---




U.S.
SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





---




FORM 10-QSB





xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the
quarterly period ended March 31, 2002





OR





 ̈ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the transition period from              to





Commission File No. 33-960-70-LA





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THANKSGIVING COFFEE COMPANY, INC.


(Exact name of small business issuer as specified in its charter)





|
|

California

94-2823626(State or other jurisdiction of incorporation or
organization)

(IRS Employer Identification Number)





19100 South Harbor Drive


Fort Bragg, California 95437


(Address of principal executive offices) (Zip Code)





Issuers telephone number, including area code: 707: 964-0118





(Former name, former address and former fiscal year, if changed since last report.)





Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  ̈





As of May 8, 2002, there were 1,234,544 shares outstanding of common stock of the issuer.





Transitional Small Business Disclosure Format (check one):  Yes  ̈ No  x





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THANKSGIVING COFFEE COMPANY, INC.





INDEX





PART I.

FINANCIAL INFORMATIONItem 1.

Financial Statements and Notes

3Balance Sheet at March 31, 2002 and March 31, 2001

5-6Statements of Income for the Three Months Ended March 31, 2002 and March 31, 2001

7Statements of Accumulated Deficit

8Statements of Cash Flows for the Three Months Ended March 31, 2002 & March 31, 2001

9Notes to Financial Statements

10-22Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

23PART II.

OTHER INFORMATIONItem 1.

Legal Proceedings

26Item 2.

Changes in Securities

26Item 3.

Defaults Upon Senior Securities

26Item 4.

Submission of Matters to a Vote of Security-Holders

26Item 5.

Other Information

26Item 6.

Exhibits and Reports on Form 8-K

27




2




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Thanksgiving Coffee Company, Inc.





For the Three Month Periods


Ended March 31, 2002 and 2001




3




---




Thanksgiving Coffee Company, Inc.





Unaudited Financial Statements


For the Three Month Periods Ended March 31, 2002 and 2001








Balance Sheets

5Statements of Income

7Statements of Accumulated Deficit

8Statements of Cash Flows

9Notes to Financial Statements

10




4




---




Thanksgiving Coffee Company, Inc.





Balance Sheets


Unaudited


March 31,2002


2001AssetsCurrent assetsCash

$
109,758


$
76,266Accounts receivable


326,320



341,895Note receivable-Griswold






10,000Employee receivable


1,060



648Inventory


438,352



462,061Prepaid expenses


10,088



68,516Total current assets


885,578



959,386Property and equipmentProperty and equipment


2,435,682



2,358,741Accumulated depreciation


(1,851,824
)


(1,663,747
)Total property and equipment


583,858



694,994Other assetsDeposits and other assets


44,834



48,236Note receivable-Griswold






2,001Goodwill


170,504



175,580Other intangibles, net of amortization


47,549



56,615Deferred tax asset


60,352



7,836Total other assets


323,239



290,268Total assets

$
1,792,675


$
1,944,648





See accompanying notes.




5




---




Thanksgiving Coffee Company, Inc.





Balance Sheets


Unaudited


March 31,2002


2001Liabilities and shareholders equityCurrent liabilitiesAccounts payable

$
360,073


$
501,046Notes payable-bank, current portion


101,134



112,800Notes payable-other, current portion


51,134



46,329Notes payable-shareholders, current portion


79,125



40,298Capital lease obligations, current portion






25,914Accrued liabilities


72,024



76,082Deferred income taxes


14,354



10,288Total current liabilities


677,844



812,757Long term debtNotes payable-bank


255,200



356,334Notes payable-other


47,026



98,160Notes payable-shareholders


12,639



29,876Total long term debt


314,865



484,370Total liabilities


992,709



1,297,127Shareholders equityCommon stock, no par value,1,960,000 shares authorized, 1,234,544 shares issued and outstanding


861,816



861,816Additional paid in capital


24,600



24,600Accumulated deficit


(86,450
)


(238,895
)Total shareholders equity


799,966



647,521Total liabilities and shareholders equity

$
1,792,675


$
1,944,648








See accompanying notes




6




---




Thanksgiving Coffee Company, Inc.





Statements of Income


Unaudited


Three Month Period Ended March 31,2002


2001IncomeNet sales

$
1,180,649


$
1,221,434Cost of sales


614,107



700,222Gross profit


566,542



521,212Operating expensesSelling, general and administrative expenses


518,296



532,937Depreciation and amortization


42,679



52,178Total operating expenses


560,975



585,115Operating income (loss)


5,567



(63,903
)Other income (expense)Interest income


140



728Miscellaneous income (expense)


(6,609
)


31,883Interest expense


(14,241
)


(27,445
)Total other income (expense)


(20,710
)


5,166Loss before income taxes


(15,143
)


(58,737
)Income tax expense


(800
)


(800
)Net loss

$
(15,943
)

$
(59,537
)Loss per share (basic)

$
(0.013
)

$
(0.048
)Loss per share (dilutive)

$
(0.013
)

$
(0.047
)





See accompanying notes




7




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Thanksgiving Coffee Company, Inc.





Statements of Accumulated Deficit


Unaudited





March 31,2002


2001Accumulated deficit, beginning

$
(70,507
)

$
(179,358
)Net loss


(15,943
)


(59,537
)Accumulated deficit, ending

$
(86,450
)

$
(238,895
)





See accompanying notes




8




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Thanksgiving Coffee Company, Inc.





Statements of Cash Flows


Unaudited





Three month period ended March 31,2002


2001Operating activitiesNet loss

$
(15,943
)

$
(59,537
)Noncash items included in net lossDepreciation and amortization


47,998



58,351Changes in operating assets and liabilitiesReceivables


(2,625
)


39,230Inventory


(58,882
)


41,807Prepaid expenses


50,846



(25
)Deposits and other assets


(3,615
)


(6,181
)Accounts payable


37,841



8,508Accrued liabilities


25,000



29,776Net cash provided by operating activities


80,620



111,929Investing activitiesPurchases of property and equipment


(21,178
)


(22,716
)Net cash used by investing activities


(21,178
)


(22,716
)Financing activitiesRepayments of notes payable and capital leases


(48,560
)


(54,842
)Net cash used by financing activities


(48,560
)


(54,842
)Net increase in cash


10,882



34,371Cash at beginning of year


98,876



41,895Cash at end of year

$
109,758


$
76,266





See accompanying notes




9




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Thanksgiving Coffee Company, Inc.





Notes to Financial Statements





March 31, 2002





1.    Summary of Significant Accounting Policies





Description of Business





Thanksgiving Coffee Company, Inc. (the Company), is a corporation that purchases and roasts high-quality whole
bean coffees and sells them to restaurants, grocery stores and other retail outlets. These products are sold primarily through its own distribution network in the Northern California area. Distributors and retailers do not have the right to return
products. Additionally, the Company produces and sells a line of high-quality tea products under the trademark of Royal Gardens Tea Company  . The Company also sells coffee, tea and related specialty products through mail order and Internet sales on a nationwide basis. The Company sells sandwiches, pastries, coffee and tea through a bakery located in Mendocino,
California.





Basis of Presentation





The Company
has prepared the financial statements on the accrual basis of accounting in accordance with generally accepted accounting principles. In the opinion of management, all adjustments considered necessary for a fair presentation have been included.





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.





Inventory





Inventory is stated at the lower of
cost or market (first-in, first-out).





Property and Equipment





Property and equipment are carried at cost less accumulated depreciation. Depreciation is provided on the straight-line and 150% declining balance methods over estimated useful lives generally ranging from five to
twelve years.





Leasehold improvements are carried at cost and are amortized over the shorter of their estimated useful lives or the related lease term
(including options), generally ranging from five to thirty-nine years.





The portion of depreciation and amortization expenses related to production
facilities is included in cost of sales.





Expenditures for major renewals that extend useful lives of property, fixtures and improvements are
capitalized. Expenditures for maintenance and repairs are charged to expense as incurred.




10




---




Thanksgiving Coffee Company, Inc.





Notes to Financial Statements (continued)





1. Summary of Significant Accounting Policies
(continued)





Property and Equipment (continued)





For income tax purposes, depreciation is computed using the accelerated cost recovery system and the modified cost recovery system.





Goodwill
and Other Intangible Assets  Adoption of FASB No. 142





Effective January 1, 2002, the Company adopted FASB No. 142, Goodwill and Other
Intangible Assets (the Statement). The Statement makes significant changes to the methods and criteria used to amortized goodwill and intangible assets. Under the Statement, goodwill is no longer amortized, but, on an annual basis, must be tested
for impairment and possibly written down to reflect an impairment loss. The Statement also requires that certain intangible assets other than goodwill that have indefinite lives, not be amortized until the lives become finite. Intangible assets that
do not have indefinite lives are amortized over their useful economic lives.





Intangible assets are amortized over the following estimated useful lives
using primarily straight-line basis.





Life in YearsLeasehold value

14Trademark

40Refinance cost

5





Goodwill will not be amortized unless events or circumstances occur indicating that impairment exists
within a particular reporting unit. Impairment losses, if any, are recorded in the statement of income as part of operating income.





Investments in
Consolidated Companies





On October 31, 1996, the Company acquired the assets of Mendocino Bakery, Inc. from Ms. Laoma Yaski in a business combination
accounted for as a purchase.





Profit Sharing Plan





The Company has a profit sharing plan covering substantially all of its employees. Benefits are based upon years of service and the employees compensation during the employment period. No contributions to the profit sharing plan were
made for the three month period ended March 31, 2002.




11




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Thanksgiving Coffee Company, Inc.





Notes to Financial Statements (continued)








1.    Summary of Significant Accounting Policies (continued)





Futures and Options Contracts





The Company occasionally enters into exchange traded coffee futures and options contracts with the objective of minimizing cost risk due to market fluctuations. The
Company does not define these contracts as hedge instruments pursuant to accounting principles and practices designated in Statement of Financial Accounting Standards No. 80, Accounting for Futures Contracts. Accordingly, changes in the market value
of futures contracts (unrealized gains and losses) are reported by the Company in the period in which the change occurs and are included as a component of stockholders equity. Realized gains and losses are a component of cost of sales. The
Company did not have any futures or options contracts in effect as of March 31, 2002.





Compensated Absences





Employees of the Company are entitled to paid vacation, paid sick days and personal days off depending on job classification, length of service, and other factors.





Advertising





The Company expenses costs of advertising the
first time the advertising takes place, except direct-response advertising, which is capitalized and amortized over its expected period of future benefits. Direct-response advertising consists primarily of mail order solicitation costs, typically
mailed to customers who have specifically responded to this type of advertising. The mail order department documents whether orders come from catalogs or other sources when processing orders. Catalog costs are amortized over the period from the
catalog mailing until the next catalog is issued.





Use of Estimates





The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.





Reclassifications





Certain amounts in the prior periods financial statements have been reclassified to conform to the current periods presentation. Such reclassifications had no effect on the reported net loss.





2.    Accounts Receivable





Accounts receivable consist of the following:





Accounts receivable

$332,638Less: Allowance for doubtful accounts

(6,318
)Accounts receivable, net

$326,320




12




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Thanksgiving Coffee Company, Inc.





Notes to Financial Statements (continued)





2.    Accounts Receivable
(continued)





The Company uses the percentage method for uncollectible accounts. The allowance for doubtful accounts is estimated from 1% to 10% of
total outstanding receivables as of March 31, 2002. Bad debt expense for the three month period ended March 31, 2002 was $32. The adjustments to the allowance account for the three month period ended March 31, 2002 was $1,741.





3.     Inventory





CoffeeUnroasted

$
149,533Roasted


86,299Tea


16,046Packaging, supplies and other merchandise held for sale


186,474Total inventory

$
438,352





4.    Property and Equipment





Property and equipment consists of the following:





Equipment and fixtures

$
1,535,057Furniture and equipment


280,516Leasehold improvements


410,107Transportation equipment


91,571Marketing equipment


118,431Total property and equipment


2,435,682Accumulated depreciation


(1,851,824
)Property and equipment, net

$
583,858





Marketing equipment includes costs to develop a website for on-line sales and promotion. Costs related to
the Companys website are depreciated on the straight-line method over three years.





Depreciation expense for the three month period ended March 31,
2002 was $45,471.




13




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Thanksgiving Coffee Company, Inc.





Notes to Financial Statements (continued)








5.    Goodwill and Other Intangible Assets





As part of the adoption of FASB Statement 142 as of January 1, 2002, the
Company no longer amortizes goodwill. The Company performed an initial test of impairment on goodwill which resulted no impairment loss as of March 31, 2002.





The change in the carrying value of goodwill during the three month period ended March 31, 2002 follows:





Carrying value  beginning of year

$
170,504Goodwill acquired


Goodwill impairment losses


Carrying valueend of year

$
170,504





Intangible assets subject to amortization consist of the following:





Leasehold value

$
67,000Trademark


2,500Refinance cost


5,127Total intangible assets


74,627Accumulated amortization


(27,078
)Intangible assets, net

$
47,549





Amortization expense for the three months ended March 31, 2002 was $2,528.




14




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Thanksgiving Coffee Company, Inc.





Notes to Financial Statements (continued)





6.    Long Term Debt





Notes Payable as of March 31, 2002





Note payable to Wells Fargo Bank, monthly installments of $7,733 plus interest at 3% over prime rate beginning December 15, 2000, (7.75% at March 31, 2002), final payment is
due on January 15, 2005. The note is collateralized by a security interest of first priority in all accounts receivable, inventory, equipment, instruments, general intangibles and contract rights.

$348,000Note payable to Wells Fargo Bank, payable in monthly installments of $1,667 plus interest at 1% over prime rate (5.75% at March 31, 2002) final payment is due on August 15,
2002. The note is secured by all accounts receivable, inventory, equipment, fixtures and improvements.

8,333Note payable to majority shareholders, Paul and Joan Katzeff, payable in monthly installments of interest only at 12%, with balance due on demand after June 30, 1996. The
shareholders have subordinated this note to all notes payable including Wells Fargo Bank as described above.

24,919Note payable to majority shareholders, Paul and Joan Katzeff, payable in monthly installments of $1,649 including interest only at 11.5%, with final payment due on November
17, 2003, unsecured. The shareholders have subordinated this note to all notes payable including Wells Fargo Bank as described above.

29,879Note payable to Laoma Yaski for the purchase of Mendocino Bakery, payable in monthly installments of $4,249, including interest at 10%, secured by property and equipment at
the bakery, final payment due on November 14, 2003.

77,985Note payable to Chase Manhattan Bank, payable in monthly installments of $324, including interest at 8.637%, secured by a vehicle, final payment due in October
2004.

8,980Note payable to Chase Manhattan Bank, payable in monthly installments of $304, including interest at 8.637% secured by a vehicle, final payment due on November 16,
2005.

11,195







15




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Thanksgiving Coffee Company, Inc.





Notes to Financial Statements (continued)





6.    Long Term Debt
(continued)





Note payable to majority shareholders, Paul and Joan Katzeff, payable in one lump sum on April 1, 2002, including interest at 10.00%. The shareholders have subordinated this
note to all notes payable including Wells Fargo as described above, unsecured.

$30,000Note payable to majority shareholders, Paul and Joan Katzeff, payable in one lump sum on April 1, 2002, including interest at 10.00%. The shareholders have subordinated this
note to all notes payable including Wells Fargo as described above, unsecured.

6,967Subtotal

546,258Less current portion

(231,393)Long-term portion of notes payable

$314,865







16




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Thanksgiving Coffee Company, Inc.





Notes to Financial Statements (continued)





6.    Long Term Debt (continued)





Substantially all of the above notes payable are personally guaranteed by the Companys majority shareholders (See sixth paragraph under
Liquidity and Capital Resources).





|Interest |  | paid for the three month period ended March 31, 2002 was $14,241.
|-------- |  | -----------------------------------------------------------------




|As |  | of March 31, 2002, maturities of notes payable are as follows:
|-- |  | --------------------------------------------------------------




2002

$
190,4362003


160,7482004


99,0812005 and thereafter


95,993$
546,258





Based on current borrowing rates, the fair value of the notes payable approximate their carrying amounts.





7.    Income Taxes





The
Company computes income taxes using the asset and liability method under which deferred income taxes are provided for temporary differences between the financial bases of the Companys assets and liabilities. Deferred tax assets recognized for
deductible temporary differences and loss carryforward are immaterial for the three month period ended March 31, 2002. Deferred tax liabilities recognized for taxable temporary differences are not material for the three month period ended March 31,
2002. The Company has a federal general business credit carryforward of $14,354, which may be used to offset federal income taxes in the future. The Company also has a California manufacturers credit carryforward of $27,017, which may be used
to offset California income taxes in the future.





The components of the provision for income taxes for the three month period ended March 31, 2002 is as
follows:





State  current

$800




17




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Thanksgiving Coffee Company, Inc.





Notes to Financial Statements (continued)





7.    Income Taxes (continued)








The Company has net operating loss and contribution carryovers to offset future income tax. If not used,
these credits will expire as follows:





FederalYears ending

Capital



Net OperatingDecember 31,

Loss

Contributions

Loss

Total2002

$
29,471

$
11,419

$


$
40,8902003





11,289





11,2892005





12,067





12,0672006





1,063





1,0632012








394,334


394,3342018








128,576


128,576$
29,471

$
35,838

$
522,910

$
588,219CaliforniaYears ending

Capital



Net OperatingDecember 31,

Loss

Contributions

Loss

Total2002

$
29,471

$


$
28,950

$
58,4212003





10,728


64,341


75,0692004





14,863





14,8632005





12,299





12,299$
29,471

$
37,890

$
93,291

$
160,652








Income taxes paid for the three month period ended March 31, 2002
was $0.




18




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Thanksgiving Coffee Company, Inc.





Notes to Financial Statements (continued)





8.    Operating Leases





The Company leases its delivery fleet, other vehicles and some office equipment under noncancellable operating leases with terms ranging from three
to five years.





As of March 31, 2002, minimum annual lease payments due under these agreements are as follows:





2002

$
67,8512003


47,4122004


43,4312005


41,8792006 and thereafter


24,454$
225,027





Total operating lease payments were $18,778 for the three month period ended March 31, 2002.





9.    Common Stock


Number of Shares

No Par ValueBeginning balance, January 1, 2001

1,234,544

$
861,816No activity




Balance, December 31, 2001

1,234,544


861,816No activity




Ending balance, March 31, 2002

1,234,544

$
861,816








981,000 shares originally issued are restricted.




19




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Thanksgiving Coffee Company, Inc.





Notes to Financial Statements (continued)





10.    Stock Option Purchase Plan





Under the terms of the Companys stock option purchase plan (See note 13), options to purchase shares of its common stock are granted at a
price of $5 per share. Options expire at various dates through 2003. Following is a summary of transactions:





Beginning balance, January 2, 2001

16,000Shares expired during the year

Shares exercised during the year

Balance, December 31, 2001

16,000Shares expired during the three month period

Shares exercised during the three month period

Ending balance, March 31, 2002

16,000





The related compensation expense for the three month period
ended March 31, 2002 was $0.





11.    Long Term Lease





The Company leases its corporate headquarters, warehouse and waterfront facilities from Paul and Joan Katzeff (the Companys majority shareholders). The lease provides for monthly rental payments of $8,600 and
the Company is responsible for all real estate taxes, insurance and maintenance costs related to the facilities. The lease provides for periodic cost of living increases during the term of the lease, including the option periods. The Company
exercised an option to renew for one five year term on March 31, 1995 and the lease was extended for a successive one year term on March 31, 2002. The Company has options to renew the lease for three successive five year renewal periods when the
current one year term expires on March 31, 2003.





Any deferred amounts are due based upon available cash flow as determined by the Companys
management or upon demand of the Companys majority shareholders. Rental expense under the above lease was $25,800 for the three month period ended March 31, 2002. The Company has made substantial leasehold improvements (note 4) and intends
along with its major shareholders to exercise all options under the terms of this lease.





The Company leases a bakery establishment in Mendocino,
California. The lease provides for monthly rental payments of $3,150 as of March 31, 2002. The lease term expires on September 30, 2010.




20




---




Thanksgiving Coffee Company, Inc.





Notes to Financial Statements (continued)





11.    Long Term Lease (continued)





The Company leased warehouse premises in Santa Rosa, California for a one-year period commencing February 1, 2000 at a base rent of $928 per month.
The Company has options to renew the lease for two successive two year renewal periods after the one year term expires. The Company exercised an option to renew for a two year term on February 1, 2001.





As of March 31, 2002, minimum future rental payments for all leases are as follows:





2002

$
114,1022003


141,9282004


141,0002005


141,0002006


141,000Thereafter


270,750$
949,780








12.    Related Party Transactions





As of March 31, 2002, the Company had two interest only notes payable on demand and two principal and interest notes payable to Paul and Joan
Katzeff (the Companys majority shareholders, see note 6). The Company also leases properties from its majority shareholders (see note 11). The summary payments made to Paul and Joan Katzeff in connection with these related party transactions
for the three month period ended March 31, 2002 is as follows:





Interest expense

$
3,244Rent expense

$
25,800





13.    Commitments





In 1996, the Company purchased a bakery from Laoma Yaski for $350,000. Under the terms of the purchase, the Company agreed to pay an additional $25,000 to Laoma Yaski upon the seven year anniversary of the
purchase, provided she does not own, manage or operate a bakery within 250 miles of Mendocino, California during such seven year period.




21




---




Thanksgiving Coffee Company, Inc.





Notes to Financial Statements (continued)





13.    Commitments (continued)





A total of 16,000 stock options may be exercised or sold at any time at the discretion of a past officer, subject to the Companys first right
of refusal.





14.    Subsequent Events





On April 1, 2002, the Company repaid the $6,967 note and $15,000 of the $30,000 note to the majority shareholders including accrued interest thereon. The remaining $15,000 was refinanced such that it becomes due on October 1, 2002 in a lump
sum (See Note 6).




22




---




THANKSGIVING COFFEE COMPANY, INC.





MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





FORWARD LOOKING STATEMENTS





In addition to historical information, this Quarterly Report on Form 10-QSB contains forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Words such as believe, anticipate, expect, intend, plan, will, may, and
other similar expressions identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. These statements relate
to, among other things, sources of liquidity and capital (see Liquidity and Capital Resources). 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 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 hire, train and
retain qualified personnel, concentration of production and sales in Northern California, the loss of one or more major customers, inability to successfully implement its business plan, natural disasters, civil unrest in countries which produce
coffee and tea, weather and other risks identified herein. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date of this Quarterly Report on Form 10-QSB.





Three Months Ended March 31, 2002 Compared With Three Months Ended March 31, 2001








Consolidated

Increase (Decrease)


Percent ChangeNet Sales

$
(40,785
)

(3.3%)Cost of Sales

$
(86,115
)

(12.3%)Gross Margin


5.3
%

12.5%Selling, G&A Expense

$
(14,641
)

(2.8%)Depreciation & Amortization

$
(9,499
)

(18.2%)Interest Expense

$
(13,204
)

(52%)Net Income

$
(43,594
)





Consolidated net sales for the three months ended March 31, 2002 were $1,180,649, down 6% or $40,785 when
compared with net sales of $1,221,434 for the same period in fiscal 2001.





Distribution revenues (e.g., revenues generated on our own truck distribution)
declined by $48,000 or 7.6% in the three month period ended March 31, 2002 when compared to the same period in fiscal 2001. Nearly half of this loss is a result of a loss in business due to attrition in a territory where a salesman had not been
replaced and the remainder of this decline is due to a loss of a customer who began roasting in the fall of 2001. In September of 1999, the salesman in the territory ceased to work with the Company. In an effort to reduce costs, the Company did not
rehire a salesperson, but attempted to maintain the business by hiring a driver for the territory. The Company has had to refill this position four times since the salesman has left. Because of the lack of continuity in the driver position and the
fact that this position does not have a sales focus, the territory has continued to lose volume. In an effort to




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reverse this trend, the Company is considering a salesperson for the territory where the salesperson was not replaced. There can be no assurance that any new salesperson will be able to restore
or improve revenues in the territory. National revenues (e.g., revenues not derived by mail order and direct truck distribution) were up by approximately $2,000 or .9% in the three month period ended March 31, 2002 when compared to the same
period in fiscal 2001.





Mail order revenues (e.g., revenues generated from product sold directly to the consumer either through print media or the
Internet) declined nearly $8,000 or 7.6% in the three month period ended March 31, 2002 when compared to the same period in fiscal 2001. The decrease in mail order revenues reflects the lack of spending on new mailings to grow the mailing list and
attrition of the current list, partially offset by increased Internet sales of $10,000 (representing nearly a 36% increase over the same period in fiscal 2001). With respect to its mail order business, the Company has shifted its emphasis to
Internet sales and increased its expenditures for development of its web site and store.





Sales attributable to operations of the Companys bakery
increased by $14,000 or nearly 9%, in the three month period ended March 31, 2002 over the same period in 2001, reflecting an increase of $3,000 on account of new wholesale account and increased traffic count in the bakery.





Consolidated cost of sales decreased to $614,107 for the three months ended March 31, 2002 down $86,115 or 12% when compared with cost of sales of $700,222 for the
same period in 2001. This decline was a result of lower green bean costs when compared to last year. Green bean costs per pound have dropped from $1.70 per pound average last year to $1.47 per pound this year representing a decrease of nearly 15%.





Consolidated gross margin (gross profit as a percentage of net sales) increased to 48% for the three months ended March 31, 2002, up 12.5% when compared
to gross margin of 42.7% for the same period in 2001. This improvement was a result of lower bean costs as noted above while selling prices remained relatively flat. The Company cannot be sure that the lower costs will continue or that selling
prices or the market for the Companys products may not erode.





Consolidated selling, general and administrative expenses were $518,296 for the
three months ending March 31, 2002, a $14,641 or nearly 3% decrease when compared to selling general and administrative expenses for the same period in 2001of $532,937. This decrease in selling, general and administrative expenses was due primarily
to lower staffing expenses because of a net reduction in a delivery position and an administrative position.





Depreciation and amortization expenses were
$42,679 for the three months ended March 31, 2002 a $9,499 or 18.2% decrease when compared to depreciation and amortization expenses of $52,178 for the same period in 2001. The decrease in depreciation is a result of lower fixed asset values and the
decrease in amortization is a result of a change in accounting method for startup and other organization costs that were written off at December 31, 2001.





Interest expense decreased to $13,748 for the three months ended March 31, 2002 a drop of $14,241 or nearly 52% when compared to interest expense of $27,445 for the same period in fiscal 2001. This was a result of a decline in total
borrowings at March 31, 2002 by nearly $150,000 compared to the same period in 2001 in addition to lower interest rates.





As a result of the foregoing
factors, the Company had a consolidated net loss of $15,943 for the three months ended March 31, 2002, compared to a loss of $59,537 for the same period in 2001. Because of the decline in sales and the uncertainty of green bean costs, there can be
no assurances that the Company will be profitable in any future period.




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LIQUIDITY AND CAPITAL RESOURCES





As of March 31, 2002, the Company had working capital of $207,734 versus working capital of $146,629 as of March 31, 2001. This increase in working capital is primarily a result of a decrease in the loss from the
three months ended March 31, 2001and a reduction of debt from that as of March 31, 2001.





Net cash provided by operating activities was $80,620 for the
three months ended March 31, 2002 compared to $111,929 provided by operating activities for the three months ended March 31, 2001. The decrease in net cash provided by operating activities was a result of a larger reduction in accounts payable as
the Company became current with most of its vendors partially offset by decreases in inventory, receivables and net loss.





Cash used by investing
activities was $21,178 for the three months ended March 31, 2002, compared to $22,716 for the same period last year. Lower capital expenditures plus a sale of fully depreciated equipment accounted for the decrease. Capital expenditures for this year
are primarily for the Companys web site and store.





Net cash used in financing activities for the three months ended March 31, 2002 was $48,560
compared to a net repayment of debt of $54,842 during the same period in 2001. This decrease was a result of a reduction of total debt as of January 1, 2002 by more than $150,000 as compared to January 1, 2001.





Because of the aforementioned activities, cash at March 31, 2002 was $109,758 compared to $76,266 at March 31,
2001.





At March 31, 2002, the Company had total borrowings of $546,258, including
$356,334 outstanding to Wells Fargo Bank. This compares to total borrowings of $709,711 as of March 31, 2001, including $469,134 outstanding to Wells Fargo at that time. The Companys accounts receivable, inventory, equipment, fixtures and
improvements secure the borrowings. Substantially all of the borrowings are guaranteed by the Companys majority shareholders.





In December of 2000,
the majority shareholders loaned the Company $50,000, payable in monthly installments of $1,649, unsecured, due in November 2003. In April 2001, the majority shareholders loaned the Company $60,000, due October 1, 2001 in a lump sum. In October
2001, the majority shareholders loaned the Company $6,967, due April, 1 2002 in a lump sum. All debt due to the majority shareholders is subordinated to Wells Fargo. Subsequent to September 30, 2001, the Company made a payment to the majority
shareholders of $30,000 on the $60,000 note and refinanced the remaining $30,000 such that it became due on April 1, 2002 in a lump sum. On April 1, 2002, the Company paid $15,000 of the $30,000 note including accrued interest thereon and refinanced
the remaining $15,000 such that it becomes due on October 1, 2002, in a lump sum (See Exhibit 10.16 attached). On April 1, 2002, the Company repaid the $6,967 note including accrued interest thereon.





The Company believes that its existing capital resources and revenues that it anticipates will be generated from operations will be sufficient to meet its cash requirements for
the next 12 months at its current level of operations.





The Company is dependent on successfully executing its business plan to finance its immediate
working capital needs. There can be no assurance that the Company will be successful in this regard. If the company is not able to meet its credit obligations, the Companys business could be materially and adversely
affected.





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.




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INDEMNIFICATION MATTERS





The Companys Bylaws provide that the Company may indemnify its directors, officers, employees and other agents to the fullest extent permitted by California law. The Company believes that indemnification under its Bylaws also permits
the Company to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in such capacity, regardless of whether California law would permit indemnification. The Company
maintains such liability insurance for its directors and certain officers and employees.





At present, there is no pending litigation or proceeding
involving any director, officer, employee or agent of the Company where indemnification would be required or permitted. The Company is not aware of any pending or threatened litigation or proceeding that might result in a claim for such
indemnification.





PART II
OTHER INFORMATION





ITEM 1.    
LEGAL PROCEEDINGS





- Not Applicable -





ITEM 2.    
CHANGES IN SECURITIES AND USE OF PROCEEDS





- Not Applicable -





ITEM 3.    
DEFAULTS UPON SENIOR SECURITIES





- Not Applicable-





ITEM 4.    
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





- Not Applicable -





ITEM 5.    
OTHER INFORMATION





- Not Applicable -




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ITEM 6.    
EXHIBITS AND REPORTS ON FORM 8-K





a.     Exhibits





10.16 Promissory Note issued by the Company to Joan and Paul Katzeff dated as of April 1, 2002





- Not Applicable -





b.    Form 8-K





No reports on Form 8-K were filed during the period from January 1, 2002 to March 31, 2002




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SIGNATURES





In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





THANKSGIVING COFFEE COMPANY, INC.





Name

Title

Date/s/    Paul Katzeff Paul Katzeff

Chief Executive Officer

May 13, 2001


/s/    Joan Katzeff Joan Katzeff

President

May 13, 2001




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