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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File No. 33-960-70-LA
THANKSGIVING COFFEE COMPANY, INC.
(Exact name of small business issuer
as specified in its charter)
California 94-2823626
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
19100 South Harbor Drive
Fort Bragg, California 95437
(Address of principal executive Officers) (Zip Code)
Issuer's telephone number, including area code: (707) 964-0118
(Former name, former address and former fiscal year,
if changed since last report.)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes \X\ No \ \
As of April 20, 2000, there were 1,237,384 shares issued and
1,234,544 shares outstanding of common stock of the issuer.
Traditional Small Business Disclosure Format (check one):
Yes \X\ No \ \
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THANKSGIVING COFFEE COMPANY, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Report of Independent Accountants 3
Balance Sheet at March 31, 2000 and
December 31, 1999 4
Statements of Income for the Three Months
Ended March 31, 2000 and March 31, 1999 6
Statements of Cash Flows for the Three
Months Ended March 31, 2000 and March 31,
1999 7
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Changes in Securities 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a vote of
Security-Holders 30
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 30
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Report of Independent Accountants
To the Board of Directors
Thanksgiving Coffee Company, Inc.
Fort Bragg, California
We have reviewed the accompanying balance sheet of Thanksgiving
Coffee Company, Inc., as of March 31, 2000, and the related
statements of income, accumulated deficit and cash flows for the
three month period then ended, in accordance with Statements on
Standards for Accounting and Review Services issued by the American
Institute of Certified Public Accountants. All information
included in these financial statements is the representation of the
management of Thanksgiving Coffee Company, Inc.
A review consists principally of inquiries of company personnel and
analytical procedures applied to financial data. It is
substantially less in scope than an audit in accordance with
generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the accompanying financial statements in
order for them to be in conformity with generally accepted
accounting principles.
SALLMANN, YANG & ALAMEDA
An Accountancy Corporation
/s/ Kathleen M. Alameda
Kathleen M. Alameda
Certified Public Accountant
May 8, 2000
3
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Thanksgiving Coffee Company, Inc.
Balance Sheet
March 31,
2000
----------
Assets
Current assets
Cash $ 67,493
Accounts receivable 363,776
Note receivable-Griswold 10,000
Employee receivable 921
Inventory 511,068
Prepaid expenses 70,601
----------
Total current assets 1,023,859
Property and equipment
Property and equipment 2,248,457
Accumulated depreciation (1,450,059)
----------
Total property and equipment 798,398
Other assets
Deposits and other assets 45,000
Note receivable-Griswold 12,028
Intangibles, net of 246,692
amortization
Deferred tax asset 28,001
----------
Total other assets 331,721
----------
Total assets $ 2,153,978
==========
Liabilities and stockholders'equity
Current liabilities
Accounts payable $ 426,697
Notes payable-banks, current 80,163
portion
Notes payable-other, current 37,063
portion
Notes payable-shareholders, 24,919
current portion
Capital lease obligations, 59,075
current portion
Accrued liabilities 66,254
Deferred income taxes 370
----------
Total current liabilities 694,541
4
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Long term debt
Notes payable 618,543
Capital lease obligations 37,868
----------
Total long term debt 656,411
----------
Total liabilities 1,350,952
----------
Stockholders' equity
Common stock, no par value,
1,960,000 shares authorized,
1,237,384 shares issued,
1,234,544 shares outstanding 861,816
Additional paid in capital 24,600
Accumulated deficit (83,390)
----------
Total stockholders' equity 803,026
----------
Total liabilities and
stockholders' equity $ 2,153,978
==========
See accompanying notes to financial statements and Accountants' report.
5
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Thanksgiving Coffee Company, Inc.
Statement of Income
Three Month Period Ended March 31, 2000
Income
Net sales $ 1,294,702
Cost of sales 670,482
-----------
Gross profit 624,220
Operating expenses
Selling, general and 534,136
administrative expenses
Depreciation and amortization 50,925
-----------
Total operating expenses 585,061
-----------
Operating income 39,159
Other income (expense)
Interest income 690
Miscellaneous income 171
Interest expense (28,985)
-----------
Total other income (expense) (28,124)
-----------
Income before income taxes 11,035
Income tax expense (800)
-----------
Net income $ 10,235
===========
Earnings per share (basic) $ 0.008
Earnings per share (dilutive) $ 0.008
See accompanying notes to financial statements and Accountants' report.
6
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Thanksgiving Coffee Company, Inc.
Statement of Cash Flows
Three Month Period Ended March 31, 2000
Operating activities
Net income $ 10,235
Noncash items included in net
income
Depreciation and amortization 56,557
Changes in operating assets and
liabilities
Receivables 31,332
Inventory (23,789)
Prepaid expenses (13,451)
Deposits and other assets (2,660)
Accounts payable 19,774
Accrued liabilities 24,489
-----------
Net cash provided by operating 102,487
activities
Investing activities
Purchases of equipment (30,381)
-----------
Net cash used by investing (30,381)
activities
Financing activities
Repayments of notes payable (45,769)
and capital leases -----------
Net cash used by financing (45,769)
activities
Net increase in cash 26,337
Cash at January 1, 2000 41,156
-----------
Cash at March 31, 2000 $ 67,493
===========
See accompanying notes to financial statements and Accountants' report.
7
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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 and food service industries throughout the country.
Consequently, the Company's ability to collect the amounts due
from customers are affected by economic fluctuations in the
retail and food service industries.
Inventory
Inventory is 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 years.
8
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Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
The portion of depreciation and amortization expenses related to
production facilities is included in cost of sales.
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.
Trademarks and Tradenames
Trademarks and tradenames are being amortized on a straight-line
basis over forty (40) years. Total amortization expense for the
three month period ended March 31, 2000 is $42.
Investments in Consolidated 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 $22,028 as of March 31, 2000.
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 three
month period ended March 31, 2000.
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
9
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Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
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.
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:
Accounts receivable $ 367,635
Less: Allowance for doubtful accounts (3,859)
----------
Accounts receivable, net $ 363,776
==========
The Company uses the allowance method for uncollectible accounts.
Bad debt expense for the three month period ended March 31, 2000 is
$3,105. The adjustment to the allowance account for the three month
period ended March 31, 2000 is ($15,182).
10
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Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
3. Inventory
Inventory consists of the following:
Coffee
Unroasted $ 180,554
Roasted 121,394
Tea 19,811
Packaging, supplies and other merchandise held for sale 189,309
---------
Total inventory $ 511,068
=========
4. Property and Equipment
Property and equipment consists of the following:
Equipment and fixtures $ 1,190,168
Furniture and equipment 276,590
Leasehold improvements 370,115
Transportation equipment 72,312
Marketing equipment 36,205
Property held under capital leases 303,067
---------
Total property and equipment 2,248,457
Accumulated depreciation (1,450,059)
---------
Property and equipment, net $ 798,398
=========
Marketing equipment includes costs to develop a website for on-line
sales and promotion. The costs related to the website are being
depreciated on the straight-line method over three years.
Depreciation expense for the three month period ended March 31, 2000
is $52,336.
11
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Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
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:
Goodwill $ 198,000
Leasehold value 67,000
Start-up costs 34,882
Organizational costs 28,565
Trademark 5,127
----------
Total intangible assets 333,574
Accumulated amortization - goodwill (17,344)
Accumulated amortization - other
intangible assets (69,538)
----------
Intangible assets, net $ 246,692
==========
Goodwill, which represents the excess of the cost of purchased
companies over the fair value of the net assets at dates of
acquisition, is being amortized on the straight-line method over
thirty-nine years.
Amortization expense for the three month period ended March 31, 2000
is $4,221.
6. Long Term Debt
Notes Payable as of March 31, 2000
Note payable to Wells Fargo Bank, monthly $531,445
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, inventory, equipment, fixtures and
improvements.
Note payable to Wells Fargo Bank, payable in $48,334
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.
12
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Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
Notes Payable as of March 31, 2000 (continued)
Note payable to majority shareholders, Paul and $24,919
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 Laoma Yaski for the purchase of $155,990
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.
Note payable to Chase Manhattan Bank, payable in $14,683
monthly installments of $324, including interest
at 8.637%, secured by a vehicle, final payment
due in October 2004.
Obligations Under Capital Lease as of March 31, 2000
Note payable to Manifest Group, payable in $9,612
monthly installments of $1,030, including
interest at 15.315%, secured by equipment, final
payment due in January 2001.
Note payable to Imperial Capital, payable in $7,772
monthly installments of $840, including interest
at 17.263%, secured by equipment, final payment
due in January 2001.
Note payable to Granite Financial, payable in $15,232
monthly installments of $1,139, including
interest at 17.607%, secured by equipment, final
payment due in June 2001.
Note payable to First Sierra Computer Equipment, $26,039
payable in monthly installments of $1,297,
including interest at 14.00%, secured by
equipment, final payment due in February 2002.
Note payable to Security Financial, payable in $18,003
monthly installments of $910, including interest
at 15.529%, secured by equipment, final payment
due in February 2002.
13
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Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
Obligations Under Capital Lease as of March 31, 2000 (continued)
Note payable to Centerpoint, payable in monthly $5,601
installments of $517, including interest at
19.225%, secured by equipment, final payment due
in March 2001. --------
$857,630
Less current portion (201,219)
--------
Long term portion of notes payable and capital $656,411
leases
All of the above notes payable and capital leases with the
exception of the First Sierra Computer Equipment capital lease
and Manifest Group lease, are personally guaranteed by the
Company's majority shareholders.
Interest paid for the three month period ended March 31, 2000 is
$28,985.
Maturities of notes payable and capital leases are as follows:
2000 $ 195,445
2001 546,162
2002 64,959
2003 47,946
2004 3,118
Thereafter -
----------
$ 857,630
==========
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 three
month period ended March 31, 2000 is as follows:
State-current $ 800
The Company computes income taxes using the asset and liability
method under which deferred income taxes are provided for
14
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Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
temporary differences between the financial basis of the
Company's assets and liabilities. Deferred tax liabilities
recognized for taxable temporary differences are not material for
the three month period ended March 31, 2000. The Company has a
California manufacturer's credit carryforward of $24,043 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
----------- ------------- ------------- ----------
2000 $ 6,403 $ - $ 6,403
2001 9,029 - 9,029
2002 11,419 - 11,419
2003 11,289 - 11,289
2012 - 584,581 584,581
2013 - 128,576 128,576
_______ _________ _________
$ 38,140 $ 713,157 $ 751,297
======= ========= =========
California
Years ending Net Operating
December 31 Contributions Loss Total
----------- ------------- ------------- ----------
2002 $ 1,091 $ 239,201 $ 240,292
2003 11,289 64,341 75,630
2004 14,863 - 14,863
_______ _________ _________
$ 27,243 $ 303,542 $ 330,785
======= ========= =========
Income taxes paid for the three month period ended March 31, 2000
is $800.
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.
15
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Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
Minimum annual lease payments due under these agreements are as
follows:
2000 $ 71,983
2001 57,462
2002 19,984
2003 5,201
Thereafter -
---------
$ 154,630
=========
Total operating lease payments are $24,000 for the three month
period ended March 31, 2000.
9. Common Stock
Number of No Par
Shares Value
-------------------------
Balance, December 31, 1996 1,237,039 $ 874,666
Issuance of stock 345 150
Repurchase of stock (640) (2,000)
-------------------------
Balance, December 31, 1997 1,236,744 872,816
No activity - -
-------------------------
Balance, December 31, 1998 1,236,744 872,816
Repurchase of stock (2,200) (11,000)
-------------------------
Balance, December 31, 1999 1,234,544 861,816
No activity - -
Balance, March 31, 2000 1,234,544 $ 861,816
=========================
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
16
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Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
at a price of $5 per share. Options may be exercised until December
31, 2000. Following is a summary of transactions:
Shares Under Option
Outstanding, beginning of year 20,000
Shares expired during the year -
Shares exercised during the year (3,000)
---------
Outstanding, as of March 31, 2000 17,000
=========
11. Long Term Lease
The Company leases its corporate headquarters, warehouse and
waterfront facilities from Paul and Joan Katzeff (the Company's
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. The lease was extended on March 31, 2000 for
sixty days until May 31, 2000, and the Company intends to fully
renew the lease at that time.
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 is $25,800. for the three month period ended March 31, 2000.
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 bakery establishment in Mendocino, California.
The lease provides for monthly rental payments of $3,115 (as of
March 31, 2000) and the lease term expires in September 2000.
The Company leases retail space in Fort Bragg, California used as an
espresso bar/caf. The lease provides for monthly rental payments
of $766, 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 caf business was terminated
and the facility was subleased.
17
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Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
11. Long Term Lease (continued)
Minimum future rental payments for all leases are as follows:
2000 $ 62,448
2001 767
2002 and thereafter -
----------
$ 63,215
==========
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 March 31, 2000 (See Note 6,
above). The Company also leases properties from its majority
shareholders (See Note 11, above).
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
--------- -----
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.
18
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Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
14. Contingent Liabilities
The Company is engaged in litigation initiated by a former employee,
who is seeking damages based upon claims of wrongful termination,
breach of an employment contract, break of fiduciary duty,
fraudulent inducement and accounting. The Company is vigorously
defending this matter and has pursued related cross-claims. The
ultimate outcome of this matter and the effect of an adverse result,
if any, cannot be determined at this time.
15. Subsequent Events
The Company is actively pursuing the sale of the Mendocino Bakery
and has listed the business with a real estate agent.
ITEM 2. COMPARATIVE FINANCIAL DATA
THANKSGIVING COFFEE COMPANY, INC.
BALANCE SHEET
ASSETS
March 31, 2000 December 31, 1999
-------------- -----------------
Reviewed Audited
--------- -------
CURRENT ASSETS
Cash $ 67,493 $ 41,156
Short Term Investments 0 0
Accounts Receivable 363,776 394,983
Employee Receivable 921 1,046
Inventory 511,068 487,279
Other Receivable & Prepaids 80,601 67,150
---------- ----------
Total Current Assets 1,023,859 991,614
PROPERTY AND EQUIPMENT
Property Fixtures &
Equipment 2,248,457 2,218,076
Accumulated
Depreciation (1,450,059) (1,397,723)
---------- ----------
Total Property & Equipment 798,398 820,353
19
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THANKSGIVING COFFEE COMPANY, INC.
BALANCE SHEET (continued)
OTHER ASSETS
Deposits And Other
Assets 85,029 82,369
Intangibles, Net Of
Amortization 246,692 250,913
---------- ----------
Total Other Assets 331,721 333,282
---------- ----------
Total Assets 2,153,978 2,145,249
========== ==========
See accompanying notes to financial statements.
20
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THANKSGIVING COFFEE COMPANY, INC.
BALANCE SHEET (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, 2000 December 31, 1999
-------------- -----------------
Reviewed Audited
-------- -------
CURRENT LIABILITIES
Accounts Payable $ 426,697 $ 406,923
Notes Payable - Banks
Current Portion 80,163 116,930
Current Portion of Long-
Term Debt - Other 121,057 99,737
Accrued Liabilities 66,624 41,765
---------- ----------
Total Current Liabilities 694,541 665,355
LONG-TERM LIABILITIES
Notes Payable 618,543 624,091
Capital Lease Obligations 37,868 58,094
---------- ----------
Total Long Term Liabilities 656,411 662,185
STOCKHOLDERS' EQUITY
Common Stock - No Par Value
1,960,000 Shares Authorized,
1,237,384 Shares Issued, and
1,234,544 Outstanding at
March 31, 2000 861,816 861,816
Additional Paid-In Capital 24,600 24,600
Unrealized Gain on Investments 0 0
Retained Earnings ( 83,390) ( 93,625)
---------- ----------
Total Stockholders' Equity 803,026 792,791
---------- ----------
Total Liabilities & Equity 2,153,978 2,145,249
========== ==========
See accompanying notes to financial statements.
21
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THANKSGIVING COFFEE COMPANY, INC.
STATEMENTS OF INCOME
Three Months Ended
March 31, March 31,
2000 1999
Reviewed Compiled
---------- ---------
Net Sales 1,294,702 1,279,039
Cost Of Sales 670,482 734,126
--------- ---------
Gross Profit 624,220 544,913
OPERATING EXPENSES
Selling, General &
Administration 534,136 452,919
Depreciation &
Amortization 50,925 44,073
--------- ---------
Total Operating
Expenses 585,061 496,992
--------- ---------
Operating Income
(Loss) 39,159 47,921
OTHER (INCOME) EXPENSE
Interest (Income) (690) (962)
Interest Expense 28,985 30,011
Misc. (Income) Expense (171) 2,176
--------- ---------
Total Other (Income)
Expense 28,124 31,225
--------- ---------
Income (Loss) Before
Taxes 11,035 16,696
--------- ---------
Tax Expense (Credit) 800 0
--------- ---------
Net Income (Loss) 10,235 16,696
========= =========
See accompanying notes to financial statements.
22
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THANKSGIVING COFFEE COMPANY, INC.
STATEMENTS OF CASH FLOW
Three Months Ended
Mar 31, 2000 Mar 31, 1999
Reviewed Compiled
------------ ------------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net Income (Loss) $ 10,235 $ 16,696
Non Cash Items Included Net
Income (Loss)
Depreciation &
Amortization 56,557 49,433
(Increase) Decrease In:
Receivables 31,332 43,687
Inventory (23,789) 82,153
Commodities Options Account 0 (7,235)
Prepaid Expenses/
Other Receivables (13,451) (5,305)
Deposits/Other (2,660) (293)
Increase (Decrease) In:
Accounts Payable 19,774 (79,320)
Accrued Liabilities 24,489 (45)
Deferred Inc. Taxes 0 0
-------- ---------
Net Cash Provided By
Operating Activities 102,487 99,771
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase Of Equipment (30,381) (32,010)
Purchase Of Intangible Assets 0 0
Repurchase of Common Stock 0 (11,198)
Unrealized Gain (Loss) on 0 0
Investments -------- ---------
Net Cash Used By
Investing Activities (30,381) (43,208)
-------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES
(Repayment) Proceeds of
Notes Payable (45,769) (30,028)
(Increase) Decrease of
Notes Receivable 0 0
-------- ---------
Net Cash Used By
Financing Activities (45,769) (30,028)
-------- ---------
See accompanying notes to financial statements.
23
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THANKSGIVING COFFEE COMPANY, INC.
Statements Of Cash Flow (continued)
Three Months Ended
Mar 31, 2000 Mar 31 1999
Reviewed Compiled
------------ -----------
Net Increase (Decrease) In Cash 26,337 26,535
Cash, As Of January 1, 2000
And January 1, 1999 41,156 89,725
-------- --------
Cash, As Of March 31, 2000
And March 31, 1999 $ 67,493 $116,259
========= ========
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on
Form 10-QSB contains forward-looking statements within the
meaning of Section 27A of The Securities Act and Section 21E of
The Securities Exchange Act of 1934. Words such as "believe,"
"anticipate," "expect," "intend," "plan," "will," "may," and
other similar expressions identify forward-looking statements.
In addition, any statements that refer to expectations,
projections or other characterizations of future events or
circumstances are forward-looking statements. These statements
relate to, among other things, planned expansions into new and
existing markets and trends in the operations of Thanksgiving
Coffee Company, Inc. (the Company). Any such statements should
be considered in light of various risks and uncertainties that
could cause results to differ materially from expectations,
estimates or forecast 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 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
24
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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. Readers are cautioned not to place undue
reliance on these forward-looking statements which speak only as
of the date of this 10-QSB.
Three Months Ended March 31, 2000 Compared With
Three Months Ended March 31, 1999
Consolidated Increase (Decrease)
Net Sales $ 15,663
Cost of Sales ($ 63,644)
Gross Margin 5.6%
Selling, G&A Expense $ 81,217
Depreciation & Amortization $ 6,852
Interest Expense ($ 1,026)
Net Income ($ 6,461)
Consolidated net sales for the three months ended March 31, 2000
were $1,294,702, a 1.2% increase over net sales of $1,279,039 for
the same period in fiscal 1999.
The Company's coffee sales increased by .7% or approximately
$8,000 for the three months ended March 31, 2000 compared to the
same period in fiscal 1999. While national revenues declined by
approximately $52,000, distribution sales and mail order revenues
increased by approximately $58,000 and $2,000 respectively in the
three month period ending March 31, 2000 compared to the same
period in 1999. The drop in national revenues is attributed to
two customers who chose local roasters.
The bakery sales grew 4.2% or nearly $6,000 during that same
period reflecting a good volume in February 2000.
Consolidated gross margin (gross profit as a percentage of net
sales) increased to 47.8% for the three month period ending
March 31, 2000 from 42.6% for the three months ended March 31,
1999.
The Company's coffee gross margins increased from 46% for the
three months ended March 31, 1999 to 50.7% in the same period of
fiscal 2000. This increase was due to the average cost of green
beans from $1.87 per pound over the three month period ending
March 31, 1999 compared to $1.73 per pound over the same period
in 2000.
Consolidated selling, general and administrative expenses were
$534,136 for the period ending March 31, 2000; a 17.9% increase
25
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over the $452,919 for three months ended March 31, 1999. This
increase in selling, general and administration expenses was due,
for the most part, to additional staffing expenses. In late
1999, the sales department added one new employee, and the
accounting department added a controller. In January 2000,
administration added another position and the sales department
added two manager positions.
Depreciation and amortization expense increased 13.5% from
$44,073 for the three months ended March 31, 1999 to $50,925 for
the same period in 2000 as a result of the purchase of additional
fixed assets. The increase in fixed assets was a result of web
store and site design and upgrade of computer hardware and
software.
Interest expense decreased 3.4% from $30,011 for the three months
ended March 31, 1999 to $28,985 for the same period in fiscal
2000, as a result of a decrease of $206,383 in total borrowings
from March 31, 1999 to March 31, 2000. Interest expense as a
percentage of net sales remained the same at 2% for both the
three months ended March 31, 2000 and for the three months ended
March 31, 1999.
Even though the Company realized a profit before taxes for the
three months ending March 31, 2000, it did not incur any tax
expense. Management deemed the recording of any tax liability as
unnecessary since the Company has sufficient tax loss carry
forwards to offset taxable income.
As a result of the foregoing factors, the Company incurred a
consolidated net profit of $10,235 for the three months ended
March 31, 2000 compared with a net profit of $16,696 for the
three months ended March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000 the Company had positive capital of $329,318.
Net cash provided by operating activities was $102,487 for the
three months ended March 31, 2000 compared to $99,771 provided by
operating activities for the three months ended
March 31, 1999. The increase in net cash provided by operating
activities was primarily due to increases in depreciation,
accounts payable and accrued liabilities of $56,557, $19,774 and
$24,489, respectively, and a $31,332 decrease in accounts
receivable. These increases were offset by increases in
inventory, prepaid expenses, and deposits of $23,789, $13,451,
and $2,660, respectively.
Net cash used by investing activities was $30,381 for equipment
purchased during three month period ending March 31, 2000
26
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<PAGE>
compared to net cash used by investing activities of $43,208 for
the same period in 1999.
Included in net cash used by financing activities during the
three months ended March 31, 2000 was $45,769 net repayment of
notes payables, primarily for equipment capital leases compared
to $30,028 in the same period for fiscal 1999.
At March 31, 1999, the Company had total borrowings of $857,630,
including $531,445 outstanding to Wells Fargo Bank under the
latest note payable dated January 6, 1999. The borrowings are
secured by the Company's accounts receivable, inventory,
equipment, fixtures and improvements. The loan terms contain
certain limitations and covenant restrictions, including limits
on the incurrence of additional indebtedness.
The Company is dependent on successfully executing its business
plan to achieve profitable operations, obtaining additional
sources of borrowings (including normal trade credit), and
securing favorable financing arrangements (including lease
financing) to finance its immediate working capital needs. There
can be no assurance that the Company will be successful in this
regard. If the Company is not able to meet its credit
obligations the Company's business could be materially and
adversely affected.
The Company maintained a revolving line of credit of up to
$650,000 in fiscal 1998. The credit agreement was renewed in the
fourth quarter of fiscal 1998; however, in January 1999 this
agreement was renegotiated and replaced with a two year note
payable in the principal amount of $601,636 with a balloon
payment due after the end of two years of $441,199.68. In the
event that the Company is unable to renegotiate this balloon
payment before it becomes due, the Company's business would be
adversely effected. The company's aggregate amount of debt at
March 31, 2000 is $857,630.
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
Many computer systems and software applications were expected to
experience problems handling dates beyond the year 1999.
Computer systems and other equipment with embedded chips or
processors have historically used two digits, rather than four,
to define a specific year. Many parties anticipated that these
systems would be unable to determine whether the digits "00"
27
<PAGE>
<PAGE>
referred to the year 1900 or 2000 and that this could result in
system failures or miscalculations. It was also thought that
this could potentially cause disruptions to the Company's various
activities and operations.
The Company has not experienced any disruptions to its operations
from the Year 2000 date change. The Company will continue to
monitor its systems and operations until it is reasonably assured
that no significant business interruptions will occur as a result
of the Year 2000 date change. The Company is not aware of any
significant Year 2000 related disruptions impacting the Company's
customers, suppliers, contractors, financial institutions and
other third parties with whom the Company does business. To
date, the Company charged to expense or capitalized, as
appropriate, approximately $14,500 in effecting Year 2000
compliance and expects any remaining costs in effecting such
compliance will not be material.
SEASONALITY AND OTHER FACTORS AFFECTING PERFORMANCE
The Company's business is seasonal in nature. The seasonal
availability of green bean coffee in the first two quarters of
the year and increased sales in the last quarter historically
creates a high use of cash and a build up in inventories and
increase in the first two quarters with a corresponding decrease
in inventory and increase in cash in the last quarter. Because
of the seasonality of the Company's business, results for any
quarter are not necessarily indicative of the results that may be
achieved for the full fiscal year. Furthermore, past seasonal
patterns are not necessarily indicative of future results. The
Company's future results of operations and earnings could be
significantly affected by other factors, such as changes in
general economic conditions, changes in business conditions in
the coffee industry, fluctuations in consumer demand for coffee
products and in the availability and costs of green coffee beans,
increased competition with the Company's businesses, variances
from budgeted sales mix and growth rate, consumer acceptance of
the Company's new products, inability to secure adequate capital
to fund its operations and working capital requirements,
inability to hire, train and retain qualified personnel,
concentration of production and sales in Northern California, the
loss of one or more major customers, inability to produce coffee
and tea, weather and other natural disasters. There can be no
assurance that sales will increase in future quarters.
INDEMNIFICATION MATTERS
The Company's Bylaws provide that the Company may indemnify its
directors, officers, employees and other agents to the fullest
28
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<PAGE>
extent permitted by California law. The Company believes that
indemnification under its Bylaws also permits the Company to
secure insurance on behalf of any officer, director, employee or
other agent for any liability arising out of his or her actions
in such capacity, regardless of whether California law would
permit indemnification. The Company maintains such liability
insurance for its directors and certain officers and employees.
At present, there is no pending litigation or proceeding
involving any director, officer, employee or agent of the Company
where indemnification would be required or permitted. The Company
is not aware of any pending or threatened litigation or
proceeding that might result in a claim for such indemnification.
SUMMARY OF RECENT DEVELOPMENTS
The Company renegotiated its line of credit with Wells Fargo Bank
in January 1999 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." This
loan is due January 15, 2001 with the balloon payment of $441,200
due at that time. The Company is currently discussing the
refinancing of the balloon payment. In the event that the
Company is unable to renegotiate this balloon payment before it
becomes due, the Company's business could be adversely affected.
It is also negotiating with Wells Fargo Bank to refinance its
leases, establish a capital equipment line and develop a working
capital line. The Company currently has no working capital line
and is using cash and operating revenues to fund its business.
See "Management's Discussion and Analysis of Financial Conditions
- - Results of Operations Liquidity and Capital Resources."
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is engaged in litigation with a former employee who
is seeking damages based upon claims of wrongful termination,
breach of an employment contract, break of fiduciary duty,
fraudulent inducement and accounting. This action was filed in
the Mendocino County Superior Court on May 18, 1999. The Company
is vigorously defending this matter and has pursued related cross-
claims. Damages in an unspecified amount have been alleged. The
ultimate outcome of this matter and the effect on an adverse
result, if any, cannot be determined at this time.
29
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<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
- - Not Applicable -
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- - Not Applicable -
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- - Not Applicable -
ITEM 5. OTHER INFORMATION
- - Not Applicable -
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27.1 Financial Data Schedule (electronic only)
b. Form 8-K
No reports on Form 8-K were filed during the period from January 1,
2000 through March 31, 2000
30
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<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THANKSGIVING COFFEE COMPANY, INC.
Name Title Date
- ---- ----- ----
/s/ Paul Katzeff Chief Executive Officer May 10, 2000
______________________
Paul Katzeff
/s/ Joan Katzeff President May 10, 2000
______________________
Joan Katzeff
31
<PAGE>
<PAGE>
EXHIBIT INDEX
27.1 Financial Data Schedule (electronic only).
32
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEET AND STATEMENTS OF INCOME, WHICH ARE
INCLUDED IN THE COMPANY'S FORM 10-QSB FILED HEREWITH, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 67
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<RECEIVABLES> 368
<ALLOWANCES> (4)
<INVENTORY> 511
<CURRENT-ASSETS> 1024
<PP&E> 2248
<DEPRECIATION> (1450)
<TOTAL-ASSETS> 2154
<CURRENT-LIABILITIES> 695
<BONDS> 619
0
0
<COMMON> 862
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<TOTAL-LIABILITY-AND-EQUITY> 2154
<SALES> 1295
<TOTAL-REVENUES> 1295
<CGS> 670
<TOTAL-COSTS> 585
<OTHER-EXPENSES> (1)
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