Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended 12/31/2011
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
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For the transition period from ____________ to ____________
Commission file number: 033-96070-LA
Thanksgiving Coffee Company, Inc.
(Exact name of registrant as specified in its charter)
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California
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94-2823626
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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19100 S. Harbor Dr. Fort Bragg, CA
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95437
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(Address of principal executive offices)
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(Zip Code)
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(707) 964-0118
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
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Title of each class
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Name of each exchange on which registered
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Securities registered pursuant to Section 12(g) of the Exchange Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes x Noo
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Regulation 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yesx Noo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | o | Accelerated filer | o | |
| Non-accelerated filer | o | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes oNo x
There currently does not exist a public trading market for the registrant’s common stock. Over the years, there have been isolated and sporadic privately negotiated transactions in the Company’s shares. See “Part II, Item 5, Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.” The approximate aggregate market value of the common equity held by non-affiliates of the registrant as of March 26, 2012, using the October 2007 trading price, was $568,383.
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Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
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Class
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Outstanding at March 26, 2012
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Common Stock, no par value
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1,236,744 shares
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DOCUMENTS INCORPORATED BY REFERENCE
Table of Contents
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PART I.
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Item1.
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Business
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Item 1A
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Risk Factors
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Item 1B
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Unresolved Staff Comments
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7 |
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Item2.
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Properties
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Item3.
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Legal Proceedings
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Item4.
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[Removed and Reserved]
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PART II.
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Item5.
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Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
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Item6.
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Selected Financial Data.
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Item 7.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item7A.
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Quantitative and Qualitative Disclosures About Market Risk
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Item8.
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Financial Statements and Supplementary Data
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Item 9.
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Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
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Item9A.
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Controls and Procedures
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Item9B.
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Other Information
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PART III.
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Item10.
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Directors, Executive Officers and Corporate Governance
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Item11.
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Executive Compensation
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Item12.
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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Item13.
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Certain Relationships and Related Transactions, and Director Independence
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Item14.
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Principal Accountant Fees and Services
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Part IV
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Item 15.
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Exhibits and Financial Statement Schedules
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PART I
ITEM 1. BUSINESS
When we refer to “we,” “our,” “us” or “Company” in this Annual report on Form 10-K, we mean the Thanksgiving Coffee Company, Inc.
FORWARD LOOKING INFORMATION
In addition to historical information, this annual report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may,” “would,” “should,” “could,” and other similar expressions. 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, possible expansions into new and existing markets and trends in the operations of “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 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, continuing competition within the Company’s markets, variances from budgeted sales mix and growth rate, consumer acceptance of the Company’s products, inability to secure adequate capital to fund its operating expenses and working capital requirements, inability to sell the Company’s bakery, inability to increase prices for the Company’s products, 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 the Company’s sales goals, natural disasters, civil unrest in countries which produce coffee, weather and other risks identified herein. We do not intend, and undertake no obligations, to update any of our forward-looking statements after the date of this annual report to reflect actual results of future events or circumstances. Given these risks and circumstances, readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date of this annual report.
GENERAL
For 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 (which are the color of coffee beans before they are roasted) through six main importers.
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 its coffee through its own distribution system and through outside distributors in the Northern California market. In other parts of the nation, the Company distributes its products either directly to retailers or through brokers and distributors. The Company also markets directly to consumers through both print and electronic media. It publishes flyers that feature most of the Company’s coffee products, in addition to complementary products and accessories of third parties. The same product offerings are made on the Company’s Internet web site. The Company will continue to market its coffee products in the retail bakery (the “Bakery”), located in Mendocino, California that was sold February 29, 2012.
In October 1996, the Company completed its initial public offering of shares of its Common Stock. As of March 26, 2012, 1,323 non-affiliated shareholders (shareholders who are not officers, directors, 5% or greater holders of the Company’s Common Stock or affiliates of the Company) held shares of the Company’s Common Stock, representing approximately 21.9% of the outstanding shares.
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 coffee, the Company roasts only high quality Arabica beans with a focus on organic, shade grown and fair-traded beans (these are coffees where a floor price has been established). Arabica beans are grown at high altitudes where the cooler climate results in slow growth and usually higher quality. In addition to its current line of classic specialty and single origin coffees produced by local farmer cooperatives from over 12 countries, the Company is producing custom products for the American Birding Association and the Dian Fossey Gorilla Fund International under exclusive contracts and private-label products for retail and serving accounts. The Company has the ability to have products custom packaged and blended for retailers and serving accounts.
Complementary products. The Company sells a wide variety of complementary coffee products and accessories, such as coffee makers, grinders, thermal carafes, books, T- shirts, mugs, compact discs and chocolate covered espresso beans.
The Company sells its coffees through a multi-channel distribution network consisting of wholesale distribution operations, the Bakery and direct marketing operations. The Company offers complementary products through all of these channels of distribution. Complementary products are purchased from third party vendors on an as-needed basis and resold to the Company’s customers. The Company generally provides its wholesale customers with brewing, grinding and related equipment (leased from third party leasing companies) and product displays (designed and manufactured by the Company) at no charge if predetermined sales volumes are reached.
Of the total fiscal 2011 revenues of $4,292,153, 88.5% were from roasted coffee, 10.5% were from the Bakery, 1% was from resale items.
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ITEM 1. BUSINESS - continued
COFFEE INDUSTRY
Total sales of coffee in the United States were expected to grow by a compounded rate of 6.9% from 2005 to 2010, reaching $48.2 billion by 2010, according to the U.S. Market for Coffee and Ready-to-Drink Coffee, a report from market research publisher Packaged Facts. According to the National Coffee Association of USA, Inc. coffee now surpasses soft drinks as the most popular beverage after water. Daily coffee drinking, according to their study, is up for the fourth year in a row with younger drinkers dominating the increases.
In the 1970’s, when the Company began to roast coffee, there were less than 100 roasters in the country, with the large roasters accounting for nearly all of the coffees consumed. Today, there are over 1,200 specialty coffee roasters, each segmenting and fragmenting the market, adapting to a wide variety of niche markets. They are focusing on their ability to provide a wide range of coffee origins, freshly roasted in the appropriate style to meet the specific needs of local and regional markets.
According to a 2009 survey of Lifestyles of Health and Sustainability Consumer Trends Database by the Natural Marketing Institute, 60% of U.S. adults would more likely purchase products of companies that are mindful of the impact their product has on the environment and society. In the study, 57% of the consumers are more loyal to companies that are socially responsible and 52% said they would recommend the food products of these companies to their friends. More that 38% of the respondents said they would pay more to buy products of socially responsible companies. In the book “The Better World Shopping Guide” by Ellis Jones, the Company is listed as an “A+” producer because of its environmental and socially responsible practices and is listed as a “Corporate Hero” in the coffee segment of the book for consumers. Even in today’s difficult economy, 34% of Americans are more likely to buy environmentally responsible products and another 44% indicate their environmental habits have not changed as a result of the economy according to the results of a 2009 study by Cone Consumer Environmental Survey.
Today, fair trade [ see Social Responsibility – Fair Trade for further description of ‘fair trade’] coffee is roasted by over 300 U. S. companies and sold at thousands of retail outlets. Dunkin Donuts, the number one U.S. retailer of coffee by the cup, has rolled out a fair trade espresso line of drinks. Even Starbucks, the largest specialty coffee company in the United States, is targeting to serve 10% of their coffee with fair trade product.
Coffee is traded on the New York Coffee Sugar and Cocoa Exchange. Market price for coffee on the New York Coffee Sugar and Cocoa Exchange has doubled in the last two years and is near the high levels that were reached in 1997. The difference between this increase and the one in 1997 according to a report of J. Ganes Consulting is that the availability of washed Arabica coffee in producer countries has become limited. This is reflected in premiums being commanded in the cash market for better grades at a time when prices are already at highs by historic standards. According to the report, this situation is caused by lack of supply on hand in producing countries and the increase in world demand for coffee especially in emerging markets of China and India. The report states that it is not known when the supply of green coffee will meet with demand and as a consequence, the market could continue to move higher. If the Company cannot offset the increase in green bean pricing with the higher prices, it would have a negative impact on the Company’s revenues.
MARKETING STRATEGY
The Company’s sales and marketing efforts are currently organized in four different sales methods:
1. Wholesale, Direct Delivery. This sales method includes customers in Northern California counties contiguous to the Company’s plant in Fort Bragg, California, and is serviced by Company trucks and/or outside distributors. The Company owns trucks and delivers coffee within a radius of 100 miles or less from Fort Bragg. Because of the cost of operating its own fleet, the Company has reduced its own fleet in favor of using distributors in certain areas previously serviced by the Company. Total Company routes have declined from nine to two over the last five years. Outside distributors have continued to service these routes.
2. Wholesale Delivery by Other Means. This sales method includes accounts that are serviced by UPS or other common carriers. Deliveries span most of the United States with the concentration of accounts in California. This method is either handled direct, via broker or by a distributor.
3. Direct Marketing. This sales method includes accounts serviced through catalogue or online programs.
4. Retail. This sales method consists of servicing the consumer through the Bakery.
The first three sales methods are part of the Company’s specialty coffee and the fourth sales method comprises the Company’s Bakery segment. See Note 12 to the “Notes to Financial Statements” included in this annual report.
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ITEM 1. BUSINESS - continued
ENVIRONMENTAL SENSITIVITY
Song Bird Coffee. In 1997, the Company entered into an exclusive arrangement with the American Birding Association, one of America’s most active and prestigious birding membership associations, to market Song Bird Coffee™ . Migratory bird populations are in 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 many as 60% of the migratory bird population of North America had disappeared since 1972, and that this disappearance could be traced to the reduction of forest habitat in Central and South America caused by “technification” of coffee agriculture. The Company’s exclusive relationship with the American Birding Association has provided alternative venues for the Company to market its products (venues other than the traditional venues comprised of supermarkets and serving locations), such as to bird lovers in bird stores and home and garden centers.
The Company believes that its relationship with the American Birding Association and its marketing of Song Bird Coffee have distinguished the Company’s role and image in the marketplace. Song Bird Coffee sales were approximately $144,000 in 2011.
There are no assurances that any of the Company’s programs will be successful in increasing the Company’s sales, revenue or profitability.
SOCIAL RESPONSIBILITY
It has been the philosophy of the Company to not only provide an excellent cup of quality coffee but also to procure, roast, package and market its products in a manner that is fair to all of its customers and suppliers. The Company’s motto, “Not Just a Cup, but a Just Cup,”™ reflects the Company’s commitment to local coffee growers in developing nations.
Fair Trade Coffee. Since 2000, the Company has worked in partnership with Fair Trade USA, and has adopted a fair trade label that distinguishes this product from its other offerings. The fair trade certification program was born in Europe in recognition of the need for small farmers to receive a fair price for their crop to enhance their economic viability. The green coffee market generally takes into consideration only the supply and demand in establishing price. It does not recognize the farmers’ cost factors and the need for a return for the small farmer to survive.
In addition to paying a floor price (for coffee purchased from cooperatives in the Fair Trade USA program) which is currently set at $0.10 per pound above the coffee commodity price of the New York Commodity Exchange, the Fair Trade USA program works only with democratically-run cooperatives which are the recipients and disbursers of additional funds. With this program, the layers of middlemen are cut, so that the cooperative is generally dealing directly with a green coffee broker or the roaster itself. The cooperative also provides a source of low cost credit for farmers who cannot generally get bank credit because of the risks in their business. In addition, most of these farmers grow their coffee in the shade of taller forest canopies, providing habitat for songbirds.
Sales of Fair Trade Certified™ products at grocery stores grew by 30% in 2011 to $140 million, lead by the growth in packaged coffee at 44% according to Spins. In a 2010 study conducted by Harvard, MIT, and LSE, consumers paid up to 8% more for coffee being the Fair Trade Certified™ label.
The Company believes that this niche provides a potential opportunity for growth. The Company provides educational programs, tastings and brochures to familiarize the public with the fair trade theme. The Company’s sales of fair trade certified coffee in 2011 were over $1,500,000.
Rwanda Coffee. The Company entered into an exclusive arrangement with the Dian Fossey Gorilla Fund International and the Dukunde Kawa Coop in 2004. This association combines the elements of environmental sensitivity by helping to prevent poaching of the last remaining mountain gorillas and promoting economic sustainability to the Rwandan coffee farmer by selling Gorilla Fund Coffee. The Company pays Fair Trade prices to the Dukunde Kawa Coop and donates between 50 cents and $1.00, depending on distribution method, to the Dian Fossey Gorilla Fund International. Sales of the Company’s Gorilla Fund Coffee help ensure that fair prices are paid to Rwandan coffee farmers, reduce pressure on the forest’s resources, support health and education advances in Rwanda and assist the Dian Fossey Gorilla Fund International operate projects intended to save the mountain gorillas. This is a positive collaboration between producers and consumers, punctuated by a fair and equitable distribution of the value of raw coffee as it is converted to a value-added beverage. Our Gorilla Fund coffee sales in 2011 were approximately $38,000.
Peace Coffee. In 2005, the Company began working with a cooperative in Uganda called Mirembe Kawomera or “delicious peace” coffee. The cooperative is comprised of a group of 700 small scale farmers and their families who grow high quality Arabica coffee on the slopes of Mt. Elgon in Mbale, Uganda. They are made up of Jewish, Christian and Muslim faiths all working together to promote peace and harmony while harvesting excellent fair-trade certified coffee. The Company has been visiting synagogues, churches and mosques to promote the Mirembe Kawomera coffee. Our Peace coffee sales in 2011 were approximately $182,000.
Because of the Company’s work with the Mirembe Kawomera Cooperative, the Company and the cooperative have received the prestigious “Dr. Jean Mayer Global Citizenship Award” in 2008. The award was given to the Company and Mirembe Kawomera Cooperative for our efforts in alleviating poverty, creating accountable and sustainable trade practices, encouraging peace and promoting interfaith harmony. Former recipients of the award include Archbishop Desmond Tutu of South Africa.
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ITEM 1. BUSINESS - continued
The Company’s mix of products has evolved from that of specialty coffee with flavor and taste to one that now also promotes social justice, environmental sensitivity and organically grown coffees. Nearly 75% of the Company’s packaged and bulk roasted sales fall into one or all of these categories.
Single Origin. Beginning in February, 2009, the Company introduced a new product line of single-origin coffees. Each product features unblended single-origin coffees representing cooperatives in micro-regions within country of origin specification. As such, this line represents the Company’s efforts to localize the presentation of its coffees and offer its customers a chance to explore the taste of specific appellations and their signature flavor profiles.
The line represents coffees that are sourced directly by the Company and features exclusively fair trade and certified organic coffees. Each package features a photograph from the producing community as well as specifications such as altitude, varietal bean, processing method and producer data.
The Company now features over twelve single-origin coffees, representing the farmers and communities who produce its coffee. Sales volume for this line was over $387,000 for 2011.
There can be no assurances that any of the Company’s programs will be successful to increase sales, gross margin or profitability.
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 Smucker’s Millstone label, Nestle’s Nescafe label and Green Mountain Coffee Roasters as well as other lesser known brands and store brands. The Company also competes regionally in Northern California with specialty roasters such as Peet’s, Taylormaid and Jeremiah’s Pick 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 Starbucks, the leading independent specialty coffee retailer and wholesaler.
The Company also competes with other eco-friendly coffee companies such as Equal Exchange, Counter Culture, Café Mam, and other coffee companies that sell eco-friendly coffees as part of their product line.
The Company competes primarily on the basis of the quality of its products, its package design, and its social and environmental philosophies. 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 the Company will be able to maintain or expand sales successfully in the future.
The Company cannot guarantee successful competition against other coffee companies. The Company believes its focus on partnering (such as the relationships with the American Birding Association and the Dian Fossey Gorilla Foundation International) has enabled the Company to find a niche in the coffee market; however there can be no assurance that these or the Company’s other marketing efforts will be successful in future years.
The Company also sells complementary 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 also sells these items in its direct marketing division. 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 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.
The Company believes its long-term relationships with many cooperatives in the various growing regions where it buys coffee and with coffee bean brokers provide adequate sources of supply of high-quality green beans to meet the Company’s needs for the foreseeable future. However, a worldwide supply shortage of the high quality Arabica coffees the Company purchases, the loss of one or more of these broker relationships or a shortage of organic, fair trade and shade grown beans, in particular, could have an adverse impact on the Company. See also “Coffee Industry.”
CUSTOMERS
In 2011, one customer accounted for 16.3% of the Company’s total revenue. This customer is a distributor of the Company’s products and also resells the Company’s products through its serving locations. A loss of this account or any other large account, or a significant reduction in sales to any of the Company’s principal customers, could have an adverse impact on the Company. See “Management’s Discussion and Analysis.”
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ITEM 1. BUSINESS - continued
CURRENT ECONOMIC ENVIRONMENT
We have concerns regarding the current economic situation. The United States continues with high unemployment and slow economic growth. The price of coffee on the New York Coffee Sugar and Cocoa Exchange has more than doubled since June of 2010. The unemployment rate for the Mendocino County continues to be above the national average. All of these factors could have a significant effect on the Company’s ability to be profitable.
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, Inca Harvest, and End the Embargo. From time to time, federal [trademarks] and service mark registrations must be renewed. The Company does not hold any patents.
GOVERNMENT REGULATION
The Company’s roasting plant has been certified wholly organic by the United States Department of Agriculture (USDA). The Organic Crop Improvement Association (OCIA) is the inspecting agent. 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, allowing the Company to market product originating at the certified farms as organic.
Our coffee roasting facility is subject to state and local air-quality and emissions regulations. If we encounter difficulties in obtaining any necessary licenses or complying with these laws and regulations our ability to produce any of our roasted products would be severely limited. We believe that we are in compliance in all material respects with all such laws and regulations and that we have obtained all material licenses that are required of our business.
EMPLOYEES
As of December 31, 2011, the Company had twenty-seven full-time employees and thirteen part-time employees.
ITEM 1A. RISK FACTORS
We are a smaller reporting company and are not required to provide information required by this item.
ITEM 1B. UNRESOLVED STAFF COMMENTS
We are a smaller reporting company and are not required to provide information required by this item
ITEM 2. PROPERTIES
The executive offices of the Company were relocated to a temporary location in downtown Fort Bragg after the July 5, 2010 fire. The warehouse has been converted to accommodate production and shipping until the new building is completed, the roasting facility was not damaged by the fire and is still being used. Approximately one half of the total 14,500 original square footage at 19100 South Noyo Harbor Drive, Fort Bragg, California 95437, was destroyed by the fire and the remaining square footage continues to be used for the Coffee Company 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 ten-year term under a lease signed on November 1, 2005 at an original rate of $8,600 per month that has been reduced to $4,500 per month (since August 2011) from Joan and Paul Katzeff, who are founders, principal shareholders, officers and directors of the Company. See Item 13 “Certain Relationships and Related Party Transactions, and Director Independence” and Notes 10 and 11 to the “Notes to Financial Statements” included in this annual report.
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ITEM 2. PROPERTIES - continued
Through December 31, 2011, the Company has received insurance advances of $1,139,708 for Business Interruption/Extra Expense and Business Personal Property losses. The full amount that the Company will be able to recover under this insurance policy is still being determined. Up to the first $1,000 of the loss will be borne by the Company as a deductible per the terms of the policy.
The Bakery, located at 10483 Lansing Street in Mendocino, California, is approximately 1,617 square feet and is leased from an unaffiliated third party. The Company currently pays rent of approximately $4,483 per month for the Bakery pursuant to a lease that expired September 30, 2011, which the landlord has agreed will continue on a month-to-month basis until further notice. The Company entered into an agreement to sell the Bakery as of February 29, 2012; as of this filing date the sale is in escrow. See subsequent events for additional discussion of the sale.
While the Company believes that its current facilities and anticipated future rebuild are adequate for its current and expected operations, it may become necessary to lease or acquire additional or alternative space in the future.
ITEM 3. LEGAL PROCEEDINGS
No material legal matters in which the Company is a party or of which its property is the subject are pending at this time.
ITEM 4. [REMOVED AND RESERVED]
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information. Trades in the Company’s Common Stock are made through Mutual Securities, Inc., in Ukiah, California, an order matching service. No established public trading market exists for the Company’s Common Stock. The Company has no present intention of developing a public trading market for the Common Stock.
The Company is aware of four trades in 1999 with respect to the Company’s Common Stock. The average price of these transactions as reported by Mutual Securities was $4.74 per share. The first three trades were for a total of 2,200 shares at $5.00 per share and took place in the first three quarters of 1999. The last trade for 150 shares took place in the last quarter of 1999 and was for $1.00 per share. No trades took place in 2000, 2001, 2002 or 2003. The Company is aware of one trade in June 2004 for 750 shares of the Company’s Common Stock at $4.50 per share and one trade in December 2005 for 400 shares of the Company’s Common Stock at $2.00 per share. In October 2007, Paul Katzeff, a director and former Chief Executive Officer of the Company, purchased 70 shares of the Company’s Common Stock at $2.104 per share. No trades have been reported in 2008, 2009, 2010 and 2011.
Holders. As of March 26, 2012, there were approximately 1,326 holders of record of the Company’s Common Stock.
Dividends. The Company has neither 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.
Securities Authorized for Issuance Under Equity Compensation Plans. The Company does not presently have an equity compensation plan or any individual compensation arrangement under which the Company’s equity securities, such as options, warrants or rights, have been authorized for issuance.
Recent Sales of Unregistered Securities. No sales of the Company’s equity securities were made by the Company during the past three fiscal years.
Company Purchases of its Equity Securities. No purchases of the Company’s equity securities were made by the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934) during the fiscal year ended December 31, 2011.
ITEM 6. SELECTED FINANCIAL DATA
We are a smaller reporting company and are not required to provide information required by this item.
ITEM 7. 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 this annual report.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
SUMMARY
Sales of the Company’s products have continued to erode over the last five years, primarily due to declines in the direct distribution sales method of the Company’s business (i.e., delivery by Company truck). Additional competition, customers that have gone out of business, and customers that have begun roasting coffee beans for their own use have all had a negative impact on the Company’s sales. The Company has tried a number of strategies that have not proven effective in abating these declines. The Company has changed its method of distribution to rely less on direct distribution by Company owned or leased trucks in favor of using independent distributors or shipping direct (via UPS or other common carrier). This change did result in a reduction in expenses. Although the Company was profitable in 2011, it was a result of gains from insurance advances and only a slight increase in volume. If the Company cannot improve its sales volume and or reduce the operating costs, it may not be able to achieve profitability in future years.
The Company pays substantially more for its coffee beans than the market price, because of quality, organic nature of many of its lines and the fact that it uses fair-traded coffees. Coffee prices have increased significantly during the latter half of 2010 and throughout 2011 as a function of increased demand and a reduction of supply. If the rise in green bean prices should continue as a consequence of inclement weather in a major producing area or any other event that affects coffee pricing and the company cannot offset the increases with higher prices, it would have a negative impact on the Company and its margins.
The Company has a revolving line of credit and a term debt facility with the Savings Bank of Mendocino. The term debt was extended another five years on December 1, 2009 and is due December 1, 2014. The credit line is renewed annually and was extended until May, 2012. If the credit line should not be renewed, the stability of the Company’s business would be in question. “See Liquidity and Capital Resources.”
The Company sustained a major fire in its packaging area, offices, tasting room and shipping facility on July 5, 2010. The roasting area and the Company’s warehouse were not damaged. The Company is currently packaging and shipping its products in its warehouse facility. Although there have been no loses of major customers due to the fire to date, the Company has experienced some difficulty in producing all of its line of bulk and packaged coffees, and there can be no assurances that the Company will be able to sustain even its current level of sales.
RESULTS OF OPERATIONS
2011 Compared to 2010
|
Combined
|
$ Inc/(Dec) | % Inc/(Dec) | ||||||
|
Net Sales
|
$ | 138,744 | 3.34 | % | ||||
|
Cost of Sales
|
$ | 279,733 | 10.72 | % | ||||
|
Gross Profit
|
$ | (140,989 | ) | (9.13 | %) | |||
|
Selling, G & A Expense
|
$ | (5,975 | ) | (0.38 | %) | |||
|
Depreciation and Amortization
|
$ | (20,476 | ) | (23.10 | %) | |||
|
Other Income/ (Expense)
|
$ | (22,259 | ) | (8.46 | %) | |||
|
Net Income/ (Loss)
|
$ | (136,796 | ) | (86.77 | %) | |||
Revenues. Combined net sales for the year ended December 31, 2011 were $4,292,153, up 3.34% or over $138,000 when compared to sales of $4,153,409 for the year ended December 31, 2010.
Distribution revenues (e.g., revenues generated on the Company’s truck distribution) were up 6%, or $98,000 for twelve months ended December 31, 2011 when compared to the same period in 2010. The increase in distribution revenues was a result of producing an expanded product line for most of the year after the fire.
National revenues (e.g., revenues not derived by mail order and direct delivery distribution) were up nearly 5% or $81,000 for the twelve months ended December 31, 2011 when compared to the same period in 2010. The increase in national revenues was a result of producing an expanded product line for most of the year after the fire.
Mail order revenues (e.g., revenues generated from product sold directly to the consumer either through print media or the Internet) decreased 1% or $5,000 for the twelve months ended December 31, 2011 when compared to the same period in 2010. The Company has installed a new online store in the fall of the 2011 that has improved year over year volume. Additionally, the Company has reduced its dependence on its non-profit partners on line.
Sales by the Company’s bakery were down nearly $61,000 for the twelve months ended in 2011 when compared to the same period in 2010. The declines were caused by lower customer counts and reduced dollars per transaction.
9
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
Cost of Sales. Combined cost of sales for the year ended December 31, 2011 was $2,889,418, an increase of over $279,000, or 10.72% when compared to cost of sales of $2,609,685 for the year ended December 31, 2010. The increase was a result of higher green bean costs. The average cost of green beans for 2011 was $3.14 versus $2.50 for 2010, or nearly $369,000 higher for the year offset by lower cost of packaging of $22,000. Cost of sales at the bakery dropped by $68,000 because of lower sales and reductions in labor through reduced hours of operation.
Gross Profit. Combined gross profit as a percentage of net sales for the year ended December 31, 2011 was 32.68%, a decrease of 4.49 percentage points or 12.10% when compared to gross profit of 37.17% for the year ended December 31, 2010. The decrease was a result of higher green bean costs at the coffee unit.
Selling, General and Administrative Expense. Combined selling, general and administrative expenses for the year ended December 31, 2011 were $1,553,866 a decrease of nearly $6,000, or .38% when compared to selling general and administrative expense of $1,559,842 for the year ended December 31, 2010.
Depreciation and Amortization. Combined depreciation and amortization expenses for the year ended December 31, 2011 were $68,162, a decrease of over $20,000, or 23.1% when compared to depreciation and amortization of $88,638 for the year ended December 31, 2010. The reduction was a result of fewer assets being added to the general, selling and administrative departments of the Company.
Other Income/Expense. Combined other income for the year ended December 31, 2011 was $240,951, a decrease of over $22,000, when compared to other expense of $263,210 for the year ended December 31, 2010. The decrease was a result of less insurance advances, and accrued liability for Business Personal Property of Others along with the additional expenses incurred in operating the business subsequent to the fire.
Net Income. Combined net income for the year ended December 31, 2011 was $20,858 a decrease of $136,796 when compared to a net income of $157,654 for the period ended December 31, 2010. However, because of the rise in green bean costs, there can be no assurances that the Company will be profitable in any future periods.
LIQUIDITY AND CAPITAL RESOURCES
Working capital as of December 31, 2011 was $188,093 as compared to working capital of $223,761 as of December 31, 2010.
Cash provided by operating activities was $67,166 for the year ended December 31, 2011, compared to cash provided by operating activities of $444,053 for the same period in 2010. The decrease in cash provided by operating activities was primarily a result of lower net income and a significant increase in inventories, a smaller increase in payables and fewer disposals. The significant increase in inventories was a result of purchasing green bean inventory that would be used during the entire year. In 2010, the purchase of green beans was used in the third and fourth quarter to recover from the fire.
Cash used in investing activities for the year ended December 31, 2011 was $103,037 compared to cash used in investing activities of $231,790 during the same period in 2010. Fixed assets included $54,000 for manufacturing and building improvements, $23,000 for brewers and fixtures, $15,000 for computers and programs and $7,000 for a used truck.
Net cash used in financing activities for the year ended December 31, 2011 was $91,476 compared to net cash used in financing activities for the same period in 2010 of $75,388. The increase in net cash used in financing activities was primarily due to the payment of the note to the majority Shareholders.
Cash as of December 31, 2011 was $64,271, compared to cash of $191,618 as of the same date in 2010. The decrease in cash for 2011 is a result of lower earnings and higher inventories compared to 2010. In December, 2010 the Company received a cash advance from the insurance company of $250,000 that it did not receive at year end of 2011.
In November 2004, the Company secured a term note with the Savings Bank of Mendocino. This note was amortized over ten years and was payable in five years with a balloon payment on December 1, 2009 at 3% over the prime rate. On December 1, 2009 the note was extended for another five years. The principle amount of the extended note was for $216,334 at December 1, 2009 with an interest rate of 7.25%. The principle and interest payments are $4,309.13 and the note matures on December 31, 2014. The principle amount of the note at December 31, 2011 was $135,580. The note is collateralized by a security interest of first priority in all accounts receivable, inventory, equipment, instruments, general intangibles and contract rights. This note is personally guaranteed by the Company’s majority shareholders.
The Company also has a $25,000 line of credit with the Savings Bank of Mendocino. The credit line is interest only payments renewable annually at 2% over the prime rate with a minimum rate of 6.5% and was extended to May 2012. The interest rate was 6.50% at December 31, 2011 with no outstanding balance on the line. The credit line is collateralized by a security interest of first priority in all accounts receivable, inventory, equipment, instruments, general intangibles and contract rights. The line of credit is personally guaranteed by the Company’s majority shareholders. The terms of the promissory note permit the Savings Bank of Mendocino to declare any unpaid principal amount and all accrued interest immediately due and payable upon the occurrence of certain events of default, as defined in the promissory note. The specified events of default under the promissory note include, but are not limited to, failure to make any payment when due, revocation of the majority shareholders’ personal guarantees, insolvency or forfeiture proceedings against the Company or the majority shareholders or any change in ownership of 25% or more of the Company’s Common Stock.
10
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
The Company’s debt at December 31, 2011 was $177,676 for all term debt and obligations under capital leases, down over $91,000 from $269,154 due at December 31, 2010. Of the total, $61,740 is due in fiscal 2012. Of the total borrowings, $135,580 is due to Savings Bank of Mendocino. See Note 7 to the “Notes to the Financial Statements” included in this annual report.
The Company paid an interest only note for $19,919 in September 2011payable to Joan and Paul Katzeff. See Note 7 to the “Notes to the Financial Statements” included in this annual report.
The Company is dependent on successfully reaching its sales goals to achieve profitable operations, obtaining additional sources of borrowings (including normal trade credit), and securing favorable financing arrangements (including lease financing) to become profitable. 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 would be adversely affected.
A summary of the Company’s principal contractual obligations and other commitments as of December 31, 2011 is shown in the following table:
|
Payments Due By Period
|
||||||||||||||||||||
|
Contractual Obligations
|
Total
|
Less than
One year
|
1-3 years
|
4-5 years
|
After 5 years
|
|||||||||||||||
|
Long Term Debt
|
$ | 177,676 | $ | 61,740 | $ | 103,206 | $ | 12,730 | $ | - | ||||||||||
|
Operating Leases
|
15,112 | 6,652 | 8,460 | - | - | |||||||||||||||
|
Real Estate Leases
|
197,966 | 62,966 | 108,000 | 27,000 | - | |||||||||||||||
|
Total Cash Obligations
|
$ | 390,754 | $ | 131,358 | $ | 219,666 | $ | 39,730 | $ | - | ||||||||||
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, weather and other natural disasters. There can be no assurance that sales will be maintained or 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.
11
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company and are not required to provide information required by this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item is set forth in the financial statements and the accompanying notes beginning on page F-1 of this annual report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Our management, with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this annual report. Based on that evaluation, our management concluded that our disclosure controls and procedures as of the end of the period covered by this annual report are not effective, including segregation of duties, accounting procedures and treatment of inventory, and are in need of further review before future recommendations can be made. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Management’s Annual Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) under the securities Exchange Act of 1934). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes accordance with generally accepted accounting principles in the United States.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
Management evaluated the effectiveness of the Company’s internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. Based on this evaluation, performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer, and the Chief Financial Officer, management concluded that the Company’s internal control over financial reporting was not effective in the areas of cost classifications and accruals, and in need of further review as of the end of the period covered by this annual report including the reporting for the gains and losses from the fire.
A material weakness is a deficiency in internal control over financial reporting such that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. In our assessment of the effectiveness of internal control over financial reporting at December 31, 2010 and 2011, we identified the following material weakness:
Controls over the period-end financial reporting for the fire losses and insurance proceeds for the fire that the Company sustained in July 5, 2010 were not effective. In January, 2011, the Company hired a consultant to review the transactions related to the fire loss. Substantial reclassifications and accruals were recorded before the Company issued its 12/31/2010 financial statements. Additional reclassifications were required throughout 2011 related to fire losses and insurance proceeds, which were recorded before the Company issued its 12/31/2011 financial statements. Additionally, many duties and functions are handled by the same person as there are only a few employees and as a result segregation of duties is an issue and a material weakness in internal control. The Company CEO continues to handle all payroll related duties and functions without oversight or approval by the CFO. More oversight and tighter control is required for all adjusting journal entries both in the review and approval process. It has also been determined that the financial accounting system needs to be modified so that the journal entry numbering is not duplicated, as is the case at the time of this report. The Company does not currently utilize a perpetual inventory accounting system, and as a result inventories are adjusted based on physical counts which have resulted in material adjustments throughout the year and at year end as of this filing. It is recommended and will be implemented, that accounting personnel be involved in quarterly physical counts.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to Item 308(a)(4) of Regulation S-K.
There have not been any significant changes in the Company’s internal control over financial reporting that occurred during the Company’s fourth fiscal quarter covered by this annual report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting other than those reported above.
12
ITEM 9B. OTHER INFORMATION
No information was required to be disclosed in a report on form 8-K during the fourth quarter of the year covered by this annual report.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The directors, nominees, key employees and executive officers of the Company and their ages as of the date of this Form 10-K are as follows:
|
Name
|
Age
|
Position with the Company
|
|
Paul Katzeff
|
74
|
Chairman of the Board of Directors
|
| Joan Katzeff | 63 | Secretary, Treasurer and Director |
|
Nicolas Hoskyns
|
45
|
Director
|
|
Sam Kraynek
|
64
|
Chief Executive Officer and Director
|
|
Janet Aguilar
|
55
|
Chief Financial Officer
|
|
Ben Corey-Moran
|
31
|
President
|
Paul Katzeff, a co-founder of the Company has served as Roastmaster, and a Director since the Company’s incorporation on May 10, 1982 and as our Chairman of the Board of Directors since June 2010. Mr. Katzeff also served as our Chief Executive Officer from the date of our incorporation. 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 co-chaired the Second Annual Sustainable Coffee Conference held in April of 1998. Mr. Katzeff served as S.C.A.A. President in the year 2000. Mr. Katzeff and Joan 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, has served as a Director of the Company since incorporation on May 10, 1982 and as our Secretary and Treasurer since June 2010. Ms. Katzeff served as the President from the date of our incorporation to June 2010. Her experience in the Company’s early years included production, delivery and bookkeeping.
Nicholas Hoskyns has been a Director of the Company since 2007. Since 2003, he has served the managing director of the Ethical Trading and Investment Company (ETICO) of Nicaragua, a company that works with small farmer cooperatives on their organizational, business and marketing development. He has helped found three cooperatives, integrating these bodies at local, regional and national levels and supporting their entry into markets in Europe, the United States and Japan. His work has been primarily in the coffee and sesame seed trade in the Central American region where he resides. He has a BA in Development Economics from the University of East Anglia in the United Kingdom.
Sam Kraynek has served as the Company’s Chief Executive Officer since June 2010 and as the Company’s Chief Financial Officer until September 2011. Before assuming the position of Chief Financial Officer, Mr. Kraynek was the Company’s Chief Operating Officer. Mr. Kraynek has been in the food business for 40 years. He was the President and General Manager of the Rosarita Mexican Food Division of Beatrice Companies, General Manager of the Bakery Distribution Division of International Multifoods and Vice President of Sales and Marketing for Bay State Milling Company. Mr. Kraynek has a B.S. in accounting and started his career in public accounting. Mr. Kraynek has been with the Company for 14 years.
Janet Aguilar joined the Company June 2011 and was appointed Chief Financial Officer September 2011. Ms. Aguilar has served as Chief Financial Officer in various organizations over her 30 year career which included The McKenna Group, McKenna Enterprises Inc., USWeb/CKS and as Division Controller of Boboli, a Division of Kraft General Foods. Ms. Aguilar has extensive and broad-based experience in Finance, Accounting and Administration, Human Resources and IT-Enterprise Systems in multi-national companies.
Ben Corey-Moran has served as the Company’s President and Director of Coffee since June 2010. Mr. Corey-Moran joined the Company in 2003 and has led the green coffee buying operations since 2008 and has managed producer relations since 2005. Prior to that, he managed the Company’s strategic partnership marketing efforts. Mr. Corey-Moran has served a full-term as a member of the S.C.A.A. Sustainability Committee and also as a member of the Advisory Board of United Students for Fair Trade. Mr. Corey-Moran holds a BA in International Affairs from Lewis and Clark College in Portland, Oregon. Mr. Corey-Moran worked with coffee cooperatives in the Dominican Republic and Oaxaca, Mexico prior to joining the Company.
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.
13
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE - continued
At the present time, the Company does not have a standing audit committee of the Board of Directors, or an audit committee financial expert, as those terms are defined by Section 3(a)(58)(A) of the Securities Exchange Act of 1934 and Item 407(d) (5)(ii) of Regulation S-K respectively.. The very small size of the Board, the small size of the Company and the remote location render it difficult at this time to fulfill these requirements. In addition, our financial statements are relatively simple to read and understand. The current Board members have had years of experience with the Company and are familiar with its financial reporting and operations. The Company makes every attempt, in conjunction with our independent auditors, our attorneys and our officers to assure that our filings and financial statements are fairly, clearly and accurately reported.
Code of Ethics. The Company has adopted a code of ethics that is applicable to all members of senior management and the Company’s employees. A copy of the code of ethics has been filed with the Securities and Exchange Commission.
Section 16(a) Beneficial Ownership Reporting Compliance. Our equity securities are not registered pursuant to Section 12 of the Securities Exchange Act of 1934. Accordingly, our officers, directors and principal shareholders are not subject to the beneficial ownership reporting requirements of Section 16(a) of the Exchange Act.
ITEM 11. EXECUTIVE COMPENSATION
The following table provides certain information concerning the compensation paid to our Chief Executive Officer and each of our two other most highly compensated executive officers during the fiscal years ended 2010 and 2011.
Summary Compensation Table
|
Name and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock Awards
($)
|
Option Awards
($)
|
Nonequity Incentive Plan Compensation
($)
|
Nonqualified Deferred Compensation Earnings
($)
|
All Other Compensation
($)
|
|||||||||||||||||||||||
|
Paul Katzeff
Chairman of the Board of Directors (formerly Chief Executive Officer)
|
2011
|
$ | 61,200 | – | – | – | – | – | (1 | ) | |||||||||||||||||||||
|
2010
|
$ | 75,418 | – | – | – | – | – | (1 | ) | ||||||||||||||||||||||
|
Joan Katzeff
Secretary, Treasurer and Director (formerly President)
|
2011
|
$ | 61,200 | – | – | – | – | – | - | ||||||||||||||||||||||
|
2010
|
$ | 75,418 | – | – | – | – | – | - | |||||||||||||||||||||||
|
Sam Kraynek
Chief Executive Officer, Chief Financial Officer and Director
|
2011
2010
|
$
$
|
105,546 97,920 |
-
-
|
-
-
|
-
-
|
-
-
|
-
-
|
(1
(1
|
)
)
|
|||||||||||||||||||||
(1) Mr. Katzeff and Mr. Kraynek received use of a company car, which was used primarily for business purposes. The aggregate incremental cost to the Company is less than $10,000 per year.
Securities Authorized for Issuance Under Equity Compensation Plans. The Company currently does not have in place any compensation plans (including individual compensation arrangements) under which equity securities of the Company are authorized for issuance.
Compensation of Directors. Our members of the Board of Directors do not receive compensation for service on the Board.
14
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding beneficial ownership of the Company’s Common Stock as of March 26, 2012, (i) by each person (or group of affiliated persons) who is known by the Company to own beneficially more than 5% of the Company’s Common Stock, (ii) by each of the named executive officers, (iii) by each of the Company’s directors, and (iv) by all directors and executive officers as a group. The Company believes that the persons 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. Beneficial ownership representing less than one percent is denoted with an “*.” The Company does not have an equity compensation plan.
| Nature of | ||
| Percent of | ||
| Name and Address of | Beneficial | Amount and |
| Beneficial Owner | Ownership (1) | Class (2) |
|
Joan and Paul Katzeff(1)
|
964,400 (3) | 78% |
|
(Joan Katzeff, Secretary, Treasurer and Director)
|
||
|
(Paul Katzeff, Chairman of the Board of Directors)
|
||
|
c/o Thanksgiving Coffee Co., Inc.
|
||
|
POB 1918
|
||
|
Fort Bragg, CA 95437
|
||
|
Sam Kraynek
|
1,800
|
*
|
|
Chief Executive Officer and Director
|
||
|
c/o Thanksgiving Coffee Co., Inc.
|
||
|
POB 1918
|
||
|
Fort Bragg, CA 95437
|
||
|
Janet Aguilar
|
0
|
*
|
|
Chief Financial Officer
|
||
|
c/o Thanksgiving Coffee Co., Inc.
|
||
|
POP 1918
|
||
|
Fort Bragg, CA 95437
|
||
|
Ben Corey-Moran
|
400
|
*
|
|
President
|
||
|
c/o Thanksgiving Coffee Co., Inc.
|
||
|
POB 1918
|
||
|
Fort Bragg, CA 95437
|
||
|
Nicolas Hoskyns
|
||
|
Director
|
0
|
*
|
|
c/o Thanksgiving Coffee Co., Inc.
|
||
|
POB 1918
|
||
|
Fort Bragg, CA 95437
|
||
|
All directors and executive officers as a group (5 persons)
|
966,600 | 78.10% |
(1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to the securities.
(2) Based upon 1,236,744 shares of the Company’s Common Stock issued and outstanding at March 26, 2012.
(3) Shares are jointly owned by Joan Katzeff and Paul Katzeff.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
In November 2005, the Company signed a new lease for its corporate headquarters, warehouse and waterfront facilities from Joan and Paul Katzeff, who own the facility and are directors, executive officers and the majority shareholders of the Company (the “Katzeffs”). The lease is for ten years and ends May 31, 2015. The lease provides for monthly payments of approximately $8,600 for the entire term of the lease. The Company is responsible for all real estate taxes, insurance and maintenance costs related to the facilities. The lease was amended in July, 2011 to $4,500 to reflect the diminished use of the property since the fire. The Katzeff’s also guaranteed personally the Company’s term note and line of credit with the Savings Bank of Mendocino. See“Liquidity and Capital Resources” under item 7 and Notes 7 and 10 to the “Notes to Financial Statements” included in this annual report.
15
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE - continued
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, officers or employees of the Company.
The Company had uncollateralized note with the majority shareholders, payable in monthly installments of interest only at 12%, with the balance due on demand after June 30, 1996. The principal of the note was paid as of September 30, 2011. In June of 2007, the Company executed an uncollateralized note for $73,100 with the majority shareholders to pay rent in arrears over the next three years to be repaid in monthly installments of $2,000 per month plus interest at 12% per annum with the final payment due July 15, 2010. The principal and interest on this was paid as of June 30, 2010. See Note 7 and 11 of “Notes to Financial Statements.”
The Company has purchased several containers of coffee from three cooperatives and one farmer in Nicaragua costing $332,238. Ethical Trading and Investment Company of Nicaragua (Etico) acted as the importer and provided the financing for the transaction. Nick Hoskyns, a director of the Company, is the managing director of Etico. At December 31, 2011, there was $147,271 payable to Etico for the purchases, which included one past due invoice in the amount of $52,071.28 (which was subsequently paid January 11, 2012).
Our Board of Directors has selected independence standards of the NASDAQ Stock Market (“NASDAQ”), solely for the purpose of making the independence determination in compliance with SEC requirements. We are not a listed issuer on the NASDAQ and are not required to meet NASDAQ’s director independence standards. None of the directors of the Company are independent under standards established by NASDAQ.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The aggregate fees billed to the Company by our principal accountant, Schumacher & Associates, Inc. for services rendered during the fiscal years ended December 31, 2011 and 2010 are set forth in the table below:
|
Fee Category
|
Fiscal Year Ended December 31, 2011 |
Fiscal Year Ended December 31, 2010
|
||||||
|
Audit fee (1)
|
$ | 42,500 | $ | 38,500 | ||||
|
Audit-related fees (2)
|
$ | 0 | $ | 0 | ||||
|
Tax fees (3)
|
$ | 0 | $ | 0 | ||||
|
All other fees (4)
|
$ | 0 | $ | 0 | ||||
|
Total fees
|
$ | 42,500 | $ | 38,500 | ||||
|
|
(1)
|
Audit fees consist of fees billed for professional services rendered in connection with the audit of the Company’s annual financial statements and the review of our financial statements included in our quarterly reports on Form 10-Q or services that are normally provided in connection with statutory and regulatory filings or engagements.
|
|
|
(2)
|
Audit-related fees consist of fees billed for professional services that are reasonably related to the performance of the audit or review of our financial statements, but which are not reported under “audit fee.”
|
|
|
(3)
|
Tax fees consist of fees billed for professional services rendered for tax compliance, tax planning and tax advice. The Company was billed $9,175 and $6,628 from Sallmann, Yang & Alameda for tax compliance, tax advice and tax planning services for the fiscal year ended December 31, 2011 and 2010, respectively.
|
|
|
(4)
|
All other fees consist of fees billed for all other products and services. The Company was billed $6,930 and $4,172 from Sallmann, Yang & Alameda for other services for the fiscal year ended December 31, 2011 and 2010, respectively.
|
Pre-approval Policies and Procedures for Audit and Non-Audit Services. As we do not have a standing audit committee, our Board of Directors performs the functions that may be delegated to an audit committee. Section 10A(i) of the Securities Exchange Act of 1934 prohibits our auditors from performing audit services for us as well as any services not considered to be “audit services” unless such services are pre-approved by the Company’s Board of Directors (in lieu of the audit committee) or unless the non-audit services meet certain de minimis standards. All audit and permitted non-audit services performed by Schumacher & Associates during 2010 and 2011 were pre-approved by the Company’s Board of Directors.
16
PART IV
ITEM 15. EXHIBITS and FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this annual report:
Financial Statements
- Report of Independent Registered Public Accounting Firm
- Balance Sheets as of December 31, 2011and 2010
- Statements of Operations for the years ended December 31, 2011and 2010
- Statements of Shareholders’ Equity for the years ended December 31, 2011 and 2010
- Statements of Cash Flows for the years ended December 31, 2011and 2010
- Notes to Financial Statements
Financial Statement Schedules
Not Applicable
Exhibits
|
3.1
|
Restated Articles of Incorporation of the Company.+
|
|
3.2
|
Bylaws of the Company.+
|
|
3.2.1
|
Amendment No. 1 to Bylaws of the Company, dated June 3, 1996.++
|
|
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.+++
|
|
10.10
|
License Agreement between the Company and the American Birding Association, Inc.**
|
|
10.11
|
Promissory Note issued by the Company to the Savings Bank of Mendocino County, dated November 19, 2004.**
|
|
10.13
|
Lease agreement for the Company’s headquarters and manufacturing and storage facility dated November 1, 2005.***
|
|
10.15
|
Promissory Note issued by the Company to the Savings Bank of Mendocino, dated November 17, 2006.****
|
|
10.16
|
Promissory Note issued by the Company to Joan and Paul Katzeff dated as of June 15, 2007.++++
|
|
10.17
|
Gift agreement between Joan and Paul Katzeff dated 12/31/2007 gifting shares of stock from their shares to various employees.>
|
|
14.1
|
Code of Ethics*
|
|
31.1
|
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) as Adopted Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
|
|
31.2
|
Certification of President Pursuant to Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31.3
|
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32.1
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32.2
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32.3
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
+ 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 March 31, 1998.
+++ Incorporated by reference to the exhibits to the Company’s Form 10-QSB for the quarter ended September 30, 1998.
++++ Incorporated by reference to the exhibits to the Company’s Form 10-QSB for the quarter ended June 30, 2007.
* Incorporated by reference to the exhibits to the Company’s Form 10-KSB for the year ended December 31, 2003.
** Incorporated by reference to the exhibits to the Company’s Form 10-KSB for the year ended December 31, 2004.
*** Incorporated by reference to the exhibits to the Company’s Form 10-KSB for the year ended December 31, 2005.
**** Incorporated by reference to the exhibits to the Company’s Form 10-KSB for the year ended December 31, 2006.
> Incorporated by reference to the exhibits to the Company’s Form 10-KSB for the year ended December 31, 2007.
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Thanksgiving Coffee Company, Inc. | |||
|
Date: March 30, 2012
|
By:
|
/s/ Sam Kraynek | |
| Name: Sam Kraynek | |||
| Title: Chief Executive Officer | |||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | |||
|
/s/ Paul Katzeff
|
Chairman of the Board
|
March 30, 2012
|
|||
|
Paul Katzeff
|
of Directors
|
||||
|
/s/ Joan Katzeff
|
Secretary, Treasurer and
|
March 30, 2012
|
|||
|
Joan Katzeff
|
Director
|
||||
|
/s/ Nicholas Hoskyns
|
Director |
March 30, 2012
|
|
||
|
Nicholas Hoskyns
|
|||||
|
/s/ Sam Kraynek
|
Chief Executive Officer
|
March 30, 2012
|
|||
|
Sam Kraynek
|
(Principal Executive Officer) and Director
|
||||
|
/s/ Janet Aguilar
|
Chief Financial Officer
|
March 30, 2012
|
|||
|
Janet Aguilar
|
|||||
|
/s/ Ben Corey-Moran
|
President
|
March 30, 2012 |
|
||
| Ben Corey-Moran | |||||
Supplemental Information to be Furnished with Reports Filed Pursuant to
Section 15(d) of the Securities Exchange Act of 1934 by Registrants Which Have Not Registered Securities
Pursuant to Section 12 of the Securities Exchange Act of 1934
No annual report covering the registrant’s last fiscal year or proxy materials with respect to any annual or other meeting of shareholders have been sent to the registrant’s shareholders.
18
Thanksgiving Coffee Company, Inc.
For the Years Ended December 31, 2011 and 2010
with Report of Independent Registered Public
Accounting Firm
Audited Financial Statements
For the Years Ended December 31, 2011 and 2010
Table of Contents
| Report | |
|
Report of Independent Registered Public Accounting Firm
|
F-2 |
|
Audited Financial Statements
|
|
| Balance Sheets | F-3 |
| Statements of Operations | F-4 |
| Statement of Shareholders' Equity | F-5 |
| Statements of Cash Flows | F-6 |
| Notes to Financial Statements | F-7 |
F-1
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Thanksgiving Coffee Company, Inc.
We have audited the accompanying balance sheets of Thanksgiving Coffee Company, Inc., as of December 31, 2011 and 2010, and the related Statements of Operations, Shareholders' Equity, and Cash Flows for the years ended December 31, 2011 and 2010. 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 audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. 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 our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Thanksgiving Coffee Company, Inc. as of December 31, 2011 and 2010, and the results of its operations and cash flows for the years ended December 31, 2011 and 2010, in conformity with accounting principles generally accepted in the United States of America.
/s/ Schumacher & Associates, Inc.
SCHUMACHER & ASSOCIATES, INC.
Denver, Colorado
March 28, 2012
See accompanying notes and auditors’ report
F-2
|
Thanksgiving Coffee Company, Inc.
|
||||||||
|
Balance Sheets
|
||||||||
|
December 31,
|
||||||||
|
2011
|
2010
|
|||||||
|
Assets
|
||||||||
|
Current assets
|
||||||||
|
Cash
|
$ | 64,271 | $ | 191,618 | ||||
|
Accounts receivable
|
256,785 | 297,586 | ||||||
|
Inventories
|
473,217 | 346,333 | ||||||
|
Prepaid expenses
|
27,629 | 20,559 | ||||||
|
Total current assets
|
821,902 | 856,096 | ||||||
|
Property and equipment
|
||||||||
|
Property and equipment
|
1,089,126 | 1,034,785 | ||||||
|
Accumulated depreciation
|
(686,855 | ) | (631,177 | ) | ||||
|
Total property and equipment
|
402,271 | 403,608 | ||||||
|
Other assets
|
||||||||
|
Deposits and other assets
|
550 | 4,927 | ||||||
|
Other intangibles, net of amortization
|
1,960 | 1,485 | ||||||
|
Total other assets
|
2,510 | 6,412 | ||||||
|
Total assets
|
$ | 1,226,683 | $ | 1,266,116 | ||||
|
Liabilities and shareholders' equity
|
||||||||
|
Current liabilities
|
||||||||
|
Accounts payable
|
$ | 375,656 | $ | 395,726 | ||||
|
Accounts payable - related party
|
147,271 | 35,173 | ||||||
|
Notes payable - bank
|
42,212 | 51,793 | ||||||
|
Notes payable - other
|
- | 325 | ||||||
|
Note payable - shareholders
|
- | 19,919 | ||||||
|
Capital lease obligations
|
19,528 | 19,416 | ||||||
|
Accrued liabilities
|
49,142 | 109,983 | ||||||
|
Total current liabilities
|
633,809 | 632,335 | ||||||
|
Long term debt
|
||||||||
|
Notes payable - bank
|
93,368 | 135,573 | ||||||
|
Capital lease obligations
|
22,568 | 42,128 | ||||||
|
Total long term debt
|
115,936 | 177,701 | ||||||
|
Total liabilities
|
749,745 | 810,036 | ||||||
|
Commitments & Contingencies (Notes 2,5,7,8,9,10,11, 12 and 13)
|
||||||||
|
Shareholders' equity
|
||||||||
|
Common stock, no par value,
|
||||||||
|
1,960,000 shares authorized,
|
||||||||
|
1,236,744 shares issued and outstanding
|
861,816 | 861,816 | ||||||
|
Additional paid in capital
|
24,600 | 24,600 | ||||||
|
Accumulated (deficit)
|
(409,478 | ) | (430,336 | ) | ||||
|
Total shareholders' equity
|
476,938 | 456,080 | ||||||
|
Total liabilities and shareholders' equity
|
$ | 1,226,683 | $ | 1,266,116 | ||||
See accompanying notes and auditors’ report
F-3
|
Thanksgiving Coffee Company, Inc.
|
||||||||
|
Statements of Operations
|
||||||||
|
For the Years Ended December 31,
|
||||||||
|
2011
|
2010
|
|||||||
|
Income
|
||||||||
|
Net sales
|
$ | 4,292,153 | $ | 4,153,409 | ||||
|
Cost of sales
|
2,889,418 | 2,609,685 | ||||||
|
Gross profit
|
1,402,735 | 1,543,724 | ||||||
|
Operating expenses
|
||||||||
|
Selling, general and administrative expenses
|
1,553,866 | 1,559,842 | ||||||
|
Depreciation and amortization
|
68,162 | 88,638 | ||||||
|
Total operating expenses
|
1,622,028 | 1,648,480 | ||||||
|
Operating loss
|
(219,293 | ) | (104,756 | ) | ||||
|
Other income (expense)
|
||||||||
|
Miscellaneous income
|
265,155 | 294,994 | ||||||
|
Interest expense
|
(24,204 | ) | (31,784 | ) | ||||
|
Total other income
|
240,951 | 263,210 | ||||||
|
Income before income taxes
|
21,658 | 158,454 | ||||||
|
Income tax expense
|
(800 | ) | (800 | ) | ||||
|
Net income
|
$ | 20,858 | $ | 157,654 | ||||
|
Income per share (basic)
|
$ | 0.02 | $ | 0.13 | ||||
|
Income per share (dilutive)
|
$ | 0.02 | $ | 0.13 | ||||
| Weighted average number of shares outstanding | 1,236,744 | 1,236,744 | ||||||
See accompanying notes and auditors’ report
F-4
|
Thanksgiving Coffee Company, Inc.
|
||||||||||||||||||||
| Statement of Shareholders' Equity | ||||||||||||||||||||
| For the Period from January 1, 2010 through December 31, 2011 | ||||||||||||||||||||
|
|
||||||||||||||||||||
|
Additional
|
||||||||||||||||||||
|
Common Stock
|
paid-in
|
Accumulated
|
||||||||||||||||||
|
Shares
|
Amount
|
capital
|
(Deficit)
|
Total
|
||||||||||||||||
|
Balance at January 1, 2010
|
1,236,744 | $ | 861,816 | $ | 24,600 | $ | (587,990 | ) | $ | 298,426 | ||||||||||
|
Net Income
|
- | - | - | 157,654 | 157,654 | |||||||||||||||
|
Balance at December 31, 2010
|
1,236,744 | 861,816 | 24,600 | (430,336 | ) | 456,080 | ||||||||||||||
|
Net Income
|
- | - | - | 20,858 | 20,858 | |||||||||||||||
|
Balance at December 31, 2011
|
1,236,744 | $ | 861,816 | $ | 24,600 | $ | (409,478 | ) | $ | 476,938 | ||||||||||
See accompanying notes and auditors’ report
F-5
|
Thanksgiving Coffee Company, Inc.
|
||||||||
|
Statements of Cash Flows
|
||||||||
|
For the Years ended December 31,
|
||||||||
|
2011
|
2010
|
|||||||
|
Operating activities
|
||||||||
|
Net income
|
$ | 20,858 | $ | 157,654 | ||||
|
Depreciation and amortization
|
99,824 | 102,398 | ||||||
|
Allowance for bad debts
|
4,075 | 976 | ||||||
|
Loss on disposal of assets
|
- | 92,238 | ||||||
|
|
||||||||
|
(Increase) decrease in:
|
||||||||
|
Accounts receivable
|
41,432 | (53,247 | ) | |||||
|
Inventories
|
(126,884 | ) | (39,141 | ) | ||||
|
Prepaid expenses
|
(7,702 | ) | 7,708 | |||||
|
Deposits and other assets
|
4,377 | 7,214 | ||||||
|
Increase (decrease) in:
|
||||||||
|
Accounts payable
|
92,029 | 100,518 | ||||||
|
Accrued liabilities
|
(60,843 | ) | 67,735 | |||||
|
Net cash provided by operating activities
|
67,166 | 444,053 | ||||||
|
Investing activities
|
||||||||
|
Purchases of property and equipment
|
(103,037 | ) | (231,790 | ) | ||||
|
Net cash (used in) investing activities
|
(103,037 | ) | (231,790 | ) | ||||
|
Financing activities
|
||||||||
|
Repayments of notes payable and capital leases
|
(91,476 | ) | (75,388 | ) | ||||
|
Net cash (used in) financing activities
|
(91,476 | ) | (75,388 | ) | ||||
|
Net increase (decrease) in cash
|
(127,347 | ) | 136,875 | |||||
|
Cash at beginning of year
|
191,618 | 54,743 | ||||||
|
Cash at end of year
|
$ | 64,271 | $ | 191,618 | ||||
Supplemental Cash Flow Information:
|
2011
|
2010
|
|||||||
|
Cash paid for interest:
|
$ | 24,204 | $ | 31,784 | ||||
| Cash paid for income taxes: | $ | 800 | $ | 800 | ||||
| Capital Lease additions | $ | 0 | $ | 19,279 | ||||
See accompanying notes and auditors’ report
F-6
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements
December 31, 2011 and 2010
1. Summary of Significant Accounting Policies
This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management who are responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles in the United States of America and have been consistently applied in the preparation of the financial statements.
Nature of Operations
Thanksgiving Coffee Company, Inc. (the Company), was incorporated in California in 1982. The Company purchases and roasts whole bean coffees and sells them to restaurants, grocery stores and other retail outlets. Products are sold through the Company’s distribution network in Northern California, nationally through common carriers selling direct, or through brokers and distributors. Distributors and retailers do not have the right to return products. The Company also sells coffee and related specialty products through mail order and Internet sales on a nationwide basis. Sales volume for the coffee division was approximately $3,840,000 for the year ended December 31, 2011. Additionally, the Company operates a sandwich and baked goods store in Mendocino, California with sales volume of approximately $452,000 for the year ended December 31, 2011.
Basis of Presentation
The Company has prepared the financial statements in accordance with generally accepted accounting principles in the United States of America.
Concentration of Credit Risk
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 is affected by economic fluctuations in the retail and food service industries. In fiscal 2011 and 2010, one customer in the Company’s specialty coffee segment accounted for 16.3% and 18.8% respectively of the Company’s revenue. The account has purchased from the Company since 1992. The account has serving locations and is a distributor of the Company’s product. A loss of this account or any other large account, or a significant reduction in sales to any of the Company’s principal customers, could have an adverse impact on the Company.
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. At December 31, 2011, the Company had no cash or cash equivalents in excess of amounts insured by agencies of the U.S. Government.
F-7
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
December 31, 2011 and 2010
1. Summary of Significant Accounting Policies (continued)
Cash and Cash Equivalents
Cash equivalents include highly liquid instruments with original maturities of 90 days or less. Due to the short term maturity of these instruments, the carrying value on our consolidated balance sheet approximates fair value.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
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 of the assets. The following useful lives are used:
F-8
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
December 31, 2011 and 2010
1. Summary of Significant Accounting Policies (continued)
Property and Equipment (continued)
|
Equipment
|
5 to 12 years |
|
Furniture and fixtures
|
5 to 7 years |
|
Leasehold improvements
|
7 to 39 years |
|
Transportation equipment
|
5 years |
|
Marketing equipment
|
5 to 7 years |
|
Capitalized website development costs
|
3 years |
Leasehold improvements are carried at cost and are amortized over the shorter of their estimated useful lives or the related lease term. Expenditures for major renewals that extend the useful lives of property, fixtures and improvements are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation and amortization expense related to production facilities is included in cost of sales.
The Company adopted ASC 350, Accounting for Web Site Development Costs, in 2001. This accounting rule provides guidance regarding capitalization or expense of certain website development costs. Accordingly, website development costs incurred in the operation phase that will result in future added functionality are capitalized and expenditures for training, administration and maintenance of an existing website are expensed as incurred.
For income tax purposes, depreciation is computed using the accelerated cost recovery system and the modified cost recovery system.
Income or Loss per Share
The Company computes net earnings (loss) per common share using ASC 260 “Earnings Per Share.” Basic income or loss per common share is computed based on the weighted average number of shares outstanding for the period. Diluted income or loss per share is computed by dividing net income loss by the weighted average shares outstanding assuming all dilutive potential common shares were issued. There were no dilutive potential common shares at December 31, 2011. Therefore, basic and diluted income or loss per share is the same. Additionally, for the purposes of calculating diluted income or loss per share, there were no adjustments to net income or loss.
Stock Based Compensation
Effective January 1, 2006, the Company adopted ASC 505 and 718, Share-Based Payments, and the related SEC rules included in Staff Accounting Bulletin No. 107. Under this method, compensation cost is recognized for costs related to 1) all share-based payments (stock options and restricted stock awards)
F-9
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
December 31, 2011 and 2010
1. Summary of Significant Accounting Policies (continued)
Stock Based Compensation (continued)
granted before but not yet vested as of January 1, 2006 based on the grant-date fair value estimated under the original provisions, and 2) all share-based payments (stock options and restricted stock units) granted after December 31, 2005 based on the grant-date fair value estimated. During the years ended December 31, 2011, 2010 and 2009 no options were granted. At December 31, 2011, there were no outstanding stock options and the Company has no plans to offer stock based compensation to its employees or others.
Recent Accounting Pronouncements
There were various accounting standards and interpretations issued during 2011 and 2010, none of which are expected to have a material impact on the Company’s financial position, operations or cash flows.
Fair Value of Financial Instruments
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management. The Company’s financial instruments include cash, accounts receivable, accounts payable, accrued expenses, other current liabilities and long-term debt. Except for long-term debt, the carrying value of financial instruments approximated fair value due to their short maturities.
The carrying value of long-term debt approximated fair value because stated interest rates on these instruments are similar to quoted rates for instruments with similar risks.
Segment Reporting
ASC 280, “Disclosures about Segments of an Enterprise and Related Information”, changed the way public companies report information about segments of their business in their financial statements. It also requires entity-wide disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenues and its major customers. Accordingly, beginning in fiscal 2006, the Company reports its operations in two segments: specialty coffee and bakery.
F-10
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
December 31, 2011 and 2010
1. Summary of Significant Accounting Policies (continued)
Shipping and Handling
Freight billed to customers is recorded in cost of sales offsetting the related freight costs.
Goodwill and Other Intangible Assets
As of January 1, 2002, the Company adopted the provisions of ASC 350, Goodwill and Other Intangibles. Goodwill is assigned to a specific reporting unit and is reviewed for possible impairment at least annually or more frequently upon the occurrence of an event or when circumstances indicate that the reporting unit’s carrying amount is greater than its fair value. Intangible assets with definite lives are amortized over their useful economic lives.
Intangible assets are amortized over the following estimated useful lives using primarily a straight-line basis.
|
Life in Years
|
|
|
Leasehold value
|
14
|
|
Trademark
|
17
|
|
Refinance costs
|
5
|
Income Taxes
The Company accounts for income taxes under the asset and liability method as prescribed by ASC 740, Accounting for Income Taxes. As such, deferred income tax assets and liabilities are recognized for the future tax consequences of the differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.
Retirement Plan
In 2003, the Company converted its existing profit sharing plan into a 401(k) savings plan. The plan covers substantially all Company employees and allows pre-tax contributions through a salary deferral program. Employer contributions are on a discretionary basis with substantially all employees eligible for allocation of employer contributions. Employees are 100% vested in amounts they contribute and vest.
No employer contributions to the 401(k) plan have ever been made.
F-11
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
December 31, 2011 and 2010
1. Summary of Significant Accounting Policies (continued)
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. The Company’s policy is that fully vested vacation is accrued at each quarter end. The accrued liability for vacation pay was $21,600 and $24,182 as of December 31, 2011 and 2010, and such amount is included in accrued liabilities. Carryover paid sick days are not available, or ever considered vested.
Advertising
Advertising costs are expensed as incurred, except for direct-response advertising, which is capitalized and amortized over its expected period of future benefits. Direct-response advertising consists primarily of mail order solicitation and catalog costs. For the twelve months ended December 31, 2011 and 2010, the Company did not engage in any direct response advertising that would require capitalization. Advertising costs charged to expense were $4,202 and $20,610 for the twelve months ended December 31, 2011 and 2010 respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Accordingly, actual results could differ from those estimates.
Revenue Recognition
Revenue is recognized in accordance with SEC Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition. Under SAB 104, product revenues (or service revenues) are recognized when persuasive evidence of an arrangement exists, delivery has occurred (or service has been performed), the sales price is fixed and determinable and collectability is reasonably assured.
Product is considered delivered and revenue is recognized when title and risk of loss have been transferred to the customer. Under the terms and conditions of the sale, the transfer of title may occur either at the time of shipment or when product is delivered to the customer.
F-12
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
December 31, 2011 and 2010
2. Accounts Receivable
Accounts receivable consist of the following:
|
2011
|
2010
|
|||||||
|
Accounts receivable
|
$ | 260,745 | $ | 305,621 | ||||
|
Less: allowance for doubtful accounts
|
(3,960 | ) | (8,035 | ) | ||||
|
Net accounts receivable
|
$ | 256,785 | $ | 297,586 | ||||
The Company utilizes a percentage method to establish the allowance for doubtful accounts. The estimated allowance ranges from 1% to 10% of outstanding receivables based on factors pertaining to the credit risk of specific customers, historical trends and other information. Delinquent accounts are written off when it is determined that amounts are uncollectible. Bad debt expense (recovery) for the twelve months ended December 31, 2011 and 2010 was $(2,099) and $1,632 respectively.
|
3.
|
Inventories
|
Inventories consist of the following:
|
2011
|
2010
|
|||||||
|
Coffee
|
||||||||
|
Unroasted raw
|
$ | 283,196 | $ | 200,775 | ||||
|
Roasted
|
48,276 | 43,796 | ||||||
| 798 | 371 | |||||||
|
Packaging, supplies and other merchandise held for sale
|
140,947 | 101,391 | ||||||
|
Total inventories
|
$ | 473,217 | $ | 346,333 | ||||
F-13
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
December 31, 2011 and 2010
4. Property and Equipment
Property and equipment consist of the following:
|
2011
|
2010
|
|||||||
|
Equipment
|
$ | 443,862 | $ | 373,072 | ||||
|
Furniture and fixtures
|
82,017 | 66,747 | ||||||
|
Leasehold improvements
|
391,792 | 395,350 | ||||||
|
Transportation equipment
|
64,569 | 92,730 | ||||||
|
Property held under capital leases
|
106,886 | 106,886 | ||||||
|
Total property and equipment
|
1,089,126 | 1,034,785 | ||||||
|
Accumulated depreciation
|
(686,855 | ) | (631,177 | ) | ||||
|
Property and equipment, net
|
$ | 402,271 | $ | 403,608 | ||||
Depreciation expense for the twelve months ended December 31, 2011, and 2010 was $99,825 and $97,687 respectively.
5. Goodwill and Other Intangible Assets
As part of the adoption of ASC 350 Goodwill and Other Tangible Assets as of January 1, 2002, the Company no longer amortizes goodwill.
Intangible assets subject to amortization consist of the following:
|
2011
|
2010
|
|||||||
|
Leasehold value
|
$ | 67,000 | $ | 67,000 | ||||
|
Trademarks
|
5,127 | 5,127 | ||||||
|
Website
|
2,800 | - | ||||||
|
Total intangible assets
|
74,927 | 72,127 | ||||||
|
Accumulated amortization
|
(72,967 | ) | (70,642 | ) | ||||
|
Other intangibles, net of amortization
|
$ | 1,960 | $ | 1,485 | ||||
Amortization expense for the twelve months ended December 31, 2011 and 2010 was $3,279 and $4,711 respectively.
F-14
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
December 31, 2011 and 2010
6. Deposits and Other Assets
Included in Deposits and other assets is $550 deposit for additional storage space needed after the fire, and $4,927 for website development costs net of amortization for 2011 and 2010 respectively.
7. Long Term Debt
|
Notes Payable
|
2011
|
2010
|
||||||
|
Note payable to Savings Bank of Mendocino, payable in monthly installments of $4,309, interest at 7.25% renewed December 1, 2009, final payment is due on December 1, 2014. The note payable is collateralized by a security interest of first priority in all accounts receivable, inventory, equipment, instruments, general intangibles and contract rights along with a personal guarantee from the Company's majority shareholders.
|
$ | 135,580 | $ | 175,866 | ||||
|
Line of credit to Savings Bank of Mendocino, payable in monthly installments of interest only at 2% over prime rate extended through May, 2012 with a minimum rate of 6.5%(6.5% at December 31, 2011). The note payable for the line of credit is collateralized by a security interest of first priority in all accounts receivable, inventory, equipment, instruments, general intangibles and contract rights along with a personal guarantee from the Company's majority shareholders. The line is for a maximum of $25,000 of which the full amount of $25,000 was unused and available at December 31, 2011.
|
- | 11,500 | ||||||
|
Note payable to majority shareholders, Paul and Joan Katzeff, uncollateralized, payable in monthly installments of interest only at 12%, with balance due on demand after June 30, 1996.
|
- | 19,919 | ||||||
|
Note payable to Chrysler Financing, payable in monthly installments of $329, including interest at 15.49%, collateralized by a vehicle, final payment due on January 24, 2011
|
- | 325 | ||||||
F-15
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
December 31, 2011 and 2010
7. Long Term Debt (continued)
|
Capital Lease Obligations
|
||||||||
|
2011
|
2010
|
|||||||
|
Note payable to BSB Leasing payable in monthly installments of $390, including interest at 14.30%, collateralized by equipment, final payment due June 2, 2012
|
2,241 | 4,540 | ||||||
|
Note payable to Bank of the West payable in monthly installments of $489, including interest at 12.69% collateralized by equipment, final payment due on May1, 2013
|
7,572 | 12,158 | ||||||
|
Note payable to BSB Leasing payable in monthly installments of $285, including interest at 15.89%, collateralized by equipment, final payment due on June 2, 2012
|
1,634 | 6,242 | ||||||
|
Note payable to Bank of the West payable in monthly installments of $427, including interest at 11.83%, collateralized by equipment, final payment due on April 1, 2015
|
13,776 | 17,058 | ||||||
|
Note payable to US BankCorp Manifest Funding Services payable in monthly installments of $621, including interest at 14.32%, collateralized by equipment, final payment due September 8, 2014
|
16,873 | 21,546 | ||||||
|
|
||||||||
|
Total notes payable
|
$ | 177,676 | $ | 269,154 | ||||
|
Less current portion
|
61,740 | 91,453 | ||||||
|
Long term portion of notes payable
|
$ | 115,936 | $ | 177,701 | ||||
F-16
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
December 31, 2011 and 2010
7. Long Term Debt (continued)
Interest paid for the twelve months ended December 31, 2011 and 2010 was $24,204 and $31,784, respectively.
As of December 31, 2011, maturities of notes payable and capital lease obligations for each of the next five years and in the aggregate were as follows:
|
Years Ending December 31,
|
||||
|
2012
|
$ | 61,740 | ||
|
2013
|
53,165 | |||
|
2014
|
50,041 | |||
|
2015
|
12,730 | |||
| $ | 177,676 | |||
Based on current borrowing rates, the fair value of the notes payable and capital lease obligations approximate their carrying amounts.
F-17
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
December 31, 2011 and 2010
8. Income Taxes
The provision for income taxes for the years ended December 31, 2011, 2010, and 2009 are as follows:
|
2011
|
2010
|
2009
|
||||||||||
|
Current tax provision - state
|
$ | 800 | $ | 800 | $ | 800 | ||||||
|
Deferred tax (benefit) liability
|
||||||||||||
|
Federal
|
(82,060 | ) | (60,307 | ) | (74,814 | ) | ||||||
|
State
|
(9,778 | ) | (5,252 | ) | (4,020 | ) | ||||||
|
Total deferred tax benefit
|
(91,838 | ) | (65,559 | ) | (78,834 | ) | ||||||
|
Less valuation allowance
|
91,838 | 65,559 | 78,834 | |||||||||
|
Net provision for income taxes
|
$ | 800 | $ | 800 | $ | 800 | ||||||
Income taxes paid for the years ended December 31, 2011, 2010 and 2009 were $800 each year.
F-18
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
December 31, 2011 and 2010
8. Income Taxes (continued)
The Company’s deferred tax asset, valuation allowance, and change in valuation allowance as of December 31, 2011, 2010, and 2009 are as follows:
|
2011
|
2010
|
2009
|
||||||||||
|
Net operating loss and tax carryforwards
|
$ | 92,646 | $ | 82,098 | $ | 97,302 | ||||||
|
Depreciation and amortization
|
(7,021 | ) | (24,339 | ) | (24,920 | ) | ||||||
|
Other temporary differences
|
6,213 | 7,800 | 6,452 | |||||||||
|
Valuation allowance
|
(91,838 | ) | (65,559 | ) | (78,834 | ) | ||||||
|
Net deferred tax asset
|
$ | - | $ | - | $ | - | ||||||
As of December 31, 2011 and 2010 deferred taxes consisted of net tax assets of $91,838 and $65,559, respectively, representing an increase of $26,279 from 2010 to 2011 due to net operating loss carryforwards and other temporary differences, which were fully allowed for in the valuation allowances of $91,838 and $65,559, respectively. The valuation allowance offsets the net deferred tax asset for which there is no assurance of recovery. The valuation allowance is evaluated at the end of each year, considering positive and negative evidence about whether the asset will be realized. At that time, the allowance will either be increased or reduced.
Income taxes at the expected statutory rate are reconciled to the Company’s actual income taxes as follows:
|
2011
|
2010
|
2009
|
||||||||||
|
Tax (benefit) at federal statutory rate
|
15.00 | % | 15.00 | % | 15.00 | % | ||||||
|
State tax (benefit) net of federal benefit
|
7.50 | % | 7.50 | % | 7.50 | % | ||||||
|
Non-taxable differences
|
5.20 | % | (18.97 | )% | 2.52 | % | ||||||
|
Temporary differences
|
(18.34 | )% | (0.31 | )% | 12.19 | % | ||||||
|
Net operating losses applied
|
(2.51 | )% | 0.00 | % | (37.21 | )% | ||||||
|
Valuation allowance
|
(5.64 | )% | (2.72 | )% | 1.83 | % | ||||||
|
Tax provision - effective rate
|
1.21 | % | 0.50 | % | 1.83 | % | ||||||
F-19
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
December 31, 2011 and 2010
8. Income Taxes (continued)
Deferred income taxes arise from temporary timing differences in the recognition of income and expenses for financial reporting and tax purposes. The Company’s deferred tax assets consist of the benefit from net operating loss (NOL) carryforwards and temporary differences. The net operating loss carryforwards expire in various years through 2030. The Company’s deferred tax assets are offset by a valuation allowance due to the uncertainty of the realization of the net operation loss carryforwards. Net operating loss carryforwards may be further limited by a change in company ownership and other provisions of the tax laws.
|
Period Ending
|
Estimated NOL Carryforward Less Temporary Differences
|
NOL Expires
|
Benefit From NOL
|
Valuation Allowance
|
Change in Valuation Allowance
|
Net Tax Benefit
|
||||||||||||||||||
|
December 31, 2011
|
||||||||||||||||||||||||
|
Federal
|
$ | 9,671 | 2017 | $ | 1,451 | $ | (1,451 | ) | $ | (1,451 | ) | - | ||||||||||||
| 128,576 | 2018 | 19,286 | (19,286 | ) | (19,286 | ) | - | |||||||||||||||||
| 96,867 | 2023 | 14,530 | (14,530 | ) | (14,530 | ) | - | |||||||||||||||||
| 49,714 | 2024 | 7,457 | (7,457 | ) | (7,457 | ) | - | |||||||||||||||||
| 118,013 | 2026 | 17,702 | (17,702 | ) | (17,702 | ) | - | |||||||||||||||||
| 63,303 | 2028 | 9,495 | (9,495 | ) | (9,495 | ) | - | |||||||||||||||||
| 48,425 | 2030 | 7,264 | (7,264 | ) | (7,264 | ) | - | |||||||||||||||||
| $ | 514,569 | $ | 77,185 | $ | (77,185 | ) | $ | (77,185 | ) | $ | - | |||||||||||||
| - | ||||||||||||||||||||||||
|
State
|
$ | 4,742 | 2026 | $ | 419 | $ | (419 | ) | $ | (419 | ) | - | ||||||||||||
| 67,858 | 2028 | 5,999 | (5,999 | ) | (5,999 | ) | - | |||||||||||||||||
| 59,114 | 2030 | 5,226 | (5,226 | ) | (5,226 | ) | - | |||||||||||||||||
| $ | 131,714 | $ | 11,644 | $ | (11,644 | ) | $ | (11,644 | ) | $ | - | |||||||||||||
Should the Company undergo an ownership change as defined in Section 382 of the Internal Revenue Code, the Company’s tax net operating loss carryforwards generated prior to the ownership change will be subject to an annual limitation, which could reduce or defer the utilization of these losses.
F-20
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
December 31, 2011 and 2010
9. Operating Leases
The Company leases some of its office equipment under non-cancelable operating leases with terms ranging from three to five years.
As of December 31, 2011, minimum annual lease payments due under these agreements for each of the next five years and in the aggregate were:
|
Years Ending December 31,
|
||||
|
|
|
|||
|
2012
|
6,652 | |||
|
2013
|
6,652 | |||
|
2014
|
1,808 | |||
|
|
||||
| $ | 15,112 | |||
Total operating lease payments for the twelve months ended December 31, 2011 and 2010 were $10,909 and $10,909 respectively.
|
10.
|
Long Term Leases
|
The Company leases its corporate headquarters, warehouse and waterfront facilities from Paul and Joan Katzeff (the Company's majority shareholders). The lease is classified as an operating lease and provides for monthly rental payments of $8,600 through July 2011 and $4,500 August 2011 until new building is completed. The Company is responsible for all real estate taxes, insurance and maintenance costs related to the facilities. The ten-year lease term ends May 31, 2015.
Because of the fire and the damage to the building, the majority shareholders reduced the rent to the Company starting in August of 2011 to reflect the usable space after the fire.
F-21
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
December 31, 2011 and 2010
10. Long Term Leases (continued)
Rental expense under the lease was $82,700 and $103,200 for the twelve months ended December 31, 2011 and 2010, respectively.
The Company also leases a bakery establishment in Mendocino, California under an operating lease which expired September 30, 2011, and became month-to-month thereafter. Rental expense under this operating lease for the twelve months ended December 31, 2011 and 2010 was $53,796 and $56,490, respectively.
As of December 31, 2011, minimum future rental payments under non-cancelable facilities operating leases for each of the next five years and in the aggregate are as follows:
|
Years Ending December 31,
|
||||
|
2012
|
$ | 62,966 | ||
|
2013
|
54,000 | |||
|
2014
|
54,000 | |||
|
2015
|
27,000 | |||
|
|
||||
|
|
||||
| $ | 197,966 | |||
11. Related Party Transactions
As of September 21, 2011, the Company paid an interest only uncollateralized note for $19,919 to Paul and Joan Katzeff (the Company’s majority shareholders). The Company also leases properties from its majority shareholders.
F-22
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
December 31, 2011 and 2010
11. Related Party Transactions (continued)
The summary of payments made to Paul and Joan Katzeff in connection with these related party transactions for the twelve months ended December 31, 2011, is as follows:
|
2011
|
2010
|
|||||||
|
Interest expense
|
$ | 1,754 | $ | 2,902 | ||||
|
Rent expense
|
$ | 82,700 | $ | 103,200 | ||||
|
Principal
|
$ | 19,919 | $ | 11,100 | ||||
The Company’s majority shareholders’ also guarantee certain notes payable of the Company (See Note 7).
The Company has purchased several containers of coffee costing $332,238 from three cooperatives and a farmer in Nicaragua. Ethical Trading and Investment Company of Nicaragua (Etico) acted as importer and financed the transaction. Nicolas Hoskyns, a director of the Company, is the managing director of Etico. At December 31, 2011, the balance due Etico was $147,271, which included one past due invoice in the amount of $52,071.
12. Information on Business Segments
As noted in Note 1 in the Notes to the financial statements, the Company operates in two different business segments: the specialty coffee business and the retail bakery business. The specialty coffee business, although primarily based in California, sells to grocery stores, serving locations and other retail outlets throughout the United States and some limited international business. The bakery sells exclusively on the north coast of California in cities of Mendocino and Fort Bragg.
|
2011
|
2010
|
|||||||
|
Net Sales
|
||||||||
|
Specialty Coffee
|
$ | 3,869,157 | $ | 3,682,218 | ||||
|
Bakery
|
452,253 | 513,861 | ||||||
|
Total
|
$ | 4,321,409 | $ | 4,196,079 | ||||
|
Intersegment Sales
|
||||||||
|
Specialty Coffee
|
$ | 29,256 | $ | 42,670 | ||||
|
Total Sales
|
$ | 4,292,153 | $ | 4,153,409 | ||||
|
Operating Loss
|
||||||||
|
Specialty Coffee
|
$ | (103,306 | ) | $ | (18,717 | ) | ||
|
Bakery
|
(115,987 | ) | (86,039 | ) | ||||
|
Total
|
$ | (219,293 | ) | $ | (104,756 | ) | ||
|
Depreciation and
|
||||||||
|
Amortization
|
||||||||
|
Specialty Coffee
|
$ | 53,656 | $ | 65,392 | ||||
|
Bakery
|
14,506 | 23,246 | ||||||
|
Total
|
$ | 68,162 | $ | 88,638 | ||||
| Interest Expense | ||||||||
| Specialty Coffee | $ | 22,991 | $ | 29,595 | ||||
| Bakery | 1,213 | 2,189 | ||||||
| Total | $ | 24,204 | $ | 31,784 | ||||
F-23
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
December 31, 2011 and 2010
12. Information on Business Segments (continued)
|
Miscellaneous Income
|
||||||||
| Specialty Coffee | $ | 265,303 | $ | 295,179 | ||||
| Bakery | (148 | ) | (184 | ) | ||||
| Total | $ | 265,155 | $ | 294,994 | ||||
|
Total Assets
|
||||||||
| Specialty Coffee | $ | 1,164,042 | $ | 1,188,298 | ||||
| Bakery | 62,641 | 77,818 | ||||||
| Total | $ | 1,226,683 | $ | 1,266,116 | ||||
| Assets - Property and Equipment | ||||||||
| Specialty Coffee | $ | 364,365 | $ | 352,357 | ||||
| Bakery | 37,906 | 51,251 | ||||||
|
Total
|
$ | 402,271 | $ | 403,608 | ||||
13. Fire Damage
The Company experienced a major fire at its plant and office facility on July 5, 2010. The preliminary finding of the authorities was that the fire was arson. The investigation of the cause is ongoing. The offices, packaging, tasting room and shipping facility were destroyed. The roasting and warehouse facility, where the Company stored most of its green beans, were not damaged.
The Company has business personal property, business interruption/extra expense insurance. Through December 31, 2011, the Company has received advances of $1,139,708 from the insurance company. The Company is using a third party adjuster to assist in negotiating the claim with the insurance company.
As a result of the ongoing fire insurance claim and receipt of insurance proceeds the Company recorded miscellaneous income of $265,155 in 2011.
14. Subsequent Events
Sale of Business Segment
The Company has evaluated subsequent events through the date which the financial statements were available to be issued. The Company has entered into an agreement with an unrelated party for the sale of the Bakery in Mendocino. The sale price is $75,000, plus the cost of the food and supply inventory at the close of the sale, which inventory is estimated to be $10,000. The $75,000 sale price will be financed over five years with annual payments as follows:
- $ 5,000 plus 7% Interest on $75,000 due June 30, 2013
- $ 7,500 plus 7% Interest on $70,000 due June 30, 2014
- $15,000 plus 7% Interest on $62,500 due on June 30, 2015
- $15,000 plus 7% Interest on $47,500 due on June 30, 2016
- $32,500 plus 7% Interest on $32,500 due on June 30, 2017
The note will be secured by a UCC-1 filing of the equipment in the sale. In addition to the purchase price, the buyer will provide a food credit to the Company in the amount of $35,000 over the term of the note up to a maximum of $30 per day for use by the Company and its Majority Shareholders. The scheduled close was February 29, 2012; Buyers have taken possession of the Bakery and its assets as of this filing, although escrow has not yet closed.
F-24
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
December 31, 2011 and 2010
14. Subsequent Events (continued)
Property Insurance Matters
The insurance company had advanced $962,568 as partial payment for the reconstruction of the building. The money was held by Union Bank, who is the mortgagor of the landlord, the Company’s majority shareholders Paul and Joan Katzeff. In January, 2012, Union Bank used $563,000 of the proceeds from the insurance company to pay off the loan and re-conveyed to Savings Bank of Mendocino (who holds second position, after Union Bank on the Building, securing the Company’s Term Note) the net balance of funds; of these re-conveyed funds Savings Bank of Mendocino is holding the full of amount of Term Note as Security (amount held as of January 31, 2012 was approximately $128,000). As of March 23, 2012 Savings Bank of Mendocino released all funds being held as security on the Term Note to the designated account being used for the reconstruction of the building.
The building insurance claim funds are a combination of building replacement cost and tenant improvements. To separate the two elements, the Company enlisted a third party insurance adjuster to assist. Of the replacement cost of the building, 54.2% is related to the building and 45.8% is related to the tenant improvements. The Company and its majority owner landlords have come to an understanding that it is the intent to rebuild the building with the insurance proceeds that are applicable to the building and leasehold improvements.
F-25