SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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.
(Name of small business issuer 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: (707) 964-0118
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
______________________________ ______________________________
______________________________ ______________________________
Securities registered under Section 12(g) of the Exchange Act:
_________________________________________________________________
(Title of class)
_________________________________________________________________
(Title of class)
<PAGE>
Check whether the issuer (1) filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes \X\ No \ \
Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B not contained in this
form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. \X\
State issuer's revenues for its most recent fiscal year:
$5,653,357
State the aggregate market value of the voting and non-
voting common equity held by nonaffiliates computed by reference
to the price at which the common equity was sold, or the average
bid and asked prices of such stock, as of a specified date within
the past 60 days: $1,278,720 as of February 28, 1999.
As of February 28, 1999, there were 1,236,744 shares
outstanding of common stock of the issuer.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the documents if incorporated by reference
and the Part of this Form 10-KSB into which the document is
incorporated: None.
2<PAGE>
THANKSGIVING COFFEE COMPANY, INC.
INDEX
Page No.
PART I.
Item 1. Description of Business. . . . . . . . . . . . . . 4
Item 2. Description of Property. . . . . . . . . . . . . . 13
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security
Holders. . . . . . . . . . . . . . . . . . . . . . 13
PART II.
Item 5. Market for Common Equity and Related Stockholder
Matters. . . . . . . . . . . . . . . . . . . . . . 13
Item 6. Management's Discussion and Analysis or Plan
of Operation . . . . . . . . . . . . . . . . . . . 14
Item 7. Financial Statements . . . . . . . . . . . . . . . 20
Item 8. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure . . . . . . 20
PART III.
Item 9. Directors and Executive Officers of the
Registrant. . . . . . . . . . . . . . . . . . . . . 20
Item 10. Executive Compensation. . . . . . . . . . . . . . . 21
Item 11. Security Ownership of Management and Certain
Others. . . . . . . . . . . . . . . . . . . . . . . 22
Item 12. Certain Relationships and Related Transactions. . . 23
Item 13. Exhibits and Reports on Form 8-K. . . . . . . . . . 24
3<PAGE>
PART I
ITEM 1 BUSINESS
FORWARD LOOKING INFORMATION
Certain information in this Form 10-KSB, including
planned expansions into new and existing markets and trends in
the operations of Thanksgiving Coffee Company, Inc. (the
"Company"), may be perceived to be forward looking statements.
Any such statements should be considered in light of various
risks and uncertainties that could cause results to differ
materially from expectations, estimates or forecasts expressed.
The various risks and uncertainties include, but are not limited
to: 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 within 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 operating expenses 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 successfully implement its business plan, natural
disasters, civil unrest in countries which produce coffee and
tea, weather and other risks identified herein. The Company does
not undertake to update any forward looking statement that may be
made from time to time by or on its behalf.
GENERAL
For more than twenty-five years, the Company has
purchased and roasted high quality coffee beans and marketed them
to the specialty coffee market. The Company buys green coffee
beans through Sustainable Harvest, Inc.("Sustainable Harvest"), a
supplier of shade grown, arabica coffee beans which was a wholly-
owned subsidiary of the Company in fiscal 1997, and through six
main importers. At the end of fiscal 1997, the Company sold
Sustainable Harvest and entered into an agreement to purchase
beans from Sustainable Harvest for five years commencing December
1997. See "Green Bean Coffee Supply and Availability."
The Company was incorporated as a California corporation
on May 10, 1982. Prior to that time, the Company was operated as
a partnership.
The Company retails over 100 varieties of its coffee and
tea through its own distribution system in the Northern
California market. In other parts of the nation the Company
distributes either direct to retailers or through brokers and
distributors. The Company also markets directly to consumers
through both the print and electronic media. It publishes a mail
order catalogue which features most of the Company's coffee and
4<PAGE>
tea products, in addition to complementary products and
accessories of third parties. The same product offerings are
made on the Company's web site on the internet. The Company
also markets its coffee and tea products in its retail bakery
(the "Bakery"), located in Mendocino, California. At the end of
February 1998, the Company closed its retail coffee shop (the
"Cafe"), which had
previously marketed the Company's coffee and tea products. The
Company sub-leases the Cafe premises to a third party.
In October 1996, the Company completed its offering of
shares of Common Stock. As of December 31, 1998, 1,323 non-
affiliated shareholders held shares of the Company's Common Stock
which represents approximately 19% of the outstanding shares.
SOCIAL RESPONSIBILITY
It has been the philosophy of the Company to not only
provide an excellent cup of quality coffee but also procure,
roast, package and market its products in a fair manner to all
its customers and suppliers. The Company's motto, "Not Just a
Cup, but a Just Cup,"(TM) reflects the Company's commitment to
local coffee growers in developing nations
The clear cutting of the rain forests to provide land for
sun-grown coffee has destroyed the habitat of neo-tropical song
birds. The Company provides cash rebates to the American Birding
Association (the "ABA") which supports the promotion of public
awareness of this destruction. The Company provides a $0.15
rebate for every Song Bird coffee package and every pound of bulk
Song Bird coffee sold.
The Company also contributes coffee, money and employee
time to a number of causes aligned with its commitment to social
and environmental responsibility.
PRODUCTS
COFFEE. The Company roasts a wide variety of whole bean
caffeinated, decaffeinated, flavored, blended and unblended
coffees. With the exception of its high-caffeinated coffees, the
Company roasts only high quality arabica beans with a focus on
organics and shade grown beans. Arabica beans are grown at high
altitudes where the cooler climate results in slow growth and
high quality. Packages have been custom-designed for retailers'
particular products. Currently, the Company is producing custom
products for the ABA under an exclusive ten-year contract and
private-label products for over 100 retail and serving accounts,
in addition to its full line of classic specialty and estate
coffees from over 20 countries.
TEA. The Company's Royal Gardens Tea Company ("Royal
Gardens") division currently offers eleven traditional teas from
5<PAGE>
China, India, Sri Lanka and Japan. Royal Gardens packages its
tea in gauze fabric bags which can expand to accommodate whole
leaf teas and allow proper infusion, unlike most teas which are
packaged in paper bags. Since the ability of paper to expand on
immersion is limited compared to gauze fabric, paper tea bags
contain crushed leaves of often lower quality teas. The Company
believes that Royal Gardens tea is the only tea product that is
packaged in fabric tea bags, and that this distinction is a
competitive advantage for the Company. Royal Gardens Tea Company
is a founding member of the American Premium Tea Institute.
COMPLEMENTARY PRODUCTS. The Company sells a wide variety
of complementary coffee and tea products and accessories, such as
coffee and espresso makers, grinders, thermal carafes, books, T-
shirts, mugs, CD's and chocolate covered espresso beans. The
Company's complementary products are purchased in quantities for
its mail order catalog.
The Company sells its coffees and teas through a multi-
channel distribution network consisting of wholesale operations,
a Company-owned Bakery and direct marketing operations. The
Company offers its complementary products through its Bakery and
direct mail operations. The Company generally provides its
wholesale customers with brewing, grinding and related equipment
(leased from manufacturers) and product displays (designed and
manufactured by the Company) at no charge if predetermined sales
volumes are reached. The Company believes that its ability to
construct its own display fixtures gives it a competitive
advantage because supermarkets, which constitute a significant
portion of the target market, require custom design fixture
programs at low cost, with accelerated delivery times.
In fiscal 1998, coffee and tea sales comprised
approximately 97% and 1%, respectively, of the Company's core
revenues (exclusive of revenues from the Cafe and Bakery), with
complementary products accounting for approximately 2% of the
Company's core revenues.
COFFEE INDUSTRY
Specialty coffee is one of the fastest growing segments
of the coffee industry. According to the Specialty Coffee
Association of America, the production of mild arabica coffees,
which are the basis of specialty coffee sales, represents
approximately $6.7 billion or 47% of the estimated total world
coffee trade valued at $14 billion in 1997. In 1997, the U.S.
specialty coffee industry purchased over 2.5 million bags of
arabica coffees, which represent $396 million or approximately 5%
of the world's output. The industry is expected to continue to be
fragmented with only a few specialty coffee companies possessing
a nationally distributed brand. Costs of green specialty coffee
increased greatly in fiscal 1997 due to the inability of green
coffee suppliers to meet the growing world wide demand for
coffee, the unfavorable weather conditions in certain growing
6<PAGE>
regions and the limited inventories of high quality and organic
coffee beans in the consuming nations. Green beans prices
decreased significantly in fiscal 1998. The Company's cost of
green beans in 1998 decreased 17% as compared to its cost in
1997.
There has been a trend of increased public awareness of
the environmental issues associated with clear cutting of rain
forests to provide land for sun-grown coffee. Recent changes in
the coffee industry have included:
1. The Specialty Coffee Association of America
("SCAA") has changed its 14-year old mission
statement to include the words: "social
responsibility", "environmental sensitivity", and
"sustainability".
2. The international community of coffee
producers has accepted the goal of
"sustainability" as the economic direction of
choice. The country of Nicaragua has embraced
the policy of shade in its coffee plantations as
public policy.
3. A Second National Conference on Coffee and the
Environment, which is co-sponsored by the SCAA
and the Smithsonian Migratory Bird Center, was
held in April 1998, in Denver, Colorado. The
Company's Chief Executive Officer, Paul Katzeff,
was co-chairman of the conference.
4. Shade grown coffee now appears on the "offer"
lists of most coffee brokers and importers and is
offered by a majority of small to mid-size coffee
roasters of specialty coffee.
5. Coffee producing countries, such as Costa
Rica, have begun shade replantings on their sun
coffee farms to improve the quality of their
coffee beans and to benefit from premium prices
paid for shade coffee.
MARKETING STRATEGY
The Company's sales and marketing efforts are currently
organized in four different segments:
1. Wholesale, direct delivery - This segment includes
customers in northern California counties contiguous to the
Company plant in Fort Bragg, California, and serviced by Company
trucks. The Company owns or leases trucks and delivers coffee
within a 200 mile radius of Fort Bragg.
7<PAGE>
2. Wholesale, delivery by other means - This segment
includes accounts which are serviced by UPS or other common
carriers. Delivery is made to over 500 accounts which span all
50 states of the United States.
3. Direct Marketing - This segment includes accounts
serviced through catalogue or online programs.
4. Retail - This segment consists of sales through the
Company's Bakery. However, the Company is actively pursuing the
sale of the Bakery and has listed the business with a real estate
agent.
During fiscal 1998, the Company continued its shift in
its blend of product sales. The Company's plan for fiscal 1998
was based on the continued growth of Song Bird Coffee(TM) sales
to the marketplace. The Company has embarked on a campaign to
market coffees to bird lovers under an exclusive ten-year
agreement with the ABA to produce and market Song Bird Coffee
worldwide. Song Bird Coffee is a registered trademark of the
ABA, one of America's most active and prestigious birding
membership associations with over 19,000 members.
The Company's strategy of "repositioning" its coffee
products by targeting bird lovers instead of coffee lovers is
predicated on the fact that migratory birds are in population
decline due to loss of habitat, which results from the clearing
of shade tree canopy to allow coffee to grow in the sun. The
Smithsonian Migratory Bird Center's landmark 1996 study reported
that as much as 60% of the migratory bird population of North
America has disappeared since 1972, and traced this disappearance
to the reduction of forest habitat in Central and South America
caused by the "technification" of coffee agriculture. The
Company's environmental concerns have meshed perfectly with the
birding community, and the Company's marketing efforts have been
extremely successful to date. In 1998, the Company opened 128
new accounts with bird stores to retail Song Bird Coffee.
In fiscal 1997, the Company pioneered the sale of the
Song Bird Coffee in bird stores, home and garden centers and drug
stores. It also began to offer Song Bird Coffee through more
traditional retail venues such as supermarkets, restaurants and
cafes, and in its direct marketing catalogue. This effort is
intended to increase the awareness of the coffee drinking public
and the birding community that production of sun grown coffee on
previously forested lands was a major factor in the deterioration
of the world's rain forests and habitat of migratory song birds.
By educating consumers through packaging and special venue sales,
such as bird stores, the Company's aim is the creation of a
strong market for shade grown coffees which preserves bird
habitat. Support by consumers could influence coffee farms to
replant limited or natural shade, and thus, help stop the
destruction of the environment before additional losses occur in
the song bird population.
8<PAGE>
The Company believes that its relationship with the ABA
and its marketing of Song Bird Coffee have distinguished the
Company's role and image in the marketplace. The devotion of
more of the Company's resources to the production of Song Bird
Coffee and an increased public awareness of the environmental
effects of coffee growing has resulted in a corresponding
increase in the sales of the Company's packaged and bulk
roasted shade grown and organic coffee varieties, from
approximately 30% of sales in fiscal 1996 to just over 33% of
sales in 1997 to 40% in 1998. Song Bird Coffee sales have grown
to represent 6% of the Company's packaged and bulk roasted coffee
sales in fiscal 1997 and 10% in 1998. Song Bird Coffee was not
sold in fiscal 1996.
COMPETITION
The specialty coffee market is highly competitive, and
the Company competes against all sellers of specialty coffee. At
the wholesale level, the Company competes with several nationally
known premium coffee brands, such as Proctor & Gamble's Millstone
label and Nestle's Sarks label, as well as other lesser known
brands and store brands. The Company also competes regionally in
Northern California with small regional specialty roasters for
retail shelf space and with large regional roasters for food
service trade. In the direct mail area, the Company competes
with established suppliers such as Gevalia, a division of General
Foods Corporation, as well as with other direct mail companies,
including Starbuck's, a leading independent specialty coffee
retailer and wholesaler.
The Company competes primarily on the basis of the
quality of its products, its graphics, and its social and
environmental philosophies. While the Company believes it
competes favorably with respect to these factors, many of the
Company's competitors are larger than the Company and have
significantly greater financial, marketing and other resources
than the Company, and there can be no assurance that it will be
able to compete or maintain or expand sales successfully in the
future.
The Company's philosophy on competition is to lead rather
than follow. The Company attempts to cooperate with retailers in
introducing novel products which face little or no competition
and to place its products in markets where such products have not
previously been sold. For example, Song Bird Coffee is marketed
in stores where bird lovers purchase birdseed and bird houses.
The Company calls this strategy "repositioning". See "Marketing
Strategy."
Similarly, the Company sells organic coffee in the
socially responsible marketplace, repositioning its products as
carriers of issues as well as flavor. In fiscal 1998, the
Company's coffee products were served and sold by prestigious
environmental organizations such as The World Wildlife Fund,
9<PAGE>
Natural Resource Defense Council, Monterey Bay Aquarium, the Cape
May Bird Observatory and by several other national institutions.
The Company cannot guarantee successful competition
against other coffee companies. The Company believes its focus
on repositioning and partnering has enabled it to find a niche in
the coffee market, however there can be no assurance that the
Company's marketing efforts will be successful.
The Company also experiences competition in connection
with sale of tea. The Company's product generally is sold in
specialty retailers and gift shops where there is competition
from a variety of companies such as Tazo, Republic of Tea, Stash
and Bigelow. The Company competes primarily on the basis of the
quality of the tea, the use of gauze fabric bags, and the
packaging. While the Company believes it competes favorably with
respect to these factors, many of the Company's competitors are
larger than the Company and have significantly greater
financial, marketing and other resources than the Company, and
there can be no assurance that it will be able to compete or
maintain or expand sales successfully in the future.
The Company also provides complimentary products
primarily to its wholesale serving accounts that are ancillary to
the coffee business but are necessary to serve coffee. These
items include chocolate, syrups, coffee cups, equipment cleaner
and the like. These items are provided as a convenience for
those accounts and assist in increasing revenue per stop for the
Company's distribution system. The Company experiences
competition in the sale of these ancillary items from
manufacturers or other distributors such as foodservice
distributors. There can be no assurance that the Company will be
able to compete or maintain or expand sales of these products
successfully in the future.
GREEN BEAN COFFEE SUPPLY AND AVAILABILITY
The Company purchases green beans from a number of
importers as well as from farmer representatives and small
producer cooperatives. Although most coffee trades in the
worldwide commodities markets, coffee of the quality sought by
the Company tends to trade on a negotiated basis at a substantial
premium or "differential" above commodity coffee pricing,
depending upon the supply and demand at the time of purchase.
Supply and price can be affected by multiple factors, such as
weather, politics and economics in the producing countries.
In addition, in its attempt to reduce the cost risk
resulting from market fluctuations in the cost of coffee beans,
the Company does from time to time purchase coffee option
contracts when it is not able to enter into coffee purchase
commitments. Changes in the market value of option contracts are
reported by the Company in the period in which the change occurs
and are included as part of cost of sales.
10<PAGE>
Sustainable Harvest was created by the Company in fiscal
1997 to provide a supply of shade coffees that would meet the
standards set by the Company's 5-year market plan. The sale of
Sustainable Harvest to its current ownership was intended to
establish and secure for the Company a source of supply without
the risks associated with the operations of a green coffee
importing company and without the need for large capital outlays
to finance purchases of container loads of coffee, which would
impact negatively on the cash flow of the Company.
With respect to organic and shade grown coffee, the
Company has entered into an agreement with Sustainable Harvest to
secure a supply of organic and shade grown coffee beans for five
years commencing December 31, 1997. Under this agreement, the
Company must purchase and Sustainable Harvest must provide a
minimum annual amount of beans at a fixed mark-up above cost.
This agreement is intended to ensure a supply of organic and
shade grown coffee for the Company's production of Song Bird
Coffee.
The Company believes its long-term relationships with
coffee bean brokers, including Sustainable Harvest, provide
adequate sources of supply of high-quality green beans to meet
its needs for the foreseeable future. However, a worldwide
supply shortage of the high quality arabica coffees the Company
purchases, and a shortage of organic and shade grown beans in
particular, could have an adverse impact on the Company. The
Company is pursuing long-term contracts with its Nicaraguan,
Costa Rican and Mexican producers.
Supplies of tea are secured from traditional sources
which are readily available in the marketplace.
SUMMARY OF RECENT DEVELOPMENTS
The Company renegotiated its line of credit with Wells
Fargo Bank to a note payable with the first year payments based
on a ten-year amortization schedule and the second year payments
based on an eight year amortization schedule and a balloon
payment due at the end of the second year. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
In July 1998, Wylan Enterprises and the Company has
entered into a license agreement for the Company to use Wylan
images on its coffee products and distribute them through
traditional and new venues. The license agreement expires on
December 31, 2001. The Company has not yet sold any products
pursuant to this agreement.
The sales results of the Company's Cafe, which previously
retailed the Company's coffee and tea products, did not meet
expectations, and accordingly, in an effort to reduce operating
costs and overhead, management closed the Cafe effective February
11<PAGE>
1998. The Company has subleased the Cafe premises to a
restauranteur.
The Company is actively pursuing the sale of the Bakery
and has listed the business with a real estate agent. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
CUSTOMERS
In fiscal 1998, no customer accounted for more than 10%
of the Company's revenue from coffee sales. However, significant
reduction in sales to any of the Company's principal customers,
or the loss of one or more major customers, may have an adverse
impact on the Company.
INTELLECTUAL PROPERTY
The Company holds various federal registrations in the
United States for the following trademarks and service marks:
Thanksgiving Coffee Company, Royal Gardens Tea Company, Pony
Express, Time Bandits, Grand Slam Coffee, "Not Just a Cup...But a
Just Cup," "Many Beans are Picked, Few are Chosen," Mayan
Harvest, and Inca Harvest. Federal trademark and service mark
registrations must be renewed every 10 years. Some of the
Company's registered marks may require renewal in the near
future. The Company also has several applications pending for
registration of additional trademarks and service marks including
the Zapotec Powerline mark. The Company does not hold any patents.
GOVERNMENT REGULATION
The Company's roasting plant has been certified by the
Organic Crop Improvement Association (OCIA). The OCIA has also
certified the organic practices of several farms from which the
Company receives green beans. The certification criteria of the
OCIA, an independent organization, meet the standards promulgated
under the Organic Foods Production Act of 1990 (OFPA). The
Company believes that new federal regulations regarding organic
and natural food products will not adversely affect the Company
because it already adheres to OCIA standards that are as
stringent as the new regulations.
EMPLOYEES
As of December 31, 1998, the Company had approximately
fifty-five full-time employees and fifteen part-time employees.
None of the Company's employees are covered by a collective
bargaining agreement. The Company has never suffered a work
stoppage due to adverse labor conditions with its employees. The
Company believes that it maintains good relations with its employees.
12<PAGE>
ITEM 2 PROPERTIES
The executive offices of the Company occupy approximately
14,500 square feet at 19100 South Noyo Harbor Drive, Fort Bragg,
California 95437, which also includes a warehouse and the
capacity for manufacturing operations. The Company leases an
additional 1,626 square feet of storage space on the Fort Bragg
waterfront. These facilities are currently being leased for a
five-year term expiring March 31, 2000, at a rate of
approximately $8,500 per month in fiscal 1997 and $8,600 per
month in fiscal 1998, from affiliates of the Company, Joan and
Paul Katzeff, who are founders, principal shareholders, officers
and directors of the Company. The Company has an option to
extend this lease for three additional five-year periods. The
Company believes this lease represents an arms-length rate and
arms-length terms for comparable space in the Fort Bragg area.
See Item 12, "Certain Relationships and Related Transactions."
The Company's Bakery in Mendocino is approximately 1,617
square feet and is leased from an unaffiliated third party. The
Company currently pays rent of approximately $2,815 per month for
the Bakery pursuant to a ten-year lease that commenced on October
1, 1990. The Bakery has an option to extend its lease through
September 30, 2010.
The Company believes that its current facilities are
adequate for its current and expected operations, and that
suitable additional space will be available in the Fort Bragg
area when and if additional space is required. The Company owns
no real property.
The Company has sub-leased the Cafe premises to the
tenant.
ITEM 3 LEGAL PROCEEDINGS
The Company is not currently party to any material
pending legal proceeding.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders
during the fourth quarter ending December 31, 1998.
PART II
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Trades in the Company's Common Stock are made through
Mutual Securities, Inc., ("Mutual Securities") in Ukiah,
California, an order matching service. No established trading
market exists for the Company's Common Stock. The Company's
13<PAGE>
Common Stock is not listed on any exchange nor the NASDAQ system,
and the Company does not currently intend to seek such listing in
fiscal 1999.
During fiscal 1998, the Company was aware of only four
trades of the Company's Common Stock totaling 2,300 shares of
Common Stock. Since all transactions were individually
negotiated between the buyer and seller through Mutual Securities
as intermediary, the Company was not informed of the exact
purchase price for the Common Stock sold in each of these
transactions. The Company, however, was informed by Mutual
Securities that the Company's Common Stock traded at $5 1/8 in
the first quarter of fiscal 1998, at $5 in the second quarter of
fiscal 1998.
The Company has not declared nor paid any cash dividend
since its inception. The Company intends to retain all earnings
for use in its business and therefore does not anticipate paying
any cash dividends in the near future. The Company's bank credit
agreement prohibits the payment of cash dividends without the
bank's consent.
As of December 31, 1998, there were 1,323 holders of
record of the Common Stock.
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of financial condition and
results of operations should be read in conjunction with the
Company's audited financial statements and notes thereto
appearing elsewhere in the Form 10KSB.
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
REVENUES. Total revenues decreased $568,781 or 9.1% to
$5,653,357 for fiscal 1998 compared to $6,222,138 for fiscal
1997. Of this decrease, approximately $80,000 was due to the
closing of the Company's Cafe in February 1998, and, therefore,
no sales for the Cafe were recorded thereafter, approximately
$700,000 was due to the absence of Sustainable Harvest sales,
which were not included since Sustainable was sold on December
31, 1997, and $50,000 was due to a decrease in direct marketing
sales over comparable sales in fiscal 1997. This decrease in
revenues was offset by a $200,000 increase in wholesale sales and
$70,000 increase in Bakery sales.
GROSS MARGIN. Gross margin (gross profit as a percentage
of net sales) increased to 41.2% in fiscal 1998 from 38.9% in
fiscal 1997. Gross margins increased mainly due to higher
selling prices and lower bean costs in the core coffee company.
The Bakery margins improved due to lower labor costs. Management
14<PAGE>
expects an increase in gross margins in the first half of fiscal
1999 as compared to fiscal 1998 due to the availability of lower
cost green beans for which the Company has already contracted.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling,
general and administrative expenses decreased by $727,200 or
24.9% from $2,918,498 in fiscal 1997 to $2,191,298 in fiscal
1998. As a percentage of total sales, selling, general and
administrative expenses decreased from 46.9% in 1997 to 38.8% in
fiscal 1998. Of the $727,200 decrease, approximately $150,000
reflects the reduction of personnel, approximately $350,000
reflects overhead decrease attributable to the Company's
restructuring of retail and green bean operations, approximately
$150,000 reflects lower mail order costs and approximately
$68,000 reflects the decrease of expenses related to legal,
accounting and shareholder related expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and
amortization expenses as a percentage of total sales increased to
3.1% in fiscal 1998 from 2.7% in fiscal 1997, due primarily to
depreciation for additional equipment related and to lower sales
in fiscal 1998.
OTHER INCOME. Miscellaneous income of $1,452 in fiscal
1998 and $17,704 in fiscal 1997 relates to a variety of
immaterial transactions.
LOSS ON SALE OF SUBSIDIARY. The sale of Sustainable
Harvest in fiscal 1997 resulted in a loss of $29,471.
INTEREST EXPENSE. Interest expense declined $15,577 or
11.7% from $132,666 in fiscal 1997 to $117,089 in fiscal 1998.
Interest expense as a percentage of total sales remained the same
at 2.1% for fiscal 1998 and 2.1% for the same time period in fiscal
1997.
INCOME TAX BENEFIT. In 1998, the Company realized a non-
recurring timing difference between book and tax depreciation and
amortization of $72,239 which resulted from tax loss carry-
forwards.
NET LOSS. As a result of the foregoing, the net loss for
fiscal 1998 amounted to $82,707 or 1.5% of total sales compared
to a net loss of $802,869 or 12.9% of total sales in fiscal 1997.
1997 COMPARED TO 1996
REVENUES. Total revenues increased 43.9% to $6,222,138
for fiscal 1997 compared to $4,323,481 for fiscal 1996. High
revenue growth was due to additional sales generated from the
purchase of the Bakery and Sustainable Harvest and the opening of
the Cafe.
15<PAGE>
GROSS MARGIN. Gross Margin (gross profit as a percentage
of net sales) decreased to 38.9% in fiscal 1997 from 45.9% in
fiscal 1996. Gross margins decreased as a result of higher costs
for specialty green beans and higher cost of goods sold in the
Bakery and Sustainable Harvest.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling,
general and administrative expenses increased by $1,168,270 or
61.0% from $1,810,684 in fiscal 1996 to $2,918,498 in fiscal
1997. As a percentage of total sales, selling, general and
administrative expenses increased from 44.3% in fiscal 1996 to
49.6% in fiscal 1997. Higher labor costs for additional sales
and management personnel and higher marketing costs for mail
order caused the increase.
Depreciation and amortization expenses as a percentage of
total sales increased to 2.1% in fiscal 1997 from 1.8% in fiscal
1996, due primarily to depreciation for additional equipment
related to sales growth.
OTHER INCOME. Miscellaneous income of $17,704 in fiscal
1997 and $5,796 in fiscal 1996 relate to a variety of different
events, none of which is material.
LOSS ON SALE OF SUBSIDIARY. The sale of Sustainable
Harvest in fiscal 1997 resulted in a loss of $29,471.
INTEREST EXPENSE. Interest expense as a percentage of
total sales increased to 2.1% for fiscal 1997, from 1.8% for
fiscal 1996.
NET LOSS. As a result of the foregoing, the net loss for
fiscal 1997 amounted to $802,5869 or 12.9% of total sales
compared to a net gain of $25,500 or 0.6% of total sales in
fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998 the Company had $89,725 in cash
and short term investments.
Working capital as of December 31, 1998 totaled a surplus
of $370,217 as compared to working capital deficiency of $3,943
at December 31, 1997.
For fiscal 1998 and for fiscal 1997, cash provided by
operating activities showed a positive $207,308 and a deficiency
of $626,980, respectively.
Net cash used in 1998 for investing activities, which
primarily consisted of expenditures for equipment to service new
accounts and sales growth and for the new roaster, was $72,135 as
compared to cash used in 1997 of $232,979 which also primarily
consisted of expenditures for equipment.
16<PAGE>
Net cash used by financing activities in 1998 was
primarily attributable to the $154,804 repayment of notes payable
and offset in part by cash provided due to a $56,972 increase of
notes receivable. In fiscal 1997 cash provided by financing
activities totaled $507,794 which consisted primarily of cash
proceeds from an increase of $719,901 in notes payable offset by
repayment of notes payable for $164,842 and an increase in notes
receivable of $89,000.
The Company maintained a revolving line of credit of up
to $650,000 for the first three quarters of 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 that Company is unable to
renegotiate this balloon payment before it becomes due, the
Company's business would be adversely affected.
There were total borrowings of $1,093,299, including
$601,636, outstanding under the new note payable at January 6,
1999. Due to the significance of the term agreement on the
classification of short and long term debt, management, with the
concurrence of the Company's auditors, has deemed the term
agreement as a material post balance sheet event and recorded it
as of December 31, 1998.
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 continue its trend to profitable operations. 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 adversely affected.
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.
YEAR 2000
Currently, many hardware and software systems represent
year data with two instead of four digits (e.g. "01" instead of
"2001"). This may cause such 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 systems may need to be upgraded or replaced
in order to correctly process dates after December 31, 1999.
17<PAGE>
The Company has reviewed and upgraded its information
technology during the past fourteen months. Since November of
1997, it has upgraded 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 all of its hardware to
assure compliance not only for the year 2000 but also for leap
year acceptability. This review, which cost $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 acknowledgements
from manufacturers for the above that these roasters, fillers and
sealers are compliant or not date sensitive.
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 prepare 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 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 the: (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
18<PAGE>
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 this time.
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 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 also 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 within 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 operating losses 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 successfully implement its business plan, civil
unrest in countries that 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, office, employee or agent of the Company
where indemnification would be required or permitted. The
Company is not aware of any pending or threatened litigation or
proceeding that might result in a claim for such indemnification.
19<PAGE>
ITEM 7 FINANCIAL STATEMENTS
Information in response to this item is set forth in the
Financial Statements beginning on page F-1 of this filing.
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 9 DIRECTORS AND EXECUTIVE OFFICERS
The directors, nominees, key employees and executive
officers of the Company and their ages as of the date of this
Form 10-KSB are as follows:
Name Age Position with the Company
Paul Katzeff 61 Chief Executive Officer & Director
Joan Katzeff 50 President and Director
Roy Doughty 49 Director
Larry Leigon 51 Director
Paul Katzeff, a co-founder of the Company, has served as
Roastmaster, Chief Executive Officer and a Director since its
incorporation on May 10, 1982. Mr. Katzeff is a co-founder of
the Specialty Coffee Association of America (S.C.A.A.) and served
as its Chairman in 1985. He has served as an elected Board
member of the S.C.A.A. since 1994, and served as Chairman of the
Environmental Committee of the Board in 1994. Mr. Katzeff will
co-chaired the Second Annual Sustainable Coffee Conference held
in April of 1998 and is an advisory Board member of Coffee Kids,
a non-profit organization concerned with social and environmental
issues as they relate to the coffee industry. Mr. Katzeff will
be S.C.A.A. President in the year 2000. Mr. Katzeff and Mrs.
Katzeff are husband and wife. Mr. Katzeff holds a Bachelors
degree in Agriculture from Cornell University and a Masters
degree in Social Work from Adelphi University.
Joan Katzeff, a co-founder of the Company, has served as
President, Chief Financial Officer and a Director of the Company
since its incorporation on May 10, 1982. Her experience in the
Company's early years included production, delivery and
bookkeeping. Mrs. Katzeff now has planning and administrative
responsibilities in operations, marketing and public relations.
Roy Doughty has served as a Director of the Company since
September 1997, and as an outside consultant to the Company since
February 1994. Since 1992, Mr. Doughty has served as a Principal
of Global Insights, a consulting firm devoted to assisting value-
centered businesses. He was the co-founder of the Spirituality
20<PAGE>
and Worklife Project and has created and delivered programs for
the Center for Ethics and Social Policy, the Center for Eco-
literacy, the California School of Integral Studies, the
California School of Professional Psychology and the Social
Investment Forum.
Larry Leigon has served as a Director of the Company
since September 1997, and as an outside consultant to the Company
since February 1994. Since November 1993, he has served as a
Principal of Global Insights. From 1985 to 1993, Mr. Leigon was
the president of Ariel Winery, the world's first exclusive non-
alcoholic winery. His experience at Ariel included creating a
whole new category of product, taking it from research and
development to worldwide distribution in 20 countries. He is
listed in Who's Who in Leading American Executives and is also
cited in The Successful Business Plan: Secrets and Strategies of
the PSI's Business Library.
The authorized number of directors is five. Currently
there are four directors and one vacancy. All directors will
hold office until the next annual meeting of shareholders and
until their successors have been elected and qualified, unless
they earlier resign or are removed from office. Committees of
the Board may be appointed by resolution passed by a majority of
the directors. The Company does not presently have any standing
audit, nominating or compensation committee, or any committee
performing similar functions. The executive officers of the
Company are elected annually by the Board of Directors and serve
at the discretion of the Board.
ITEM 10 EXECUTIVE COMPENSATION
The following table provides certain information
concerning the compensation paid to the Company's Chief Executive
for fiscal 1996, 1997 and 1998. All other Named Executive
Officers received less than $100,000 in fiscal 1998.
SUMMARY COMPENSATION TABLE
Name and Principal Year Salary Bonus Underlying Securities
Position ($) ($) Options
Paul Katzeff 1998 $75,000 - - -
Chief Executive
Officer 1997 $75,000 - - -
and Director 1996 $75,000 - - -
STOCK OPTION GRANTS
The Company did not grant stock options to any of the
Named Executive Officers during fiscal 1998.
21<PAGE>
COMPENSATION OF DIRECTORS
Members of the Board of Directors who are not also
employees of the Company do not receive any additional
compensation for service on the Board.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information
regarding beneficial ownership of the Company's Common Stock as
of December 31, 1998, (i) by each person (or group of affiliated
persons) who is known by the Company to own beneficially more
than five per cent of the Company's Common Stock, (ii) by each of
the named executive officers, (iii) by each of the Company's
directors and nominees, and (iv) by all directors and executive
officers as a group. The Company believes that the person and
entities named in the table have sole voting and investment power
with respect to all shares of Common Stock shown as beneficially
owned by them, subject to community property laws, where
applicable.
Name and Address of Shares Percentage
Beneficial Owner Beneficially
Owned
Joan and Paul Katzeff(1) 979,000(1) 79.16%
(Joan Katzeff, President)
(Paul Katzeff, CEO)
c/o Thanksgiving Coffee Co., Inc.
POB 1918
Fort Bragg, CA 95437
Ray Doughty 200 0.02%
Director
c/o Thanksgiving Coffee Co., Inc.
POB 1918
Fort Bragg, CA 95437
Larry Leigon
Director
c/o Thanksgiving Coffee Co., Inc.
POB 1918
Fort Bragg, CA 95437
All directors and 979,200 79.18%
executive officers as a
group (4 persons)
(1) Shares are originally issued, restricted and jointly
owned by Joan Katzeff and Paul Katzeff.
22<PAGE>
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In December 1997, the Company sold all outstanding shares
of its wholly-owned subsidiary, Sustainable Harvest, to Mr. David
Griswold. Under the terms of the agreement, the Company is
required to purchase a certain quantity of green coffee beans per
year for a five-year period commencing December 31, 1997, at a
fixed mark-up over "landed coffee costs".
The Company leases its corporate headquarters, warehouse
and waterfront facilities from Joan and Paul Katzeff, who are
affiliates of the Company (the "Katzeffs"). The lease provided
for monthly payments of $8,600 in fiscal 1998, and the Company is
also responsible for all real estate taxes, insurance and
maintenance costs related to the facilities. See Note 12 of
"Notes to Financial Statements".
As of December 31, 1998, the Company held a note payable
to the Katzeffs in the amount of $52,000, payable in monthly
interest installments at a rate of 12% per annum, with the
balance payable on demand after June 30, 1996. See Note 6 of the
"Notes to Financial Statements".
As of December 31, 1998, the Company also held a note
payable to the Katzeffs in the amount of $5,877, payable in
quarterly installments of $3,229 including interest at an annual
rate of 10%, with the balance due on July 17, 1999. See Note 6
of the "Notes to Financial Statements".
Global Insights, of which Messrs. Doughty and Leigon,
both directors of the Company, are principals, is party to a
consulting agreement for fiscal 1999. It is a one-year agreement
commencing January 1, 1999 for the provision of specific business
functions including a provision of shareholder relation services
for $72,000 per year. Global Insights received an aggregate of
$60,605 during fiscal 1998 for similar services.
The Company carries insurance indemnifying its directors
and certain officers and certain employees against certain
liabilities by reason of their status or service as directors or
officers or employees of the Company. See Item 10, Executive
Compensation - Indemnification Matter."
23<PAGE>
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Restated Articles of Incorporation of the Company.+
3.2 By laws of the Company.+
3.2.1 Amendment No. 1 to Bylaws of the Company, dated June 3,
1996.++
10.1 Business Loan Agreement dated as of September 5, 1995 by
and between the Company and Wells Fargo Bank, N.A., as
amended on August 11,1997.+++
10.2 Lease Agreements for the Company's Fort Bragg
facilities.++++
10.2.1 Extension of Term and Further Amendment to Lease
Agreement dated April 1, 1992.++++
10.2.2 Further Amendment to Lease Agreement dated July 1, 1992.+
10.2.3 Third Amendment to Lease Agreement dated July 1, 1994.+
10.2.4 Exercise Option to Extend Lease Agreement April 1, 1995.+
10.3 Lease Agreement for the Company's Bakery in
Mendocino.++++
10.4 Sample Coffee Purchase Agreement.+
10.5 Promissory Note issued by the Company to Joan and Paul
Katzeff dated as of April 17, 1996.++++
10.6 Promissory Note issued by the Company to Joan and Paul
Katzeff dated as of December 30, 1990.++++
10.7 Stock Purchase Agreement between the Company, Sustainable
Harvest, Inc. and David Griswold as of December 31,
1997.! !!
10.8 Summary Plan Description of the Company's Profit Sharing
Plan.!
10.9 Business Loan Agreement dated as of August 13, 1997 by
and between the Company and Wells Fargo Bank, N.A.
10.10 Business Loan Agreement dated as of January 6, 1999 by
and between the Company and Wells Fargo Bank, N.A.
10.11 Non-exclusive License Agreement dated as of July 14, 1998
by and between the Company and Wyland International,
LLC.!!!
24.1 Consent of Sallmann, Yang & Alameda.
27.1 Financial Data Schedule.
(b) Reports on 8-K
None.
_______________________________________________
+ Incorporated by reference to the exhibits to the Company's
Registration Statement on Form S-1 (File No 33-96070-LA).
++ Incorporated by reference to the exhibits to the Company's
Form 10-QSB for the quarter ended June 30,1997.
+++ Incorporated by reference to the exhibits to the Company's
Form 10-QSB for the quarter ended September 30, 1997.
++++ Incorporated by reference to the exhibits to the Company's
Form 10-KSB for the year ended December 31, 1997.
24<PAGE>
! Incorporated by reference to the exhibits to the Company's
Form 10-KSB for the year ended December 31, 1998.
!! Portions of this Exhibit were omitted and have been filed
separately with the Secretary of the Securities and
Exchange Commission pursuant to a Confidential Treatment
Request under Rule 24-b2 of the Securities Exchange Act of
1934, as amended, filed on March 31, 1998 which was
subsequently granted.
!!! Portions of this Exhibit were omitted and have been filed
separately with the Secretary of the Securities and
Exchange Commission pursuant to a Confidential Treatment
Request under Rule 24-b2 of the Securities Exchange Act of
1934, as amended, filed on March 31, 1999.
25<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d)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 March 31, 1999
_________________ Officer (Principal
Paul Katzeff Executive Officer)
and Director
/s/ Joan Katzeff President, Chief March 31, 1999
_________________ Financial Officer
Joan Katzeff (Principal Financial
Officer) and Director
/s/ Roy Doughty Director March 31, 1999
_________________
Roy Doughty
_________________ Director March 31, 1999
Larry Leigon
26<PAGE>
"Auditor's Report"
To The Board of Directors
Thanksgiving Coffee Company, Inc.
Fort Bragg, California
We have audited the accompanying balance sheets of Thanksgiving
Coffee Company, Inc. (a California Corporation) as of December
31, 1998 and 1997 and the related statements of income, retained
earnings and cash flows for each of the three years ended
December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all
material respects, the financial position of Thanksgiving Coffee
Company, Inc. at December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years
then ended, in conformity with generally accepted accounting
principles.
SALLMANN, YANG & ALAMEDA
An Accountancy Corporation
Kathleen M. Alameda
Certified Public Accountant
March 17, 1999
27<PAGE>
F-1
THANKSGIVING COFFEE COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997 ASSETS
CURRENT ASSETS 1998 1997
CASH $ 89,725 $ 46,872
SHORT TERM INVESTMENTS - 31,519
ACCOUNTS RECEIVABLE 412,634 417,221
NOTE RECEIVABLE - GRISWOLD 10,000 56,973
EMPLOYEE RECEIVABLE 1,968 4,296
SHAREHOLDER RECEIVABLE 2,105 2,105
INVENTORY 473,718 513,303
PREPAID EXPENSES 39,016 144,983
DEFERRED TAX ASSET 40,940 35,398
_________ _________
TOTAL CURRENT ASSETS 1,070,106 1,252,310
_________ _________
PROPERTY AND EQUIPMENT 2,097,013 2,045,464
ACCUMULATED DEPRECIATION (1,210,609) (1,049,873)
_________ _________
TOTAL PROPERTY
AND EQUIPMENT 886,404 995,591
_________ _________
OTHER ASSETS
DEPOSITS AND OTHER ASSETS 41,291 35,329
NOTE RECEIVABLE - GRISWOLD 22,028 32,027
INTANGIBLES LESS AMORTIZATION 264,480 281,192
_________ _________
TOTAL OTHER ASSETS 327,799 348,548
_________ _________
TOTAL ASSETS $2,284,309 $2,596,449
========= =========
1<PAGE>
F-2
THANKSGIVING COFFEE COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES 1998 1997
ACCOUNTS PAYABLE $ 454,247 $ 426,809
NOTES PAYABLE - BANKS 75,150 621,636
NOTES PAYABLE - SHAREHOLDER 35,876 24,625
CURRENT PORTION OF NOTES PAYABLE 97,280 108,459
ACCRUED LIABILITIES 37,336 74,724
__________ __________
TOTAL CURRENT LIABILITIES 699,889 1,256,253
__________ __________
LONG-TERM DEBT
NOTES PAYABLE 862,993 429,044
NOTES PAYABLE - SHAREHOLDER 22,000 58,827
__________ __________
TOTAL LONG TERM DEBT 884,993 487,871
__________ __________
OTHER LIABILITIES
DEFERRED INCOME TAXES 0 66,535
__________ __________
TOTAL OTHER LIABILITIES 0 66,535
__________ __________
TOTAL LIABILITIES 1,584,882 1,810,659
__________ __________
STOCKHOLDERS' EQUITY
COMMON STOCK - NO PAR VALUE
1,960,000 SHARES AUTHORIZED,
1,237,384 SHARES ISSUED, AND
1,236,744 SHARES OUTSTANDING 872,816 872,816
ADDITIONAL PAID IN CAPITAL 24,600 24,600
UNREALIZED GAIN ON INVESTMENTS 0 3,656
RETAINED EARNINGS (197,989) (115,282)
__________ __________
TOTAL STOCKHOLDERS' EQUITY 699,427 785,790
__________ __________
TOTAL LIABILITIES AND EQUITY $ 2,584,309 $ 2,596,449
========== ==========
2<PAGE>
F-3
THANKSGIVING COFFEE COMPANY, INC.
CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
INCOME
NET SALES $ 5,653,357 $ 6,222,138 $ 4,323,481
COST OF SALES 3,326,747 3,800,149 2,337,64
_________ __________ __________
GROSS PROFIT 2,326,610 2,421,989 1,985,833
__________ __________ __________
OPERATING EXPENSES
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,191,298 2,918,498 1,810,684
DEPRECIATION AND AMORTIZATION 174,910 165,404 104,948
__________ __________ __________
TOTAL OPERATING EXPENSES 2,366,208 3,083,902 1,915,632
__________ __________ __________
OPERATING (LOSS) INCOME (39,598) (661,913) 70,201
__________ __________ __________
OTHER INCOME (EXPENSE)
INTEREST INCOME 1,172 5,357 10,080
INTEREST EXPENSE (117,089) (132,666) (77,658)
GAIN (LOSS) ON SALE OF ASSETS (83) 11,785 (394)
LOSS ON SALE OF SUBSIDIARY 0 (29,471) 0
CASUALTY LOSS 0 (746) 0
MISCELLANEOUS INCOME 1,452 17,704 5,797
__________ __________ __________
TOTAL OTHER INCOME (EXPENSE) (114,548) (128,037) (62,175)
__________ __________ __________
(LOSS) INCOME BEFORE INCOME TAXES (154,146) (789,950) 8,026
INCOME TAX BENEFIT (EXPENSE) 71,439 (12,919) 17,474
__________ __________ __________
NET (LOSS) INCOME $ (82,707) $ (802,869) $ 25,500
========== ========== ==========
EPS (BASIC) $ (0.07) $ (0.65) $ (0.02)
========== ========== ==========
EPS (DILUTIVE) $ (0.07) $ (0.64) $ (0.02)
========== ========== =========
3<PAGE>
F-4
THANKSGIVING COFFEE COMPANY, INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
DECEMBER 31, 1998, 1997 AND 1996
RETAINED EARNINGS 1998 1997 1996
RETAINED EARNINGS, BEGINNING $ (115,282) $ 687,586 $ 662,086
NET (LOSS) INCOME (82,707) (802,869) 25,500
_________ __________ ________
RETAINED EARNINGS, ENDING $ (197,989) $ (115,283) $ 687,586
========= ========= =========
4<PAGE>
F-5
THANKSGIVING COFFEE COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
CASH FLOWS FROM OPERATING 1998 1997 1996
ACTIVITIES:
NET (LOSS) INCOME $ (82,707) $(802,869) $ 25,500
NON CASH ITEMS INCLUDED IN NET
(LOSS) INCOME
DEPRECIATION AND AMORTIZATION 194,295 177,848 126,761
GAIN (LOSS) ON SALE OF ASSETS 83 (11,785) 394
CHANGES IN OPERATING ASSETS AND
LIABILITIES
SHORT TERM INVESTMENTS 31,519 (31,519) 4,094
RECEIVABLES 6,555 (121,225) 115,075
INVENTORY 39,585 (26,506) (2,493)
PREPAID EXPENSES 105,969 (63,453) (57,090)
DEPOSITS AND OTHER ASSETS (5,962) (4,744) 2,464
ACCOUNTS PAYABLE 27,436 220,394 (260,005)
ACCRUED LIABILITIES (37,388) 21,772 (14,820)
DEFERRED INCOME TAXES (72,077) 15,106 (6,554)
________ ________ ________
NET CASH (USED) PROVIDED BY
OPERATING ACTIVITIES 207,308 (626,980) (66,674)
________ ________ ________
CASH FLOWS FROM INVESTING
ACTIVITIES:
DECREASE IN STOCKHOLDER 0 0 6,231
RECEIVABLE
PURCHASE OF EQUIPMENT (73,993) (251,994) (333,297)
PROCEEDS FROM SALE OF EQUIPMENT 5,514 22,000 300
PURCHASE OF INTANGIBLE ASSETS 0 (4,791) (299,882)
INCREASE IN PREPAID STOCK 0 0 (234,404)
OFFERING COSTS
PROCEEDS FROM SALE OF COMMON 0 150 1,273,445
STOCK
REPURCHASE OF COMMON STOCK 0 (2,000) 0
UNREALIZED GAIN (LOSS) ON (3,656) 3,656 (962)
INVESTMENTS ________ _________ _________
NET CASH (USED) PROVIDED BY
INVESTING ACTIVITIES (72,135) (232,979) 411,431
________ _________ _________
CASH FLOWS FROM FINANCING
ACTIVITIES:
INCREASE IN NOTES RECEIVABLE 0 (89,000) (41,736)
PROCEEDS FROM NOTES RECEIVABLE 56,972 41,735 0
PROCEEDS FROM NOTES PAYABLE 5,512 719,901 454,375
REPAYMENT OF NOTES PAYABLE (154,804) (164,842) (486,618)
________ ________ ________
5<PAGE>
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (92,320) 507,794 (73,979)
NET (DECREASE) INCREASE IN CASH 42,853 (352,165) 270,778
CASH AT BEGINNING OF YEAR 46,872 399,037 128,259
CASH AT END OF YEAR $ 89,725 $ 46,872 $ 399,037
6<PAGE>
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements
1. Summary of Significant Accounting Policies
Description of Business
Thanksgiving Coffee Company, Inc. (The Company), is a corporation
that purchases and roasts high-quality whole bean coffees and
sells them to restaurants, grocery stores and other retail
outlets. These products are sold primarily through its own
distribution network in the Northern California area.
Distributors and retailers do not have the right to return
products. Additionally, the Company produces and sells a line of
high-quality tea products under the trademark of Royal Gardens
Tea Company. The Company also sells coffee, tea and related
specialty products through mail order on a national basis. The
Company sells sandwiches, pastries, coffee and tea through a
bakery located in Mendocino, California. During 1998 the company
subleased a cafe located in Fort Bragg, California. In 1997, the
Company purchased and sold a subsidiary, a wholesale purchaser
and distributor of coffee beans, located in Emeryville,
California.
Basis of Presentation
The Company has prepared the financial statements on the accrual
basis of accounting in accordance with generally accepted
accounting principles. The Company grants credit to customers in
the retail industry throughout the country. Consequently, the
Company's ability to collect the amounts due from customers are
affected by economic fluctuations in the retail industry.
Inventories
Inventories are stated at the lower of cost or market (first-in,
first-out).
Property and Equipment
Property and equipment are carried at cost less accumulated
depreciation. Depreciation is provided on the straight-line and
150% declining balance methods over estimated useful lives
generally ranging from five to twelve years.
Leasehold improvements are carried at cost and are amortized over
the shorter of their estimated useful lives or the related lease
term (including options), generally ranging from five to thirty-
nine and one-half years.
The portion of depreciation and amortization expenses related to
production facilities is included in cost of sales.
1<PAGE>
Expenditures for major renewals that extend useful lives of
property, fixtures and improvements are capitalized.
Expenditures for maintenance and repairs are charged to expense
as incurred.
For income tax purposes, depreciation is computed using the
accelerated cost recovery system and the modified cost recovery
system.
Investments in Unconsolidated Companies
On January 1, 1997, the Company acquired the assets and
liabilities of Sustainable Harvest, Inc., in a business
combination accounted for as a purchase. The Company
subsequently sold the subsidiary at a loss of $29,471 on November
1, 1997. The Company has a note receivable reflected on the
books as a result of the sale, with a balance of $32,028 as of
December 31, 1998. The results of operations of Sustainable
Harvest are included in the 1997 accompanying financial
statements.
On October 31, 1996, the Company acquired the assets of Mendocino
Bakery, Inc. in a business combination accounted for as a
purchase.
Profit Sharing Plan
The Company has a profit sharing plan covering substantially all
of its employees. Benefits are based upon years of service and
the employee's compensation during the employment period. No
contributions to the profit sharing plan were made for the years
ended December 31, 1998, 1997 and 1996.
Futures and Options Contracts
The Company occasionally enters into exchange traded coffee
futures and options contracts with the objective of minimizing
cost risk due to market fluctuations. The Company does not
define contracts as a hedge as it applies to accounting
principles and practices designated in Statement of Financial
Accounting Standards No. 80, Accounting for Futures Contracts.
Accordingly, changes in the market value of futures contracts
(unrealized gains and losses) are reported by the Company in the
period in which the change occurs and are included as a component
of stockholders' equity. Realized gains and losses are a
component of costs of goods sold.
Compensated Absences
Employees of the Company are entitled to paid vacation, paid sick
days and personal days off, depending on job classification,
length of service, and other factors.
2<PAGE>
Advertising
The Company expenses costs of advertising the first time the
advertising takes place, except direct-response advertising,
which is capitalized and amortized over its expected period of
future benefits. Direct-response advertising consists primarily
of mail order catalog costs, typically mailed to customers who
have specifically responded to this type of advertising. The
mail order department documents whether orders come from catalogs
or other sources when processing orders. Catalog costs are
amortized over the period from the catalog mailing until the next
catalog is issued.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
2. Accounts Receivable
Accounts receivable consist of the following:
1998 1997
Accounts receivable $ 435,676 $ 439,564
Less: Allowance for doubtful (23,042) (22,343)
accounts __________ __________
Accounts receivable, net $ 412,634 $ 417,221
========== ==========
The Company uses the allowance method for uncollectible accounts.
Bad debt expense for the years ended December 31, 1998, 1997 and
1996 was $37,412, $14,226 and $56,176, respectively.
3. Inventory
Inventory consists of the following:
1998 1997
Coffee
Unroasted $ 174,284 $ 163,810
Roasted 181,096 183,906
Tea 22,527 32,867
Packaging, supplies and other 95,811 132,720
merchandise held for sale __________ __________
Total inventory $ 473,718 $ 513,303
=============== ========== ==========
3<PAGE>
4. Property and Equipment
Property and equipment consists of the following:
1998 1997
Equipment and fixtures $ 1,176,558 $ 1,125,832
Furniture and equipment 212,479 205,114
Leasehold improvements 363,075 363,075
Transportation equipment 41,323 50,053
Property held under capital 303,578 301,390
leases
Total property and equipment 2,097,013 2,045,464
Accumulated depreciation (1,210,609) (1,049,873)
Property and equipment, net $ 886,404 $ 995,591
Depreciation expense as of December 31, 1998, 1997 and 1996 was
$177,593, $194,599 and $119,090, respectively.
5. Intangible Assets
Intangible assets represent the costs associated with the
acquired divisions over the fair value of their net assets at
date of acquisition. The detail of the intangible assets are as
follows:
1998 1997
Goodwill $ 198,000 $ 198,000
Leasehold value 67,000 67,000
Start-up costs 34,882 34,882
Organizational costs 28,565 28,565
Trademark 1,877 1,877
Total intangible assets 330,324 330,324
Accumulated amortization (65,844) (49,132)
Intangible assets, net $ 264,480 $ 281,192
Amortization expense as of December 31, 1998, 1997 and 1996 was
$16,712, $26,171 and $7,671, respectively.
6. Long-Term Debt 1998 1997
Notes Payable
Note payable to Wells Fargo $ 601,636 $ -
Bank, monthly installments of
$5,014 plus interest at 2.75%
over prime rate beginning
February 15, 1999, final
payment is due on January 15,
2001. The note payable is
collateralized by a security
interest of first priority in
all accounts receivable,
4<PAGE>
inventory, equipment,
fixtures and improvements.
Revolving bank line of credit - 601,636
to Wells Fargo Bank with
interest payable monthly at
1% over prime rate, expired
December 10, 1998. For 1998
the maximum amount available
on the line was $650,000.
The line of credit was
collateralized by a security
interest of first priority in
all accounts receivable,
inventory, equipment,
fixtures and improvements.
Note payable to Wells Fargo 73,174 93,174
Bank, payable in monthly
installments of $1,667 plus
interest at 1% over prime
rate, final payment is due on
August 15, 2002. The note is
secured by all accounts
receivable, inventory,
equipment, fixtures and
improvements.
Note payable to majority 52,000 66,000
shareholders, Paul and Joan
Katzeff, payable in monthly
installments of interest only
at 12%, with balance due on
demand after June 30, 1996.
The shareholders have
subordinated this note to all
notes payable including Wells
Fargo Bank as described
above.
Note payable to majority 5,877 17,452
shareholders, Paul and Joan
Katzeff, payable in quarterly
installments of $3,229
including interest at 10%,
with balance due on July 17,
1999. The shareholders have
subordinated this note to all
notes payable including Wells
Fargo Bank as described
above.
5<PAGE>
Note payable to Laoma Yaski 197,418 246,021
for the purchase of Mendocino
Bakery, payable in monthly
installments of $4,249,
including interest at 10%,
secured by property and
equipment at the bakery,
final payment due in August
2003.
Obligations Under Capital
Lease
Note payable to Nations 10,628 18,218
Credit, payable in monthly
installments of $833,
including interest at 16.17%,
secured by equipment, final
payment due in January 2000.
Note payable to Colonial - 3,353
Pacific, payable in monthly
installments of $313,
including interest at 17.44%,
secured by equipment, final
payment was due November
1998.
Note payable to Commerce - 1,289
Security Bank, payable in
monthly installments of $591,
including interest at 17.24%,
secured by equipment, final
payment was due February
1998.
Note payable to Commerce - 3,410
Security Bank, payable in
monthly installments of $401,
including interest at 19.44%,
secured by equipment, final
payment was due September
1998.
Note payable to Manifest 21,928 30,225
Group, payable in monthly
installments of $1,030,
including interest at
15.315%, secured by
equipment, final payment due
in January 2001.
6<PAGE>
Note payable to Imperial 17,534 23,970
Capital, payable in monthly
installments of $840,
including interest at
17.263%, secured by
equipment, final payment due
in January 2001.
Note payable to Granite 27,475 35,515
Financial, payable in monthly
installments of $1,139,
including interest at
17.607%, secured by
equipment, final payment due
in June 2001.
Note payable to Imperial 2,811 5,142
Bakery/Cafe, payable in
monthly installments of $259,
including interest at
19.001%, secured by
equipment, final payment due
in December 1999
Note payable to 39,639 48,938
Oakmont/Heritage Pacific,
payable in monthly
installments of $1,297,
including interest at 14.00%,
secured by equipment, final
payment due in February 2002.
Note payable to 27,178 33,348
Oakmont/Heritage Pacific,
payable in monthly
installments of $910,
including interest at
15.529%, secured by
equipment, final payment due
in February 2002.
Note payable to Centerpoint, 11,255 14,900
payable in monthly
installments of $517,
including interest at
19.225%, secured by
equipment, final payment due
in March 2001.
7<PAGE>
Note payable to Hansel 4,746 -
Leasing, payable in monthly
installments of $380,
including interest at
28.510%, secured by a
vehicle, final payment due in
March 2000.
1,093,299 1,242,591
Less Current Portion (208,306) (754,720)
Long term portion of notes $ 884,993 $ 487,871
payable and capital leases
All of the above notes payable and capital leases with the
exception of the $39,639 Oakmont/Heritage Pacific capital lease,
are personally guaranteed by the Company's majority shareholders.
Interest paid as of December 31, 1998, 1997 and 1996 was
$122,479, $132,666 and $77,658, respectively.
Maturities of notes payable and capital leases are as follows:
1999 $ 208,306
2000 227,627
2001 551,254
2002 61,627
2003 44,485
Thereafter -
_________
$1,093,299
=========
Based on current borrowing rates, the fair value of the notes
payable and capital leases approximate their carrying amounts.
7. Income Taxes
The components of the provision for income taxes for the years
ended December 31, 1998, 1997 and 1996 are as follows:
1998 1997 1996
Federal - current $ - $ - $ 1,016
Federal - deferred (55,954) 3,380 (10,739)
State - current 800 800 800
State - deferred (16,285) 8,739 (8,551)
_________ _______ _________
Total income taxes $ (71,439) $ 12,919 $ (17,474)
========= ======= =========
The Company computes income taxes using the asset and liability
method under which deferred income taxes are provided for
temporary differences between the financial basis of the
Company's assets and liabilities. As of December 31, 1998 and
1997, deferred tax assets recognized for deductible temporary
differences and loss carryforwards total $40,940 and $35,398,
8<PAGE>
respectively. Deferred tax liabilities recognized for taxable
temporary differences total $0 and $66,535, respectively. The
Company has a California manufacturer's credit carryforward of
$23,737 which may be used to offset California income taxes in
the future.
The Company has net operating loss and contribution carryovers to
offset future income tax. If not used, these credits will expire
as follows:
Federal
Years ending Net Operating
December 31, Contributions Loss Total
--------------------------------------------------------
1999 $ 6,866 $ - $ 6,866
2000 6,403 - 6,403
2001 9,029 - 9,029
2002 11,419 - 11,419
2003 11,289 - 11,289
2012 - 755,654 755,654
2018 - 109,371 109,371
____________________________________________
$45,006 $865,025 $910,031
============================================
California
Years ending Net Operating
December 31, Contributions Loss Total
--------------------------------------------------------
2000 - $ 23,940 $ 23,940
2001 9,310 2,141 11,451
2002 11,419 415,940 427,359
2003 11,289 54,378 65,667
-------------------------------------------
$32,018 $496,399 $528,417
===========================================
Income taxes paid as of December 31, 1998, 1997 and 1996 were
$800, $0 and $11,063, respectively.
8. Operating Leases
The Company leases its delivery fleet, other vehicles and some
office equipment under noncancellable operating leases with terms
ranging from three to five years.
9<PAGE>
Minimum annual lease payments due under these agreements are as
follows:
1999 $ 97,694
2000 42,912
2001 9,353
2002 3,651
Thereafter -
___________
$153,610
======================
Total annual operating lease payments were $69,400, $49,472 and
$28,632 as of December 31, 1998, 1997 and 1996, respectively.
9. Common Stock
Number of Shares No Par Value
Balance, December 31, 1996 1,237,039 $874,866
Issuance of stock 345 150
Repurchase of stock (640) (2,000)
_________ _______
Balance, December 31, 1997 1,236,744 872,816
No Activity 0 0
_________ _______
Balance, December 31, 1998 1,236,744 $872,816
_________ _______
981,000 shares originally issued are restricted.
10. Stock Option Purchase Plan
Under the terms of its stock option purchase plan (see note 13),
options to purchase shares of the Company's common stock are
granted at a price of $5 per share. Options may be exercised
until the year 2000. Following is a summary of transactions:
Shares Under Option
1998 1997
Outstanding, beginning of year 23,000 26,000
Shares exercised during the year (3,000) (3,000)
Outstanding, end of year 20,000 23,000
The related compensation expense for December 31, 1998, 1997 and
1996 is $6,750, $6,750 and $13,500, respectively.
11. Long-Term Lease
The Company leases its corporate headquarters, warehouse and
waterfront facilities from Paul and Joan Katzeff (the Company's
10<PAGE>
majority shareholders). The lease provides for monthly rental
payments of $8,600 and the Company is responsible for all real
estate taxes, insurance and maintenance costs related to the
facilities. The lease provides for periodic cost of living
increases during the term of the lease, including the option
periods. The Company exercised the first of four five-year
options on March 31, 1995.
Any deferred amounts are due based upon available cash flow as
determined by the Company's management or upon demand of the
Company's majority shareholders. Rental expense under the above
lease was $103,000, $102,000 and $102,000 as of December 31,
1998, 1997 and 1996, respectively. The Company has made
substantial leasehold improvements (Note 4) and intends to
exercise all options under the terms of this lease.
The Company leases a restaurant establishment in Mendocino,
California. The lease provides for monthly rental payments of
$2,815 and the lease term expires in September 2010.
The Company leases retail space in Fort Bragg, California used as
an espresso bar/cafe. The lease provides for monthly rental
payments of $767, and the lease expires in January 2001, with an
option to renew for another five years. The lease also provides
for periodic cost of living increases during the term of the
lease, including the option periods. In February 1998, the cafe
business was terminated and the facility was subleased.
Minimum future rental payments for all leases are as follows:
1999 $ 140,460
2000 63,060
2001 29,230
2002 28,500
2003 and Thereafter 192,375
________
$ 482,125
========
12. Related-Party Transactions
The Company has an interest only note payable due on demand and a
principal and interest note payable to Paul and Joan Katzeff (the
Company's majority shareholders) at December 31, 1998, 1997 and
1996 (See Note 6, above). The Company also leases properties
rom its majority shareholders (See Note 11, above).
The summary of these related-party transactions for the years
ended December 31, 1998, 1997 and 1996 follows:
1998 1997 1996
Interest expense $ 7,899 $ 11,343 $ 11,858
Rent expense $103,000 $102,000 $102,000
11<PAGE>
13. Commitments
Under the terms of an agreement with the subsidiary sold in 1997,
the Company is required to purchase coffee beans each year for
the next five years ending December 31, 2002 at a predetermined
price per pound over landed coffee costs.
The Company purchased a bakery from Laoma Yaski in 1996 for
$350,000. The Company agreed to pay an additional $25,000 to
Laoma Yaski upon the seven year anniversary of the purchase
provided she does not own, manage or operate a bakery within 250
miles of Mendocino, California.
Under the terms of an agreement with a past officer of the
Company, the Company may purchase options under the following
terms:
Number Of Shares Total
1999 3,000 $ 9,750
2000 1,000 $ 3,500
A remaining 16,000 options may be exercised or sold at any time
at the discretion of the past officer subject to the Company's
first right of refusal.
14. Impact of the Year 2000 (Unaudited)
The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the
applicable year. Any computer programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions
or engage in similar normal business activities.
The Company has completed an assessment and will modify or
replace some portions of their equipment so that their computer
systems will function properly with respect to dates in the year
2000 and thereafter. The total Year 2000 project cost is
estimated at approximately $14,000. To date, the Company has
incurred $10,500 in expenses related to the Year 2000 Issue.
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 hardware and conversions to upgrade software, the
Year 2000 Issue will not pose significant operation problems for
its computer systems.
The date on which the Company believes it will complete the Year
2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources
12<PAGE>
and other factors. 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
ability to locate and correct all relevant computer codes, and
similar uncertainties.
15. Subsequent Events
The Company is actively pursuing the sale of the Bakery and has
listed the business with a real estate agent.
13<PAGE>
Exhibit 10.9
Principal $100,000.00
Loan Date 08-13-1997
Maturity 08-15-2002
Loan No. SJ04233962
Borrower: Thanksgiving Coffee Company
19100 S. Harbor Drive
Fort Bragg, CA 95437
Lender: Wells Fargo Bank, National Association
Business Lending Division
177 Park Center Plaza 0514-011
San Jose, CA 95113
Date of Note: August 13 1997
Principal Amount: $100,000.00
Initial Rate: 9.500%
* Promise to Pay. THANKSGIVING COFFEE COMPANY, INC.
("Borrower") promises to pay to Wells Fargo Bank, National
Association ("Lender"), or order, in lawful money of the
United States of America, the principal amount of One
Hundred Thousand & 00/100 Dollars ($100,000.00), together
with interest on the unpaid principal balance from August 13,
1997, until paid in full.
* PAYMENT. Subject to any payment changes resulting from
changes in the Index, Borrower will pay this loan in 59
principal payments of $1,666.66 each and one time principal
and interest payment of $1,680.70. Borrower's first
principal payment is due September 15, 1997, and all
subsequent principal payments are due on the same day of each
month after that. In addition borrower will pay regular
monthly payments of all accrued unpaid interest due as of
each payment date. Borrower's first interest payment is due
September 15, 1997, and all subsequent interest payments are
due on the same day of each month after that. Borrower's
final payment due August 15, 2002, will be for all principal
and accrued interest not yet paid.
The interest on this Note is computed on a 365/360 simple
interest basis: that is, by applying the ratio of the annual
interest rate over a year of 360 days, multiplied by the
outstanding principal balance, multiplied by the actual number of
days the principal balance is outstanding. Borrower will pay
Lender at Lender's address shown above or at such other place as
Lender may designate in writing. Unless otherwise agreed or
required by applicable law, payments will be applied first to
accrued unpaid interest, then to principal, and any remaining
amount to any unpaid collection costs and late charges.
14<PAGE>
VARIABLE INTEREST RATE. The interest rate on this Note is subject
to change from time to time based on changes in an index which is
the Prime Rate (the "Index"). The Prime Rate is a base rate that
the Lender from time to time establishes and which serves as the
basis upon which effective rates of interest are calculated for
those loans making reference thereto. The Prime Rate is not
necessarily the lowest or best rate at which the lender makes
loans. Each change in the rate of interest shall become effective
on the date each Prime Rate change is announced within the
Lender. Lender will tell Borrower the current index rate upon
Borrower's request. Borrower understands that Lender may make
loans based on other rates as well. The interest rate change will
not occur more often than each time the Index changes. The Index
currently is 8.500% per annum. The interest rate to be applied to
the unpaid principal balance of this Note will be at a rate of
1.000 percentage point over the index, resulting in an initial
rate of 9.500% per annum. Notice: under no circumstances will
the interest rate on this capital end be more than the maximum
allowed by applicable law.
PREPAYMENT. Borrower agrees that all loan fees and other prepaid
finance charges are earned fully as of the date of the loan and
will not be subject to refund upon early payment (whether
voluntary or as a result of default), except as otherwise
required by law. Except for the foregoing Borrower may pay
without penalty all or a portion of the amount owed earlier than
it is due. Early payments will not, unless agreed to by the
Lender in writing, relieve Borrower of Borrower's obligation to
continue to make payments under the payment schedule period.
Rather, they will reduce the principal balance due and may result
in Borrower making fewer payments.
LATE CHARGE. If a payment is 15 days or more late, Borrower will
be charged 5.000% of the regularly scheduled payment or $15.00,
whichever is greater.
DEFAULT. Borrower will be in default if any of the following
happens: (a) Borrower fails to make any payment when due. (b)
Borrower breaks any promise Borrower has made to Lender, or
Borrower fails to comply with or to perform when due any other
term, obligation, covenant or condition contained in this Note or
any agreement related to this Note, or in any other agreement or
loan Borrower has with Lender. (c) Borrower defaults under any
loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor
or person that may materially affect any of Borrower's property
or Borrower's ability to repay this Note or perform Borrower's
obligations under this Note or any of the Related Documents. (d)
Any representation or statement made or furnished to lender by
Borrower or on Borrower's behalf is false or misleading in any
material respect either now or at the time made or furnished.
(e) Borrower becomes insolvent, a receiver is appointed for any
part of Borrower's property. Borrower makes an assignment for the
benefit of creditors, or any proceeding is commenced either by
15<PAGE>
Borrower or against Borrower under any bankruptcy or insolvency
laws. (f) Any creditor tries to take any of Borrower's property
on or in which Lender has a lien or security interest. This
includes a garnishment of any of Borrower's accounts with Lender.
(g) Any guarantor dies or any of the other events described in
this default section occurs with respect to any guarantor of this
Note. (h) A material adverse change occurs in Borrower's
financial condition, or Lender believes the prospect of payment
or performance of the indebtedness is impaired. (i) Lender in
good faith deems itself insecure.
LENDER'S RIGHTS. Upon default, Lender may declare the entire
unpaid principal balance on this Note and all accrued unpaid
interest immediately due, without notice, and the Borrower will
pay that amount. Lender may hire or pay someone else to help
collect this Note if Borrower does not pay. Borrower also will
pay Lender that amount. This includes, subject to any limits
under applicable law, Lender's attorneys fees and Lender's legal
expenses whether or not there is a lawsuit, including attorneys
fees and legal expenses for bankruptcy proceedings (including
efforts to modify or vacate any automatic stay or
injunction), appeals, and any anticipated post-judgment
collection services. Borrower also will pay any court costs, in
addition to all other sums provided by law. This Note has been
delivered to Lender and accepted by Lender in the State of
California. This Note shall be governed by and construed in
accordance with the laws of the State of California.
RIGHT OF SETOFF. Borrower grants to Lender a contractual
possessory security interest in, and hereby assigns, conveys,
delivers, pledges, and transfers to Lender all Borrower's right,
title and interest in and to, Borrower's accounts with Lender
(whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else
and all accounts Borrower may open in the future, excluding
however all IRA and Keogh accounts, and all trust accounts for
which the grant of a security interest would be prohibited by
law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge of setoff all sums owning on this Note
against any and all such accounts.
ADDITIONAL PROVISION. Notwithstanding anything herein to the
contrary, at no time shall the rate of interest on this Note be
less than two percent (2%) above the highest effective annual
rate of interest rounded upward to the next highest quarter
percent (taking into account any compounding of interest) earned
by Borrower on any time deposit, market rate account or savings
account pledged to Lender as collateral for such amounts.
PAYMENT DATE DEFERRAL. If this loan is not entered on Lender's
books during the month this Note is dated, the due dates of all
scheduled payments shall be deferred one month.
16<PAGE>
LOAN FEES - AUTHORIZATION. Borrower shall pay to Lender any and
all fees as specified in the "Disbursement Request and
Authorization" executed by Borrower in connection with this Note.
Such fees are non-refundable and shall be due and payable in full
immediately upon Borrower's execution of this Note.
COLLECTION FROM DEPOSIT ACCOUNT. Borrower authorizes Lender to
collect all payments, including principal, interest, fees,
charges, and other amounts due under this note by charging
Borrower's primary deposit account as specified in the
"Disbursement Request and Authorization" executed by Borrower in
connection with this Note for the full amount thereof, or such
other deposit account of Borrower as Borrower shall designate in
writing. Should there be insufficient funds in said account to
pay when due all or any portion of the total amount due from
Borrower to Lender, the full amount of such deficiency shall be
immediately due and payable by Borrower.
ARBITRATION PROGRAM. (a) Binding Arbitration. Upon the demand of
any party, any Dispute shall be resolved by binding arbitration
in accordance with the terms of this Arbitration Program. A
"Dispute" shall include any action, dispute, claim, or
controversy of any kind, whether in contract or in tort, legal or
equitable, now existing or hereafter arising between the parties
relating in any way to any agreement incorporating this
Arbitration Program, or any related agreements (the "Documents"),
and all past, present, or future loans, transactions, contracts,
agreements, relationships, incidents or injuries of any kind
whatsoever relating to or involving the Business Banking Group or
any successor group or department of Lender. Any party to this
Arbitration Program may by summary proceedings bring any action
in court or compel arbitration of any Dispute. Any party who
fails to submit to binding arbitration following a lawful demand
by the opposing party shall bear all costs and expenses incurred
by the opposing party in compelling arbitration of any Dispute.
The parties agree that by engaging in activities with or involving
each other as described above, they are participating in transactions
involving interstate commerce. THE PARTIES UNDERSTAND THAT BY THIS
AGREEMENT THEY HAVE DECIDED THAT THEIR DISPUTES SHALL BE RESOLVED BY
BINDING ARBITRATION RATHER THAN IN COURT, AND ONCE DECIDED BY
ARBITRATION NO DISPUTE CAN LATER BE BROUGHT, FILED OR PURSUED IN
COURT BEFORE A JUDGE OR JURY, except under the limited circumstances
provided for herein.
(b) Governing Rules, Preservation of Remedies, Arbitrators. All
Disputes between the parties submitted to arbitration shall be
resolved by binding arbitration administered by the American
Arbitration Association (the "AAA") in accordance with its
Commercial Arbitration Rules and the Federal Arbitration Act
(Title 9 of the United State Code). Judgment upon any award made
hereunder may be entered in any court having jurisdiction. Any
claim or dispute related to the exercise of any self-help,
auxiliary or other rights under this paragraph shall be a Dispute
hereunder. However, no provision of, nor the exercise of any
17<PAGE>
rights under, this Arbitration Program shall limit the right of
any party to seek, use, and employ ancillary or preliminary
remedies, judicial or otherwise, for the purposes of (1)
preserving, foreclosing, or obtaining possession of real or
personal property, (2) exercising self-help remedies including
setoff and repossession rights, or (3) obtaining provisional or
ancillary remedies such as injunctive relief, sequestration,
attachment, garnishment, or the appointment of a receiver from a
court having jurisdiction. Such rights can be exercised at any
time, unless contrary to a final award of decision in an
arbitration proceeding, and shall not constitute a waiver of the
arbitration rights of any party. Any party may proceed against
all liable persons, or against any one of them, and may release
or settle with any of them, without impairing rights against
other liable persons. A Dispute involving claims or amounts in
controversy of $5,000,000 or less shall be decided by a single
arbitrator who shall not render an award of greater that
$5,000,000 (including damages, costs, fees and expenses), and
each party expressly waives any right or claim to recover more
than $5,000,000 in such cases. A Dispute involving greater
amounts shall be heard by and decided by a majority vote of a
panel of three arbitrators. Any arbitrator must be a retired
member of the state or federal judiciary or a practicing attorney
experienced and knowledgeable in the substantive laws applicable
to the subject matter of the Dispute. Arbitrator(s) (i) may
grant any remedy or relief within the scope hereof that a court
of competent jurisdiction could, including ancillary relief as is
necessary to make effective any award, (ii) shall have the power
to award recovery of all costs and fees, and (iii) may impose
sanctions and take other actions as they deem necessary to the
same extent a judge could. The determination of the
arbitrator(s) shall be binding on all parties and shall not be
subject to further review or appeal except as otherwise allowed
by applicable law.
(c) Judicial Review; Real Property Collateral; Judicial
Reference. Notwithstanding anything herein to the contrary, in
any arbitration in which the amount in controversy exceeds
$25,000,000, the arbitrators shall be required to make specific,
written findings of fact and conclusions of law. In such
arbitrations (A) the arbitrators shall not have the power to make
any award which is not supported by substantial evidence or which
is based on legal error, (B) an award shall not be binding upon
the parties unless the findings of fact are supported by
substantial evidence and the conclusions of law are not erroneous
under applicable substantive law, and (C) the parties shall have,
in addition to the grounds referred to in the Federal Arbitration
Act for vacating, modifying or correcting an award, the right to
judicial review of (1) whether the findings of fact rendered by the
arbitrators are supported by substantial evidence, and (2)
whether the conclusions of law are erroneous under applicable
substantive law. Judgment confirming an award in such a
proceeding may be entered only if a court determines the award is
supported by substantial evidence and not based on legal error
18<PAGE>
under applicable substantive law. Notwithstanding contrary
provisions herein, no Dispute shall be submitted to arbitration
if the Dispute concerns indebtedness secured by real property and
if arbitration of the Dispute would preclude enforcement of a
mortgage, lien or security interest securing such indebtedness,
unless (i) the holder of such mortgage, lien or security interest
specifically elects in writing to proceed with the arbitration,
or (ii) all parties to the arbitration proceeding waive any
rights or benefits that might accrue to them by virtue of any
applicable one action rule statutes, thereby agreeing that all
indebtedness and obligations of the parties, and all mortgages,
liens and security interests securing any such indebtedness and
obligations, shall remain fully valid and enforceable. If such a
Dispute is not submitted to arbitration under such circumstances,
the Dispute shall be determined by Judicial Reference at the
election of any Party. If such an election is made, the Dispute
shall be determined by a reference in accordance with California
Code of Civil Procedure Section 638, et seq., or the judicial
reference procedures of some other state if such state in which
the real property is located offers a comparable judicial
reference procedure. A referee shall be selected pursuant to AAA
procedures and must meet the selection criteria set forth herein
for an arbitrator.
(d) Miscellaneous. To the maximum extent practicable, the AAA,
the arbitrator and the parties shall act to assure that any
arbitration proceeding shall be concluded with 180 days of the
filing of the Dispute with the AAA. Arbitration proceedings
hereunder shall be conducted at a location mutually agreeable to
the parties, or if they cannot agree, then in the state of the
applicable substantive law designated in the Documents relating
to the Dispute at a location selected by the AAA. All discovery
activities shall be expressly limited to matters directly
relevant to the Dispute. No party or arbitrator may disclose the
existence, content, or results of any arbitration hereunder,
except for disclosures of information required in the ordinary
course of a party's business or by applicable law or regulation.
This Arbitration Program shall be administered and construed in
accordance with the Federal Arbitration Act, other applicable
Federal law, and to the extent inapplicable or unenforceable,
other applicable law providing for arbitration. If there is any
inconsistency between the terms hereof and any governing rules or
statutes, the terms hereof shall control. This Arbitration
Program constitutes the entire agreement of the parties and
supersedes all prior arrangements and other communications on
dispute resolution concerning Disputes relating to the Business
Banking Group or retail operations of Lender, except for other
arbitration programs entered into by the parties after August
1,1996. In the event more than one arbitration program entered
into by the parties is potentially applicable to a Dispute, the
one most directly related to the Documents or transaction that is
the subject of the Dispute shall control. The provisions of the
Arbitration Program shall survive any termination, amendment, or
expiration of the Documents or relationships of the parties.
19<PAGE>
TELEPHONE TRANSFER. Borrower authorizes Lender to make
transfers, up to the available balance or credit limit, between
designated accounts specified in writing, upon Lender's receipt
of instructions from any of Borrower's Owners/Principals. Lender
will have no liability for any transfer made upon the written or
verbal request of any person believed by Lender in good faith
to be an authorized representative of Borrower. Borrower will
indemnify and hold Lender harmless from and against any damages,
liabilities, costs or expenses (including attorneys fees) arising
out of any claim by Borrower or any third party against Lender in
connection with Lender's performance of transfers as described
above.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of
its rights or remedies under this Note without losing them.
Borrower and any other person who signs, guarantees or endorses
this Notes, to the extent allowed by law, waive any applicable
statue of limitations, presentiment, demand for payment, protest
and notice of dishonor. Upon any change in the terms of this
Note, and unless otherwise expressly stated in writing, no party
who signs this Note, whether as maker, guarantor, accommodation
maker or endorser, shall be released from liability. All such
parties agree that Lender may renew or extend (repeatedly and for
any length of time) this loan, or release any party or guarantor
or collateral; or impair, fail to realize upon or perfect
Lender's security interest in the collateral; and take any other
action deemed necessary by Lender without the consent of or
notice to anyone. All such parties also agree that Lender may
modify this loan without the consent of or notice to anyone other
that the party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE
PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE
PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE AND
ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
THANKSGIVING COFFEE COMPANY, INC.
By: By:
/s/ Paul E. Katzeff, C.E.O /s/ Joan F. Katzeff, President
20<PAGE>
Exhibit 10.10
Principal $601,635.74
Loan Date 01-06-1999
Maturity 01-15-2001
Loan No. 12844326
Borrower: Thanksgiving Coffee Company
19100 S. Harbor Drive
Fort Bragg, CA 95437
Lender: Wells Fargo Bank, National Association
Business Lending Division
177 Park Center Plaza 0514-011
San Jose, CA 95113
Date of Note: January 6, 1999
Principal Amount: $601,635.74
* Promise to Pay. THANKSGIVING COFFEE COMPANY, INC.
("Borrower") promises to pay to Wells Fargo Bank, National
Association ("Lender"), or order, in lawful money of the
United States of America, the principal amount of Six Hundred
One Thousand Six Hundred Thirty Five & 74/100 Dollars
($601,635.74), together with interest on the unpaid principal
balance from January 6, 1999, until paid in full.
* PAYMENT. Subject to any payment changes resulting from
changes in the Index, Borrower will pay this loan in
accordance with the following payment schedule:
* 24 consecutive monthly interest payments, beginning February
15, 1999, with interest calculated on the unpaid principal
balances at an interest rate off 2.750 percentage points over
the index described below; 12 consecutive monthly principal
payments of $5,013.63 each, beginning February 15, 1999, with
interest calculated on the unpaid balances at an interest
rate of 2.750 percentage points over the index described
below: 12 consecutive monthly principal payments of $8,356.05
each, beginning February 16, 2000, with interest calculated
on the unpaid principal balances at an interest rate of 2.750
percentage points over the index described below; and 1
principal and interest payment in the initial amount of
$441,199.68 on January 15, 2001, with interest calculated on
the unpaid principal balances at an interest rate of 2.750
percentage points over the index described below. This
estimated final payment is based on the assumption that all
payments will be made exactly as scheduled and that the index
does not change; the actual final payment will be for all
principal and accrued interest not yet paid, together with
any other unpaid amounts under this note.
The annual interest rate for this Note is computed on a 365/380
basis: that is, by applying the ratio of the annual interest rate
21<PAGE>
over a year of 360 days, multiplied by the outstanding principal
balance, multiplied by the actual number of days the principal
balance is outstanding. Borrower will pay Lender at Lender's
address shown above or at such other place as Lender may
designate in writing. Unless otherwise agreed or required by
applicable law, payments will be applied first to accrued unpaid
interest, then to principal, and any remaining amount to any
unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject
to change from time to time based on changes in an index which is
the Prime Rate (the "Index"). The Prime Rate is a base rate that
the Lender from time to time establishes and which serves as the
basis upon which effective rates of interest are calculated for
those loans making reference thereto. The Prime Rate is not
necessarily the lowest or best rate at which the lender makes
loans. Each change in the rate of interest shall become effective
on the date each Prime Rate change is announced within the
Lender. Lender will tell Borrower the current index rate upon
Borrower's request. Borrower understands that Lender may make
loans based on other rates as well. The interest rate change will
not occur more often that each time the Index changes. The Index
current is 7.750% per annum. The interest rate or rates to be
applied to the unpaid principal balance of this Note will be more
than the maximum rate allowed by applicable law. Whenever
increases occur in the interest rate, Lender, at its option, may
do one or more of the following: (a) increase Borrower's payments
to ensure Borrower's loan will pay off by its original final
maturity date, (b) increase Borrower's payments to cover accruing
interest, (c) increase the number of Borrower's payments, and (d)
continue Borrower's payments at the same amount and increase
Borrower's final payment.
PREPAYMENT. Borrower may pay without penalty all or a portion of
the amount owed earlier than it is due. Early payments will not,
unless agreed to by Lender in writing, relieve Borrower of
Borrower's obligation to continue to make payments under the
payment schedule. Rather they will reduce the principal balance
due and my result in Borrower making fewer payments.
LATE CHARGE. If payment is 15 days or more late, Borrower will be
charged 5.000% of the regularly scheduled payment or $15.00,
whichever is greater.
DEFAULT. Borrower will be in default if any of the following
happens: (a) Borrower fails to make any payment when due. (b)
Borrower breaks any promise Borrower has made to Lender, or
Borrower fails to comply with or to perform when due any other
term, obligation, covenant or condition contained in this Note or
any agreement related to this Note, or in any other agreement or
loan Borrower has with Lender. (c) Borrower defaults under any
loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor
or person that may materially affect any of Borrower's property
22<PAGE>
or Borrower's ability to repay this Note or perform Borrower's
obligations under this Note or any of the Related Documents. (d)
Any representation or statement made or furnished to lender by
Borrower or on Borrower's behalf is false or misleading in any
material respect either now or at the time made or furnished.
((e) Borrower becomes insolvent, a receiver is appointed for any
part of Borrower's property. Borrower makes an assignment for the
benefit of creditors, or any proceeding is commenced either by
Borrower or against Borrower under any bankruptcy or insolvency
laws. (f) Any creditor tries to take any of Borrower's property
on or in which Lender has a lien or security interest. This
includes garnishment of any of Borrower's accounts with Lender.
(g) Any guarantor class any of the other events described in this
default section occurs with respect to any guarantor of this
Note. (h) A material adverse change occurs in Borrower's
financial condition, or Lender believes the prospect of payment
or performance of the indebtedness is impaired. (i) Lender in
good faith deems itself insecure.
LENDER'S RIGHTS. Upon default, Lender may declare the entire
unpaid principal balance on this Note and all accrued unpaid
interest immediately dues, without notice, and the Borrower
will pay that amount. Lender may hire or pay someone else to
help collect this Note if Borrower does not pay. Borrower also
will pay Lender that amount. This includes, subject to any limits
under applicable law, Lender's attorneys fees and Lender's legal
expenses whether or not there is a lawsuit, including attorneys
fees and legal expenses for bankruptcy proceedings (including
efforts to modify or vacate any automatic stay or injunction),
appeals, and any anticipated post-judgment collection services.
Borrower also will pay any court costs in addition to all other
sums provided by law. This Note has been delivered to Lender and
accepted by Lender in the State of California. This Note shall be
governed by and construed in accordance with the laws of the State
of California.
RIGHT OF SETOFF. Borrower grants to Lender a contractual security
interest in, and hereby assigns, conveys, delivers, pledges, and
transfers to Lender all Borrower's right, title and interest in
and to, Borrower's accounts with Lender (whether checking,
savings, or some other account), including without limitation all
accounts held jointly with someone else and all accounts Borrower
may open in the future, excluding however all IRA and Keogh
accounts, and all trust accounts for which the grant of a
security interest would be prohibited by law. Borrower authorizes
Lender, to the extent permitted by applicable law, to charge of
setoff all sums owning on this Note against any and all such
accounts.
ADDITIONAL PROVISION. Notwithstanding anything herein to the
contrary, at no time shall the rate of interest on this Note be
less than two percent (2%) above the highest effective annual
rate of interest rounded upward to the next highest quarter
percent (taking into account any compounding of interest) earned
23<PAGE>
by Borrower on any time deposit, market rate account or savings
account pledged to Lender as collateral for such amounts.
PAYMENT DATE DEFERRAL. If this loan is not entered on Lender's
books during the month this Note is dated, the due dates of all
scheduled payments shall be deferred one month.
LOAN FEES - AUTHORIZATION. Borrower shall pay to Lender any and
all fees as specified in the "Disbursement Request and
Authorization" executed by Borrower in connection with this Note.
Such fees are non-refundable and shall be due and payable in full
immediately upon Borrower's execution of this Note.
COLLECTION FROM DEPOSIT ACCOUNT. Borrower authorizes Lender to
collect all payments, including principal, interest, fees,
charges, and other amounts due under this note by charging
Borrower's primary deposit account as specified in the
"Disbursement Request and Authorization" executed by Borrower in
connection with this Note for the full amount thereof, or such
other deposit account of Borrower as Borrower shall designate in
writing. Should there be insufficient funds ins aid account to
pay when due all or any portion of the total amount due from
Borrower to Lender, the full amount of such deficiency shall be
immediately due and payable by Borrower.
ARBITRATION PROGRAM. (a) Binding Arbitration. Upon the demand of
any party, any Dispute shall be resolved by binding arbitration
in accordance with the terms of this Arbitration Program. A
"Dispute" shall include any action, dispute, claim, or
controversy of any kind, whether in contract or in tort, legal or
equitable, now existing or hereafter arising between the parties
relating in any way to any agreement incorporating this
Arbitration Program, or any related agreements (the "Documents"),
and all past, present, or future loans, transactions, contracts,
agreements, relationships, incidents or injuries of any kind
whatsoever relating to or involving the Business Banking Group or
any successor group or department of Lender. Any party to this
Arbitration Program may by summary proceedings bring any action
in court or compel arbitration of any Dispute. Any party who
fails to submit to binding arbitration following a lawful demand
by the opposing party shall bear all costs and expenses incurred
by the opposing party in compelling arbitration of any Dispute.
The parties agree that by engaging in activities with or involving
each other as described above, they are participating in transactions
involving interstate commerce. THE PARTIES UNDERSTAND THAT BY THIS
AGREEMENT THEY HAVE DECIDED THAT THEIR DISPUTS SHALL BE RESOLVED
BY BINDING ARBITRATION RATHER THAN IN COURT, AND ONCE DECIDED BY
ARBITRATION NO DISPUTE CAN LATER BE BROUGHT, FILED OR PURSUED IN
COURT BEFORE A JUDGE OR JURY, except under the limited
circumstances provided for herein.
(b) Governing Rules, Preservation of Remedies: Arbitrators. All
Disputes between the parties submitted to arbitration shall be
resolved by binding arbitration administered by the American
24<PAGE>
Arbitration Association (the "AAA") in accordance with its
Commercial Arbitration Rules and the Federal Arbitration Act
(Title 9 of the United State Code). Judgment upon any award made
hereunder may be entered in any court having jurisdiction. Any
claim or dispute related to the exercise of any self-help,
auxiliary or other rights under this paragraph shall be a Dispute
hereunder. However, no provision of, nor the exercise of any
rights under, this Arbitration Program shall limit the right of
any party to seek, use, and employ ancillary or preliminary
remedies, judicial or otherwise, for the purposes of (1)
preserving, foreclosing, or obtaining possession of real or
personal property, (2) exercising self-help remedies including
setoff and repossession rights, or (3) obtaining provisional or
ancillary remedies such as injunctive relief, sequestration,
attachment, garnishment, or the appointment of a receiver from a
court having jurisdiction. Such rights can be exercised at any
time, unless contrary to a final award of decision in an
arbitration proceeding, and shall not constitute a waiver of the
arbitration rights of any party. Any party may proceed against
all liable persons, or against any one of them, and may release
or settle with any of them, without impairing rights against
other liable persons. A Dispute involving claims or amounts in
controversy of $5,000,000 or less shall be decided by a single
arbitrator who shall not render an award of greater that
$5,000,000 (including damages, costs, fees and expenses), and
each party expressly waives any right or claim to recover more
than $5,000,000 in such cases. A Dispute involving greater
amounts shall be heard by and decided by a majority vote of a
panel of three arbitrators. Any arbitrator must be a retired
member of the state of federal judiciary or a practicing attorney
experienced and knowledgeable in the substantive laws applicable
to the subject matter of the Dispute. Arbitrator(s) (i) may grant
any remedy or relief within the scope hereof that a court of
competent jurisdiction could, including ancillary relief as is
necessary to make effective any award, (ii) shall have the power
to award recovery of all costs and fees, and (iii) may impose
sanctions and take other actions as they deem necessary to the
same extent a judge could. The determination of the arbitrator(s)
shall be binding on all parties and shall not be subject to
further review or appeal except as otherwise allowed by
applicable law.
(c) Judicial Review: Real Property Collateral: Judicial
Reference. Notwithstanding anything herein to the contrary, in
any arbitration in which the amount in controversy exceeds
$25,000,000, the arbitrators shall be required to make specific,
written findings of fact and conclusions of law. In such
arbitrations (A) the arbitrators shall not have the power to make
any award which is not supported by substantial evidence or which is
based on legal error, (B) an award shall not be binding upon the
parties unless the findings of fact are supported by substantial
evidence and the conclusions of law are not erroneous under
applicable substantive law, and (C) the parties shall have in
addition to the grounds referred to in the Federal Arbitration
25<PAGE>
Act for vacating, modifying or correcting an award, the right to
judicial review of (1) whether the findings of fact rendered by
the arbitrators are supported by substantial evidence, and (2)
whether the conclusions of law are erroneous under applicable
substantive law. Judgment confirming an award in such a
proceeding may be entered only if a court determines the award is
supported by substantial evidence and not based on legal error
under applicable substantive law. Notwithstanding contrary
provisions herein, no Dispute shall be submitted to arbitration
if the Dispute concerns indebtedness secured by real property and
if arbitration of the Dispute would preclude enforcement of a
mortgage, lien or security interest securing such indebtedness,
unless (i) the holder of such mortgage, lien or security interest
specifically elects in writing to proceed with the arbitration,
or (ii) all parties to the arbitration proceeding waive any
rights or benefits that might accrue to them by virtue of any
applicable one action rule statures, thereby agreeing that all
indebtedness and obligations of the parties, and all mortgages,
liens and security interests securing any such indebtedness and
obligations, shall remain fully valid and enforceable. If such a
Dispute is not submitted to arbitration under such circumstances,
the Dispute shall be determined by Judicial Reference at the
election of any Party. If such an election is made, the Dispute
shall be determined by a reference in accordance with California
Code of Civil Procedure Section 638, et seq., or the judicial
reference procedures of some other state if such state in which
the real property is located offers a comparable judicial
reference procedure. A referee shall be selected pursuant to AAA
procedures and must meet the selection criteria set forth herein
for an arbitrator.
(d) Miscellaneous. To the maximum extent practicable, the AAA,
the arbitrator and the parties shall act to assure that any
arbitration proceeding shall be concluded with 180 days of the
filing of the Dispute with the AAA. Arbitration proceedings
hereunder shall be conducted at a location mutually agreeable to
the parties, or if they cannot agree, then in the state of the
applicable substantive law designated in the Documents relating
to the Dispute at a location selected by the AAA. All discovery
activities shall be expressly limited to matters directly
relevant to the Dispute. No party or arbitrator may disclose the
existence, content, or results of any arbitration hereunder,
except for disclosures of information required in the ordinary
course of a party's business or by applicable law or regulation.
This Arbitration Program shall be administered and construed in
accordance with the Federal Arbitration Act, other applicable
Federal law, and to the extent inapplicable or unenforceable,
other applicable law providing for arbitration. If there is any
inconsistency between the terms hereof and any governing rules or
statutes, the terms hereof shall control. This Arbitration
Program constitutes the entire agreement of the parties and
supersedes all prior arrangements and other communications on
dispute resolution concerning Disputes relating to the Business
Banking Group or retail operations of Lender, except for other
26<PAGE>
arbitration programs entered into by the parties after August
1,1996. In the event more than one arbitration program entered
into by the parties is potentially applicable to a Dispute, the
one most directly related to the Documents or transaction that is
the subject of the Dispute shall control. The provisions of the
Arbitration Program shall service any termination, amendment, or
expiration of the Documents or relationships of the parties.
TELEPHONE TRANSFER. Borrower authorizes Lender to make transfers,
up to the available balance or credit limit, between designated
accounts specified in writing, upon Lender's receipt of
instructions from any of Borrower's Owners/Principals. Lender
will have no liability for any transfer made upon the written or
verbal request of any person believed by Lender in good faith to
be an authorized representative of Borrower. Borrower will
indemnity and hold Lender harmless from and against any damages,
liabilities, costs or expenses (including attorneys fees) arising
out of any claim by Borrower or any third party against Lender in
connection with Lender's performance of transfers as described
above.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of
its rights or remedies under this Note without losing them.
Borrower and any other person who signs, guarantees or endorses
this Notes, to the extent allowed by law waive any applicable
statue of limitations, presentiment, demand for payment, protest
and notice of dishonor. Upon any change in the terms of this
Note, and unless otherwise expressly stated in writing, no party
who signs this Note, whether as maker, guarantor, accommodation
maker or endorser, shall be released from liability. All such
parties agree that Lender may renew or extend (repeatedly and for
any length of time) this loan, or release any party or guarantor
or collateral; or impair, fail to realize upon or perfect
Lender's security interest in the collateral; and take any other
action deemed necessary by Lender without the consent of or
notice to anyone. All such parties also agree that Lender may
modify this loan without the consent of or notice to anyone other
that the party with whom the modification is made.
PRIOR TO SIGNING THISNOTE, BORROWER READ AND UNDERSTOOD ALL THE
PROVISIONS OF THISNOTE, INCLUDING THE VARIABLE INTEREST RATE
PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE AND
ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
THANKSGIVING COFFEE COMPANY, INC.
By: By:
/s/ Paul E. Katzeff, C.E.O /s/ Joan F. Katzeff, President
27<PAGE>
Exhibit 10.11
NON-EXCLUSIVE LICENSE AGREEMENT
AGREEMENT, dated this _______ day of ______________, 1998
between Wyland International, LLC., located at 5 Columbia, Aliso
Viejo, CA 92656 ("Licensor") and Thanksgiving Coffee Company
having its principal office at 19100 S. Harbor Drive, Ft. Bragg,
CA 95437 ("Licensee").
SCHEDULE
A. "PROPRIETARY SUBJECT MATTER": The "Proprietary Subject
Matter" shall consist of the copyright image(s) owned by
Licensor".
B. "LICENSED ARTICLES": The "Licensed Articles" shall consist
of: Coffee (packaged and/or specialty blended) utilizing the
Proprietary Subject Matter.
C. "DISTRIBUTION OUTLETS": The term "Distribution Outlets"
shall mean the following market(s) in which Licensee is hereby
authorized to sell and/or distribute the Licensed Articles: All
Stores including grocery.
D. "TERM":
1. "Term". The "Term" will commence on July 8, 1998 and expire
on December 31, 2001.
2. "Earliest Commencement Date": The "Earliest Commencement
Date", which means the date before which Licensee shall not sell
or offer to sell any Licensed Articles to the public (or permit
any third party to do so), is July 8, 1998.
3. "Initial Shipping Deadline": Subject to the limitations and
conditions contained in paragraphs 2 and 11 of the Standard Terms
and Conditions attached hereto, Licensee agrees to commence in
good faith to manufacture, distribute and sell the Licensed
Articles on or before November 1, 1998.
E. "LICENSED TERRITORY": The "Licensed Territory" is the United
States, its territories and possessions and the Commonwealth of
Puerto Rico (excluding U.S. military bases and PX's worldwide).
F. "ROYALTY": The "Royalty" is *.
G. "ADVANCE": The "Advance" is waived.
H. "GUARANTEE": The "Guarantee" is waived.
I. "PRODUCT LIABILITY INSURANCE": The amount of bodily injury
coverage under product liability insurance is $1,000,000.00
combined single limit with no deductible amount.
J. "COPYRIGHT NOTICE": Licensee shall place on the Licensed
Articles in a manner acceptable to Licensor all copyright notices
as depicted in the Styleguide.
* Portions of this Exhibit were omitted and have been filed
separately with the Secretary of the Securities and Exchange
Commission pursuant to a Confidential Treatment Request under
Rule 24-b2 of the Securities Exchange Act of 1934, as amended,
filed on March 31, 1999.
28<PAGE>
K. "SERVICE OF PROCESS": Licensee appoints _____________ whose
address in California is ________________________
__________________________ to accept service of process
on Licensee's behalf. If no name or address is filled in
above or if for any reason said person has moved or
cannot be validly served, then Licensee appoints the
Secretary of State of the State of California to accept
service of process on Licensee's behalf.
L. "SPECIAL PROVISIONS": Thanksgiving Coffee Company will
supply Wyland Galleries with coffee at * per bag and *
notification must occur prior to any price increases.
By signing in the spaces provided below, the parties have agreed
to all of the terms and conditions contained in the above
Agreement and the attached Standard Terms and Conditions. This
Agreement shall consist of the above Schedule, the attached
Standard Terms and Conditions and any rider making specific
reference to this Agreement attached hereto and separately signed
by authorized representatives of Licensee and Licensor.
Thanksgiving Coffee Company Wyland International, LLC.
(Licensee) (Licensor)
By /s/ Paul Katzeff By /s/ Wyland
____________________________ ______________________________
Its Wyland/President
Address: 19100 S. Harbor Drive 5 Columbia
Ft. Bragg, CA 95437 Aliso Viejo, CA 92656
Telephone: (800) 462-1999 (714) 643-7070
Telecopier:(707) 964-0118 (714) 643-7099
* Portions of this Exhibit were omitted and have been filed
separately with the Secretary of the Securities and Exchange
Commission pursuant to a Confidential Treatment Request under
Rule 24-b2 of the Securities Exchange Act of 1934, as amended,
filed on March 31, 1999.
29<PAGE>
Exhibit 24.1
[LETTERHEAD OF SALLMAN, YANG & ALAMEDA]
March 31, 1999 VIA FACSIMILE & U.S. MAIL
Christopher Kim
Howard, Rice, Nemerovski, Canady, Falk & Rabkin
Three Embarcadero Center, Seventh Floor
San Francisco, CA 94111
Fax#: 415-217-5910
Dear Mr. Kim:
We consent to the incorporation by reference in the registration
statement of Thanksgiving Coffee Company, Inc. on the 1999 Form 10KSB
of our report dated March 17, 1999 on our audits of the consolidated
financial statements of Thanksgiving Coffee Company, Inc. as of
December 31, 1998 and 1997 and for the years ended December 31, 1998,
1997 and 1996, which report is included in this Annual Report of
Form 10-K.
Yours very truly,
SALLMAN, YANG & ALAMEDA
/s/ Kathleen M. Alameda
_______________________
Kathleen M. Alameda
Certified Public Accountant
KMA:flr\tcc.consent
30<PAGE>
TERMS AND CONDITIONS
1. GRANT OF LIMITED LICENSE: Licensor grants to Licensee and
Licensee accepts the non-transferable, non-assignable right
(without the right to grant sub-licenses) to utilize the
Proprietary Subject Matter solely on or in connection with the
manufacture by Licensee (or an approved third party manufacturer)
of the Licensed Articles and the sale by Licensee of the Licensed
Articles solely in the Licensed Territory during the Term, all as
defined above.
2. TERM: The "Term" as defined in Section D.(1) in the Schedule
shall expire on the date set forth in such section unless sooner
terminated as provided herein. Licensee shall comply with the
exploitation dates set forth in Sections D.(2) and D.(3) of the
Schedule and shall not advertise to the trade or manufacture or
ship Licensed Articles prior to receiving a fully executed copy
of this Agreement. Licensee shall not advertise, promote or
otherwise market Licensed Articles to the public (or permit any
third party to do so) earlier than the date which is 30 days
prior to the Earliest Selling Date set forth above.
3. LICENSED TERRITORY: The "Licensed Territory" is set forth
above. Licensee agrees that it will not make or authorize other
parties to make any use, direct or indirect, of the Proprietary
Subject Matter in any other geographical area and Licensee will
not knowingly sell Licensed Articles to third parties who intend
or are likely to resell them outside the Licensed Territory, and
will take all necessary precautions against such resale to the
extent permitted by law.
4. "ROYALTY", STATEMENTS AND PAYMENTS: Licensee shall pay to
Licensor in U.S. dollars a "Royalty" on Net Sales in the amount
stated above. "Net Sales" shall mean Licensee's gross sales less
only the sum of actual cash discounts, quantity discounts and
freight discounts and actual returns for damaged or defective
Licensed Articles, the aggregate of such discounts and returns
not to exceed 5% of gross sales during any accounting period.
The Royalty shall be due and payable to Licensor when the
Licensed Articles are sold, shipped, distributed, billed and/or
paid for; whichever comes first. Royalty statements shall be
prepared in a manner containing quantities sold and the monthly
sales amounts by image and product. Royalty payments shall be
made within 45 days after the close of each month. Royalty
Statements shall be rendered monthly regardless of whether
Royalties are actually due and payable. If Licensor does not
receive the applicable Royalty payment on the 20th day after the
close of the preceding month, Licensee shall pay interest with
respect to any Royalties owed to Licensor at the lower of (a) the
maximum rate allowed by law or (b) the rate of 1-1/2% per month,
computed from the original due date until paid. Neither the
acceptance of any payment or Royalty statement nor the deposit of
any check shall preclude Licensor from questioning the
correctness of such payment or Royalty statement at any time.
1<PAGE>
Licensee shall keep at its principal place of business accurate
and complete books and records as they relate hereto for the
greater of six years or two years from termination or expiration
of the Term. On reasonable notice, Licensor or its designee
shall have the right to examine said books and records. If any
audit discloses that Licensee owes Royalties to Licensee in
excess of 5% of Royalties previously paid, Licensee shall pay the
audit costs.
5. "ADVANCE": a non-refundable Advance in the amount stated above
shall be payable to Licensor upon signature of this Agreement by
Licensee. The Advance shall be applied against the Royalty to be
paid to Licensor during the Term.
6. "GUARANTEE": The minimum amount of Royalties, including the
Advance, shall not be less than the Guarantee stated above. Not
later than 90 days prior to the expiration of the Term, Licensee
shall pay to Licensor an amount equal to that portion of the
Guarantee not previously paid pursuant to Paragraphs 4. and 5.
above.
7. "COPYRIGHT AND TRADEMARK":
(a) Ownership of Images. Licensee recognizes the unique value of
the Proprietary Subject Matter and the goodwill associated
therewith and the secondary meaning that the Proprietary Subject
Matter and associated goodwill have acquired in the mind of the
public. Licensee acknowledges that Licensee's use of the
Proprietary Subject Matter shall not confer or imply a grant of
rights, title or interest in the Proprietary Subject Matter or
goodwill associated therewith and all ownership of copyrights,
trademarks and other rights in the Proprietary Subject Matter and
in all artwork, packaging, copy, literary text, advertising and
promotional materials of any sort utilizing the Proprietary
Subject Matter, including all such materials developed by
Licensee, and the goodwill pertaining thereto ("Copyrighted
Materials"), shall be and at all items remain in the name of
Licensor. Licensee hereby transfers and assigns such Copyrighted
Materials to Licensor without any further action by any party
hereto. All Copyrighted Materials shall be prepared by an
employee-for-hire of Licensee under Licensee's sole supervision,
responsibility and monetary obligation. If third parties who are
not employees of Licensee contribute to the creation of the
Copyrighted Materials, Licensee shall obtain from such third
parties, prior to commencement of work, a full written assignment
of rights so that all right, title and interest in the
Copyrighted Materials, throughout the universe, in perpetuity,
shall vest in Licensor.
(b) Notices. All Licensed Articles and Copyrighted Materials
shall bear the copyright notice set forth above and the following
trademark notices and any other legal notices which Licensor may
from time to time require.
(1) The designation (TM) in close proximity to the trademark,
and
2<PAGE>
(2) "(TM) designates a trademark of Licensor".
(c) Protection of Copyrights. Trademarks and Goodwill. Licensee
agrees to assist Licensor at Licensor's request and expense in
procuring and maintaining the rights to Licensor in the
Proprietary Subject Matter (including trademark and copyright).
In connection therewith, Licensee agrees to execute and/or
deliver to Licensor in such form as Licensor may reasonably
request all instruments necessary to effectuate copyright and
trademark protection or to record Licensee as a registered user
of any trademarks or to cancel such registration. If Licensee
fails to execute any such instruments, Licensee appoints Licensor
as its attorney-in-fact to do so on Licensee's behalf. Licensor
makes no warranty or representation that copyright or trademark
protection shall be secured in the Proprietary Subject Matter.
Licensor does represent and warrant, however, that Licensor is
authorized to license the Proprietary Subject Matter to Licensee,
that such license does not conflict with any other license granted
with respect to the Proprietary Subject Matter, and Licensor has
not received any written notice alleging infringement of the
Proprietary Subject Matter on the property rights of others.
Licensee shall inform Licensor if they become aware of any
infringing activity. Licensor shall control absolutely all
infringement litigation brought against third parties involving
or affecting the Proprietary Subject Matter.
8. "INDEMNIFICATIONS":
(a) By Licensor. Licensor agrees to indemnify and hold harmless
Licensee from and against any final judgments arising solely out
of Licensee's use of the Proprietary Subject Matter as authorized
hereunder, provided that Licensee gives Licensor prompt notice of
all claims or suits relating to such use. Licensor shall have
the option to undertake and control the defense and settlement of
any such claim or suit and if Licensor fails to undertake such
defense, Licensor shall reimburse Licensee for reasonable
attorneys' fees incurred by Licensee in its defense of such claim
or suit.
(b) By Licensee. Licensee agrees to indemnify and hold harmless
Licensor and their respective successors, assigns, affiliates and
co-venturers and all other parties associated with the
Proprietary Subject Matter, and their respective directors,
officers, employees and agents from and against all claims,
damages, losses, liabilities, suits and expenses (including
reasonable attorneys' fees) arising out of or in connection with
the Licensed Articles or their manufacture, packaging,
distribution, promotion, sale or exploitation (except with
respect to those matters against which Licensor has agreed to
indemnify Licensee hereunder). Licensor shall have the right to
defend any such action or proceeding with counsel of their choice
at Licensee's cost and expense.
3<PAGE>
9. PRODUCT LIABILITY INSURANCE: Licensee shall obtain and
maintain at its own expense product liability insurance from a
qualified insurance carrier, in the amount set forth in Section
1. of the Schedule for bodily injury and $1,000,000 for property
damage, naming Licensor as additional named insured under said
policy. The policy shall be non-cancelable. Licensee shall
furnish Licensor with a copy of such policy within 30 days after
signature of this Agreement by Licensor.
10. APPROVALS/SAMPLES/INSPECTION/PRODUCT SAFETY. All prototypes
of Licensed Articles and of all artwork, copy, packaging,
literary text, advertising and promotional materials, including
the quality and style thereof, shall at all stages of production
be subject to Licensor's prior written approval before
manufacture, sale or distribution. Before selling or
distributing the Licensed Articles, Licensee shall furnish and
ship to Licensor, at Licensee's expense, 36 samples of each
Licensed Article, including all packaging materials, and 6
samples of all advertising and promotional materials related
thereto. After such samples have been approved by Licensor,
Licensee shall not depart therefrom without Licensor's prior
written approval. Thereafter, within 30 days following the close
of each calendar quarter during the Term, Licensee shall furnish
and ship to Licensor, at Licensee's expense, one representative
sample of each Licensed Article together with its packaging to
enable Licensor to determine whether Licensee is maintaining
quality control. Licensee will permit Licensor at all reasonable
times to inspect the site of production of the Licensed Articles.
Licensee warrants and represents that all Licensed Articles shall
be of merchantable quality, shall not deviate from approved
prototypes, shall not be derogatory of the Proprietary Subject
Matter and shall be safe for public use. Licensee shall comply
with all applicable laws and regulations and will observe all
safety standards in the manufacture and sale of the Licensed
Articles.
11. EXCLUSIVITY; RESTRICTIONS ON AND MANNER OF EXPLOITATION:
(a) Exclusivity: Licensor agrees while the contract between
Licensor and Licensee is in effect and Licensee is meeting their
obligations Licensor will not enter into another agreement with
another coffee company specifically to market Wyland coffee.
Should a breach of contract occur Licensor has the right to
license any third party at Licensor's discretion.
(b) Premiums/Promotional Arrangements. The use of the Licensed
Articles as premiums, promotional tie-ins and any other secondary
use of the Licensed Articles is not licensed hereunder; such
rights are reserved by Licensor and may be exercised by Licensor
concurrently herewith.
(c) Restrictions on and Manner of Exploitation: The Proprietary
Subject Matter shall not be used in conjunction with any other
licensed name, character, symbol, design, likeness or literary of
4<PAGE>
artistic material, unless any such use is expressly permitted in
writing by Licensor. In no event shall the Licensed Articles be
packaged for sale or distribution with other articles. The
Licensed Articles shall be sold and distributed in commercial
quantities and commercially reasonable assortments, sufficient to
meet public demand, at competitive prices, only to jobbers,
wholesalers and distributors for sales and distribution to retail
stores and to retail stores for direct sale to the public, and
not as close-outs or on an approval or consignment basis and not
through direct mail channels.
(d) Reservation by Licensor. Licensor does not warrant or
represent to Licensee that the Proprietary Subject Matter will
continue to be exploited. Licensor may from time to time, at any
time, discontinue, resume or change any present or future use of
the Proprietary Subject Matter.
12. EVENTS OF DEFAULT; TERMINATION:
(a) Bankruptcy. If Licensee's liabilities exceeds its assets, or
if Licensee becomes unable to pay its debts as they become due,
or files or has filed against Licensee a petition in bankruptcy,
reorganization or for the adoption of an arrangement under any
present or future bankruptcy, reorganization or similar law
(which petition if filed against Licensee shall not be dismissed
within 30 days from the filing date), or if Licensee makes an
assignment for the benefit of its creditors or is adjudicated a
bankrupt, or if a receiver or trustee of all or substantially all
of Licensee's property is appointed, or if Licensee discontinues
its business, this Agreement shall automatically terminate
forthwith without notice to Licensee.
(b) Transfer or Change of Control. If a substantial portion of
the assets or controlling stock in License's business is sold or
transferred, or if there is substantial change in Licensee's
management, or if Licensee's property is expropriated,
confiscated or nationalized by any government or if any
government assumes de facto control of Licensee's business, in
whole or in part, Licensee must inform Licensor in advance of
such transaction and Licensor will approve or disapprove of
continuation of licensing contract.
(c) Failure to Exploit. If, during any calendar quarter,
Licensee fails to sell, manufacture and/or distribute
commercially reasonable quantities of any Licensed Articles,
Licensor may terminate this Agreement as to such Licensed
Articles and/or Licensed Territory, either in whole or in part,
by written notice to Licensee.
(d) Other Breaches. If Licensee fails to perform any of its
obligations hereunder, Licensor may terminate this Agreement upon
ten days notice, unless Licensee cures any such breach within
said ten days and gives notice to Licensor thereof within that
period, provided, however, that there shall be no cure period for
5<PAGE>
Licensee's failure to adhere to the approval process for Licensed
Articles as set forth in Paragraph 10 above.
(e) Effect of Termination. Upon expiration or termination of
this Agreement, Licensee shall immediately stop in all respects
the manufacture, sale and distribution of Licensed Articles and
shall send Licensor a complete inventory report and accounting
with payment of all Royalties (including any unpaid portions of
the Guarantee) due within 30 days. Licensor shall have the right
to enter the premises where the Licensed Articles are located to
verify such inventory statement and Licensee's refusal to
cooperate shall cause the forfeiture of any sell-off rights
Licensee may have. Upon expiration or termination, Licensee
shall have no further right to exercise the rights licensed
hereunder or otherwise acquired in relation to this Agreement.
Licensee agrees that its failure to stop in all respects the
manufacture, sale and/or distribution upon expiration or
termination of this Agreement will result in immediate
irreparable damage to Licensor for which there is no adequate
remedy of law, and in the event of such failure by Licensee,
Wyland Galleries shall be entitled to injunctive relief.
Licensor shall be entitled to recover from Licensee, in addition
to any other remedies in the event of default, reasonable
attorneys' fees, costs and expenses, including collection agency
fees incurred by Licensor in the enforcement of the provisions
hereof. Licensor exercise of any of the foregoing remedies shall
not operate as a waiver of any other rights or remedies which
Licensor may have.
(f) Sell-off Rights. Upon expiration of the Term Licensee shall
have a period of 90 days in which to sell-off previously
manufactured Licensed Articles on a non-exclusive basis, subject
to Licensee's obligation to pay Royalties on and account to
Licensor for such sales. Upon expiration of the sell-off period,
all remaining Licensed Articles shall upon Licensor's option be
sold to Licensor at Licensee's direct cost of manufacture,
excluding overhead, or Licensee shall destroy the Licensed
Articles and furnish Licensor with a sworn certificate of
destruction.
13. CONFIDENTIALITY: Licensee acknowledges that in connection
with Licensee's exploitation of the Licensed Articles, Licensee
may acquire confidential information from Licensor. Licensee
agrees not to utilize any such information except as expressly
permitted hereunder or to disclose to other any such information
without Licensor prior written consent. Any materials embodying
such confidential information shall be returned to Licensor upon
expiration of termination of this Agreement, or earlier if so
requested by Licensor.
14. MISCELLANEOUS:
(a) Notices. All notices and statements shall be in writing and
shall together with any payments be personally delivered or sent
6<PAGE>
postage prepaid to the intended party at the address set forth on
the signature page of this Agreement (unless notification of a
change of address is given in writing). The date of mailing of a
notice or statement shall be deemed the date the notice is given
or statement rendered.
(b) Waiver, Modification. The terms of this Agreement may not be
waived or modified except by an agreement in writing executed by
the parties hereto. The waiver by Licensor or any breach of this
Agreement by Licensee must be in writing and shall not be deemed
to be a waiver of any prior or succeeding breach.
(c) Relationship to Parties. Nothing herein contained shall be
construed to place the parties in the relationship of partners or
joint venturers and Licensee shall have no power to obligate or
bind Licensor in any manner whatsoever. Subject only to
Paragraph 8(a) hereof, Licensee acknowledges that it has no
recourse against Licensor as a result of any claims, damages,
suits and/or expenses (including attorneys' fees) arising out of
or in connection with Licensee's use of the Proprietary Subject
Matter.
(d) No Assignment. The rights and obligations of Licensee under
this Agreement are personal to Licensee and may not be assigned,
mortgaged, sub-licensed or otherwise transferred or encumbered by
Licensee or by operation of law. Any purported assignment or
other transfer by Licensee of any rights granted to Licensee
under this Agreement shall be void and of no effect.
(e) Governing Law/Jurisdiction/Service of Process. This
Agreement shall be construed in accordance with the laws of the
State of California applicable to agreements executed and to be
wholly performed therein. The parties hereto agree that any
suit, action or proceeding arising out of or relating to this
Agreement may be instituted and prosecuted in the United States
District Court for the Central District of California or in any
court of competent jurisdiction of the State of California
located in Orange County, and the parties hereto irrevocably
submit to the jurisdiction of said courts and waive any rights to
object to or challenge the appropriateness of said forums.
Service of process shall be in accordance with the laws of the
State of California.
(f) Reserved Rights. Licensor reserves all rights not expressly
granted herein.
(g) Captions. Captions of paragraphs and quotation marks
appearing herein are inserted for reference and convenience only
and did not define or limit the scope or intent of any provision
hereof.
(h) Binding Agreement. Licensee shall have no rights hereunder
and Licensor shall not be bound hereby unless and until this
Agreement has been accepted in writing by Wyland International, LLC.
7<PAGE>
at its corporate headquarters located in Aliso Viejo. If
Licensor does not accept this Agreement, the parties shall be
released from all liability and this documents shall be of no
force and affect.
(i) Limitation of Actions. No legal action shall be brought by
Licensee under this Agreement unless commenced within 12 months
from the date of the cause of action arose.
(j) Entire Agreement. There are not representations, warranties
or covenants other than those set forth in this Agreement which
sets forth the entire understanding among the parties hereto.
15. LICENSOR'S OPTION TO PURCHASE GOODS: Licensor will supply
Wyland Galleries with coffee at * per bag and * notifications
must occur prior to any price changes.
* Portions of this Exhibit were omitted and have been filed
separately with the Secretary of the Securities and Exchange
Commission pursuant to a Confidential Treatment Request under
Rule 24-b2 of the Securities Exchange Act of 1934, as amended,
filed on March 31, 1999.
8
<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-KSB FILED HEREWITH, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 90
<SECURITIES> 0
<RECEIVABLES> 436
<ALLOWANCES> (23)
<INVENTORY> 474
<CURRENT-ASSETS> 1070
<PP&E> 2,097
<DEPRECIATION> (1,211)
<TOTAL-ASSETS> 2,284
<CURRENT-LIABILITIES> 700
<BONDS> 885
0
0
<COMMON> 873
<OTHER-SE> (173)
<TOTAL-LIABILITY-AND-EQUITY> 2,284
<SALES> 5,653
<TOTAL-REVENUES> 5,653
<CGS> 3,327
<TOTAL-COSTS> 3,327
<OTHER-EXPENSES> 2,366
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 117
<INCOME-PRETAX> (154)
<INCOME-TAX> (71)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (83)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
