
its computer systems.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the
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<PAGE>
ability to locate and correct all relevant computer codes, and similar
uncertainties.
SEASONALITY AND OTHER FACTORS AFFECTING PERFORMANCE
The Company's business is seasonal in nature. The seasonal availability of
green bean coffee in the first two quarters of the year and increased sales in
the last quarter historically creates a high use of cash and a build up in
inventories and increase in the first two quarters with a corresponding decrease
in inventory and increase in cash in the last quarter. Because of the
seasonality of the Company's business, results for any quarter are not
necessarily indicative of the results that may be achieved for the full fiscal
year. Furthermore, past seasonal patterns are not necessarily indicative of
future results. The Company's future results of operations and earnings could be
significantly affected by other factors , such as changes in general economic
conditions, changes in business conditions in the coffee industry, fluctuations
in consumer demand for coffee products and in the availability and costs of
green coffee beans, increased competition with the Company's businesses,
variances from budgeted sales mix and growth rate, consumer acceptance of the
Company's new products, inability to secure adequate capital to fund its
operations and working capital requirements, inability to hire, train and retain
qualified personnel, concentration of production and sales in Northern
California, the loss of one or more major customers, inability to produce coffee
and tea, weather and other natural disasters. There can be no assurance that
sales will increase in future quarters.
INDEMNIFICATION MATTERS
The Company's Bylaws provide that the Company may indemnify its directors,
officers, employees and other agents to the fullest extent permitted by
California law. The Company believes that indemnification under its Bylaws also
permits the Company to secure insurance on behalf of any officer, director,
employee or other agent for any liability arising out of his or her actions in
such capacity, regardless of whether California law would permit
indemnification. The Company maintains such liability insurance for its
directors and certain officers and employees.
At present, there is no pending litigation or proceeding involving any director,
officer, employee or agent of the Company where indemnification would be
required or permitted. The Company is not aware of any pending or threatened
ligation or proceeding that might result in a claim for such indemnification.
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<PAGE>
SUMMARY OF RECENT DEVELOPMENTS
In the first quarter of 1999 the Board of Directors has authorized the minimum
repurchase of the Company's common stock up to an amount not to exceed 5% of the
Company's net income calculated quarterly on a year to date basis. Any
repurchases are subject to certain legal requirements and the covenants
associated with the Company's debts.
The Company is actively pursuing the sale of the Bakery and has listed the
business with a real estate agent.
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<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
- - Not Applicable -
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 January 1, 1999 through
March 31, 1999.
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<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 May 13, 1999
- ----------------
Paul Katzeff
/s/ Joan Katzeff President May 13, 1999
- ----------------
Joan Katzeff
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<PAGE>
EXHIBIT INDEX
27.1 Financial Data Schedule (electronic only).
-18-
<TABLE> <S> <C>
<PAGE>
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 116
<SECURITIES> 7
<RECEIVABLES> 381
<ALLOWANCES> (16)
<INVENTORY> 392
<CURRENT-ASSETS> 983
<PP&E> 2,129
<DEPRECIATION> (1,256)
<TOTAL-ASSETS> 2,182
<CURRENT-LIABILITIES> 646
<BONDS> 832
0
0
<COMMON> 862
<OTHER-SE> (156)
<TOTAL-LIABILITY-AND-EQUITY> 2,182
<SALES> 1,268
<TOTAL-REVENUES> 1,268
<CGS> 723
<TOTAL-COSTS> 723
<OTHER-EXPENSES> 498
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30
<INCOME-PRETAX> 17
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
